PAINEWEBBER STRATEGY FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Strategy Fund is a diversified series of PaineWebber Managed
Investments Trust ("Trust"), a professionally managed, open-end management
investment company.
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.
This Statement of Additional Information ("SAI") is not a prospectus and
should be read only in conjunction with the fund's current Prospectus, dated
September 27, 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 September 27, 1999.
TABLE OF CONTENTS
PAGE
The Fund and Its Investment Policies................................... 2
The Fund's Investments, Related Risks and Limitations.................. 4
Strategies Using Derivative Instruments................................ 12
Organization; Board Members, Officers and Principal
Holders of Securities.................................................. 20
Investment Advisory and Distribution Arrangements...................... 27
Portfolio Transactions................................................. 30
Reduced Sales Charges, Additional Exchange and Redemption
Information and Other Services......................................... 32
Conversion of Class B Shares........................................... 37
Valuation of Shares.................................................... 37
Performance Information................................................ 38
Taxes.................................................................. 40
Other Information...................................................... 42
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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 long-term capital appreciation. The
fund seeks to achieve this objective by investing at least 80% of its assets in
the securities of issuers that are on PaineWebber's HIGHLIGHTED STOCKS list.
Historically, the HIGHLIGHTED STOCKS list has consisted primarily of common
stocks of relatively large, well known U.S. companies, although it is not
restricted to those types of companies. As of September 1, 1999, the average
capitalization of companies listed on the HIGHLIGHTED STOCKS list was $60
billion. The fund may invest up to 20% of its assets in short-term debt
obligations, money market instruments and options and futures contracts.
The fund will purchase a security that has been added to or sell a
security that has been removed from the HIGHLIGHTED STOCKS list after
publication of that change. The fund may trade in securities added to or deleted
from the HIGHLIGHTED STOCKS list no earlier than the market open after relevant
changes to the HIGHLIGHTED STOCKS list are announced. Under normal
circumstances, the fund will not purchase stocks that are not included on the
HIGHLIGHTED STOCKS list or keep stocks that have been removed from the
HIGHLIGHTED STOCKS list.
There is no assurance that the fund will be able to maintain an equal
weighting of assets among all the stocks on the HIGHLIGHTED STOCKS list. In
certain instances, such as when the HIGHLIGHTED STOCKS list contains fewer than
20 stocks, the fund may choose not to re-balance its portfolio following an
announced change to the HIGHLIGHTED STOCKS list. The fund may be unable to
purchase or sell sufficient securities due to market restrictions or
diversification and illiquid security limitations imposed by the Investment
Company Act of 1940 ("Investment Company Act"). In such circumstances, the fund
may purchase options and futures contracts on security indices, index-based
securities such as Standard and Poor's Depository Receipts ("SPDRs") and stocks
not on the HIGHLIGHTED STOCKS list.
For more than a century, PaineWebber has been committed to providing
superior equity research, resulting in one of the strongest franchises on Wall
Street. PaineWebber Investment Strategy Group's approach to research places its
recommendations in the context of broad social, economic and political themes.
PaineWebber believes that the ability to spot emerging trends--and the companies
expected to benefit from them--has proven critical to successful investing. The
Investment Strategy Group attempts to identify these themes before they emerge
and become well recognized, and in doing so, aims to provide clients with
specific investment opportunities that offer superior performance. While the
Investment Strategy Group identifies several industries and companies that are
expected to benefit from each theme, the HIGHLIGHTED STOCKS list is a list of
"choice" companies from each theme. Historically, the HIGHLIGHTED STOCKS list
has included approximately 25 stocks, which are typically covered by the
PaineWebber Research Department and carry a "1" (Buy) or "2" (Attractive)
rating. Stocks are usually added to or deleted from the HIGHLIGHTED STOCKS list
at the beginning of a month, but revisions can also be made on other days.
The fund is designed for investors seeking long-term capital appreciation
from a fully invested, all-equity portfolio. The fund is not a market-timing
vehicle and not a complete investment program.
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The HIGHLIGHTED STOCKS list as of September 1, 1999, consisted of the
following 28 securities.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
America Online Chase Manhattan IBM Schering-Plough
American Express Delta Airlines Lucent Technologies Smurfit-Stone Container
American Intl Group Disney MCI WorldCom Sun Microsystems
Avon Products Freddie Mac Medtronic Time Warner
Bank of New York Gap Microsoft Wal-Mart
Bed Bath & Beyond Home Depot Nextel Warner-Lambert
Carnival Corp Illinois Tool Works Pfizer Xerox
</TABLE>
In addition to the securities listed above, the following securities have
appeared on the HIGHLIGHTED STOCKS list at some point during the twelve months
from September 1, 1998 to August 31, 1999: Abbot Laboratories, Air Products and
Chemicals, Coca Cola, Ecolab, Compaq, Gannett, Lear, New York Times, NiSource,
Pepsico, Sherwin-Williams, Staples and State Street.
As of September 1, 1999, the HIGHLIGHTED STOCKS list reflects the
following investment themes:
THE NEW MILLENNIUM AMERICAN (September 1998). This theme focuses on the
consumer, taking an approach more typical of Madison Avenue than of Wall Street.
What this report attempts to do is understand consumer behavior and, in
particular, the behavior of baby boomers--the largest, fastest-growing and
wealthiest segment of the population. Driven by "shared life experiences," the
attitudes of baby boomers about everything from consumption to leisure to health
care have changed dramatically as this generation has aged. With most of their
material needs satisfied, boomers today place more value on experiences than on
tangibles.
