As filed with the Securities and Exchange Commission on June , 1995
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
---
Post-Effective Amendment No. [ ]
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PAINEWEBBER OLYMPUS FUND
(Exact Name of Registrant as Specified in Charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of Principal Executive Offices)
(212) 713-2000
(Registrant's Area Code and Telephone Number)
DIANNE E. O'DONNELL, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and Address of Agent for Service)
Copies to:
ARTHUR J. BROWN, ESQ.
BARRY E. SIMMONS, ESQ.
Kirkpatrick & Lockhart
South Lobby - 9th Floor
1800 M Street, N.W.
Washington, D.C. 20036-5891
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: as soon as
practicable after this Registration Statement becomes effective.
The Registrant has filed a declaration registering an indefinite
amount of securities pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. Accordingly, no filing fee is
payable herewith. The Registrant filed on October 28, 1994, the
notice required by Rule 24f-2 for its fiscal year ended August 31,
1994.
It is proposed that this filing will become effective on July ,
1995 pursuant to Rule 488.
<PAGE>
PAINEWEBBER OLYMPUS FUND
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Letters to Shareholders
Notices of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PAINEWEBBER OLYMPUS FUND
Form N-14 Cross Reference Sheet
Part A Item No. Prospectus/Proxy
and Caption Statement Caption
--------------- -----------------
1. Beginning of Registration Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3. Synopsis Information and Synopsis; Comparison of
Risk Factors Principal Risk Factors
4. Information About the Synopsis; The Proposed
Transaction Transactions; Appendix A;
Appendix B
5. Information About the Synopsis; Comparison of
Registrant Principal Risk Factors;
Additional Information
About Growth Fund;
Prospectus of PaineWebber
Growth Fund
6. Information About the Synopsis; Comparison of
Company Being Acquired Principal Risk Factors;
Miscellaneous; Prospectuses
of PaineWebber
Communications & Technology
Growth Fund and PaineWebber
Blue Chip Growth Fund
7. Voting Information Voting Information
8. Interest of Certain Persons Not Applicable
and Experts
9. Additional Information Not Applicable
Required for Reoffering by
Persons Deemed to be
Underwriters
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
<PAGE>
PAINEWEBBER OLYMPUS FUND
Form N-14 Cross Reference Sheet
Part B Item No. Prospectus/Proxy
and Caption Statement Caption
--------------- -----------------
12. Additional Information About Additional Information
the Registrant About Growth Fund;
Statement of Additional
Information of PaineWebber
Growth Fund
13. Additional Information About Statements of Additional
the Company Being Acquired Information of PaineWebber
Communications & Technology
Growth Fund and PaineWebber
Blue Chip Growth Fund
14. Financial Statements Annual Reports of
PaineWebber Growth Fund,
for Fiscal Year Ended
August 31, 1994, and of
PaineWebber Communications
& Technology Growth Fund
for Fiscal Year Ended
August 31, 1994;
See also the Annual Report
of PaineWebber Blue Chip
Growth Fund, dated February 28,
1995, File No. 811-4448, filed
May 3, 1995, SEC EDGAR accession
no. 950117-95-000133
Semi-Annual Reports of
PaineWebber Growth Fund and
PaineWebber Communications
& Technology Growth Fund,
each for the six month's ended
February 28, 1995, File No.
811-4180, filed May 9, 1995,
SEC EDGAR accession no.
950130-95-000915
Pro Forma Financial
Statements for the twelve months
ended February 28, 1995
Part C
------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PAINEWEBBER COMMUNICATIONS & TECHNOLOGY GROWTH FUND
(a series of PaineWebber Olympus Fund)
July __, 1995
Dear Shareholder:
The attached proxy materials describe a proposal that PaineWebber
Communications & Technology Growth Fund ("ComTech Growth Fund") reorganize and
become part of PaineWebber Growth Fund ("Growth Fund") (each a "Fund"). If the
proposal is approved and implemented, each shareholder of ComTech Growth Fund
automatically would become a shareholder of Growth Fund. ComTech Growth Fund
and Growth Fund are each a series of PaineWebber Olympus Fund ("Trust"), an
open-end management investment company organized as a Massachusetts business
trust.
Your board of trustees recommends a vote FOR the reorganization
proposal. The board believes that combining the two Funds will benefit ComTech
Growth Fund's shareholders by providing them with a portfolio that has an
investment objective identical to the investment objective of ComTech Growth
Fund, is managed in a similar manner and will have lower operating expenses as a
percentage of net assets. The attached materials provide more information about
the proposed reorganization and the two Funds.
Your vote is important no matter how many shares you own. Voting your
---------------------------------------------------------
shares early will permit the Trust to avoid costly follow-up mail and telephone
solicitation. After reviewing the attached materials, please complete, date and
sign your proxy card and mail it in the enclosed return envelope today.
Very truly yours,
MARGO N. ALEXANDER
President, PaineWebber Olympus Fund
<PAGE>
PAINEWEBBER BLUE CHIP GROWTH FUND
(a series of PaineWebber Master Series, Inc.)
July __, 1995
Dear Shareholder:
The attached proxy materials describe a proposal that PaineWebber Blue
Chip Growth Fund ("Blue Chip Growth Fund") reorganize and become part of
PaineWebber Growth Fund ("Growth Fund") (each a "Fund"). If the proposal is
approved and implemented, each shareholder of Blue Chip Growth Fund
automatically would become a shareholder of Growth Fund. Blue Chip Growth Fund
is a series of PaineWebber Master Series, Inc. ("Corporation"), a professionally
managed, open-end investment company organized as a Maryland corporation.
Growth Fund is a series of PaineWebber Olympus Fund, an open-end management
investment company organized as a Massachusetts business trust.
Your board of directors recommends a vote FOR the reorganization
proposal. The board believes that combining the two Funds will benefit Blue
Chip Growth Fund's shareholders by providing them with a portfolio that has an
investment objective similar to the investment objective of Blue Chip Growth
Fund, is managed in a similar manner and will have lower operating expenses as a
percentage of net assets. The attached materials provide more information about
the proposed reorganization and the two Funds.
Your vote is important no matter how many shares you own. Voting your
---------------------------------------------------------
shares early will permit the Corporation to avoid costly follow-up mail and
telephone solicitation. After reviewing the attached materials, please
complete, date and sign your proxy card and mail it in the enclosed return
envelope today.
Very truly yours,
MARGO N. ALEXANDER
President, PaineWebber Master Series,
Inc.
<PAGE>
PAINEWEBBER COMMUNICATIONS & TECHNOLOGY GROWTH FUND
(a series of PaineWebber Olympus Fund)
____________________
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
August 11, 1995
____________________
To The Shareholders:
A special meeting of shareholders ("Meeting") of PaineWebber Communications
& Technology Growth Fund ("ComTech Growth Fund"), a series of PaineWebber
Olympus Fund ("Trust"), will be held on August 11, 1995, at [10:00 a.m.] eastern
standard time, at 1285 Avenue of the Americas, 38th Floor, Room [ ], New York,
New York 10019, for the following purposes:
(1) To consider an Agreement and Plan of Reorganization and
Termination under which PaineWebber Growth Fund ("Growth Fund"), a series of the
Trust, would acquire the assets of ComTech Growth Fund in exchange solely for
shares of beneficial interest in Growth Fund and the assumption by Growth Fund
of ComTech Growth Fund's liabilities, followed by the distribution of those
shares to the shareholders of ComTech Growth Fund, all as described in the
accompanying prospectus/proxy statement; and
(2) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
You are entitled to vote at the Meeting and any adjournment thereof if you
owned shares of ComTech Growth Fund at the close of business on June 26, 1995.
If you attend the Meeting, you may vote your shares in person. If you do not
expect to attend the Meeting, please complete, date, sign and return the
enclosed proxy card in the enclosed postage paid envelope.
By order of the board of trustees,
DIANNE E. O'DONNELL
Secretary
July __, 1995
1285 Avenue of the Americas
New York, New York 10019
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions
on the enclosed proxy card, date and sign the
card, and return it in the envelope provided.
IF YOU SIGN, DATE AND RETURN THE PROXY CARD BUT
GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL
BE VOTED "FOR" THE PROPOSALS NOTICED ABOVE. In
order to avoid the additional expense to
ComTech Growth Fund of further solicitation, we
ask your cooperation in mailing in your proxy
card promptly. Unless proxy cards submitted by
corporations and partnerships are signed by the
appropriate persons as indicated in the voting
instructions on the proxy card, they will not
be voted.
<PAGE>
PAINWEBBER BLUE CHIP GROWTH FUND
(a series of Paine Webber Master Series, Inc.)
-------------------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
August 11, 1995
To The Shareholders:
A special meeting of shareholders ("Meeting") of PaineWebber Blue Chip
Growth Fund ("Blue Chip Growth Fund"), a series of PaineWebber Master Series,
Inc., will be held on August 11, 1995, at [10:00 a.m.] eastern standard time, at
1285 Avenue of the Americas, 38th Floor, Room [ ], New York, New York 10019,
for the following purposes:
(1) To consider an Agreement and Plan of Reorganization and
Termination under which PaineWebber Growth Fund ("Growth Fund"), a series of
PaineWebber Olympus Fund, would acquire the assets of Blue Chip Growth Fund in
exchange solely for shares of beneficial interest in Growth Fund and the
assumption by Growth Fund of Blue Chip Growth Fund's liabilities, followed by
the distribution of those shares to the shareholders of Blue Chip Growth Fund,
all as described in the accompanying prospectus/proxy statement; and
(2) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
You are entitled to vote at the Meeting and any adjournment thereof if you
owned shares of Blue Chip Growth Fund at the close of business on June 26, 1995.
If you attend the Meeting, you may vote your shares in person. If you do not
expect to attend the Meeting, please complete, date, sign and return the
enclosed proxy card in the enclosed postage paid envelope.
By order of the board of directors,
DIANNE E. O'DONNELL
Secretary
July __, 1995
1285 Avenue of the Americas
New York, New York 10019
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions
on the enclosed proxy card, date and sign the
card, and return it in the envelope provided.
IF YOU SIGN, DATE AND RETURN THE PROXY CARD BUT
GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL
BE VOTED "FOR" THE PROPOSALS NOTICED ABOVE. In
order to avoid the additional expense to Blue
Chip Growth Fund of further solicitation, we
ask your cooperation in mailing in your proxy
card promptly. Unless proxy cards submitted by
corporations and partnerships are signed by the
appropriate persons as indicated in the voting
instructions on the proxy card, they will not
be voted.
<PAGE>
PAINEWEBBER GROWTH FUND
PAINEWEBBER COMMUNICATIONS & TECHNOLOGY
GROWTH FUND
(each a series of PaineWebber Olympus Fund)
PAINEWEBBER BLUE CHIP GROWTH FUND
(a series of PaineWebber Master Series, Inc.)
1285 Avenue of the Americas
New York, New York 10019
(Toll Free) 1-800-647-1568
_____________________
PROSPECTUS/PROXY STATEMENT
July __, 1995
_____________________
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished
to shareholders of PaineWebber Communications & Technology Growth Fund
("ComTech Growth Fund"), a series of PaineWebber Olympus Fund ("Trust"),
and PaineWebber Blue Chip Growth Fund ("Blue Chip Growth Fund"), a series
of PaineWebber Master Series, Inc. ("Corporation") (each an"Acquired Fund"
and collectively, the "Acquired Funds"), in connection with the
solicitation of proxies by the Trust's board of trustees and the
Corporation's board of directors for use at a combined special meeting of
shareholders of the Acquired Funds, to be held on August 11, 1995, at
[10:00 a.m.] eastern standard time, and at any adjournment thereof
("Meeting").
As more fully described in the Proxy Statement, the primary purpose of
the Meeting is to vote on two proposed reorganizations (each, a
"Reorganization" and collectively, the "Reorganizations"). In each
Reorganization, PaineWebber Growth Fund ("Growth Fund"), a series of the
Trust, would acquire the assets of an Acquired Fund, in exchange solely for
shares of beneficial interest in Growth Fund and the assumption by Growth
Fund of that Acquired Fund's liabilities. Those Growth Fund shares then
would be distributed to that Acquired Fund's shareholders, by class, so
that each such shareholder would receive a number of full and fractional
shares of the applicable class of Growth Fund having an aggregate value
that, on the effective date of the Reorganization, is equal to the
aggregate net asset value of the shareholder's shares of the corresponding
class in the Acquired Fund. As soon as practicable following these
distributions, each Acquired Fund will be terminated.
Growth Fund is a diversified series of the Trust, which is an open-end
management investment company comprised of two outstanding series (Growth
Fund and ComTech Growth Fund). Growth Fund's investment objective is long-
term capital appreciation. Growth Fund seeks to achieve its investment
objective by investing primarily in common stocks issued by companies that,
in the judgment of Growth Fund's investment adviser, have substantial
potential for capital growth.
This Proxy Statement, which should be retained for future reference,
sets forth concisely the information about each Reorganization and Growth
Fund that a shareholder should know before voting. This Proxy Statement is
accompanied by the Prospectus of Growth Fund dated January 1, 1995, and by
its Annual Report to Shareholders for the fiscal year ended August 31,
1994, which are incorporated by this reference into this Proxy Statement.
A Statement of Additional Information dated July __, 1995, including
historical financial statements, has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by this reference.
A Prospectus of ComTech Growth Fund dated January 1, 1995, and
<PAGE>
Statements of Additional Information of Growth Fund and ComTech Growth
Fund, each dated January 1, 1995, have been filed with the SEC and are
incorporated herein by this reference. A Prospectus and Statement of
Additional Information of Blue Chip Growth Fund, each dated July __, 1995,
are included in the registration statement of which this Proxy Statement is
a part and are incorporated herein by this reference. Copies of these
documents, as well as each Acquired Fund's annual report, or semi-annual
report, if applicable, may be obtained without charge and further inquiries
may be made by contacting your investment executive at PaineWebber
Incorporated ("PaineWebber") or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
-----------------
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
COMPARISON OF PRINCIPAL RISK FACTORS . . . . . . . . . . . . . . . . . 13
ADDITIONAL INFORMATION ABOUT GROWTH FUND . . . . . . . . . . . . . . . 21
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
APPENDIX A FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION INVOLVING BLUE CHIP GROWTH FUND. . . . . . . . . . . . 25
APPENDIX B FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION INVOLVING COMTECH GROWTH FUND. . . . . . . . . . . . . 26
i
<PAGE>
PAINEWEBBER COMMUNICATIONS & TECHNOLOGY GROWTH FUND
(a series of PaineWebber Olympus Fund)
PAINEWEBBER BLUE CHIP GROWTH FUND
(a series of PaineWebber Master Series, Inc.)
______________
PROSPECTUS/PROXY STATEMENT
Special Meeting of Shareholders
to be held on
August 11, 1995
______________
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished
to shareholders of PaineWebber Communications & Technology Growth Fund
("ComTech Growth Fund"), a series of PaineWebber Olympus Fund ("Trust"),
and PaineWebber Blue Chip Growth Fund ("Blue Chip Growth Fund"), a series
of PaineWebber Master Series, Inc. ("Corporation") (each an "Acquired Fund"
and collectively, the "Acquired Funds"), in connection with the
solicitation of proxies by the board of trustees of the Trust and the board
of directors of the Corporation (each a "Board"), for use at a combined
special meeting of shareholders of the Acquired Funds to be held on August
11, 1995, and any adjournment thereof ("Meeting"). This Proxy Statement
will first be mailed to shareholders on or about July __, 1995.
At least one-third of Blue Chip Growth Fund's shares, and a majority
of ComTech Growth Fund's shares, outstanding on June 26, 1995, represented
in person or by proxy, must be present for the transaction of business by
that Acquired Fund at the Meeting. If, with respect to either Acquired
Fund, a quorum is not present at the Meeting or a quorum is present but
sufficient votes to approve the proposal are not received, the persons
named as proxies may propose one or more adjournments of the Meeting with
respect to that Acquired Fund to permit further solicitation of proxies.
Any such adjournment will require the affirmative vote of a majority of
those shares of the Acquired Fund represented at the Meeting in person or
by proxy. The persons named as proxies will vote those proxies that they
are entitled to vote FOR any such proposal in favor of such an adjournment
and will vote those proxies required to be voted AGAINST any such proposal
against such adjournment. A shareholder vote may be taken on one or more
of the proposals in this Proxy Statement prior to any such adjournment if
sufficient votes have been received and it is otherwise appropriate.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial
owners or other persons entitled to vote and the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be
counted as shares present for purposes of determining whether a quorum is
present but will not be voted for or against any adjournment or proposal.
Accordingly, abstentions and broker non-votes effectively will be a vote
against adjournment or against any proposal where the required vote is a
percentage of the shares present. Abstentions and broker non-votes will
not be counted, however, as votes cast for purposes of determining whether
sufficient votes have been received to approve a proposal.