KEY TRENDS & INVESTMENT IMPLICATIONS
o CRADLE-TO-GRAVE ENTREPRENEURIALISM: Beneficiaries include firms catering
to small businesses, home offices, investors seeking asset management
and parents supervising children's education.
o TIME DROUGHT: Americans feel short of time and find themselves doing
several things at once. Trusted brands and time-savers could flourish.
o STRESSLESS LEISURE: As baby boomers age, they seek leisure activities
with less effort, less physical exertion, less risk and fewer projects.
Cruise lines, airlines, theme parks, casinos and hotels could benefit.
o NO-SERVICE/FULL-SERVICE ECONOMY: A tight labor market creates
opportunities for low-cost, highly efficient services and for premium
quality service providers.
o NEW DRUG CULTURE: Aging baby boomers want more pharmaceuticals and
"better-for-you" products.
MUTED CYCLE CYCLICALS (April 1999). "Benign deflation" and the muting of
the business cycle--infrequent and less severe recessions--have altered the old
sector rotation, which typically followed this pattern: first, defensive stocks;
second, interest-rate sensitive cyclicals; third, commodity cyclicals; and
lastly, capital goods makers. Although the domestic economy has become less
volatile, in addition to the muted business cycle, the "new profit pattern" has
two other elements: industry mini-recessions and global recession rotation. In
this "new profit pattern" there are four types of cyclical companies whose
earnings are affected by different variables: Capacity cyclicals, Demand
cyclicals, Growth cyclicals, Credit cycle cyclicals.
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KEY TRENDS & INVESTMENT IMPLICATIONS
o CAPACITY CYCLICALS: Companies that could benefit from swings in industry
capacity. Supply and demand situation appears favorable for airlines,
papers and semiconductors.
o DEMAND CYCLICALS: Solid economic growth could prove favorable for autos,
diversified industrials, railroads and retailers.
o GROWTH CYCLICALS: Global rebound and global growth could be favorable
for computer, household products, specialty chemicals and telecom
equipment firms.
o CREDIT CYCLE CYCLICALS: Rebounds in Japanese and Asian markets could
benefit select U.S. financial services firms.
INFORMATION REVOLUTION WARS (May 1999). The quantity of global GDP that
ultimately will be "digitizable" will likely surpass today's wildest
speculations. Major technological revolutions are always bigger than anyone ever
thinks. The First and Second Industrial Revolutions were violent upheavals
marked by many simultaneous "wars" between competing interests, technologies and
business models. So too will the Information Revolution witness many wars in
which some firms perish while others flourish.
SOME KEY TRENDS & INVESTMENT IMPLICATIONS
o INFORMATION AGE VS. INDUSTRIAL AGE: The distribution and manipulation of
information is now the central wealth-creating activity.
o PRODUCER VS. DISTRIBUTOR: The Internet increases the power of producers
and threatens distributors and middlemen that don't add value.
o E-TAILING VS. BRICK-AND-MORTAR RETAILING: Companies with strong brands
and sophisticated distribution could benefit more than retailers with
weak brands.
o COMMODITIZED INFORMATION VS. PROPRIETARY CONTENT VS. SPECIALIZED
INSIGHT: Commoditization of information could hurt traditional
information providers, such as newspapers. Proprietary content is
valuable if consumers prove willing to pay for it. Consumers will pay
for specialized insight tailored to their specific needs.
Both the stocks on the HIGHLIGHTED STOCKS list and the investment themes
will change from time to time. Changes to the list of stocks are normally made
monthly but may be made more frequently. Themes have changed less frequently in
the past.
OTHER INVESTMENT POLICIES. 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 borrow up to 33 1/3 of
its total assets. The fund may invest in the 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 (referred to as "stocks" in the
Prospectus) include common stocks, most preferred stocks and securities that are
convertible into them, including common stock purchase warrants and rights,
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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
securities may include debentures, notes and preferred equity 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. 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.
HIGHLIGHTED STOCKS LIST RISK. There can be no assurance that the equity
securities of issuers on the HIGHLIGHTED STOCKS list will perform as
anticipated. The past performance of these securities and issuers cannot be used
to predict the future results of either the HIGHLIGHTED STOCKS list or the fund.
The fund's investment results will not be identical to those of the HIGHLIGHTED
STOCKS list for a number of reasons, including: (1) the timing of the fund's
purchase and sale of stocks in response to changes in the HIGHLIGHTED STOCKS
list--the fund will buy and sell stocks only after publication of the changes to
the HIGHLIGHTED STOCKS list has been made; (2) the fund's cash flow from
purchases and sales of fund shares, which can occur daily and will result in
portfolio purchases and sales; (3) the fees and expenses, including the costs of
buying and selling stocks, that the fund bears; (4) the fund's possible
inability to add to or subtract from its holdings of a stock on the HIGHLIGHTED
STOCKS list at a given time, particularly in connection with the re-balancing of
the fund's portfolio to establish equal weightings of its assets among the
stocks on the HIGHLIGHTED STOCKS list; and (5) the fund's investment of part of
its assets in short-term debt obligations, money market instruments and options
and futures contracts. The fund may invest in these instruments, for example,
for liquidity in anticipation of shareholder sales of fund shares or because the
diversification requirements that apply to mutual funds prevent it from
investing substantially all its assets in the stocks that are on the HIGHLIGHTED
STOCKS list.
Because the HIGHLIGHTED STOCKS list includes a relatively small number of
issuers and the fund invests in stocks only if they are on the HIGHLIGHTED
STOCKS list, the fund will hold a relatively small number of stocks. As a
result, changes in the market value of a single issuer's stock could affect the
fund's performance and net asset value more severely than if its holdings were
more diversified. PaineWebber Investment Strategy Group makes subjective
decisions to add or delete companies from the HIGHLIGHTED STOCKS list, but the
list is not compiled with any particular client or product in mind, including
the fund. When selecting the companies for its HIGHLIGHTED STOCKS list, the
Investment Strategy Group does not take industry sector diversification into
account.