The individuals named as proxies on the enclosed proxy card will vote
in accordance with your direction as indicated thereon if your proxy card
is received properly executed by you or by your duly appointed agent or
attorney-in-fact. If you sign, date and return the proxy card, but give no
voting instructions, your shares will be voted in favor of approval of the
Agreement and Plan of Reorganization and Termination dated as of June 1,
1995 (each a "Reorganization Plan") that involves your Acquired Fund. The
Reorganization Plans are attached to this Proxy Statement as Appendix A and
Appendix B. Under each Reorganization Plan, PaineWebber Growth Fund
("Growth Fund" or "Acquiring Fund"), a series of the Trust, would acquire
the assets of an Acquired Fund in exchange solely for shares of beneficial
interest in Growth Fund and the assumption by Growth Fund of that Acquired
Fund's liabilities; those shares then would be distributed to that Acquired
Fund's
<PAGE>
shareholders. (Each of these transactions is referred to herein as a
"Reorganization.") After completion of a Reorganization, the participating
Acquired Fund will be terminated.
The duly appointed proxies may, in their discretion, vote upon such
other matters as may come before the Meeting or any adjournments thereof.
The proxy card may be revoked by giving another proxy or by letter or
telegram revoking such proxy. To be effective, such revocation must be
received by the Trust or the Corporation, as applicable, prior to the
Meeting and must indicate your name and account number. In addition, if
you attend the Meeting in person you may, if you wish, vote by ballot at
the Meeting thereby canceling any proxy previously given.
As of the record date, June 26, 1995 ("Record Date"), ComTech Growth
Fund had ____________ shares of beneficial interest outstanding, consisting
of _____ Class A shares, _____ Class B shares and _____ Class D shares, and
Blue Chip Growth Fund had ____________ shares of common stock outstanding,
consisting of _____ Class A shares, _____ Class B shares and _____ Class D
shares. The solicitation of proxies, the cost of which will be borne by
Growth Fund, ComTech Growth Fund and Blue Chip Growth Fund (each a "Fund,"
and collectively, the "Funds") in proportion to their respective net
assets, will be made primarily by mail but also may include telephone or
oral communications by representatives of Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), who will not receive any
compensation therefor from such Funds, or by Shareholder Communications
Corporation, professional proxy solicitors retained by the Acquired Funds,
who will be paid fees and expenses of up to approximately $24,000 for
soliciting services. Management does not know of any person who owns
beneficially 5% or more of the shares of either Acquired Fund. Trustees
and officers of the Trust and directors and officers of the Corporation own
in the aggregate less than 1% of the shares of their respective Acquired
Funds.
Summarized below is the proposal the shareholders of each Acquired
Fund are being asked to consider:
Fund Proposal
---- --------
ComTech Growth To approve a Reorganization Plan.
Blue Chip Growth To approve a Reorganization Plan.
For voting purposes, the shareholders of each Acquired Fund will vote
only on the Reorganization Plan applicable to it. Approval of a
Reorganization Plan and consummation of the transactions contemplated
thereby for one Acquired Fund does not depend on the approval of the other
Reorganization Plan by the other Acquired Fund's shareholders and
consummation of the transactions contemplated thereby.
Approval of the Reorganization Plan with respect to ComTech Growth
Fund requires the affirmative vote of a majority of the outstanding voting
securities of that Fund. As defined in the Investment Company Act of 1940
("1940 Act"), "majority of the outstanding voting securities" means the
lesser of (1) 67% of ComTech Growth Fund's shares present at a meeting of
shareholders if the owners of more than 50% of its shares then outstanding
are present in person or by proxy, or (2) more than 50% of its outstanding
shares. Under Maryland law and the Corporation's Amended and Restated
Articles of Incorporation, the affirmative vote of a majority of the
outstanding shares of Blue Chip Growth Fund entitled to vote at the Meeting
is required to approve the Reorganization Plan. Each full outstanding
share of each Acquired Fund is entitled to one vote, and each outstanding
fractional share of each Acquired Fund is entitled to a proportionate
fractional share of one vote. If a Reorganization Plan is not approved by
the requisite vote of the shareholders of the involved Acquired Fund, the
persons named as proxies may propose one or more adjournments of the
Meeting to permit further solicitation of proxies. Such lack of approval
by one Acquired Fund will not affect the other Reorganization.
2
<PAGE>
APPROVAL OF THE REORGANIZATIONS
SYNOPSIS
The following is a summary of certain information contained elsewhere
in this Proxy Statement, the prospectuses of the Funds (which are
incorporated herein by reference), and the Reorganization Plans.
Shareholders should read the entire Proxy Statement and the prospectus of
Growth Fund carefully. As discussed more fully below, the Boards believe
that the proposed Reorganizations will benefit their respective Acquired
Fund's shareholders. Growth Fund has an investment objective identical to
that of ComTech Growth Fund and similar to the investment objective of Blue
Chip Growth Fund. It is anticipated that, following the Reorganizations,
each Acquired Fund's shareholders, as shareholders of Growth Fund, will be
subject to lower operating expenses as a percentage of net assets.
The Proposed Reorganizations
Each Board approved a Reorganization Plan with respect to its Acquired
Fund at a combined meeting of the Boards held on April 28, 1995. Each
Reorganization Plan provides for the acquisition by Growth Fund of the
assets of an Acquired Fund in exchange solely for Class A, Class B and
Class D shares of Growth Fund and the assumption of Growth Fund of the
liabilities of the Acquired Fund. Each Acquired Fund then will distribute
the Growth Fund shares to its shareholders, by class, so that each
shareholder will receive the number of full and fractional shares of the
class of Growth Fund that corresponds in terms of fees and other
characteristics ("Corresponding Class") and that is equal in value to the
value of such shareholder's holdings in the Acquired Fund as of the Closing
Date (defined below). Each Acquired Fund then will be terminated as soon
as practicable thereafter.
The exchange of each Acquired Fund's assets for Growth Fund shares and
Growth Fund's assumption of its liabilities will occur at or as of 4:00
p.m., eastern standard time, on August 18, 1995, or on such later date as
the conditions to the closing are satisfied ("Closing Date").
Growth Fund currently offers for sale four classes of shares (each, a
"Class" and collectively, "Classes"), designated as Class A, Class B, Class
C and Class D shares. Growth Fund will only issue Class A, Class B and
Class D shares in exchange for an Acquired Fund's assets; Class C shares
will not be issued in the proposed Reorganizations. Each Acquired Fund has
three Classes of shares, designated as Class A, Class B and Class D shares,
which are identical to the correspondingly lettered Classes of Growth
Fund's shares.
The rights and privileges of the former shareholders of each Class of
an Acquired Fund will be effectively unchanged by the Reorganizations.
Accordingly, the Reorganizations will have no effect on the holding period
of Class B shares of the Acquired Funds for purposes of calculating any
applicable contingent deferred sales charge ("CDSC") or the holding period
for the conversion of Class B shares into Class A shares. Similarly, the
Reorganization will have no effect on the policies regarding the ability of
investors to qualify for reduced or waived sales charges, as currently in
effect for the Acquired Funds.
For the reasons set forth below under "The Proposed Transactions --
Reasons for the Reorganizations," the Trust's Board (with respect to
ComTech Growth Fund) and the Corporation's Board (with respect to Blue Chip
Growth Fund), including the trustees and directors who are not "interested
persons," as that term is defined in the 1940 Act, of the Trust or the
Corporation ("Independent Persons"), have concluded, in each instance, that
the Reorganization is in the best interests of the participating Acquired
Fund, that the terms of the Reorganization are fair and reasonable, and
that the interests of such Acquired Fund's shareholders will not be diluted
as a result of the Reorganization. Accordingly, each Board recommends
approval of the Reorganizations. In addition, the Trust's board of
trustees, including its Independent Persons, has concluded that the
Reorganizations are in the best interests of Growth Fund, that the terms of
the Reorganizations are fair and reasonable, and that the interests of
Growth Fund's shareholders will not be diluted as a result of the
Reorganizations.
Comparative Fee Tables
3
<PAGE>
Shareholder Transaction Expenses
The table below shows certain fees and expenses for each Class of
shares that will be issued in the Reorganizations. These fees and expenses
are identical for Growth Fund and each of the Acquired Funds, and will
remain the same if either one or both Reorganizations are completed.
All Funds
---------
Class A Class B Class D
Maximum Sales Charge (as a 4.5% NONE NONE
percentage of public offering price)
Exchange fee $5.00 $5.00 $5.00
Maximum contingent deferred sales NONE 5% NONE
charge (as a percentage of
redemption proceeds)
Reorganization of ComTech Growth Fund into Growth Fund
The following table shows the current fees and expenses incurred by
the Class A, Class B and Class D shares of ComTech Growth Fund for the
fiscal period from November 2, 1993 (commencement of operations) to August
31, 1994, and Growth Fund for the fiscal year ended August 31, 1994, and
pro forma fees for Growth Fund's Class A, Class B and Class D shares after
giving effect to the Reorganization.
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE><CAPTION>
ComTech Growth Fund Growth Fund Combined Fund (Estimated)
------------------- ----------- -------------------------
Class A Class B Class D Class A Class B Class D Class A Class B Class D
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees . . . . . . 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(1). . 0.25% 1.00% 1.00% 0.21% 1.00% 1.00% 0.23% 1.00% 1.00%
Other Expenses . 0.54% 0.53% 0.54% 0.25% 0.25% 0.23% 0.24% 0.26% 0.25%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Fund
Operating
Expenses(2). . . 1.54%* 2.28%* 2.29%* 1.21% 2.00% 1.98% 1.22% 2.01% 2.00%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
__________________________________
* Annualized
(1) 12b-1 fees have two components, as follows:
<TABLE><CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
12b-1 service fee......................... 0.25% 0.25% 0.25%
12b-1 distribution fee.................... 0.00% 0.75% 0.75%
</TABLE>
4
<PAGE>
For the fiscal year ended August 31, 1994, Growth Fund Class A
shareholders paid a 12b-1 service fee of 0.21% of that Fund's average
daily net assets, which reflected a blended annual rate of 0.25% with
respect to shares sold on or after December 2, 1989, and 0.15% with
respect to shares sold prior to that date.
(2) For the twelve months ended February 28, 1995 (the period used for the
Combined Fund (Estimated) expenses), the ratios of total operating
expenses as a percentage of average net assets for ComTech Growth Fund
were 1.64%, 2.39% and 2.41% for Class A, Class B and Class D shares,
respectively, and for Growth Fund were 1.25%, 2.02% and 2.02% for
Class A, Class B and Class D shares, respectively.
Example of Effect of Fund Expenses
The following illustrates the expenses on a $1,000 investment under
the existing and estimated fees and expenses stated above, assuming a 5%
annual return. The fees shown below reflect a maximum initial sales charge
of up to 4.5% of the public offering price that is charged in connection
with the sale of each Fund's Class A shares. No initial sales charge will
be charged in connection with Class A Shares of Growth Fund distributed to
Class A shareholders of the Acquired Funds as part of the Reorganizations.
<TABLE><CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
ComTech Growth Fund
Class A shares . . . . . . . . . $ 60 $ 91 $125 $220
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2). . $ 73 $101 $142 $226
Assuming no redemption(2) . . $ 23 $ 71 $122 $226
Class D shares . . . . . . . . . $ 23 $ 72 $123 $263
Growth Fund
Class A shares . . . . . . . . . $ 57 $ 82 $108 $185
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2). . $ 70 $ 93 $128 $194
Assuming no redemption(2). . . $ 20 $ 63 $108 $194
Class D shares . . . . . . . . . $ 20 $ 62 $107 $231
Combined Fund
Class A shares . . . . . . . . . $57 $82 $109 $186
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2). . $70 $93 $128 $195
Assuming no redemption(2). . . $20 $63 $108 $195
Class D shares . . . . . . . . . . $20 $63 $108 $233
</TABLE>
- -------------------------------
(1) Assumes deduction at the time of the redemption of the maximum
applicable CDSC.
(2) Ten-year figures assume conversion of Class B shares to Class A
shares at the end of the sixth year.
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same in the years shown. The above tables
and the assumption in the Example of a 5% annual return are required by
regulations of the Securities and Exchange Commission ("SEC"); the assumed
5% annual return is not a prediction of, and does not represent, the
projected or actual performance of any Class of the Funds' shares.
5
<PAGE>
The Example should not be considered a representation of past or
future expenses, and a Fund's actual expenses may be more or less than
those shown. The actual expenses attributable to each Class of a Fund's
shares will depend upon, among other things, the level of average net
assets and the extent to which a Fund incurs variable expenses, such as
transfer agency costs.
Reorganization of Blue Chip Growth Fund into Growth Fund
The following table shows the current fees and expenses incurred by
the Class A, Class B and Class D shares of Blue Chip Growth Fund and Growth
Fund for the fiscal years ended February 28, 1995 and August 31, 1994,
respectively, and pro forma fees for Growth Fund's Class A, Class B and
Class D shares after giving effect to the Reorganization.
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE><CAPTION>
Blue Chip Growth Fund Growth Fund Combined Fund (Estimated)
--------------------- ----------- -------------------------
Class A Class B Class D Class A Class B Class D Class A Class B Class D
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees . . . . . . 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(1). . 0.25% 1.00% 1.00% 0.21% 1.00% 1.00% 0.23% 1.00% 1.00%
Other Expenses . 0.36% 0.37% 0.39% 0.25% 0.25% 0.23% 0.21% 0.24% 0.25%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Fund
Operating
Expenses(2). . . 1.36% 2.12% 2.14% 1.21% 2.00% 1.98% 1.19% 1.99% 2.00%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
__________________________________
(1) 12b-1 fees have two components, as follows:
<TABLE><CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
12b-1 service fee........................ 0.25% 0.25% 0.25%
12b-1 distribution fee................... 0.00% 0.75% 0.75%
</TABLE>
For the fiscal year ended August 31, 1994, Growth Fund Class A
shareholders paid a 12b-1 service fee of 0.21% of that Fund's average
daily net assets, which reflected a blended annual rate of 0.25% with
respect to shares sold on or after December 2, 1989, and 0.15% with
respect to shares sold prior to that date.
(2) For the twelve months ended February 28, 1995 (the period used for the
Combined Fund (Estimated) expenses), the ratios of total operating
expenses as a percentage of average net assets for Blue Chip Growth
Fund were 1.36%, 2.13% and 2.14% for Class A, Class B and Class D
shares, respectively, and for Growth Fund were 1.25%, 2.02% and 2.02%
for Class A, Class B and Class D shares, respectively.
6
<PAGE>
Example of Effect of Fund Expenses
The following illustrates the expenses on a $1,000 investment under
the existing and estimated fees and expenses stated above, assuming a 5%
annual return. The fees shown below reflect a maximum initial sales charge
of up to 4.5% of the public offering price that is charged in connection
with the sale of each Fund's Class A shares. No initial sales charge will
be charged in connection with Class A shares of Growth Fund distributed to
Class A shareholders of the Acquired Funds as part of the Reorganizations.
7
<PAGE>
<TABLE><CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Blue Chip Growth Fund
Class A shares. . . . . . . . . . $ 58 $ 86 $116 $201
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2) . . $ 72 $ 96 $134 $208
Assuming no redemption(2). . . $ 22 $ 66 $114 $208
Class D shares . . . . . . . . . $ 22 $ 67 $115 $247
Growth Fund
Class A shares . . . . . . . . . $ 57 $ 82 $108 $185
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2) $ 70 $ 93 $128 $194
Assuming no redemption(2) . . . $ 20 $ 63 $108 $194
Class D shares . . . . . . . . . $ 20 $ 62 $107 $231
Combined Fund
Class A shares . . . . . . . . . $57 $81 $107 $183
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2) . . $70 $92 $127 $192
Assuming no redemption(2) . . . $20 $62 $107 $192
Class D shares. . . . . . . . . . . $20 $63 $108 $233
</TABLE>
- ------------------------------------
(1) Assumes deduction at the time of the redemption of the maximum
applicable CDSC.
(2) Ten-year figures assume conversion of Class B shares to Class A
shares at the end of the sixth year.
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same in the years shown. The above tables
and the assumption in the Example of a 5% annual return are required by
regulations of the SEC; the assumed 5% annual return is not a prediction
of, and does not represent, the projected or actual performance of any
Class of the Funds' shares.
The Example should not be considered a representation of past or
future expenses, and a Fund's actual expenses may be more or less than
those shown. The actual expenses attributable to each Class of a Fund's
shares will depend upon, among other things, the level of average net
assets and the extent to which a Fund incurs variable expenses, such as
transfer agency costs.
8
<PAGE>
Reorganization of ComTech Growth Fund and Blue Chip Growth Fund into Growth
Fund
The following table shows the current fees and expenses incurred by
the Class A, Class B and Class D shares of ComTech Growth Fund for the
fiscal period from November 2, 1993 (commencement of operations) to August
31, 1994, Growth Fund for the fiscal year ended August 31, 1994, and Blue
Chip Growth Fund for the fiscal year ended February 28, 1995, and pro forma
fees for Growth Fund's Class A, Class B and Class D shares after giving
effect to the Reorganizations.