PaineWebber could at any time suspend or terminate publication of the
HIGHLIGHTED STOCKS list. In that event, the fund will determine how to proceed
consistent with its investment objective and the interests of its shareholders.
It is also possible that the HIGHLIGHTED STOCKS list would include fewer
securities than are necessary for the fund to satisfy the diversification
requirements for qualifying as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended ("Code"). See "Taxes." In that event,
the fund will invest in short-term debt obligations, money market instruments,
options and futures contracts, index-based securities such as SPDRs and stocks
not on the HIGHLIGHTED STOCKS list. Since January 1988, the HIGHLIGHTED STOCKS
list has included between 11 and 31 stocks, although on average it has consisted
of 25 stocks.
It is possible that the HIGHLIGHTED STOCKS list will include stocks of
issuers for which PaineWebber or one of its affiliates performs banking services
for which it receives fees, as well as stocks of issuers in which PaineWebber or
one of its affiliates makes a market and may have long or short positions. Fund
purchases and sales will be affected by market conditions following publication
of changes to the HIGHLIGHTED STOCKS list and will be subject to competing
orders by other PaineWebber clients who invest based on the HIGHLIGHTED STOCKS
list recommendations. If a stock is removed from or no longer appears on the
HIGHLIGHTED STOCKS list because PaineWebber or one of its affiliates is engaged
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in activities such as those mentioned above, the fund may continue to regard
that stock as being on the HIGHLIGHTED STOCK list.
Mitchell Hutchins does not have access to information regarding additions
to or deletions from the HIGHLIGHTED STOCKS list prior to their publication. The
HIGHLIGHTED STOCKS list is not maintained for the purpose of managing any
account or investment company such as the fund. In addition to being available
to the fund, the HIGHLIGHTED STOCKS list is also available to other clients of
PaineWebber and its affiliates, including Mitchell Hutchins, which may trade on
the basis of the HIGHLIGHTED STOCKS list. PaineWebber publishes other lists of
recommended securities that could be appropriate for fund investors but which
are not used by Mitchell Hutchins for the fund.
INVESTING IN FOREIGN SECURITIES. Historically, the HIGHLIGHTED STOCKS list
has only once included a foreign security. If the HIGHLIGHTED STOCKS list
includes one or more foreign securities, the fund will invest in them. Investing
in foreign securities involves more risks than investing in the United States.
The value of foreign securities is subject to economic and political
developments in the countries where the companies operate and to changes in
foreign currency values. Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, withholding taxes on interest and/or dividends,
limitations on the use of or transfer of fund assets and political or social
instability or diplomatic developments. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. In those European
countries that have begun using the Euro as a common currency unit, individual
national economies may be adversely affected by the inability of national
governments to use monetary policy to address their own economic or political
concerns.
Securities of many foreign companies may be less liquid and their prices
more volatile than securities of comparable U.S. companies. Transactions in
foreign securities may be subject to less efficient settlement practices.
Foreign securities trading practices, including those involving securities
settlement where fund assets may be released prior to receipt of payment, may
expose the fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer. Legal remedies for defaults and disputes
may have to be pursued in foreign courts, whose procedures differ substantially
from those of U.S. courts. Additionally, the costs of investing outside the
United States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
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.
If the HIGHLIGHTED STOCKS list includes depository receipts, including
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and
Global Depository Receipts ("GDRs"), or other securities convertible into
securities of issuers based in foreign countries, the fund will invest in these
receipts. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. 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. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of the fund's investment policies, depository receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depository receipt 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
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or all of the depository's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depository'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.
The fund anticipates that its brokerage transactions involving foreign
securities of companies headquartered in countries other than the United States
will be conducted primarily on the principal exchanges of such countries.
However, from time to time foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. Although
the fund will endeavor to achieve the best net results in effecting its
portfolio transactions, transactions on foreign exchanges are usually subject to
fixed commissions that are generally higher than negotiated commissions on U.S.
transactions. There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United States.
FOREIGN CURRENCY TRANSACTIONS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of the fund's foreign
investments. The fund's share value may change significantly when its
investments are denominated in foreign currencies. Generally, currency exchange
rates are determined by supply and demand in the foreign exchange markets and
the relative merits of investments in different countries. Currency exchange
rates also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.
The fund values its assets daily in U.S. dollars and does not intend to
convert its holdings of foreign currencies to U.S. dollars on a daily basis.
From time to time the fund's foreign currencies may be held as "foreign currency
call accounts" at foreign branches of foreign or domestic banks. These accounts
bear interest at negotiated rates and are payable upon relatively short demand
periods. If a bank became insolvent, the fund could suffer a loss of some or all
of the amounts deposited. The fund may convert foreign currency to U.S. dollars
from time to time.
The value of the assets of the fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a fund at one rate, while offering a lesser rate of exchange should
a fund desire immediately to resell that currency to the dealer. The fund
conducts its currency exchange transactions either on a spot (I.E., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward, futures or options contracts to purchase or sell foreign
currencies.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and this SAI 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 fund'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 it writes at a
maximum price to be calculated by a formula set forth in the option agreements.
The cover for an over-the-counter option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option. To the extent the
fund invests in illiquid securities, it may not be able to readily liquidate
such investments 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
("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
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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. To the extent that
foreign securities are freely tradable in the country in which they are
principally traded, they generally are not considered illiquid, even if they are
restricted in the United States. 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 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.