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE><CAPTION>
ComTech Growth Fund Blue Chip Growth Fund Growth Fund Combined Fund (Estimated)
------------------- --------------------- ----------- -------------------------
Class A Class B Class D Class A Class B Class D Class A Class B Class D Class A Class B Class D
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees . . . . 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(1) 0.25% 1.00% 1.00% 0.25% 1.00% 1.00% 0.21% 1.00% 1.00% 0.23% 1.00% 1.00%
Other Expenses. 0.54% 0.53% 0.54% 0.36% 0.37% 0.39% 0.25% 0.25% 0.23% 0.20% 0.24% 0.24%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Fund
Operating
Expenses(2)
. . . 1.54%* 2.28%* 2.29%* 1.36% 2.12% 2.14% 1.21% 2.00% 1.98% 1.18% 1.99% 1.99%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
__________________________________
* Annualized
(1) 12b-1 fees have two components, as follows:
<TABLE><CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
12b-1 service fee............................. up to 0.25% 0.25% 0.25%
12b-1 distribution fee........................ 0.00% 0.75% 0.75%
</TABLE>
For the fiscal year ended August 31, 1994, Growth Fund Class A
shareholders paid a 12b-1 service fee of 0.21% of that Fund's average
daily net assets, which reflected a blended annual rate of 0.25% with
respect to shares sold on or after December 2, 1989, and 0.15% with
respect to shares sold prior to that date.
(2) For the twelve months ended February 28, 1995 (the period used for the
Combined Fund (Estimated) expenses), the ratios of total operating
expenses as a percentage of average net assets for Blue Chip Growth
Fund were 1.36%, 2.13% and 2.14% for Class A, Class B and Class D
shares, respectively, for ComTech Growth Fund were 1.64%, 2.39% and
2.41% for Class A, Class B and D shares, respectively, and for Growth
Fund were 1.25%, 2.02% and 2.02% for Class A, Class B and Class D
shares, respectively.
-9-
<PAGE>
Example of Effect of Fund Expenses
The following illustrates the expenses on a $1,000 investment under
the existing and estimated fees and expenses stated above, assuming a 5%
annual return. The fees shown below reflect a maximum initial sales charge
of up to 4.5% of the public offering price that is charged in connection
with the sale of each Fund's Class A shares. No initial sales charge will
be charged in connection with Class A shares of Growth Fund distributed to
Class A shareholders of the Acquired Funds as part of the Reorganizations.
<TABLE><CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
ComTech Growth Fund
Class A shares. . . . . . . . . $ 60 $ 91 $125 $220
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2) . $ 73 $101 $142 $226
Assuming no redemption(2) . . $ 23 $ 71 $122 $226
Class D shares . . . . . . . . $ 23 $ 72 $123 $263
Blue Chip Growth Fund
Class A shares . . . . . . . . $ 58 $ 86 $116 $201
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2) . $ 72 $ 96 $134 $208
Assuming no redemption(2) . . $ 22 $ 66 $114 $208
Class D shares . . . . . . . . $ 22 $ 67 $115 $247
Growth Fund
Class A shares . . . . . . . . $ 57 $ 82 $108 $185
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2) . $ 70 $ 93 $128 $194
Assuming no redemption(2) . . $ 20 $ 63 $108 $194
Class D shares. . . . . . . . . $ 20 $ 62 $107 $231
Combined Fund
Class A shares. . . . . . . . . $ 56 $ 81 $107 $182
Class B shares:
Assuming complete redemp-
tion at end of period(1)(2) . $ 70 $ 92 $127 $192
Assuming no redemption(2) . . $ 20 $ 62 $107 $192
Class D shares . . . . . . . . . $ 20 $ 62 $107 $232
</TABLE>
- ------------------------------------
(1) Assumes deduction at the time of the redemption of the maximum
applicable CDSC.
(2) Ten-year figures assume conversion of Class B shares to Class A
shares at the end of the sixth year.
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same in the years shown. The above tables
and the assumption in the Example of a 5% annual return are required by
regulations of the SEC; the assumed 5% annual return is not a prediction
of, and does not represent, the projected or actual performance of any
Class of the Funds' shares.
The Example should not be considered a representation of past or
future expenses, and a Fund's actual expenses may be more or less than
those shown. The actual expenses attributable to each Class of a Fund's
shares will depend upon, among other things, the level of average net
assets and the extent to which a Fund incurs variable expenses, such as
transfer agency costs.
10
<PAGE>
Forms of Organization
The Trust is an open-end management investment company organized as a
Massachusetts business trust, and Growth Fund, its initial series,
commenced operations on March 18, 1985. ComTech Growth Fund, the other
series of the Trust, commenced operations on November 2, 1993. The
Corporation is an open-end management investment management company
organized as a Maryland corporation, and Blue Chip Growth Fund, one of its
series, commenced operations on July 18, 1986. ComTech Growth Fund and
Blue Chip Growth Fund each offers three Classes of shares, designated as
Class A, Class B and Class D shares, and Growth Fund offers four Classes of
shares, designated as Class A, Class B, Class C and Class D shares. The
Trust's Declaration of Trust authorizes the trustees to issue an unlimited
number of each Class of Growth Fund's and ComTech Growth Fund's shares of
beneficial interest, par value $.001 per share. The Corporation is
authorized to issue ten billion shares, three billion of which have been
designated as Blue Chip Growth Fund shares and are classified as Class A,
Class B and Class D shares (one billion shares each). As a Massachusetts
business trust, the Trust is not required to (and does not) hold annual
shareholder meetings. The Corporation, a Maryland corporation operating as
an open-end investment company, is also not required to (and does not) hold
annual shareholder meetings. None of the Funds currently issue share
certificates. Although shareholders of a Massachusetts business trust may,
under certain circumstances, be held personally liable for its obligations,
the Trust's Declaration of Trust expressly disclaims and provides
indemnification against such liability. Accordingly, the risks of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which Growth Fund or ComTech Growth Fund would
be unable to meet its obligations, a possibility that Mitchell Hutchins
believes is remote and, thus, does not pose a material risk.
Investment Objectives and Policies
The investment objective and policies of each Fund are set forth
below. There can be no assurance that any Fund will achieve its investment
objective, and each Fund's net asset value fluctuates based upon changes in
the value of its portfolio securities.
Growth Fund. The investment objective of Growth Fund is to provide
long-term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in common stocks issued by companies that, in the
judgment of Mitchell Hutchins, have substantial potential for capital
growth. Under normal circumstances, at least 65% of its assets are
invested in common stocks. The Fund may invest up to 35%, and for
temporary purposes more than 35%, of its assets in U.S. government
securities and convertible and non-convertible debt securities. The Fund
may invest in debt securities rated as low as B+ by Standard & Poor's
Ratings Group ("S&P"), B1 by Moody's Investor's Services, Inc. ("Moody's"),
comparably rated by another nationally recognized statistical rating
organization ("NRSRO") or, if unrated, determined by Mitchell Hutchins to
be of comparable quality.
ComTech Growth Fund. The investment objective of ComTech Growth Fund
is long-term capital appreciation. The Fund seeks to achieve this
objective by investing in equity securities of companies primarily engaged
in communications or technology, including companies primarily engaged in
new information technology development or information production,
distribution or use. Under normal circumstances, the Fund invests at least
65% of its total assets in the equity securities of such companies. The
Fund may invest up to 35% of its total assets in equity securities of other
companies (including companies that will benefit from these new
technologies such as companies in the financial services, retailing and
health care industries) as well as convertible debt securities, convertible
preferred stocks, U.S. government securities, corporate debt securities and
money market instruments. The Fund may invest in debt securities rated as
low as B+ by S&P, B1 by Moody's, comparably rated by another NRSRO or, if
unrated, determined by Mitchell Hutchins to be of comparable quality.
Blue Chip Growth Fund. The investment objective of Blue Chip Growth
Fund is capital appreciation. The Fund seeks to achieve this objective by
investing principally in equity securities of large, established U.S.
companies with market capitalization of at least $300 million. At least
65% of the Fund's assets normally are invested
11
<PAGE>
in such securities. The Fund may invest up to 35% of its assets in other
equity securities, including stocks of companies with lower market
capitalization levels, convertible securities, debt securities of U.S.
companies and debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The
Fund may invest in debt securities that, at the time of purchase are rated
at least BBB by S&P, Baa by Moody's, comparably rated by another NRSRO or,
if unrated, have been determined by Mitchell Hutchins to be of comparable
quality.
Other Policies of the Funds. Each Fund may invest up to 25% of its
total assets in U.S. dollar-denominated securities of foreign issuers that
are traded on recognized U.S. exchanges or in the U.S. over-the-counter
market. The Funds may also use options and futures contracts. In
addition, Growth Fund and Blue Chip Growth Fund each may invest up to 10%
of its net assets in illiquid securities; ComTech Growth Fund may invest up
to 15% of its net assets in illiquid securities.
Operations of Growth Fund Following the Reorganizations
There are differences in the investment objective (with respect to
Blue Chip Growth Fund) and policies of the Funds. It is not expected,
however, that Growth Fund will revise its investment objective or policies
to reflect those of either Acquired Fund following the Reorganizations.
Mitchell Hutchins believes that most, if not all, of the assets held by the
Acquired Funds will be consistent with the investment policies of Growth
Fund and thus could be transferred to and held by Growth Fund if the
Reorganizations are approved. If the Reorganizations are approved, the
Acquired Funds will sell any assets that are inconsistent with the
investment policies of Growth Fund prior to the effective time of the
Reorganizations, and the proceeds thereof will be held in temporary
investments or reinvested in assets that qualify to be held by Growth Fund.
The need for the Acquired Funds to dispose of assets prior to the effective
time of the Reorganizations may result in selling securities at a
disadvantageous time and could result in an Acquired Fund's realizing
losses that would not otherwise have been realized.
After the Reorganizations, the trustees and officers of the Trust and
Growth Fund's investment adviser, distributor, exclusive dealer and other
outside agents will continue to serve Growth Fund in their current
capacities. In addition, Ellen R. Harris, who currently is primarily
responsible for the day-to-day portfolio management of Growth Fund, will
continue to be primarily responsible for such portfolio management
following the Reorganizations.
Purchases and Redemptions
Shares of each Fund are available through PaineWebber Incorporated
("PaineWebber") and its correspondent firms or, for shareholders who are
not clients of PaineWebber, through each Fund's transfer agent, PFPC Inc.
("Transfer Agent"). The minimum initial investment in each Fund is $1,000;
each additional investment must be $100 or more. These minimums may be
waived or reduced for investments by employees of PaineWebber or its
affiliates, certain pension plans and retirement accounts and participants
in a Fund's automatic investment plan.
The Class A shares of each Fund are sold subject to a maximum initial
sales charge of 4.5%. The Class A shares of Growth Fund that would be
distributed to Class A shareholders of the Acquired Funds would not be
subject to an initial sales charge. Class B shares are sold subject to a
maximum CDSC of 5% of redemption proceeds, which declines to zero after six
years, when Class B shares automatically convert into Class A shares. The
Class D shares of each Fund are sold without initial sales charges or
CDSCs.
Shares of each Class of each Fund may be redeemed at their particular
net asset value (subject to any applicable CDSC), and redemption proceeds
will be paid within seven days of the receipt of a redemption request.
Clients of PaineWebber or its correspondent firms may redeem shares held in
non-certificate form through PaineWebber or its correspondent firms; all
other shareholders must redeem through each Fund's transfer agent.
12
<PAGE>
Following the Reorganizations, the Class B shares of Growth Fund
received pursuant to the Reorganizations by former shareholders of Class B
shares of an Acquired Fund would remain subject to the maximum 5% CDSC and
six-year schedule of reduced CDSCs in effect prior to the Reorganizations.
New purchases of Class A, Class B and Class D shares of Growth Fund by any
shareholders would be subject to their terms, including, for example, for
Class A shares, the 4.5% initial sales charge. As is currently the case
for each Fund, no CDSC will be applied to redemptions of Class B shares
that represent reinvested dividends or other distributions, nor will Class
A shares so acquired be subject to any initial sales charge.
If a Reorganization is approved with respect to an Acquired Fund,
purchases of all Classes of shares of that Acquired Fund will cease on
August 1, 1995, so that shares of the Acquired Fund will no longer be
available for purchase or exchange starting on that date. If the Meeting
with respect to an Acquired Fund is adjourned and the Reorganization
involving it is approved on a later date, its shares will no longer be
available for purchase or exchange on the business day following the date
on which the Reorganization is approved. Redemptions of the Acquired
Fund's shares and exchanges of such shares for shares of any other
PaineWebber or Mitchell Hutchins/Kidder, Peabody ("MH/KP") fund may be
effected through the Closing Date.
Exchanges
Shares of each Fund may be exchanged for shares of the Corresponding
Class of other PaineWebber and MH/KP funds, and shares of each Fund may be
acquired through an exchange of shares of the Corresponding Class of other
PaineWebber or MH/KP funds, as provided in the prospectus of each Fund. No
initial sales charge will be imposed on the shares being acquired, and no
CDSC will be imposed on the shares being disposed of, through an exchange.
However, a CDSC may apply to redemptions of a PaineWebber fund's Class B
shares acquired through an exchange. Exchanges may be subject to minimum
investment and other requirements of the fund into which exchanges are
made. The $5.00 service fee currently imposed on each exchange of shares
of an Acquired Fund for shares of any other PaineWebber or MH/KP fund will
be waived on such exchanges until the Closing Date.
Dividends and Other Distributions
Dividends from each Fund's net investment income, if any, are
distributed annually. Any net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and net short-term capital
gain realized from the sale of portfolio securities are also distributed
annually. Shareholders of each Fund may reinvest dividends and other
distributions in additional shares on the payment date at those shares' net
asset value that day or receive them in cash. Each Fund may make
additional distributions if necessary to avoid a 4% excise tax on certain
undistributed ordinary income and capital gain.
On or before the Closing Date, each Acquired Fund will declare as a
dividend substantially all of its net investment income, net capital gain
and net short-term capital gain in order to maintain its tax status as a
regulated investment company. Growth Fund may distribute to its
shareholders, on or before the Closing Date, substantially all of its
undistributed net investment income.
13
<PAGE>
Federal Income Tax Consequences of the Reorganizations
Each of the Corporation and the Trust has received an opinion of its
counsel, Kirkpatrick & Lockhart LLP, to the effect that the proposed
Reorganization will constitute a tax-free reorganization within the meaning
of section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
("Code"). Accordingly, no gain or loss will be recognized to any of the
Funds or their shareholders as a result of the Reorganizations. See "The
Proposed Transactions -- Federal Income Tax Considerations," page [ ].
COMPARISON OF PRINCIPAL RISK FACTORS
Because Growth Fund's investment objective and policies are
substantially similar to those of the Acquired Funds, the investment risks
of all three Funds are those typically associated with investing in a
growth fund. As described below, however, an investment in Growth Fund
presents somewhat greater risks than an investment in Blue Chip Growth Fund
because Growth Fund does not limit its investments in equity securities to
those of issuers with a minimum market capitalization of at least $300
million and may invest up to 35% of its assets in debt securities rated
below investment grade. Also, because Growth Fund does not invest
primarily in the equity securities of companies primarily engaged in
communications or technology, its shares will not be affected by economic
and regulatory developments in those industries to as great an extent as is
the case for the shares of ComTech Growth Fund. See the prospectus of
Growth Fund, which accompanies this Proxy Statement, for a more detailed
discussion of such risks.
Equity Securities. Each Fund invests, under normal conditions, at
least 65% of its total assets in equity securities. In the case of Growth
Fund, these equity securities consist of common stocks issued by companies
that, in the judgement of Mitchell Hutchins, have substantial potential for
capital growth and no minimum market capitalization or other requirement
relating to size is imposed on these investments. Blue Chip Growth Fund,
however, with respect to 65% of its assets, normally invests in equity
securities of large established U.S. companies with market capitalizations
of at least $300 million and that Mitchell Hutchins considers to be "blue
chip." Because Growth Fund may invest to a greater extent in equity
securities of smaller, less established issuers, its shares are subject to
greater risk than those of Blue Chip Growth Fund.
Under normal circumstances, ComTech Growth Fund invests at least 65%
of its total assets in the equity securities of companies primarily engaged
in communications and technology, including companies primarily engaged in
information production, distribution or use (including content owners,
content providers, content distributors and content subscribers), as well
as new information technology development companies. This emphasis
subjects the shares of ComTech Growth Fund to greater risk than the shares
of a fund that is not so limited, and in particular, the net asset value of
its shares is affected by economic and regulatory developments in those
industries. Growth Fund does not similarly limit its investments, and so
is not subject to as great a degree to the risks of concentrating
investments in a single group of related industries.
Debt Securities. Each Fund may invest up to 35% of its assets in debt
securities that will be subject to credit risk and the inverse relationship
between market prices and interest rates; that is, when interest rates
rise, the prices of such securities tend to decline, and conversely, when
interest rates fall, prices tend to rise. Blue Chip Growth Fund is
permitted to purchase only investment grade debt securities. Debt
securities rated Baa by Moody's or BBB by S&P are investment grade,
although Moody's considers securities rated Baa to have speculative
characteristics. Growth Fund and ComTech Growth Fund each is permitted to
invest up to 35% of its total assets in debt securities rated as low as B+
by S&P, B1 by Moody's or comparably rated by another NRSRO. These
securities are deemed by those NRSROs to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal and
may involve major risk exposure to adverse conditions. Such securities are
commonly referred to as "junk bonds." Accordingly, an investment in Growth
Fund involves greater risks than one in Blue Chip Growth Fund because
Growth Fund may invest up to 35% of its assets in debt securities rated
below investment grade.
14
<PAGE>
These lower-rated debt securities generally offer a higher current
yield than that available for higher grade issues, but they involve higher
risks, since they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged,
to changes in the financial condition of the issuers and to price
fluctuations in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to
make payments of interest and principal and increase the possibility of
default. In addition, such issuers may not have more traditional methods of
financing available to them, and may be unable to repay debt at maturity by
refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
The market for lower-rated debt securities has expanded rapidly in
recent years, and its growth paralleled a long economic expansion. In the
past, the prices of many lower-rated debt securities declined
substantially, reflecting an expectation that many issuers of such
securities might experience financial difficulties. As a result, the yields
on lower-rated debt securities rose dramatically. However, such higher
yields did not reflect the value of the income stream that holders of such
securities expected, but rather the risk that holders of such securities
could lose a substantial portion of their investment as a result of the
issuers' financial restructuring or default. There can be no assurance that
such declines will not recur. The market for lower-rated debt issues
generally is thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at
fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of
lower-rated securities, especially in a thinly traded market.
U.S. Dollar-Denominated Foreign Securities. Each Fund may invest in
U.S. dollar denominated securities of foreign issuers. The U. S.
dollar-denominated securities of foreign issuers in which the Funds may
invest may involve special risks, arising both from political and economic
developments abroad and differences between foreign and U.S. regulatory
systems. Foreign securities may be less liquid and their prices more
volatile than comparable U.S. securities. The prices of these securities
may also be affected by fluctuations in the values of foreign currencies.
Hedging Strategies. Each Fund may use options and futures contracts
for hedging purposes. There can be no assurance, however, that any hedging
strategy utilizing these instruments will succeed. If Mitchell Hutchins
incorrectly forecasts interest rates, market values or other economic
factors in utilizing a hedging strategy for a Fund, the Fund would be in a
better position had it not hedged at all. The use of these strategies
involves certain special risks, including (1) the fact that skills needed
to use hedging instruments are different from those needed to select the
Funds' securities, (2) possible imperfect correlation, or even no
correlation, between price movements of hedging instructions and price
movements of the investments being hedged, (3) the fact that, while hedging
strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable
price movements in hedged investments, and (4) the possible inability of a
Fund to purchase or sell a portfolio security at a time that otherwise
would be favorable for it to do so, or the possible need for a Fund to sell
a portfolio security at a disadvantageous time, due to the need for the
Fund to maintain "cover" or to segregate securities in connection with
hedging transactions and the possible inability of a Fund to close out or
to liquidate its hedged position.
THE PROPOSED TRANSACTIONS
Reorganization Plans
The terms and conditions under which the proposed transactions may be
consummated are set forth in the Reorganization Plans. Significant
provisions of the Reorganization Plans are summarized below; however, this
summary is qualified in its entirety by reference to the Reorganization
Plans, which are attached as Appendices A and B to this Proxy Statement.
15
<PAGE>
Each Reorganization Plan contemplates (a) Growth Fund acquiring on the
Closing Date the assets of an Acquired Fund in exchange solely for its
shares and its assumption of the Acquired Fund's liabilities and (b) the
constructive distribution of such shares to the shareholders of the
Acquired Fund.
The assets of each Acquired Fund to be acquired by Growth Fund include
all cash, cash equivalents, securities, receivables and other property
owned by the Acquired Fund. Growth Fund will assume from each Acquired
Fund all debts, liabilities, obligations and duties of the Fund of whatever
kind or nature; provided, however, that each Acquired Fund will use its
best efforts, to the extent practicable, to discharge all of its known
debts, liabilities, obligations and duties prior to the Closing Date.
Growth Fund also will deliver its shares to each Acquired Fund, which then
will be constructively distributed to the Acquired Fund's shareholders.
The value of an Acquired Fund's assets to be acquired, and the amount
of its liabilities to be assumed, by Growth Fund and the net asset value of
a Class A, a Class B and a Class D share of Growth Fund will be determined
as of the close of regular trading on the New York Stock Exchange, Inc.
("NYSE") on the Closing Date. Where market quotations are readily
available, portfolio securities will be valued based upon such market
quotations, provided such quotations adequately reflect, in Mitchell
Hutchins' judgment, fair value of the security. Where such market
quotations are not readily available, such securities will be valued based
upon appraisals received from a pricing service using a computerized matrix
system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. The amortized cost method of valuation generally will be used
to value debt instruments with 60 days or less remaining to maturity,
unless the Corporation's board of directors (with respect to Blue Chip
Growth Fund) or the Trust's board of trustees (with respect to Growth Fund
and ComTech Growth Fund) determines that this does not represent fair
value. All other securities and assets will be valued at fair value as
determined in good faith by or under the direction of the respective
Boards. All investments quoted in foreign currencies will be valued in
U.S. dollars on the basis of the foreign currency exchange rates prevailing
at the time such valuation is determined by each Fund's custodian.
On or as soon as practicable after the Closing Date, each Acquired
Fund will distribute to its shareholders of record the shares of Growth
Fund it received, by Class, so that each Acquired Fund shareholder will
receive a number of full and fractional shares of the Corresponding Class
or Classes of Growth Fund shares equal in value to the shareholder's
holdings in the Acquired Fund; each Acquired Fund will be terminated as
soon as is practicable thereafter. Such distribution will be accomplished
by opening accounts on the books of Growth Fund in the names of the
Acquired Fund shareholders and by transferring thereto the shares of each
Class previously credited to the account of each Acquired Fund on those
books. Each shareholder account shall represent the respective
corresponding value of Growth Fund shares in each Class due to each
Acquired Fund shareholder. Fractional shares in each Class of shares of
Growth Fund will be rounded to the third decimal place.
Accordingly, immediately after each Reorganization, each former
shareholder of the participating Acquired Fund will own shares of the Class
of Growth Fund that will equal the value of that shareholder's shares of
the Corresponding Class of the Acquired Fund immediately prior to the
Reorganization. Moreover, because shares of each Class of Growth Fund will
be issued at net asset value in exchange for the net assets applicable to
the Corresponding Class of each Acquired Fund, the aggregate value of each
Class of Growth Fund shares so issued will equal the aggregate value of the
Corresponding Class of the Acquired Fund's shares. The net asset value per
share of Growth Fund will be unchanged by the transactions. Thus, the
Reorganizations will not result in a dilution of any shareholder interest.
Any transfer taxes payable upon issuance of shares of Growth Fund in a
name other than that of the registered holder of the shares on the books of
an Acquired Fund shall be paid by the person to whom such shares are to be
issued as a condition of such transfer. Any reporting responsibility of an
Acquired Fund will continue to be its responsibility up to and including
the Closing Date and such later date on which such Fund is terminated.
The cost of the Reorganizations, including professional fees and the
cost of soliciting proxies for the Meeting, consisting principally of
printing and mailing expenses, together with the cost of any supplementary
solicitation, will
16
<PAGE>
be borne by the Funds in proportion to their respective net assets. This
method of allocation will result in Growth Fund bearing the greatest part
of the Reorganization costs. Mitchell Hutchins recommended this method of
expense allocation to the Boards. Mitchell Hutchins based its
recommendations on its belief that the method is fair because, for the
reasons discussed under "Reasons for the Reorganizations," the
Reorganizations have the potential to benefit all Funds. The Boards
considered the expense allocation method in approving the Reorganizations
and in finding that the Reorganizations are in the best interests of their
respective Fund.
The consummation of each Reorganization is subject to a number of
conditions set forth in the Reorganization Plan, some of which may be
waived by an Acquired Fund. In addition, the Reorganization Plans may be
amended in any mutually agreeable manner, except that no amendment may be
made subsequent to the Meeting that would have a material adverse effect on
the shareholders' interests.
Reasons for the Reorganizations
The Trust's Board, including a majority of its Independent
Persons, has determined that the Reorganization involving ComTech
Growth Fund is in the best interests of ComTech Growth Fund, that the terms of
the Reorganization are fair and reasonable, and that the interests of ComTech
Growth Fund's shareholders will not be diluted as a result of the
Reorganization. The Corporation's Board, including a majority of the
Independent Persons thereof, has determined that the Reorganization is in the
best interest of Blue Chip Growth Fund, that the terms of the Reorganization are
fair and reasonable and that the interests of Blue Chip Growth Fund's
shareholders will not be diluted as a result of the Reorganization. In
addition, the Trust's board of trustees, including a majority of its
Independent Persons, has concluded that each Reorganization is in the best
interest of Growth Fund, that the terms of the Reorganization are fair and
reasonable and that the interests of Growth Fund's shareholders will not be
diluted as a result of the Reorganization.
In considering the Reorganizations, the boards of trustees/directors
made an extensive inquiry into a number of factors, including the
following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Funds;
(2) the investment performance of the Funds;
(3) the effect of the Reorganizations on the expense ratio of Growth
Fund relative to each Fund's current
expense ratio;
(4) the costs to be incurred by each Fund as a result of the
Reorganizations;
(5) the tax consequences of the Reorganizations;
(6) possible alternatives to the Reorganizations, including
continuing to operate on a stand-alone basis or
liquidation; and
(7) the potential benefits of the Reorganizations to other persons,
especially Mitchell Hutchins and PaineWebber.
The Reorganizations were recommended to the Boards by Mitchell
Hutchins at a combined meeting of the Boards held on April 28, 1995. In
considering the proposed transactions, the Boards were advised by Mitchell
Hutchins that, because Growth Fund has greater net assets than ComTech
Growth Fund and Blue Chip Growth Fund, combining the Funds would reduce the
expenses borne by the shareholders of each Acquired Fund as a percentage of
net assets. The Boards were further advised that the expenses of Growth
Fund would also be likely to decrease if, as a result of the
Reorganizations, the combined Fund experienced increased sales of its
shares.
In recommending the Reorganizations, Mitchell Hutchins advised the
Boards that the Funds have similar investment objectives and generally
similar investment policies, with the material differences noted. Mitchell
Hutchins also noted its belief that there was no reason to maintain three
Funds with substantially similar investment objectives, two of which also
have substantially similar investment portfolios. In approving the
proposed transactions, the Boards took account of the opinion that Growth
Fund's overall objective of seeking long-term capital appreciation by
investing
17
<PAGE>
primarily in common stocks remains an appropriate one to offer to investors
as part of an overall investment strategy. The Boards also considered the
fact that the investment objectives and policies of the Funds are
sufficiently compatible, that the Reorganizations would not require any
basic changes in Growth Fund's policies, and that the risk profile of
Growth Fund is substantially the same as that for Blue Chip Growth Fund,
and may be an improvement compared to the risk profile for ComTech Growth
Fund.
Mitchell Hutchins further advised the Boards that, while past
performance is no guarantee of future results, Growth Fund had experienced
better investment performance than either Acquired Fund during the recent
time period. Mitchell Hutchins also advised the Boards that it did not
expect to receive any immediate direct benefits from the Reorganizations,
because the compensation that would be received by it as investment adviser
to the combined Fund would be the same as the aggregate compensation it
receives from the three Funds currently, assuming no change in aggregate
net assets. However, Mitchell Hutchins noted that it could benefit in the
future if the combined Fund's assets grow faster than would be the case for
the three separate Funds in the absence of the Reorganizations.
THE BOARDS OF TRUSTEES/DIRECTORS
RECOMMEND THAT THE SHAREHOLDERS OF THE
ACQUIRED FUNDS VOTE "FOR" THE REORGANIZATIONS
Description of Securities to be Issued
The Trust is registered with the SEC as an open-end management
investment company. Its trustees are authorized to issue an unlimited
number of shares of beneficial interest of separate series (par value $.001
per share). The trustees have established Growth Fund as one of its two
series and have authorized the public offering of four Classes of shares of
Growth Fund. Each share in a Class represents an equal proportionate
interest in Growth Fund with each other share in that Class. Shares of
Growth Fund entitle their holders to one vote per full share and fractional
votes for fractional shares held, except that each Class of shares has
exclusive voting rights on matters pertaining to the plan of distribution.
On the Closing Date, Growth Fund will have outstanding four Classes of
shares, designated Class A, Class B, Class C and Class D shares. Only
Class A, Class B and Class D shares will be issued as part of the
Reorganizations. Each Class represents interests in the same assets of the
Fund. The Classes differ as follows: (1) each Class has exclusive voting
rights on matters pertaining to its plan of distribution; (2) Class A
shares are subject to an initial sales charge; (3) Class B shares bear
ongoing distribution fees, are subject to a CDSC upon certain redemptions
and automatically convert to Class A shares approximately six years after
issuance; (4) Class C shares have no initial sales charge or CDSC, bear no
distribution fees and may be purchased only by certain categories of
purchasers; (5) Class D shares are subject to neither an initial sales
charge nor a CDSC, bear ongoing distribution expenses and do not convert to
another Class; and (6) each Class may bear differing amounts of certain
Class-specific expenses. Each share of each Class of Growth Fund is
entitled to participate equally in dividends and other distributions and
the proceeds of any liquidation, except that because of the higher expenses
resulting from the distribution fees borne by the Class B and Class D
shares, dividends on those shares are expected to be lower than those for
Class A shares of the Fund. Dividends on each Class also might be affected
differently by the allocation of other Class-specific expenses.
The Trust does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing
trustees unless fewer than a majority of the trustees holding office has
been elected by shareholders, at which time the trustees then in office
will call a shareholders meeting for the election of trustees. Under the
1940 Act, shareholders of record of at least two-thirds of the outstanding
shares of an investment company may remove a trustee by votes cast in
person or by proxy at a meeting called for that purpose. The trustees are
required to call a meeting of shareholders for the purpose of voting upon
the question of removal of any Trustee
18
<PAGE>
when requested in writing to do so by the shareholders of record holding at
least 10% of the Trust's outstanding shares.
Federal Income Tax Considerations
The exchange of an Acquired Fund's assets for Growth Fund shares and
Growth Fund's assumption of liabilities of that Acquired Fund is intended
to qualify for federal income tax purposes as a tax-free reorganization
under section 368(a)(1)(C) of the Code. The Corporation has received an
opinion of Kirkpatrick & Lockhart LLP, its counsel with respect to the
Reorganization involving Blue Chip Growth Fund, and the Trust has received
an opinion of Kirkpatrick & Lockhart LLP, with respect to each
Reorganization, each substantially to the effect that:
(i) Growth Fund's acquisition of the Acquired Fund's assets
in exchange solely for Growth Fund shares and Growth Fund's
assumption of the Acquired Fund's liabilities, followed by the
Acquired Fund's distribution of those shares to its shareholders
constructively in exchange for their Acquired Fund shares, will
constitute a "reorganization" within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
(ii) No gain or loss will be recognized to the Acquired Fund
on the transfer to Growth Fund of its assets in exchange solely
for Growth Fund shares and Growth Fund's assumption of the
Acquired Fund's liabilities or on the subsequent distribution of
those shares to the Acquired Fund's shareholders in constructive
exchange for their Acquired Fund shares;
(iii) No gain or loss will be recognized to Growth Fund
on its receipt of the assets in exchange solely for Growth Fund
shares and its assumption of the Acquired Fund's liabilities;
(iv) Growth Fund's basis for the transferred assets will be
the same as the basis thereof in the Acquired Fund's hands
immediately prior to the Reorganization, and Growth Fund's
holding period for those assets will include the Acquired Fund's
holding period therefor;
(v) An Acquired Fund shareholder will recognize no gain or
loss on the constructive exchange of all its Acquired Fund shares
solely for Growth Fund shares pursuant to the Reorganization; and
(vi) An Acquired Fund shareholder's basis for the Growth
Fund shares to be received by it in the Reorganization will be
the same as the basis for its Acquired Fund shares to be
constructively surrendered in exchange for those Growth Fund
shares, and its holding period for those Growth Fund shares will
include its holding period for those Growth Fund shares, provided
they are held as capital assets by the shareholder on the Closing
Date.
Each such opinion may state that no opinion is expressed as to the effect
of the Reorganization on the Funds or any shareholder (regarding the
recognition of gain or loss and/or the determination of the basis or
holding period) with respect to any asset (including certain options,
futures and forward contracts) as to which any unrealized gain or loss is
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-
market system of accounting.
Utilization by Growth Fund after the Reorganizations of pre-organization
capital losses realized by an Acquired Fund could be subject to limitation
in future years under the Code.
Shareholders of an Acquired Fund should consult their tax advisers
regarding the effect, if any, of the Reorganizations in light of their
individual circumstances. Because the foregoing discussion only relates to
the federal income tax
19
<PAGE>
consequences of the Reorganizations, those shareholders also should consult
their tax advisers as to state and local tax consequences, if any, of the
Reorganizations.
PRO FORMA FINANCIAL INFORMATION AND RATIOS
The following tables show the capitalization of the Funds as of
February 28, 1995 (unaudited for Growth Fund and ComTech Growth Fund) and
on a pro forma combined basis (unaudited) as of that date giving effect to
the Reorganizations, and assuming that the Acquired Funds indicated
participate in the Reorganizations.