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. Repurchase agreements
involving obligations other than U.S. government securities (such as commercial
paper and corporate bonds) may be subject to special risks and may not have the
benefit of certain protections in the event of the counterparty's insolvency. If
the seller or guarantor becomes insolvent, the fund may suffer delays, costs and
possible losses in connection with the disposition of collateral. 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. Reverse repurchase agreements are subject to the fund's
limitation on borrowings and may be entered into only with banks or securities
dealers or their affiliates. 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.
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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. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce 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 payment of fees (including
fees calculated as a percentage of invested cash collateral) to PaineWebber for
these services. PaineWebber also has been approved as a borrower under the
fund's securities lending program. The board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent and/or
borrower.
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
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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 that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect 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.
MONEY MARKET INVESTMENTS. The fund may invest in money market investments
for liquidity, in anticipation of shareholder redemptions of fund shares, or
when the fund is unable to purchase or sell sufficient securities due to market
restrictions or diversification and illiquid security limitations imposed by the
Investment Company Act. Such investments include, among other things, (1)
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, (2) debt obligations of banks, savings and loan institutions,
insurance companies and mortgage bankers, (3) commercial paper and notes,
including those with variable and floating rates of interest, (4) debt
obligations of foreign branches of U.S. banks, U.S. branches of foreign banks
and foreign branches of foreign banks, (5) debt obligations issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities, including obligations of supranational entities,
(6) bonds issued by foreign issuers, (7) repurchase agreements and (8) other
investment companies that invest exclusively in money market instruments.
SEGREGATED ACCOUNTS. When the fund enters into certain transactions that
involve obligations to make future payments to third parties, it will maintain
with an approved custodian in a segregated account cash or liquid securities,
marked to market daily, in an amount at least equal to the fund's obligation or
commitment under such transactions. As described below under "Strategies Using
Derivative Instruments," segregated accounts may also be required in connection
with certain transactions involving options, futures and swaps.
SPDRS ("STANDARD & POOR'S DEPOSITORY RECEIPTS"). The fund may invest in
SPDRs. SPDRs are exchange-traded securities that represent ownership in
long-term unit investment trusts established to accumulate and hold a portfolio
of common stocks that is intended to track the price performance and dividend
yield of the Standard & Poor's 500 Composite Stock Price Index.
To the extent the fund invests in SPDRs, fund shareholders would
indirectly pay a portion of the operating costs of such companies in addition to
the expenses of its own operation. Indirectly then, fund shareholders may pay
higher operational costs than if they owned the underlying investments directly.
Additionally, the fund's investment in SPDRs is subject to limitations under the
Investment Company Act and market availability.
The price of a SPDR is derived from and based upon the securities it
holds. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stocks, with the exception that the pricing mechanism for such instruments is
based on a basket of stocks. The market prices of SPDRs are expected to
fluctuate in accordance with both changes in the net asset values of their
underlying indices and the supply and demand for the instruments on the
exchanges on which they are traded. Substantial market or other disruptions
affecting a SPDR could adversely affect the liquidity and value of the shares of
the fund.
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
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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 restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
(2) purchase any security if, as a result of that purchase, 25% or more of
the fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or to municipal securities, and provided that the
fund will invest 25% or more of its total assets in securities of issuers in the
same industry if necessary to replicate the composition of the HIGHLIGHTED
STOCKS list.
(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.
The following interpretation applies to but is not part of this
fundamental restriction: The fund's investments in master notes, funding
agreements and similar instruments will not be considered to be 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.
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NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by a vote of the board without shareholder
approval.
The fund will not:
(1) invest more than 15% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the fund has
valued the securities and includes, among other things, repurchase agreements
maturing in more than seven days.
(2) purchase 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.
(3) 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.
(4) 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.
(5) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
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"), options on
futures contracts and swaps to attempt to hedge the fund's portfolio and also to
attempt to enhance income or return. The fund may enter into transactions
involving one or more type 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 SECURITIES AND FOREIGN CURRENCIES. 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 or currency 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 or currency 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 or currency 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 or currency 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
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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 AND FOREIGN CURRENCY FUTURES CONTRACTS. Interest rate and
foreign currency 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 or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of bonds or currency, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended 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.
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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 stock
market sectors in which the fund has invested or expects to invest.
Income strategies using Derivative Instruments may include the writing of
covered options to obtain the related option premiums. Return 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 and return
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 utilize these
opportunities for the fund to the extent that they are consistent with the
fund's investment objective and permitted by its investment limitations and
applicable regulatory authorities. The fund's Prospectus or SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of Mitchell Hutchins to predict movements of the overall securities, interest
rate or currency exchange 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.
(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 was
unable to close out its positions in such Derivative Instruments, it might be
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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,
currencies 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.
OPTIONS. The fund may purchase put and call options, and write (sell)
covered put or call options on securities in which it invests and related
indices and on foreign currencies. 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 the 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, European-style options can only be exercised
immediately prior to their 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.
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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-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-listed
options depends on the existence of a liquid market. The fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
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.
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.
FUTURES. The fund may purchase and sell securities index futures
contracts, interest rate futures contracts and foreign currency futures
contracts. The fund may 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.