If only ComTech Growth Fund participates in a Reorganization:
<TABLE><CAPTION>
ComTech Pro Forma
Growth Fund Growth Fund Combined
----------- ----------- --------
<S> <C> <C> <C>
Net Assets
Class A . . . . . . . . . . . . . . . . $120,933,807 $16,557,013 $137,490,820
Class B . . . . . . . . . . . . . . . . 83,636,897 42,955,786 126,592,683
Class C . . . . . . . . . . . . . . . . 29,937,919 _____ 29,937,919
Class D . . . . . . . . . . . . . . . . 22,936,179 9,001,324 31,937,503
NAV (1) Per Share
Class A . . . . . . . . . . . . . . . . $19.21 $9.30 $19.21
Class B . . . . . . . . . . . . . . . . $18.65 $9.21 18.65
Class C . . . . . . . . . . . . . . . . 19.41 _____ 19.41
Class D . . . . . . . . . . . . . . . . 18.78 9.21 18.78
Shares Outstanding
Class A . . . . . . . . . . . . . . . . 6,294,685 1,780,835 7,156,828
Class B . . . . . . . . . . . . . . . . 4,485,279 4,666,041 6,789,528
Class C . . . . . . . . . . . . . . . . 1,542,616 _____ 1,542,616
Class D . . . . . . . . . . . . . . . . 1,221,271 977,690 1,700,745
</TABLE>
- -------------------------------------------------------------------------
(1) Net Asset Value
20
<PAGE>
If only Blue Chip Growth Fund participates in a Reorganization:
<TABLE><CAPTION>
Blue Chip Pro Forma
Growth Fund Growth Fund Combined
----------- ----------- --------
<S> <C> <C> <C>
Net Assets
Class A . . . . . . . . . . . . . . . . $120,933,807 $50,445,093 $171,378,900
Class B . . . . . . . . . . . . . . . . 83,636,897 32,772,270 116,409,167
Class C . . . . . . . . . . . . . . . . 29,937,919 _____ 29,937,919
Class D . . . . . . . . . . . . . . . . 22,936,179 3,445,624 26,381,803
NAV Per Share
Class A . . . . . . . . . . . . . . . . $19.21 $14.54 $19.21
Class B . . . . . . . . . . . . . . . . 18.65 14.04 18.65
Class C . . . . . . . . . . . . . . . . 19.41 _____ 19.41
Class D . . . . . . . . . . . . . . . . 18.78 14.20 18.78
Shares Outstanding
Class A . . . . . . . . . . . . . . . . 6,294,685 3,469,743 8,920,925
Class B . . . . . . . . . . . . . . . . 4,485,279 2,333,945 6,242,308
Class C . . . . . . . . . . . . . . . . 1,542,616 _____ 1,542,616
Class D . . . . . . . . . . . . . . . . 1,221,271 242,573 1,404,686
</TABLE>
If both Acquired Funds participate in the Reorganizations:
<TABLE><CAPTION>
ComTech Blue Chip Pro Forma
Growth Fund Growth Fund Growth Fund Combined
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Net Assets
Class A . . . . . . . . . . $120,933,807 $16,557,013 $50,445,093 $187,935,913
Class B . . . . . . . . . . 83,636,897 42,955,786 32,772,270 159,364,953
Class C . . . . . . . . . . 29,937,919 _____ _____ 29,937,919
Class D . . . . . . . . . . 22,936,179 9,001,324 3,445,624 35,383,127
NAV Per Share
Class A . . . . . . . . . . $19.21 $9.30 $14.54 $19.21
Class B . . . . . . . . . . 18.65 9.21 14.04 18.65
Class C . . . . . . . . . . 19.41 _____ _____ 19.41
Class D . . . . . . . . . . 18.78 9.21 14.20 18.78
Shares Outstanding
Class A . . . . . . . . . . 6,294,685 1,780,835 3,469,743 9,783,068
Class B . . . . . . . . . . 4,485,279 4,666,041 2,333,945 8,546,557
Class C . . . . . . . . . . 1,542,616 _____ _____ 1,542,616
Class D . . . . . . . . . . 1,221,271 977,690 242,573 1,884,160
</TABLE>
21
<PAGE>
ADDITIONAL INFORMATION ABOUT GROWTH FUND
Financial Highlights
The table below provides condensed information concerning income and
capital changes for one Class A, one Class B and one Class D share of
Growth Fund for the periods shown. (No Class C shares of Growth Fund will
be issued in connection with the Reorganizations.) This information is
supplemented by the financial statements and accompanying notes appearing
in Growth Fund's Annual Report to Shareholders for the fiscal year ended
August 31, 1994, and the unaudited financial statements and accompanying
notes in Growth Fund's Semi-Annual Report to Shareholders for the six
months ended February 28, 1995, which are incorporated herein by this
reference. The financial statements and notes for the fiscal year ended
August 31, 1994 and the financial information in the tables below, insofar
as they relate to the five years in the period ended August 31, 1994, have
been audited by Ernst & Young LLP, independent auditors, whose report
thereon is included in the Annual Report to Shareholders that accompanies
this Proxy Statement.
Selected data for a Class A, Class B, and Class D share of beneficial
interest of Growth Fund outstanding throughout each period is presented
below:
<TABLE><CAPTION>
Class A
-----------------------------------------------------------------
For the Six
Months
Ended
February
28, 1995 For the Years Ended August 31,
---------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(unaudited)
------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period . . . . . . . . . . . . . $ 20.04 $ 20.60 $ 16.78 $ 17.50 $ 13.43 $ 15.57
-------- -------- -------- ------- -------- -------
Income (loss) from investment
operations:
Net investment income (loss) 0.06 -- 0.07 -- 0.02 0.17
Net realized and unrealized
gains (losses) from
investment transactions . . (0.86) 0.51 4.37 (0.11) 4.68 (1.16)
-------- ------ ---- ------ ---- ------
Total income (loss) from
investment operations . . . . . . (0.80) 0.51 4.44 (0.11) 4.70 (0.99)
-------- ------ ------ ------ ---- -----
Less dividends and distribution
from:
Net investment income . . . -- -- -- (0.01) (0.17) --
Net realized gains on
investments . . . . . . . . (0.03) (1.07) (0.62) (0.60) (0.46) (1.15)
-------- -------- -------- ------ ------ ------
Total dividends and
distributions . . . . . . . (0.03) (1.07) (0.62) (0.61) (0.63) (1.15)
-------- -------- -------- ------ ------ ------
Net asset value, end of
period . . . . . . . . . . . $ 19.21 $ 20.04 $ 20.60 $ 16.78 $ 17.50 $ 13.43
======= ======= ======= ======= ======= =======
Total return (1) . . . . . . . . (8.48)% 2.33% 26.97% (0.85) 37.02% (7.05)%
======= ======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period
(000's) . . . . . . . . . . $120,934 $141,342 $130,353 $102,64 $96,796 $72,805
Expenses to average net
assets . . . . . . . . . . . 1.23%* 1.21% 1.22% 1.43% 1.56% 1.59%
Net investment income (loss)
to average net assets . . . 0.43%* 0.06% 0.38% 0.00% 0.10% 2.96%
Portfolio turnover . . . . . 12.44% 24.41% 35.81% 32.49% 28.59% 39.16%
Class B
__________________________________________________________________
</TABLE>
22
<PAGE>
<TABLE><CAPTION>
____________________________________________
For the Six For the
Months Ended Period July
February 28, 1, 1991+
1995 For the Years Ended August 31, to August 31,
--------------------------------
(unaudited) 1994 1993 1992 1991
-------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period . . . . . . . . . . . . . $ 19.53 $ 20.25 $ 16.64 $ 17.48 $ 15.63
-------- -------- -------- -------- --------
Income (loss) from investment
operations:
Net investment income (loss) (0.05) (0.06) (0.05) (0.06) (0.02)
Net realized and unrealized
gains (losses) from investment
transactions . . . . . . . . (0.80) 0.41 4.28 (0.18) 1.87
-------- ------ ---- ------ -----
Total income (loss) from
investment operations . . . . . . (0.85) 0.35 4.23 (0.24) 1.85
-------- ------ ------ ------ ------
Less dividends and distribution
from:
Net investment income . . . -- -- -- -- --
Net realized gains on
investments . . . . . . . . (0.03) (1.07) (0.62) (0.60)
-------- -------- -------- ------ -----
Total dividends and
distributions . . . . . . . (0.03) (1.07) (0.62) (0.60)
-------- -------- -------- ------ -----
Net asset value, end of period
$ 18.65 $ 19.53 $ 20.25 $ 16.64 $ 17.48
======= ======= ======= ======= =======
Total return (1) . . . . . . . . (9.16)% 1.55% 25.91% (1.58)% 11.84%
======= ======= ======= ====== =======
Ratios/Supplemental Data:
Net assets, end of period $83,637 $97,272 $60,280 $35,867 $3,804
(000's) . . . . . . . . . .
Expenses to average net assets 2.01%* 2.00% 2.02% 2.20% 2.24%*
Net investment income (loss)
to average net assets . . . (0.35)%* (0.66)% (0.46)% (0.70)% (0.81)%*
Portfolio turnover . . . . . 12.44% 24.41% 35.81% 32.49% 28.59%
</TABLE>
23
<PAGE>
<TABLE><CAPTION>
Class D
--------------------------------------------
For the Six For the Period
Months Ended July 2, 1992+
February 28, to
1995 For the Years Ended August 31, August 31,
-------------------------------- --------------
(unaudited) 1994 1993 1992
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 19.67 $ 20.38 $ 16.75 $ 17.04
------- ------- ------- -------
Income (loss) from investment
operations:
Net investment income (loss) . (0.06) (0.08) (0.06) (0.01)
Net realized and unrealized
gains (losses) from investment
transactions . . . . . . . . . (0.80) 0.44 4.31 0.28
-------- ------ ---- -----
Total income (loss) from investment
operations . . . . . . . . . . . . (0.86) 0.36 4.25 (0.29)
-------- ------ ------ --------
Less dividends and distribution
from:
Net investment income . . . . -- -- -- --
Net realized gains on
investments . . . . . . . . . (0.03) (1.07) (0.62) --
-------- -------- -------- -----
Total dividends and
distributions . . . . . . . . (0.03) (1.07) (0.62) --
-------- -------- -------- -----
Net asset value, end of period $ 18.78 $ 19.67 $ 20.38 $ 16.75
======= ======= ======= =======
Total return (1) . . . . . . . . . (9.15)% 1.59% 25.86% (2.95)%
======= ======= ======= =========
Ratios/Supplemental Data:
Net assets, end of period
(000's) . . . . . . . . . . . $22,936 $28,561 $16,474 $2,275
Expenses to average net assets 1.99%* 1.98% 2.06% 1.98%*
Net investment income (loss) to
average net assets . . . . . . (0.34)%* (0.65)% (0.69)% (0.65)%*
Portfolio turnover . . . . . . 12.44% 24.41% 35.81% 32.49%
</TABLE>
* Annualized
+ Commencement of offering of shares.
(1) Total return is calculated assuming a $1,000 investment on the first
day of each period reported, reinvestment of all dividends and capital
gain distributions at net asset value on the payable date, and a sale
at net asset value on the last day of each period reported. The
figures do not include sales charges; results of Class A and Class B
shares would be lower if sales charges were included. Total return
information for periods less than one year is not annualized.
24
<PAGE>
MISCELLANEOUS
Available Information
The Trust and the Corporation are each subject to the informational
requirements of the Securities Exchange Act of 1934 and the 1940 Act and in
accordance therewith file reports, proxy material and other information
with the SEC. Such reports, proxy material and other information can be
inspected and copied at the Public Reference Room maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material
can also be obtained from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549, at prescribed rates.
Legal Matters
Certain legal matters in connection with the issuance of Growth Fund
shares will be passed upon by Kirkpatrick & Lockhart LLP, counsel to the
Trust and to the Corporation.
Experts
The audited financial statements of Growth Fund and ComTech Growth Fund
incorporated by reference herein and in their respective Statements of
Additional Information, have been audited by Ernst & Young LLP, independent
auditors, whose reports thereon are included in the Funds' respective
Annual Reports to Shareholders for the fiscal year and fiscal period,
respectively, ended August 31, 1994. The audited financial statements of
Blue Chip Growth Fund incorporated by reference herein and in its Statement
of Additional Information, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon is included in the Fund's
Annual Report to Shareholders for the fiscal year ended February 28, 1995.
The financial statements audited by Ernst & Young LLP and Price Waterhouse
LLP have been incorporated herein by reference in reliance on their reports
given on their authority as experts in auditing and accounting.
25
<PAGE>
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
----------------------------------------------------
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
("Agreement") is made as of June 1, 1995, between PaineWebber
Olympus Fund, a Massachusetts business trust ("Trust"), on behalf
of PaineWebber Growth Fund, a segregated portfolio of assets
("series") thereof ("Acquiring Fund"), and PaineWebber Master
Series, Inc., a Maryland corporation ("Corporation"), on behalf
of its PaineWebber Blue Chip Growth Fund series ("Target").
(Acquiring Fund and Target are sometimes referred to herein indi-
vidually as a "Fund" and collectively as the "Funds," and Trust
and Corporation are sometimes referred to herein collectively as
the "Investment Companies.")
This Agreement is intended to be, and is adopted as, a plan
of a reorganization described in section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended ("Code"). The reorgan-
ization will involve the transfer to Acquiring Fund of Target's
assets solely in exchange for voting shares of beneficial
interest in Acquiring Fund ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of Target's liabilities, followed by
the constructive distribution of the Acquiring Fund Shares to the
holders of shares of common stock in Target ("Target Shares") in
exchange therefor, all upon the terms and conditions set forth
herein. The foregoing transactions are referred to herein as the
"Reorganization." All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by
either Fund are made and shall be taken or undertaken by Trust on
behalf of Acquiring Fund and by Corporation on behalf of Target.
Acquiring Fund's shares are divided into four classes,
designated Class A, Class B, Class C, and Class D shares ("Class
A Acquiring Fund Shares," "Class B Acquiring Fund Shares," "Class
C Acquiring Fund Shares," and "Class D Acquiring Fund Shares,"
respectively). Except as noted in the following sentence, these
classes differ only with respect to the sales charges imposed on
the purchase of shares and the fees ("12b-1 fees") payable by
each class pursuant to plans adopted under Rule 12b-1 promulgated
under the Investment Company Act of 1940 ("1940 Act"), as
follows: (1) Class A Acquiring Fund Shares are offered at net
asset value ("NAV") plus a sales charge, if applicable, and are
subject to a 12b-1 service fee at the annual rate of 0.21% of the
average daily net assets attributable to the class ("class as-
sets"); (2) Class B Acquiring Fund Shares are offered at NAV
without imposition of any sales charge and are subject to a con-
tingent deferred sales charge and 12b-1 service and distribution
fees at the respective annual rates of 0.25% and 0.75% of class
assets; (3) Class C Acquiring
<PAGE>
Fund Shares are offered, currently only to the trustee of the
PaineWebber Savings Investment Plan on behalf of that plan, at
NAV without imposition of any sales charge and are not subject to
any 12b-1 fee; and (4) Class D Acquiring Fund Shares are offered
at NAV without imposition of any sales charge and are subject to
12b-1 service and distribution fees at the respective annual
rates of 0.25% and 0.50% of class assets. These classes also may
differ from one another with respect to the allocation of certain
class-specific expenses other than 12b-1 fees. Only Classes A,
B, and D Acquiring Fund Shares are involved in the Reorganiza-
tion.
Target's shares are divided into three classes, designated
Class A, Class B, and Class D shares ("Class A Target Shares,"
"Class B Target Shares," and "Class D Target Shares," respec-
tively). These classes are identical to the correspondingly let-
tered classes of Acquiring Fund Shares, except that the Class A
Target Shares are subject to a 12b-1 service fee at the annual
rate of 0.25%, rather than 0.21%, of class assets.
In consideration of the mutual promises herein, the parties
covenant and agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
------------------------------------------------
1.1. Target agrees to assign, sell, convey, transfer, and
deliver all of its assets described in paragraph 1.2 ("Assets")
to Acquiring Fund. Acquiring Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full
and fractional (i) Class A Acquiring Fund Shares determined
by dividing the net value of Target (computed as set forth
in paragraph 2.1) ("Target Value") attributable to the Class
A Target Shares by the NAV (computed as set forth in
paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class
B Acquiring Fund Shares determined by dividing the Target
Value attributable to the Class B Target Shares by the NAV
(as so computed) of a Class B Acquiring Fund Share, and
(iii) Class D Acquiring Fund Shares determined by dividing
the Target Value attributable to the Class D Target Shares
by the NAV (as so computed) of a Class D Acquiring Fund
Share; and
(b) to assume all of Target's liabilities described in
paragraph 1.3 ("Liabilities").
Such transactions shall take place at the Closing (as defined in
paragraph 3.1).
1.2. The Assets shall include, without limitation, all
cash, cash equivalents, securities, receivables (including
interest and dividends receivable), claims and rights of action,
rights to register shares under applicable securities laws, books
and rec-
A-2
<PAGE>
ords, deferred and prepaid expenses shown as assets on Target's
books, and other property owned by Target at the Effective Time
(as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise
provided herein) all of Target's liabilities, debts, obligations,
and duties of whatever kind or nature, whether absolute, accrued,
contingent, or otherwise, whether or not arising in the ordinary
course of business, whether or not determinable at the Effective
Time, and whether or not specifically referred to in this Agree-
ment, including without limitation Target's share of the expenses
described in paragraph 7.2. Notwithstanding the foregoing,
Target agrees to use its best efforts to discharge all of its
known Liabilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target
shall declare and pay to its shareholders a dividend and/or other
distribution in an amount large enough so that it will have
distributed substantially all (and in any event not less than
90%) of its investment company taxable income (computed without
regard to any deduction for dividends paid) and realized net
capital gain, if any, for the current taxable year through the
Effective Time.
1.5. At the Effective Time (or as soon thereafter as is
reasonably practicable), Target shall constructively distribute
the Acquiring Fund Shares received by it pursuant to paragraph
1.1 to Target's shareholders of record, determined as of the
Effective Time (collectively "Shareholders" and individually a
"Shareholder"), in exchange for their Target Shares. Such dis-
tribution shall be accomplished by the Funds' transfer agent
("Transfer Agent") opening accounts on Acquiring Fund's share
transfer books in the Shareholders' names and transferring such
Acquiring Fund Shares thereto. Each Shareholder's account shall
be credited with the respective pro rata number of full and
fractional (rounded to the third decimal place) Acquiring Fund
Shares due that Shareholder, by class (i.e., the account for a
Shareholder of Class A Target Shares shall be credited with the
respective pro rata number of Class A Acquiring Fund Shares due
that Shareholder, the account for a Shareholder of Class B Target
Shares shall be credited with the respective pro rata number of
Class B Acquiring Fund Shares due that Shareholder, and the ac-
count for a Shareholder of Class D Target Shares shall be
credited with the respective pro rata number of Class D Acquiring
Fund Shares due that Shareholder). All outstanding Target
Shares, including any represented by certificates, shall
simultaneously be canceled on Target's share transfer records.
Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution
of the Acquiring Fund Shares pursuant to paragraph 1.5, Target
shall be terminated as a series of Corporation and any further
actions
A-3
<PAGE>
shall be taken in connection therewith as required by applicable
law.
1.7. Any reporting responsibility of Target to a public
authority is and shall remain its responsibility up to and
including the date on which it is terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring
Fund Shares in a name other than that of the registered holder on
Target's books of the Target Shares constructively exchanged
therefor shall be paid by the person to whom such Acquiring Fund
Shares are to be issued, as a condition of such transfer.
2. VALUATION
---------
2.1. For purposes of paragraph 1.1(a), Target's net value
shall be (a) the value of the Assets computed as of the close of
regular trading on the New York Stock Exchange, Inc. ("NYSE") on
the date of the Closing ("Valuation Time"), using the valuation
procedures set forth in Target's then-current prospectus and
statement of additional information less (b) the amount of the
Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A
Acquiring Fund Share, a Class B Acquiring Fund Share, and a Class
D Acquiring Fund Share shall be computed as of the Valuation
Time, using the valuation procedures set forth in Acquiring
Fund's then-current prospectus and statement of additional
information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2
shall be made by or under the direction of Mitchell Hutchins
Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
--------------------------
3.1. The Reorganization, together with related acts
necessary to consummate the same ("Closing"), shall occur at the
Funds' principal office on August 18, 1995, or at such other
place and/or on such other date as the parties may agree. All
acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the date thereof or
at such other time as the parties may agree ("Effective Time").
If, immediately before the Valuation Time, (a) the NYSE is closed
to trading or trading thereon is restricted or (b) trading or the
reporting of trading on the NYSE or elsewhere is disrupted, so
that accurate appraisal of the net value of Target and the NAV
per Acquiring Fund Share is impracticable, the Effective Time
shall be postponed until the first business day after the day
when such trading shall have been fully resumed and such
reporting shall have been restored.
A-4
<PAGE>
3.2. Corporation shall deliver to Trust at the Closing a
schedule of the Assets as of the Effective Time, which shall set
forth for all portfolio securities included therein their
adjusted tax basis and holding period by lot. Target's custodian
shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all
necessary taxes in conjunction with the delivery of the Assets,
including all applicable federal and state stock transfer stamps,
if any, have been paid or provision for payment has been made.
3.3. Corporation shall deliver to Trust at the Closing a
list of the names and addresses of the Shareholders and the
number (by class) of outstanding Target Shares owned by each
Shareholder, all as of the Effective Time, certified by
Corporation's Secretary or Assistant Secretary. The Transfer
Agent shall deliver at the Closing a certificate as to the
opening on Acquiring Fund's share transfer books of accounts in
the Shareholders' names. Trust shall issue and deliver a
confirmation to Corporation evidencing the Acquiring Fund Shares
(by class) to be credited to Target at the Effective Time or
provide evidence satisfactory to Corporation that such Acquiring
Fund Shares have been credited to Target's account on Acquiring
Fund's books. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, stock certifi-
cates, receipts, or other documents as the other party or its
counsel may reasonably request.
3.4. Each Investment Company shall deliver to the other at
the Closing a certificate executed in its name by its President
or a Vice President in form and substance satisfactory to the
recipient and dated the Effective Time, to the effect that the
representations and warranties it made in this Agreement are true
and correct at the Effective Time except as they may be affected
by the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
4.1. Target represents and warrants as follows:
4.1.1. Corporation is a corporation duly organized,
validly existing, and in good standing under the laws of the
State of Maryland, and a copy of its Articles of
Incorporation is on file with the Department of Assessments
and Collections of Maryland;
4.1.2. Corporation is duly registered as an open-end
management investment company under the 1940 Act, and such
registration will be in full force and effect at the
Effective Time;
A-5
<PAGE>
4.1.3. Target is a duly established and designated
series of Corporation;
4.1.4. At the Closing, Target will have good and
marketable title to the Assets and full right, power, and
authority to sell, assign, transfer, and deliver the Assets
free of any liens or other encumbrances; and upon delivery
and payment for the Assets, Acquiring Fund will acquire good
and marketable title thereto;
4.1.5. Target's current prospectus and statement of
additional information conform in all material respects to
the applicable requirements of the Securities Act of 1933
("1933 Act") and the 1940 Act and the rules and regulations
thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading;
4.1.6. Target is not in violation of, and the
execution and delivery of this Agreement and consummation of
the transactions contemplated hereby will not conflict with
or violate, Maryland law or any provision of Corporation's
Articles of Incorporation or By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a
party or by which it is bound or result in the acceleration
of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Target is a
party or by which it is bound, except as previously
disclosed in writing to and accepted by Trust;
4.1.7. Except as disclosed in writing to and accepted
by Trust, all material contracts and other commitments of or
applicable to Target (other than this Agreement and invest-
ment contracts, including options, futures, and forward con-
tracts) will be terminated, or provision for discharge of
any liabilities of Target thereunder will be made, at or
prior to the Effective Time, without either Fund's incurring
any liability or penalty with respect thereto and without
diminishing or releasing any rights Target may have had with
respect to actions taken or omitted to be taken by any other
party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and
accepted by Trust, no litigation, administrative proceeding,
or investigation of or before any court or governmental body
is presently pending or (to Target's knowledge) threatened
against Corporation with respect to Target or any of its
properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition
or the conduct of its business; Target knows of no facts
that
A-6
<PAGE>
might form the basis for the institution of any such litiga-
tion, proceeding, or investigation and is not a party to or
subject to the provisions of any order, decree, or judgment
of any court or governmental body that materially or
adversely affects its business or its ability to consummate
the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of
this Agreement has been duly authorized as of the date
hereof by all necessary action on the part of Corporation's
board of directors, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject
to approval by Target's shareholders and receipt of any
necessary exemptive relief or no-action assurances requested
from the Securities and Exchange Commission ("SEC") or its
staff with respect to sections 17(a) and 17(d) of the 1940
Act, this Agreement will constitute a valid and legally
binding obligation of Target, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights
and by general principles of equity;
4.1.10. At the Effective Time, the performance of this
Agreement shall have been duly authorized by all necessary
action by Target's shareholders;
4.1.11. No governmental consents, approvals,
authorizations, or filings are required under the 1933 Act,
the Securities Exchange Act of 1934 ("1934 Act"), or the
1940 Act for the execution or performance of this Agreement
by Corporation, except for (a) the filing with the SEC of a
registration statement by Trust on Form N-14 relating to the
Acquiring Fund Shares issuable hereunder, and any supplement
or amendment thereto ("Registration Statement"), including
therein a prospectus/proxy statement ("Proxy Statement"),
(b) receipt of the exemptive relief referenced in
subparagraph 4.1.9, and (c) such consents, approvals,
authorizations, and filings as have been made or received or
as may be required subsequent to the Effective Time;
4.1.12. On the effective date of the Registration
Statement, at the time of the shareholders' meeting referred
to in paragraph 5.2, and at the Effective Time, the Proxy
Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the
1940 Act and the regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in
or omissions from the
A-7
<PAGE>
Proxy Statement made in reliance on and in conformity with
information furnished by Trust for use therein;
4.1.13. The Liabilities were incurred by Target in the
ordinary course of its business;
4.1.14. Target is a "fund" (within the meaning of sec-
tion 851(h)(2) of the Code); it qualified for treatment as a
regulated investment company ("RIC") under Subchapter M of
the Code for each past taxable year since it commenced
operations and will continue to meet all the requirements
for such qualification for its current taxable year; and it
has no earnings and profits accumulated in any taxable year
in which the provisions of Subchapter M did not apply to it.
The Assets shall be invested at all times through the
Effective Time in a manner that ensures compliance with the
foregoing;
4.1.15. Target is not under the jurisdiction of a
court in a "title 11 or similar case" (within the meaning of
section 368(a)(3)(A) of the Code);
4.1.16. Not more than 25% of the value of Target's
total assets (excluding cash, cash items, and U.S.
government securities) is invested in the stock or
securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock or securities
of five or fewer issuers; and
4.1.17. Target will be terminated as soon as reason-
ably practicable after the Reorganization, but in all events
within six months after the Effective Time.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Trust is an unincorporated voluntary associ-
ation with transferable shares organized as a business trust
under a written instrument ("Business Trust"); it is duly
organized, validly existing, and in good standing under the
laws of the Commonwealth of Massachusetts; and a copy of its
Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
4.2.2. Trust is duly registered as an open-end manage-
ment investment company under the 1940 Act, and such reg-
istration will be in full force and effect at the Effective
Time;
4.2.3. Acquiring Fund is a duly established and desig-
nated series of Trust;
A-8
<PAGE>
4.2.4. No consideration other than Acquiring Fund
Shares (and Acquiring Fund's assumption of the Liabilities)
will be issued in exchange for the Assets in the Reorganiza-
tion;
4.2.5. The Acquiring Fund Shares to be issued and
delivered to Target hereunder will, at the Effective Time,
have been duly authorized and, when issued and delivered as
provided herein, will be duly and validly issued and
outstanding shares of Acquiring Fund, fully paid and non-
assessable, except to the extent that under Massachusetts
law shareholders of a Business Trust may, under certain
circumstances, be held personally liable for its obliga-
tions. Except as contemplated by this Agreement, Acquiring
Fund does not have outstanding any options, warrants, or
other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible into any
of its shares;
4.2.6. Acquiring Fund's current prospectus and
statement of additional information conform in all material
respects to the applicable requirements of the 1933 Act and
the 1940 Act and the rules and regulations thereunder and do
not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the
execution and delivery of this Agreement and consummation of
the transactions contemplated hereby will not conflict with
or violate, Massachusetts law or any provision of Trust's
Declaration of Trust or By-Laws or of any provision of any
agreement, instrument, lease, or other undertaking to which
Acquiring Fund is a party or by which it is bound or result
in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, judgment, or decree to
which Acquiring Fund is a party or by which it is bound,
except as previously disclosed in writing to and accepted by
Corporation;
4.2.8. Except as otherwise disclosed in writing to and
accepted by Corporation, no litigation, administrative pro-
ceeding, or investigation of or before any court or govern-
mental body is presently pending or (to Acquiring Fund's
knowledge) threatened against Trust with respect to Acquir-
ing Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect
Acquiring Fund's financial condition or the conduct of its
business; Acquiring Fund knows of no facts that might form
the basis for the institution of any such litigation, pro-
ceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any
court or governmental
A-9
<PAGE>
body that materially or adversely affects its business or
its ability to consummate the transactions contemplated
hereby;
4.2.9. The execution, delivery, and performance of
this Agreement has been duly authorized as of the date
hereof by all necessary action on the part of Trust's board
of trustees, which has made the determinations required by
Rule 17a-8(a) under the 1940 Act; and, subject to receipt of
any necessary exemptive relief or no-action assurances
requested from the SEC or its staff with respect to sections
17(a) and 17(d) of the 1940 Act, this Agreement will
constitute a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by
general principles of equity;
4.2.10. No governmental consents, approvals,
authorizations, or filings are required under the 1933 Act,
the 1934 Act, or the 1940 Act for the execution or
performance of this Agreement by Trust, except for (a) the
filing with the SEC of the Registration Statement,
(b) receipt of the exemptive relief referenced in
subparagraph 4.2.9, and (c) such consents, approvals,
authorizations, and filings as have been made or received or
as may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration
Statement, at the time of the shareholders' meeting referred
to in paragraph 5.2, and at the Effective Time, the Proxy
Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the
1940 Act and the regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in
or omissions from the Proxy Statement made in reliance on
and in conformity with information furnished by Corporation
for use therein;
4.2.12. Acquiring Fund is a "fund" (within the meaning
of section 851(h)(2) of the Code); it qualified for
treatment as a RIC under Subchapter M of the Code for each
past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification
for its current taxable year; Acquiring Fund intends to
continue to meet all such requirements for the next taxable
year; and it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M did not
apply to it;
A-10
<PAGE>
4.2.13. Acquiring Fund has no plan or intention to
issue additional Acquiring Fund Shares following the
Reorganization except for shares issued in the ordinary
course of its business as a series of an open-end investment
company; nor does Acquiring Fund have any plan or intention
to redeem or otherwise reacquire any Acquiring Fund Shares
issued to the Shareholders pursuant to the Reorganization,
other than through redemptions arising in the ordinary
course of that business;
4.2.14. Acquiring Fund (a) will actively continue Tar-
get's business in substantially the same manner that Target
conducted that business immediately before the
Reorganization, (b) has no plan or intention to sell or
otherwise dispose of any of the Assets, except for
dispositions made in the ordinary course of that business
and dispositions necessary to maintain its status as a RIC
under Subchapter M of the Code, and (c) expects to retain
substantially all the Assets in the same form as it receives
them in the Reorganization, unless and until subsequent
investment circumstances suggest the desirability of change
or it becomes necessary to make dispositions thereof to
maintain such status;
4.2.15. There is no plan or intention for Acquiring
Fund to be dissolved or merged into another corporation or
business trust or any "fund" thereof (within the meaning of
section 851(h)(2) of the Code) following the Reorganization;
4.2.16. Acquiring Fund is not under the jurisdiction
of a court in a "title 11 or similar case" (within the
meaning of section 368(a)(3)(A) of the Code);
4.2.17. Immediately after the Reorganization, (a) not
more than 25% of the value of Acquiring Fund's total assets
(excluding cash, cash items, and U.S. government securities)
will be invested in the stock or securities of any one
issuer and (b) not more than 50% of the value of such assets
will be invested in the stock or securities of five or fewer
issuers; and
4.2.18. Acquiring Fund does not own, directly or indi-
rectly, nor will it acquire, directly or indirectly, at any
time through the Effective Time, nor has it owned, directly
or indirectly, at any time during the past five years, any
shares of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund
Shares, when received by the Shareholders, will be approxi-
mately equal to the fair market value of their Target Shares
constructively surrendered in exchange therefor;
A-11
<PAGE>
4.3.2. Its management (a) is unaware of any plan or
intention of Shareholders to redeem or otherwise dispose of
any portion of the Acquiring Fund Shares to be received by
them in the Reorganization and (b) does not anticipate dis-
positions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and
frequency of dispositions of shares of Target as a series of
an open-end investment company. Consequently, its
management expects that the percentage of Shareholder inter-
ests, if any, that will be disposed of as a result of or at
the time of the Reorganization will be de minimis. Nor does
its management anticipate that there will be extraordinary
redemptions of Acquiring Fund Shares immediately following
the Reorganization;
4.3.3. The Shareholders will pay their own expenses,
if any, incurred in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reor-
ganization, Acquiring Fund will hold substantially the same
assets and be subject to substantially the same liabilities
that Target held or was subject to immediately prior
thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis
of the Assets will equal or exceed the Liabilities to be
assumed by Acquiring Fund and those to which the Assets are
subject;
4.3.6. There is no intercompany indebtedness between
the Funds that was issued or acquired, or will be settled,
at a discount;
4.3.7. Pursuant to the Reorganization, Target will
transfer to Acquiring Fund, and Acquiring Fund will acquire,
at least 90% of the fair market value of the net assets, and
at least 70% of the fair market value of the gross assets,
held by Target immediately before the Reorganization. For
the purposes of this representation, any amounts used by
Target to pay its Reorganization expenses and redemptions
and distributions made by it immediately before the
Reorganization (except for (a) distributions made to conform
to its policy of distributing all or substantially all of
its income and gains to avoid the obligation to pay federal
income tax and/or the excise tax under section 4982 of the
Code and (b) redemptions not made as part of the Reorganiza-
tion) will be included as assets thereof held immediately
before the Reorganization;
4.3.8. None of the compensation received by any Share-
holder who is an employee of Target will be separate
consideration for, or allocable to, any of the Target Shares
held by such Shareholder-employee; none of the Acquiring
Fund Shares
A-12
<PAGE>
received by any such Shareholder-employee will be separate
consideration for, or allocable to, any employment
agreement; and the consideration paid to any such
Shareholder-employee will be for services actually rendered
and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the
Shareholders will not own shares constituting "control" of
Acquiring Fund within the meaning of section 304(c) of the
Code.