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 its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
16
<PAGE>
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 guideline, which can be
changed by its board without shareholder vote:
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.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The fund may
use options and futures on foreign currencies, as described above, and forward
currency contracts, as described below, to hedge against movements in the values
of the foreign currencies in which the fund's securities are denominated. Such
currency hedges can protect against price movements in a security a fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
The fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the fund may
17
<PAGE>
hedge against price movements in that currency by entering into transactions
using Derivative Instruments on another currency or a basket of currencies, the
value of which Mitchell Hutchins believes will have a positive correlation to
the value of the currency being hedged. In addition, the fund may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if the fund owned securities denominated in a
foreign currency and Mitchell Hutchins believed that currency would decline
relative to another currency, it might enter into a forward contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency. Transactions that use two foreign currencies are
sometimes referred to as "cross hedging." Use of a different foreign currency
magnifies the risk that movements in the price of the Derivative Instrument will
not correlate or will correlate unfavorably with the foreign currency being
hedged.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, a fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. The fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, the fund may purchase a forward currency contract to lock
in the U.S. dollar price of a security denominated in a foreign currency that
the fund intends to acquire. Forward currency contract transactions may also
serve as short hedges--for example, the fund may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.
The cost to the fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, parties to forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument purchased or sold, but in the opposite direction. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that a fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, a fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
18
<PAGE>
subject of the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. The fund may enter
into forward currency contracts or maintain a net exposure to such contracts
only if (1) the consummation of the contracts would not obligate the fund to
deliver an amount of foreign currency in excess of the value of the position
being hedged by such contracts or (2) the fund segregates with its custodian
cash or liquid securities in an amount not less than the value of its total
assets committed to the consummation of the contract and not covered as provided
in (1) above, as marked to market daily.
SWAP TRANSACTIONS. The fund may enter into swap transactions, which
include swaps, caps, floors and collars relating to interest rates, currencies,
securities or other instruments. Interest rate swaps involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the "notional principal amount") for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated ceiling level or goes below
a designated floor level on predetermined dates or during a specified time
period. Currency swaps, caps, floors and collars are similar to interest rate
swaps, caps, floors and collars, but they are based on currency exchange rates
rather than interest rates. Equity swaps or other swaps relating to securities
or other instruments are also similar, but they are based on changes in the
value of the underlying securities or instruments. For example, an equity swap
might involve an exchange of the value of a particular security or securities
index in a certain notional amount for the value of another security or index or
for the value of interest on that notional amount at a specified fixed or
variable rate.
The fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its bond portfolio or
to protect against any increase in the price of securities it anticipates
purchasing at a later date. The fund may use interest rate swaps, caps, floors
and collars as a hedge on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. Interest rate
swap transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.
The fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the fund receiving or paying, as the case
may be, only the net amount of the two payments. Since segregated accounts will
be established with respect to such transactions, Mitchell Hutchins believes
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the fund's borrowing restrictions. The net amount
of the excess, if any, of the fund's obligations over its entitlements with
respect to each swap will be accrued on a daily basis, and appropriate fund
assets having an aggregate net asset value at least equal to the accrued excess
will be maintained in a segregated account as described above in "The Fund's
Investment, Related Risks and Limitations--Segregated Accounts." The fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis.
The fund will enter into interest rate swap transactions only with banks
and recognized securities dealers or their respective affiliates believed by
Mitchell Hutchins to present minimal credit risk in accordance with guidelines
established by the fund's board. If there is a default by the other party to
such a transaction, the fund will have to rely on its contractual remedies
(which may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
19
<PAGE>
ORGANIZATION; BOARD MEMBERS, 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 and has eight operating series. The
Trust is governed by a board of trustees which oversees its operations and which
is authorized to establish additional series and to issue an unlimited number of
shares of beneficial interest of the Trust as applicable, for each existing or
future series, par value $0.001 per share.
The trustees ("board members") and executive officers of the Trust, their
ages, business addresses and principal occupations during the past five years
are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
<S> <C> <C>
Margo N. Alexander*+; 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.
R.Q.A. Enterprises Enterprises (management consulting firm) (since
One Old Church Road April 1991 and principal occupation since March
Unit #6 1995). Mr. Armstrong was chairman of the board,
Greenwich, CT 06830 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.
E. Garrett Bewkes, Trustee and Chairman Mr. Bewkes is a director of Paine Webber Group
Jr.**+; 72 of the Board of Inc. ("PW Group") (holding company of PaineWebber
Trustees 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.
20
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
<S> <C> <C>
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
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp. (gold
mining), Powerhouse Technologies Inc. (provides
technology to gaming and wagering industry) and
Weirton Steel Corp. (makes and finishes steel
products). 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 Management
Columbia University of the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president
New York, NY 10027 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.
21
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
<S> <C> <C>
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Ave, N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle
Washington, DC 20004 '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 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. (biotechnology company).
Prior to January 1993, he was chairman of the
Investment Advisory Committee of the Howard Hughes
Medical Institute. Mr. Schafer is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
22
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH 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).
Prior to March 1999, he was president of
Prudential Investments (1996-1999). Prior to
joining Prudential, he was a managing director at
Fidelity Investments. Mr. Storms is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director and chief
investment officer-quantitative investments of
Mitchell Hutchins. 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 Mr. Lee is a vice president and a manager of
and the mutual fund finance department of Mitchell
Assistant Hutchins. Prior to September 1997, he was an
Treasurer audit manager in the financial services
practice of Ernst & Young LLP. Mr. Lee is a vice
president and assistant treasurer of 32 investment
companies for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as an investment
adviser.
23
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH 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**; 33 Vice President Mr. Mahoney is a first vice president and senior
and manager of the mutual fund finance department
Assistant of Mitchell Hutchins. From August 1996
Treasurer 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 of 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 Ms. Moran is a vice president and a
and manager of the mutual fund finance department
Assistant of Mitchell Hutchins. Ms. Moran is a vice
Treasurer 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**; Vice President Ms. O'Donnell is a senior vice president and
47 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*; 38 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.