5. COVENANTS
---------
5.1. Each Fund covenants to operate its respective business
in the ordinary course between the date hereof and the Closing,
it being understood that (a) such ordinary course will include
declaring and paying customary dividends and other distributions
and such changes in operations as are contemplated by each Fund's
normal business activities and (b) each Fund will retain
exclusive control of the composition of its portfolio until the
Closing; provided that Target shall not dispose of more than an
insignificant portion of its historic business assets during such
period without Acquiring Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to
consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated
hereby.
5.3. Target covenants that the Acquiring Fund Shares to be
delivered hereunder are not being acquired for the purpose of
making any distribution thereof, other than in accordance with
the terms hereof.
5.4. Target covenants that it will assist Trust in obtain-
ing such information as Trust reasonably requests concerning the
beneficial ownership of Target Shares.
5.5. Target covenants that Target's books and records (in-
cluding all books and records required to be maintained under the
1940 Act and the rules and regulations thereunder) will be turned
over to Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the
Proxy Statement in compliance with applicable federal securities
laws.
5.7. Each Fund covenants that it will, from time to time,
as and when requested by the other Fund, execute and deliver or
cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further
action, as the other Fund may deem necessary or desirable in
order to vest in,
A-13
<PAGE>
and confirm to, (a) Acquiring Fund, title to and possession of
all the Assets, and (b) Target, title to and possession of the
Acquiring Fund Shares to be delivered hereunder, and otherwise to
carry out the intent and purpose hereof.
5.8. Trust covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act,
the 1940 Act, and such state securities laws it may deem
appropriate in order to continue its operations after the
Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take
or cause to be taken all actions, and to do or cause to be done
all things, reasonably necessary, proper, or advisable to
consummate and effectuate the transactions contemplated hereby.
6. CONDITIONS PRECEDENT
--------------------
Each Fund's obligations hereunder shall be subject to
(a) performance by the other Fund of all the obligations to be
performed hereunder at or before the Effective Time, (b) all
representations and warranties of the other Fund contained herein
being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same
force and effect as if made at and as of the Effective Time, and
(c) the following further conditions that, at or before the
Effective Time:
6.1. This Agreement and the transactions contemplated
hereby shall have been duly adopted and approved by Corporation's
board of directors and shall have been approved by Target's
shareholders in accordance with applicable law.
6.2. All necessary filings shall have been made with the
SEC and state securities authorities, and no order or directive
shall have been received that any other or further action is
required to permit the parties to carry out the transactions
contemplated hereby. The Registration Statement shall have
become effective under the 1933 Act, no stop orders suspending
the effectiveness thereof shall have been issued, and the SEC
shall not have issued an unfavorable report with respect to the
Reorganization under section 25(b) of the 1940 Act nor instituted
any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940
Act. All consents, orders, and permits of federal, state, and
local regulatory authorities (including the SEC and state securi-
ties authorities) deemed necessary by either Fund to permit
consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund,
provided that either Fund may for itself waive any of such condi-
tions.
A-14
<PAGE>
6.3. At the Effective Time, no action, suit, or other pro-
ceeding shall be pending before any court or governmental agency
in which it is sought to restrain or prohibit, or to obtain
damages or other relief in connection with, the transactions
contemplated hereby.
6.4. Corporation shall have received an opinion of Kirkpat-
rick & Lockhart LLP, counsel to Trust, substantially to the
effect that:
6.4.1. Acquiring Fund is a duly established series of
Trust, a Business Trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with
power under its Declaration of Trust to own all of its prop-
erties and assets and, to the knowledge of such counsel, to
carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized,
executed, and delivered by Trust on behalf of Acquiring Fund
and (b) assuming due authorization, execution, and delivery
of this Agreement by Corporation on behalf of Target, is a
valid and legally binding obligation of Trust with respect
to Acquiring Fund, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by
general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and dis-
tributed to the Shareholders under this Agreement, assuming
their due delivery as contemplated by this Agreement, will
be duly authorized and validly issued and outstanding and
fully paid and non-assessable, except to the extent that
under Massachusetts law shareholders of a Business Trust
may, under certain circumstances, be held personally liable
for its obligations, and no shareholder of Acquiring Fund
has any preemptive right to subscribe for or purchase such
shares;
6.4.4. The execution and delivery of this Agreement
did not, and the consummation of the transactions
contemplated hereby will not, materially violate Trust's
Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel) to which Trust (with
respect to Acquiring Fund) is a party or by which it is
bound or, to the knowledge of such counsel, result in the
acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which
Trust (with respect to Acquiring Fund) is a party or by
which it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by
Corporation;
A-15
<PAGE>
6.4.5. To the knowledge of such counsel, no consent,
approval, authorization, or order of any court or
governmental authority is required for the consummation by
Trust on behalf of Acquiring Fund of the transactions
contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act and such as may
be required under state securities laws;
6.4.6. Trust is registered with the SEC as an invest-
ment company, and to the knowledge of such counsel no order
has been issued or proceeding instituted to suspend such
registration; and
6.4.7. To the knowledge of such counsel, (a) no liti-
gation, administrative proceeding, or investigation of or
before any court or governmental body is pending or
threatened as to Trust (with respect to Acquiring Fund) or
any of its properties or assets attributable or allocable to
Acquiring Fund and (b) Trust (with respect to Acquiring
Fund) is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body
that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as other-
wise disclosed in writing to and accepted by Corporation.
In rendering such opinion, such counsel may rely, as to matters
governed by the laws of the Commonwealth of Massachusetts, on an
opinion of competent Massachusetts counsel.
6.5. Trust shall have received an opinion of Kirkpatrick &
Lockhart LLP, counsel to Corporation, substantially to the effect
that:
6.5.1. Target is a duly established series of Corpora-
tion, a corporation duly organized and validly existing
under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and
assets and, to the knowledge of such counsel, to carry on
its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized,
executed, and delivered by Corporation on behalf of Target
and (b) assuming due authorization, execution, and delivery
of this Agreement by Trust on behalf of Acquiring Fund, is a
valid and legally binding obligation of Corporation with
respect to Target, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by
general principles of equity;
A-16
<PAGE>
6.5.3. The execution and delivery of this Agreement
did not, and the consummation of the transactions
contemplated hereby will not, materially violate
Corporation's Articles of Incorporation or By-Laws or any
provision of any agreement (known to such counsel) to which
Corporation (with respect to Target) is a party or by which
it is bound or, to the knowledge of such counsel, result in
the acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which
Corporation (with respect to Target) is a party or by which
it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by Trust;
6.5.4. To the knowledge of such counsel, no consent,
approval, authorization, or order of any court or
governmental authority is required for the consummation by
Corporation on behalf of Target of the transactions
contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act and such as may
be required under state securities laws;
6.5.5. Corporation is registered with the SEC as an
investment company, and to the knowledge of such counsel no
order has been issued or proceeding instituted to suspend
such registration; and
6.5.6. To the knowledge of such counsel, (a) no liti-
gation, administrative proceeding, or investigation of or
before any court or governmental body is pending or
threatened as to Corporation (with respect to Target) or any
of its properties or assets attributable or allocable to
Target and (b) Corporation (with respect to Target) is not a
party to or subject to the provisions of any order, decree,
or judgment of any court or governmental body that
materially and adversely affects its business, except as set
forth in such opinion or as otherwise disclosed in writing
to and accepted by Trust.
In rendering such opinion, such counsel may rely, as to matters
governed by the laws of the State of Maryland, on an opinion of
competent Maryland counsel.
6.6. Each Investment Company shall have received an opinion
of Kirkpatrick & Lockhart LLP, its counsel, addressed to and in
form and substance satisfactory to it, as to the federal income
tax consequences mentioned below ("Tax Opinion"). In rendering
the Tax Opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the repre-
sentations made in this Agreement (and/or in separate letters
addressed to such counsel) and the certificates delivered
pursuant to paragraph 3.4. The Tax Opinion shall be subs-
tantially to the effect that, based on the facts and assumptions
stated therein, for federal income tax purposes:
A-17
<PAGE>
6.6.1. Acquiring Fund's acquisition of the Assets in
exchange solely for Acquiring Fund Shares and Acquiring
Fund's assumption of the Liabilities, followed by Target's
distribution of those shares to the Shareholders con-
structively in exchange for the Shareholders' Target Shares,
will constitute a reorganization within the meaning of
section 368(a)(1)(C) of the Code, and each Fund will be "a
party to a reorganization" within the meaning of section
368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on
the transfer to Acquiring Fund of the Assets in exchange
solely for Acquiring Fund Shares and Acquiring Fund's
assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in
constructive exchange for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring
Fund on its receipt of the Assets in exchange solely for
Acquiring Fund Shares and its assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be
the same as the basis thereof in Target's hands immediately
before the Reorganization, and Acquiring Fund's holding
period for the Assets will include Target's holding period
therefor;
6.6.5. A Shareholder will recognize no gain or loss on
the constructive exchange of all its Target Shares solely
for Acquiring Fund Shares pursuant to the Reorganization;
and
6.6.6. A Shareholder's basis for the Acquiring Fund
Shares to be received by it in the Reorganization will be
the same as the basis for its Target Shares to be
constructively surrendered in exchange for those Acquiring
Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target
Shares, provided they are held as capital assets by the
Shareholder at the Effective Time.
Notwithstanding paragraphs 6.6.2 and 6.6.4, the Tax Opinion may
state that no opinion is expressed as to the effect of the Reor-
ganization on the Funds or any Shareholder (regarding the
recognition of gain or loss and/or the determination of the basis
or holding period) with respect to any asset (including certain
options, futures, and forward contracts included in the Assets)
as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a
mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive
any of the foregoing conditions if, in the judgment of Trust's
board of trustees, such waiver will not have a material adverse
A-18
<PAGE>
effect on its shareholders' interests, and (b) Target may waive
any of the foregoing conditions if, in the judgment of
Corporation's board of directors, such waiver will not have a
material adverse effect on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
---------------------------
7.1. Each Investment Company represents and warrants to the
other that there are no brokers or finders entitled to receive
any payments in connection with the transactions provided for
herein.
7.2. Except as otherwise provided herein, all expenses
incurred in connection with the transactions contemplated by this
Agreement (whether or not they are consummated) will be borne by
the Funds proportionately, as follows: each such expense will be
borne by the Funds in proportion to their respective net assets
as of the close of business on the last business day of the month
in which such expense was incurred. Such expenses include:
(a) expenses incurred in connection with entering into and
carrying out the provisions of this Agreement; (b) expenses
associated with the preparation and filing of the Registration
Statement; (c) registration or qualification fees and expenses of
preparing and filing such forms as are necessary under applicable
state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which Target's
shareholders are resident as of the date of the mailing of the
Proxy Statement to such shareholders; (d) printing and postage
expenses; (e) legal and accounting fees; and (f) solicitation
costs.
8. ENTIRE AGREEMENT; SURVIVAL
--------------------------
Neither party has made any representation, warranty, or
covenant not set forth herein, and this Agreement constitutes the
entire agreement between the parties. The representations, war-
ranties, and covenants contained herein or in any document
delivered pursuant hereto or in connection herewith shall survive
the Closing.
9. TERMINATION OF AGREEMENT
------------------------
This Agreement may be terminated at any time at or prior to
the Effective Time, whether before or after approval by Target's
shareholders:
9.1. By either Fund (a) in the event of the other Fund's
material breach of any representation, warranty, or covenant con-
tained herein to be performed at or prior to the Effective Time,
(b) if a condition to its obligations has not been met and it
reasonably appears that such condition will not or cannot be met,
A-19
<PAGE>
or (c) if the Closing has not occurred on or before December 31,
1995; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2,
there shall be no liability for damages on the part of either
Fund, or the trustees/directors or officers of either Investment
Company, to the other Fund.
10. AMENDMENT
---------
This Agreement may be amended, modified, or supplemented at
any time, notwithstanding approval thereof by Target's sharehold-
ers, in such manner as may be mutually agreed upon in writing by
the parties; provided that following such approval no such amend-
ment shall have a material adverse effect on the Shareholders'
interests.
11. MISCELLANEOUS
-------------
11.1. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massa-
chusetts; provided that, in the case of any conflict between such
laws and the federal securities laws, the latter shall govern.
11.2. Nothing expressed or implied herein is intended or
shall be construed to confer upon or give any person, firm,
trust, or corporation other than the parties and their respective
successors and assigns any rights or remedies under or by reason
of this Agreement.
11.3. The parties acknowledge that Trust is a Business
Trust. Notice is hereby given that this instrument is executed
on behalf of Trust's trustees solely in their capacity as trus-
tees, and not individually, and that Trust's obligations under
this instrument are not binding on or enforceable against any of
its trustees, officers, or shareholders, but are only binding on
and enforceable against Acquiring Fund's assets and property.
Target agrees that, in asserting any rights or claims under this
Agreement, it shall look only to Acquiring Fund's assets and
property in settlement of such rights or claims and not to such
trustees or shareholders.
A-20
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to
be executed by its duly authorized officer.
ATTEST: PAINEWEBBER OLYMPUS FUND,
on behalf of its series,
PAINEWEBBER GROWTH FUND
By: /s/ Gregory K. Todd /s/ Diane E. O'Donnell
----------------------- ------------------------------
Assistant Secretary Vice President
ATTEST: PAINEWEBBER MASTER SERIES, INC.
on behalf of its series,
PAINEWEBBER BLUE CHIP GROWTH
FUND
By: /s/ Gregory K. Todd /s/ Joan L. Cohen
----------------------- ------------------------------
Assistant Secretary Vice President
A-21
<PAGE>
Appendix B
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
----------------------------------------------------
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of June 1, 1995, between PaineWebber Olympus Fund, a Massachusetts
business trust ("Trust"), on behalf of PaineWebber Growth Fund, a segregated
portfolio of assets ("series") thereof ("Acquiring Fund"), and Trust, on behalf
of its PaineWebber Communications & Technology Growth Fund series ("Target").
(Acquiring Fund and Target are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds.")
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended ("Code"). The reorganization will involve the transfer to
Acquiring Fund of Target's assets solely in exchange for voting shares of
beneficial interest in Acquiring Fund ("Acquiring Fund Shares") and the assump-
tion by Acquiring Fund of Target's liabilities, followed by the constructive
distribution of the Acquiring Fund Shares to the holders of shares of beneficial
interest in Target ("Target Shares") in exchange therefor, all upon the terms
and conditions set forth herein. The foregoing transactions are referred to
herein as the "Reorganization." All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by either Fund
are made and shall be taken or undertaken by Trust on its behalf.
Acquiring Fund's shares are divided into four classes, designated Class A,
Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class B
Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D Acquiring
Fund Shares," respectively). Except as noted in the following sentence, these
classes differ only with respect to the sales charges imposed on the purchase of
shares and the fees ("12b-1 fees") payable by each class pursuant to plans
adopted under Rule 12b-1 promulgated under the Investment Company Act of 1940
("1940 Act"), as follows: (1) Class A Acquiring Fund Shares are offered at net
asset value ("NAV") plus a sales charge, if applicable, and are subject to a
12b-1 service fee at the annual rate of 0.21% of the average daily net assets
attributable to the class ("class assets"); (2) Class B Acquiring Fund Shares
are offered at NAV without imposition of any sales charge and are subject to a
contingent deferred sales charge and 12b-1 service and distribution fees at the
respective annual rates of 0.25% and 0.75% of class assets; (3) Class C
Acquiring Fund Shares are offered, currently only to the trustee of the
PaineWebber Savings Investment Plan on behalf of that plan, at NAV without
imposition of any sales charge and are not subject to any 12b-1 fee; and
(4) Class D Acquiring Fund Shares are offered at NAV
<PAGE>
without imposition of any sales charge and are subject to 12b-1 service and
distribution fees at the respective annual rates of 0.25% and 0.50% of class
assets. These classes also may differ from one another with respect to the
allocation of certain class-specific expenses other than 12b-1 fees. Only
Classes A, B, and D Acquiring Fund Shares are involved in the Reorganization.
Target's shares are divided into three classes, designated Class A, Class
B, and Class D shares ("Class A Target Shares," "Class B Target Shares," and
"Class D Target Shares," respectively). These classes are identical to the
correspondingly lettered classes of Acquiring Fund Shares, except that the Class
A Target Shares are subject to a 12b-1 service fee at the annual rate of 0.25%,
rather than 0.21%, of class assets.