24
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
<S> <C> <C>
Victoria E. Schonfeld**; Vice President Ms. Schonfeld is a managing director and
48 general counsel of Mitchell Hutchins (since
May 1994) and a senior vice president of
PaineWebber (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 Mr. Schubert is a senior vice president and
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**; Vice President Mr. Taglialatela is a vice president and a
38 and manager of the mutual fund finance department
Assistant of Mitchell Hutchins. Prior to February
Treasurer 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*; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell Hutchins.
Prior to March 1995, he was a vice president and
directed the U.S. funds management and equity
research areas of Chase Manhattan Private Bank.
Mr. Tincher is a vice president of 13 investment
companies for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment
adviser.
Keith A. Weller**; 38 Vice President Mr. Weller is a first vice president and associate
and general counsel of Mitchell Hutchins. Prior
Assistant to May 1995, he was an attorney in private
Secretary 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>
25
<PAGE>
- -------------
* 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.
+ Mrs. Alexander, Mr. Bewkes and Mr. Storms are "interested persons" of the
fund as defined in the Investment Company Act by virtue of their positions
with Mitchell Hutchins 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
board members up to $150 per series for each board meeting and each separate
meeting of a board committee. 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 board members are reimbursed for any expenses incurred in attending
meetings. Board members and officers own in the aggregate less than 1% of the
shares of the fund. 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.
The table below includes certain information relating to the compensation
of the current board members who hold office with the Trust and the compensation
of those board members from all PaineWebber funds during calendar year 1998.
COMPENSATION TABLE+
ESTIMATED
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE TRUST AND
NAME OF PERSON, POSITION FROM THE TRUST* THE 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............ 17,077 108,272
Frederic V. Malek,
Trustee............ 14,000 101,372
Carl W. Schafer,
Trustee............ 14,000 101,372
- --------------------
+ Only independent board members are compensated by the Trust and the fund
complex and identified above; board members who are "interested persons," as
defined by the Investment Company Act, do not receive compensation.
* Represents fees estimated to be paid to each board member during the fund's
initial full fiscal year.
**Represents total compensation paid during the calendar year ended December
31, 1998, to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one of
their affiliates served as investment adviser. No fund within the PaineWebber
fund complex has a bonus, pension, profit sharing or retirement plan.
26
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of September 27, 1999, Mitchell Hutchins owned 100% of all outstanding
fund shares, and thus may be deemed a controlling person of the fund until
additional investors purchase shares. None of the trustees and officers of the
fund beneficially owned any of the outstanding fund shares.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator of the fund pursuant to an
advisory contract ("Advisory Contract") with the fund. Under the Advisory
Contract, the fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate of 0.75% of its average daily net assets.
Under the terms of the Advisory Contract, the fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the fund include the following: (1) the cost
(including brokerage commissions, 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 fund or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and other insurance or fidelity bonds; (9) any costs, expenses or losses
arising out of a liability of or claim for damages or other relief asserted
against the 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 makes the Investment Strategy Group, headed by Edward M.
Kerschner, available to consult with Mitchell Hutchins regarding the development
of investment themes and stocks covered by the Research Department. Mr.
Kerschner is PaineWebber's Chief Investment Strategist and Chairman of its
Investment Policy Committee. PaineWebber does not receive a fee for these
consulting services.
NET ASSETS. The following table shows the approximate net assets as of
August 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.
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NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
Domestic (excluding Money Market)................... $ 7,939.9
Global.............................................. 4,531.1
Equity/Balanced..................................... 7,677.7
Fixed Income (excluding Money Market)............... 4,799.3
Taxable Fixed Income.......................... 3,290.8
Tax-Free Fixed Income........................ 1,508.5
Money Market Funds.................................. 35,356.5
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 mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber funds and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of the fund under a distribution contract with the fund
("Distribution Contracts"). The Distribution Contract 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 separate exclusive
dealer agreements between Mitchell Hutchins and PaineWebber relating to each
class of shares of the fund (collectively, "Exclusive Dealer Agreements"),
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 that Class. 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.
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 the fund or investors at the time Class B
or C shares are bought.
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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 Contract 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 board members will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendment thereto is
approved, by the board, including those board members 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 and (4) while the
Plan remains in effect, the selection and nomination of board members who are
not "interested persons" of the fund shall be committed to the discretion of the
board members who are not "interested persons" of their fund.
In reporting amounts expended under the Plans to the board members,
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.
"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 of the fund 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
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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 board
members also recognized that Mitchell Hutchins' willingness to compensate
PaineWebber and its Financial Advisors, without the concomitant receipt by
Mitchell Hutchins of initial sales charges, was conditioned upon its expectation
of being compensated under the Class B Plan.
In approving the Class C Plan, 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 board members 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.
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 over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker.
The 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
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PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contract authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the 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.
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 fund and
subject to the review of the 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.
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,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Mitchell Hutchins
may engage in agency transactions in over-the-counter equity and debt securities
in return for research and execution services. These transactions are entered
into only pursuant to procedures that are designed to ensure that the
transaction (including commissions) is at least as favorable as it would have
been if effected directly with a market-maker that did not provide research or
execution services.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which the fund effects securities transactions may be used
by Mitchell Hutchins in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that it advises may be used in advising
the fund.
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 that fund and the other
account(s) as to amount according to a formula deemed equitable to the fund and
the other account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as 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 the board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
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end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the fund.
PORTFOLIO TURNOVER. The fund's annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of the fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. The fund is
expected to have an annual turnover rate greater than 100%.
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 re-balancing
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
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 table
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");
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(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 fund among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONESM Program.
An investor who participates in the PaineWebber InsightOneSM Program is eligible
to purchase Class A shares without a sales load. The PaineWebber InsightOneSM
Program offers a non-discretionary 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]. Accountholders may purchase or sell certain investment products
without paying commissions or other markups/markdowns (other than the
asset-based program fee). For more information, investors should contact their
PaineWebber Financial Advisors.
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.
PURCHASES OF CLASS Y SHARES THROUGH THE PACE (SERVICEMARK) MULTIADVISOR
PROGRAM. An investor who participates in the PACE(SERVICEMARK) MultiAdvisor
Program is eligible to purchase Class Y shares. The PACE(SERVICEMARK)
MultiAdvisor Program is an advisory
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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(SERVICEMARK) MultiAdvisor 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 PACESM MultiAdvisor Program.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the fund 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.
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 is closed or trading on
the New York Stock Exchange is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for 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." 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
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PaineWebber mutual fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $100,
$200, $300 and $400, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to a
contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of 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 fund of sufficient fund shares to provide the withdrawal
payments specified by participants in the fund's systematic withdrawal plan. The
payments generally are transmitted (and can be wired to client account as well
as 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 PLAN(SERVICEMARK);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a "PW fund" and, collectively,
the "PW funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
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order: uninvested cash balances, balances in RMA money market funds, and margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW funds and/or mutual funds other than the PW funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(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(REGISTERED), 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(REGISTERED) are debited to the RMA account once
monthly, permitting accountholders to remain invested for a longer
period of time;
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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 transfer 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(REGISTERED), with an additional fee of $40 if the investor selects an
optional line of credit with the Gold MasterCard(REGISTERED).
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 the two classes,
as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued or (ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The 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 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 New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. and foreign 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 over-the-counter market and listed on the Nasdaq Stock
Market ("Nasdaq") normally are valued at the last available sale price on Nasdaq
prior to valuation; other over-the-counter securities are valued at the last bid
price available prior to valuation. Where market quotations are readily
available, portfolio securities are valued based upon market quotations,
provided those quotations adequately reflect, in the judgment of 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
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derived from information concerning the security or similar securities received
from recognized dealers in those securities. All other securities and other
assets are valued at fair value as determined in good faith by or under the
direction of the board. The amortized cost method of valuation generally is used
to value debt obligations with 60 days or less remaining until maturity, unless
the board determines that this does not represent fair value.
All investments quoted in foreign currency will be valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined by the fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular trading on
the NYSE. Occasionally events affecting the value of foreign investments and
such exchange rates occur between the time at which they are determined and the
close of trading on the NYSE, which events would not be reflected in the
computation of a fund's net asset value on that day. If events materially
affecting the value of such investments or currency exchange rates occur during
such time period, the investments will be valued at their fair value as
determined in good faith by or under the direction of the applicable board. The
foreign currency exchange transactions of the fund conducted on a spot (that is,
cash) basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. Under normal market conditions this
rate differs from the prevailing exchange rate by less than one-tenth of one
percent due to the costs of converting from one currency to another.
PERFORMANCE INFORMATION
Past performance of the HIGHLIGHTED STOCKS list does not predict future
results of the HIGHLIGHTED STOCKS list or the fund. Materials showing any
performance of the HIGHLIGHTED STOCKS list do not reflect performance for the
fund, which is managed by Mitchell Hutchins and the results of which will vary
from the performance of the HIGHLIGHTED STOCKS list. 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.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in the fund's Performance Advertisements are
calculated according to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of
a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
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.
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Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
OTHER INFORMATION. In Performance Advertisements, the 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 Lehman Bond Index, the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), the Dow Jones
Industrial Average, the Morgan Stanley Capital International World Index, the
Lehman Brothers Treasury Bond Index, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. The fund also may refer in these
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(REGISTERED) 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. An
investment in any 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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GRAPH
The graph pictured shows the performance of common stocks, long-term
government bonds, inflation and treasury bills using the following plot points:
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
1928 $22,039 $11,751 $9,553 $11,028
1929 $20,184 $12,153 $9,572 $11,552
1930 $15,158 $12,719 $8,994 $11,831
1931 $8,588 $12,044 $8,138 $11,957
1932 $7,885 $14,072 $7,300 $12,072
1933 $12,142 $14,062 $7,337 $12,108
1934 $11,967 $15,473 $7,486 $12,128
1935 $17,672 $16,243 $7,710 $12,148
1936 $23,667 $17,465 $7,803 $12,170
1937 $15,376 $17,505 $8,045 $12,208
1938 $20,161 $18,473 $7,822 $12,205
1939 $20,079 $19,570 $7,784 $12,208
1940 $18,115 $20,762 $7,859 $12,208
1941 $16,015 $20,955 $8,623 $12,215
1942 $19,273 $21,630 $9,424 $12,248
1943 $24,265 $22,080 $9,721 $12,291
1944 $29,057 $22,700 $9,926 $12,331
1945 $39,645 $25,136 $10,150 $12,372
1946 $36,446 $25,111 $11,993 $12,415
1947 $38,527 $24,453 $13,074 $12,478
1948 $40,646 $25,284 $13,428 $12,579
1949 $48,283 $26,915 $13,186 $12,717
1950 $63,594 $26,931 $13,950 $12,870
1951 $78,869 $25,873 $14,769 $13,061
1952 $93,357 $26,173 $14,899 $13,278
1953 $92,433 $27,126 $14,991 $13,520
1954 $141,071 $29,076 $14,916 $13,636
1955 $185,594 $28,701 $14,971 $13,850
1956 $197,768 $27,097 $15,399 $14,191
1957 $176,449 $29,118 $15,864 $14,636
1958 $252,957 $27,345 $16,144 $14,862
1959 $283,211 $26,727 $16,386 $15,300
1960 $284,542 $30,410 $16,628 $15,707
1961 $361,055 $30,705 $16,740 $16,042
1962 $329,535 $32,820 $16,944 $16,480
1963 $404,669 $33,217 $17,223 $16,994
1964 $471,359 $34,383 $17,428 $17,596
1965 $530,043 $34,627 $17,763 $18,287
1966 $476,721 $35,891 $18,358 $19,158
1967 $591,038 $32,597 $18,916 $19,964
1968 $656,407 $32,512 $19,809 $21,004
1969 $600,613 $30,863 $21,019 $22,386
1970 $624,697 $34,601 $22,173 $23,846
1971 $714,091 $39,179 $22,918 $24,893
1972 $849,626 $41,408 $23,700 $25,849
1973 $725,071 $40,948 $25,785 $27,640
1974 $533,144 $42,730 $28,931 $29,851
1975 $731,474 $46,661 $30,956 $31,582
1976 $905,565 $54,500 $32,442 $33,193
1977 $840,364 $54,118 $34,648 $34,886
1978 $895,828 $53,469 $37,767 $37,398
1979 $1,060,661 $52,827 $42,790 $41,287
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YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
1980 $1,404,315 $50,767 $48,096 $45,911
1981 $1,335,504 $51,732 $52,376 $52,660
1982 $1,621,301 $72,631 $54,419 $58,190
1983 $1,986,094 $73,139 $56,487 $63,310
1984 $2,111,218 $84,476 $58,746 $69,515
1985 $2,791,030 $110,664 $60,979 $74,867
1986 $3,307,371 $137,776 $61,649 $79,509
1987 $3,479,354 $134,056 $64,362 $83,882
1988 $4,063,885 $147,060 $67,194 $89,167
1989 $5,344,009 $173,678 $70,285 $96,657
1990 $5,173,001 $184,446 $74,572 $104,196
1991 $6,750,766 $220,044 $76,884 $110,031
1992 $7,270,575 $237,867 $79,114 $113,882
1993 $7,996,906 $281,159 $81,250 $117,185
1994 $8,101,665 $259,229 $83,443 $121,755
1995 $10,507,050 $313,511 $85,404 $126,856
1996 $13,710,736 $337,286 $88,451 $135,380
1997 $18,274,382 $363,828 $90,067 $142,494
1998 $23,495,420 $441,777 $91,513 $149,416
- ---------------------
Source: Stocks, Bonds, Bills and Inflation 1999 Yearbook(TRADEMARK) Ibbotson
Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not represent
the fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. Year-to-year fluctuations in certain markets have
been significant and 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 1926 to 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.
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
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those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
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 same or another PaineWebber mutual
fund without paying a sales charge due to the 365-day reinstatement privilege or
the exchange privilege. In these cases, any gain on the sale or exchange of the
original Class A shares would be increased, or any loss would be decreased, by
the amount of the sales charge paid when those shares were bought, and that
amount would increase the basis of the PaineWebber mutual fund shares
subsequently acquired.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or loss
as a result of a conversion from Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To qualify for treatment
as a RIC under the 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, net short-term capital gain and net gain
from certain foreign currency transactions) ("Distribution Requirement") and
must meet several additional requirements. These requirements include the
following: (1) the fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in securities or
those currencies ("Income Requirement"); (2) 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, it would be taxed as an ordinary corporation on its taxable income for
that year (even if that income was distributed to its shareholders) and all
distributions out of its earnings and profits would be taxable to its
shareholders as dividends (that is, ordinary income).
OTHER INFORMATION. Dividends and other distributions declared by the fund
in October, November or December of any year and payable to shareholders of
record on a date in that month will be deemed to have been paid by the fund and
received by the shareholders on December 31 of that year if the fund pays the
distributions 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.
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Investors also should be aware that if shares are purchased shortly before
the record date for a capital gain distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Dividends and interest received, and gains realized, by the fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions that would reduce the return on its
securities. Tax conventions between certain countries and the United States,
however, may reduce or eliminate foreign taxes, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors.
The fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for the calendar year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that 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 the disposition of foreign currencies (except
certain gains that may be excluded by future regulations) and gains from
options, futures and forward currency contracts derived by the fund with respect
to its business of investing in securities or foreign currencies, qualify as
permissible income under the Income Requirement.
If the fund has an "appreciated financial position"-- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis--and enters into a "constructive sale" of the 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 or forward
contract entered into by the fund or a related person with respect to the same
or substantially identical property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction
during any taxable year that otherwise would be treated as a constructive sale
if the transaction is closed within 30 days after the end of that year and the
fund holds the appreciated financial position unhedged for 60 days after that
closing (i.e., at no time during that 60-day period is the fund's risk of loss
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
board members or by any officers or officer by or on behalf of the Trust or the
fund, the board members 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
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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 board members 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 that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.
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 board
members 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 board member
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called to vote on the removal
of a board member at the written request of holders of 10% of the outstanding
shares of the Trust.
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 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.
The custodian employs foreign sub-custodians approved by the board in accordance
with applicable requirements under the Investment Company Act to provide custody
of the foreign assets of the fund outside the United States. 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 Trust and
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.
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YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THE PaineWebber
PROSPECTUS AND THIS STATEMENT OF Strategy Fund
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.
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Statement of Additional Information
September 27, 1999
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PAINEWEBBER
(C)1999 PaineWebber Incorporated