In consideration of the mutual promises herein, the parties covenant and
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
------------------------------------------------
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and fractional
(i) Class A Acquiring Fund Shares determined by dividing the net value of
Target (computed as set forth in paragraph 2.1) ("Target Value")
attributable to the Class A Target Shares by the NAV (computed as set forth
in paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class B Acquiring
Fund Shares determined by dividing the Target Value attributable to the
Class B Target Shares by the NAV (as so computed) of a Class B Acquiring
Fund Share, and (iii) Class D Acquiring Fund Shares determined by dividing
the Target Value attributable to the Class D Target Shares by the NAV (as
so computed) of a Class D Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
B-2
<PAGE>
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement,
including without limitation Target's share of the expenses described in
paragraph 7.2. Notwithstanding the foregoing, Target agrees to use its best
efforts to discharge all of its known Liabilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without regard
to any deduction for dividends paid) and realized net capital gain, if any, for
the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund Shares
received by it pursuant to paragraph 1.1 to Target's shareholders of record,
determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such dis-
tribution shall be accomplished by the Funds' transfer agent ("Transfer Agent")
opening accounts on Acquiring Fund's share transfer books in the Shareholders'
names and transferring such Acquiring Fund Shares thereto. Each Shareholder's
account shall be credited with the respective pro rata number of full and
fractional (rounded to the third decimal place) Acquiring Fund Shares due that
Shareholder, by class (i.e., the account for a Shareholder of Class A Target
Shares shall be credited with the respective pro rata number of Class A
Acquiring Fund Shares due that Shareholder, the account for a Shareholder of
Class B Target Shares shall be credited with the respective pro rata number of
Class B Acquiring Fund Shares due that Shareholder, and the account for a
Shareholder of Class D Target Shares shall be credited with the respective pro
rata number of Class D Acquiring Fund Shares due that Shareholder). All out-
standing Target Shares, including any represented by certificates, shall
simultaneously be canceled on Target's share transfer records. Acquiring Fund
shall not issue certificates representing the Acquiring Fund Shares in
connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be terminated as a series of
Trust and any further actions shall be taken in connection therewith as required
by applicable law.
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
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1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
---------
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the New York
Stock Exchange, Inc. ("NYSE") on the date of the Closing ("Valuation Time"),
using the valuation procedures set forth in Target's then-current prospectus and
statement of additional information less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A Acquiring Fund
Share, a Class B Acquiring Fund Share, and a Class D Acquiring Fund Share shall
be computed as of the Valuation Time, using the valuation procedures set forth
in Acquiring Fund's then-current prospectus and statement of additional informa-
tion.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
--------------------------
3.1. The Reorganization, together with related acts necessary to consummate
the same ("Closing"), shall occur at the Funds' principal office on August 18,
1995, or at such other place and/or on such other date as the parties may agree.
All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the date thereof or at such other
time as the parties may agree ("Effective Time"). If, immediately before the
Valuation Time, (a) the NYSE is closed to trading or trading thereon is
restricted or (b) trading or the reporting of trading on the NYSE or elsewhere
is disrupted, so that accurate appraisal of the net value of Target and the NAV
per Acquiring Fund Share is impracticable, the Effective Time shall be postponed
until the first business day after the day when such trading shall have been
fully resumed and such reporting shall have been restored.
3.2. Trust shall deliver at the Closing a schedule of the Assets as of the
Effective Time, which shall set forth for all portfolio securities included
therein their adjusted tax basis and holding period by lot. Target's custodian
shall deliver at the Closing a certificate of an authorized officer stating that
(a) the Assets held by the custodian will be transferred to Acquiring Fund at
the Effective Time and (b) all necessary taxes in conjunction
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with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made.
3.3. Trust shall deliver at the Closing a list of the names and addresses
of the Shareholders and the number (by class) of outstanding Target Shares owned
by each Shareholder, all as of the Effective Time, certified by Trust's Secre-
tary or Assistant Secretary. The Transfer Agent shall deliver at the Closing a
certificate as to the opening on Acquiring Fund's share transfer books of
accounts in the Shareholders' names.
3.4. Trust shall deliver at the Closing a certificate executed in its name
by its President or a Vice President dated the Effective Time, to the effect
that the representations and warranties it made in this Agreement are true and
correct at the Effective Time except as they may be affected by the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
4.1. Target represents and warrants as follows:
4.1.1. Trust is an unincorporated voluntary association with trans-
ferable shares organized as a business trust under a written instrument
("Business Trust"); it is duly organized, validly existing, and in good
standing under the laws of the Commonwealth of Massachusetts; and a copy of
its Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts;
4.1.2. Trust is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force and
effect at the Effective Time;
4.1.3. Target is a duly established and designated series of Trust;
4.1.4. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.5. Target's current prospectus and statement of additional
information conform in all material respects to the applicable requirements
of the Securities Act of 1933 ("1933 Act") and the 1940 Act and the rules
and regulations thereunder and do not include any untrue statement of a
material
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fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Massachusetts law or any provision of
Trust's Declaration of Trust or By-Laws or of any agreement, instrument,
lease, or other undertaking to which Target is a party or by which it is
bound or result in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, judgment, or decree to which Target is a
party or by which it is bound;
4.1.7. All material contracts and other commitments of or applicable
to Target (other than this Agreement and investment contracts, including
options, futures, and forward contracts) will be terminated, or provision
for discharge of any liabilities of Target thereunder will be made, at or
prior to the Effective Time, without either Fund's incurring any liability
or penalty with respect thereto and without diminishing or releasing any
rights Target may have had with respect to actions taken or omitted to be
taken by any other party thereto prior to the Closing;
4.1.8. No litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Target's knowledge) threatened against Trust with respect to Target or any
of its properties or assets that, if adversely determined, would materially
and adversely affect Target's financial condition or the conduct of its
business; Target knows of no facts that might form the basis for the
institution of any such litigation, proceeding, or investigation and is not
a party to or subject to the provisions of any order, decree, or judgment
of any court or governmental body that materially or adversely affects its
business or its ability to consummate the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to approval by
Target's shareholders and receipt of any necessary exemptive relief or no-
action assurances requested from the Securities and Exchange Commission
("SEC") or its staff with respect to sections 17(a) and 17(d) of the 1940
Act, this Agreement will constitute a valid and legally binding obligation
of Target, enforceable in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, fraudulent transfer,
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reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.1.10. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Target's
shareholders;
4.1.11. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934 ("1934 Act"), or the 1940 Act for the execution or performance of this
Agreement by Trust, except for (a) the filing with the SEC of a registra-
tion statement by Trust on Form N-14 relating to the Acquiring Fund Shares
issuable hereunder, and any supplement or amendment thereto ("Registration
Statement"), including therein a prospectus/proxy statement ("Proxy
Statement"), (b) receipt of the exemptive relief referenced in subparagraph
4.1.9, and (c) such consents, approvals, authorizations, and filings as
have been made or received or as may be required subsequent to the
Effective Time;
4.1.12. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Trust with respect to Acquiring Fund for use
therein;
4.1.13. The Liabilities were incurred by Target in the ordinary
course of its business;
4.1.14. Target is a "fund" (within the meaning of section 851(h)(2)
of the Code); it qualified for treatment as a regulated investment company
("RIC") under Subchapter M of the Code for each past taxable year since it
commenced operations and will continue to meet all the requirements for
such qualification for its current taxable year; and it has no earnings and
profits accumulated in any taxable year in which the provisions of Sub-
chapter M did not apply to it. The Assets shall be invested at all times
through the Effective Time in a manner that ensures compliance with the
foregoing;
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4.1.15. Target is not under the jurisdiction of a court in a "title
11 or similar case" (within the meaning of section 368(a)(3)(A) of the
Code);
4.1.16. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in
the stock or securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock or securities of five or
fewer issuers; and
4.1.17. Target will be terminated as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Trust is a Business Trust; it is duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Massachusetts; and a copy of its Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts;
4.2.2. Trust is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force and
effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued
and outstanding shares of Acquiring Fund, fully paid and non-assessable,
except to the extent that under Massachusetts law shareholders of a
Business Trust may, under certain circumstances, be held personally liable
for its obligations. Except as contemplated by this Agreement, Acquiring
Fund does not have outstanding any options, warrants, or other rights to
subscribe for or purchase any of its shares, nor is there outstanding any
security convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of addi-
tional information conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
thereunder and do not include
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any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Massachusetts law or
any provision of Trust's Declaration of Trust or By-Laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, judgment, or decree to which Acquiring Fund is a party or by
which it is bound;
4.2.8. No litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against Trust with respect to
Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; Acquiring Fund knows of
no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to receipt of
any necessary exemptive relief or no-action assurances requested from the
SEC or its staff with respect to sections 17(a) and 17(d) of the 1940 Act,
this Agreement will constitute a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer, reor-
ganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by Trust, except for (a) the
filing with the SEC of the Registration Statement, (b) receipt of the
exemptive relief referenced in subparagraph 4.2.9, and (c) such consents,
approvals, authorizations, and filings as have been
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made or received or as may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Trust with respect to Target for use therein;
4.2.12. Acquiring Fund is a "fund" (within the meaning of section
851(h)(2) of the Code); it qualified for treatment as a RIC under
Subchapter M of the Code for each past taxable year since it commenced
operations and will continue to meet all the requirements for such
qualification for its current taxable year; Acquiring Fund intends to
continue to meet all such requirements for the next taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than through redemptions
arising in the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business
in substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to sell
or otherwise dispose of any of the Assets, except for dispositions made in
the ordinary course of that business and dispositions necessary to maintain
its status as a RIC under Subchapter M of the Code, and (c) expects to
retain substantially all the Assets in the same form as it receives them in
the Reorganization, unless and until subsequent investment circumstances
suggest the desirability of change or it becomes necessary to make dispo-
sitions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business
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trust or any "fund" thereof (within the meaning of section 851(h)(2) of the
Code) following the Reorganization;
4.2.16. Acquiring Fund is not under the jurisdiction of a court in a
"title 11 or similar case" (within the meaning of section 368(a)(3)(A) of
the Code);
4.2.17. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock or securities
of any one issuer and (b) not more than 50% of the value of such assets
will be invested in the stock or securities of five or fewer issuers; and
4.2.18. Acquiring Fund does not own, directly or indirectly, nor will
it acquire, directly or indirectly, at any time through the Effective Time,
nor has it owned, directly or indirectly, at any time during the past five
years, any shares of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when re-
ceived by the Shareholders, will be approximately equal to the fair market
value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring
Fund Shares to be received by them in the Reorganization and (b) does not
anticipate dispositions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Nor does its
management anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to im-
mediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
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4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made to
conform to its policy of distributing all or substantially all of its
income and gains to avoid the obligation to pay federal income tax and/or
the excise tax under section 4982 of the Code and (b) redemptions not made
as part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to, any
of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" of Acquiring Fund within the meaning
of section 304(c) of the Code.
5. COVENANTS
---------
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the Closing;
provided that Target shall not dispose of more than an insignificant portion of
its historic business assets during such period without Acquiring Fund's prior
consent.
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5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Trust covenants to use all reasonable efforts to obtain the approvals
and authorizations required by the 1933 Act, the 1940 Act, and such state
securities laws it may deem appropriate in order to continue its operations
after the Effective Time.
5.5. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
--------------------
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all the obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by Trust's board of trustees and shall have been
approved by Target's shareholders in accordance with applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory authori-
ties (including the SEC and state securities authorities) deemed necessary by
either Fund to permit consummation, in all material respects, of
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the transactions contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material adverse effect on
the assets or properties of either Fund, provided that either Fund may for
itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Trust (on behalf of Target) shall have received an opinion of Kirk-
patrick & Lockhart LLP, its counsel, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such counsel,
to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Trust on behalf
of Target, is a valid and legally binding obligation of Trust with respect
to Acquiring Fund, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting cre-
ditors' rights and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable, except to the extent
that under Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiring Fund has any preemptive right to subscribe for
or purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel) to which Trust (with respect to Acquiring
Fund) is a party or by which it is bound or, to the knowledge of such
counsel, result in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, judgment,
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or decree to which Trust (with respect to Acquiring Fund) is a party or by
which it is bound, except as set forth in such opinion;
6.4.5. To the knowledge of such counsel, no consent, approval,
authorization, or order of any court or governmental authority is required
for the consummation by Trust on behalf of Acquiring Fund of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act and such as may be required
under state securities laws;
6.4.6. Trust is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel, (a) no litigation,
administrative proceeding, or investigation of or before any court or
governmental body is pending or threatened as to Trust (with respect to
Acquiring Fund) or any of its properties or assets attributable or
allocable to Acquiring Fund and (b) Trust (with respect to Acquiring Fund)
is not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially and adversely
affects Acquiring Fund's business, except as set forth in such opinion.
In rendering such opinion, such counsel may rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel.
6.5. Trust (on behalf of Acquiring Fund) shall have received an opinion of
Kirkpatrick & Lockhart LLP, its counsel, substantially to the effect that:
6.5.1. Target is a duly established series of Trust, a Business Trust
duly organized and validly existing under the laws of the Commonwealth of
Massachusetts with power under its Declaration of Trust to own all of its
properties and assets and, to the knowledge of such counsel, to carry on
its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Trust on behalf of Target and (b) assuming due authorization,
execution, and delivery of this Agreement by Trust on behalf of Acquiring
Fund, is a valid and legally binding obligation of Trust with respect to
Target, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or
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affecting creditors' rights and by general principles of equity;
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel) to which Trust (with respect to Target)
is a party or by which it is bound or, to the knowledge of such counsel,
result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which Trust (with
respect to Target) is a party or by which it is bound, except as set forth
in such opinion;
6.5.4. To the knowledge of such counsel, no consent, approval,
authorization, or order of any court or governmental authority is required
for the consummation by Trust on behalf of Target of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
6.5.5. Trust is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.5.6. To the knowledge of such counsel, (a) no litigation,
administrative proceeding, or investigation of or before any court or
governmental body is pending or threatened as to Trust (with respect to
Target) or any of its properties or assets attributable or allocable to
Target and (b) Trust (with respect to Target) is not a party to or subject
to the provisions of any order, decree, or judgment of any court or gov-
ernmental body that materially and adversely affects its business, except
as set forth in such opinion.
In rendering such opinion, such counsel may rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel.
6.6. Trust shall have received an opinion of Kirkpatrick & Lockhart LLP,
its counsel, as to the federal income tax consequences mentioned below ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the represen-
tations made in this Agreement (and/or in separate letters addressed to such
counsel) and the certificate delivered pursuant to paragraph 3.4. The Tax
Opinion shall be substantially to the effect that, based on the facts and
assumptions stated therein, for federal income tax purposes:
B-16
<PAGE>
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the Liabili-
ties, followed by Target's distribution of those shares to the Shareholders
constructively in exchange for the Shareholders' Target Shares, will con-
stitute a reorganization within the meaning of section 368(a)(1)(C) of the
Code, and each Fund will be "a party to a reorganization" within the
meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer
to Acquiring Fund of the Assets in exchange solely for Acquiring Fund
Shares and Acquiring Fund's assumption of the Liabilities or on the
subsequent distribution of those shares to the Shareholders in constructive
exchange for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
Notwithstanding paragraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder (regarding the recognition of gain or loss and/or the determination
of the basis or holding period) with respect to any asset (including certain
options, futures, and forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal income tax pur-
poses at the end of a taxable year (or on the termination or transfer thereof)
under a mark-to-market system of accounting.
At any time before the Closing, either Fund may waive any of the foregoing
conditions if, in the judgment of Trust's board of
B-17
<PAGE>
trustees, such waiver will not have a material adverse effect on its
shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
---------------------------
7.1. There are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
7.2. Except as otherwise provided herein, all expenses incurred in
connection with the transactions contemplated by this Agreement (whether or not
they are consummated) will be borne by the Funds proportionately, as follows:
each such expense will be borne by the Funds in proportion to their respective
net assets as of the close of business on the last business day of the month in
which such expense was incurred. Such expenses include: (a) expenses incurred
in connection with entering into and carrying out the provisions of this
Agreement; (b) expenses associated with the preparation and filing of the
Registration Statement; (c) registration or qualification fees and expenses of
preparing and filing such forms as are necessary under applicable state
securities laws to qualify the Acquiring Fund Shares to be issued in connection
herewith in each state in which Target's shareholders are resident as of the
date of the mailing of the Proxy Statement to such shareholders; (d) printing
and postage expenses; (e) legal and accounting fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
--------------------------
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall survive
the Closing.
9. TERMINATION OF AGREEMENT
------------------------
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed at
or prior to the Effective Time, (b) if a condition to its obligations has not
been met and it reasonably appears that such condition will not or cannot be
met, or (c) if the Closing has not occurred on or before December 31, 1995; or
B-18
<PAGE>
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or Trust's trustees or
officers, to the other Fund.
10. AMENDMENT
---------
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the Share-
holders' interests.
11. MISCELLANEOUS
-------------
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. The parties acknowledge that Trust is a Business Trust. Notice is
hereby given that this instrument is executed on behalf of Trust's trustees
solely in their capacity as trustees, and not individually, and that Trust's
obligations under this instrument are not binding on or enforceable against any
of its trustees, officers, or shareholders, but are only binding on and
enforceable against each Fund's assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to the
other Fund's assets and property in settlement of such rights or claims and not
to such trustees or shareholders.
B-19
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
ATTEST: PAINEWEBBER OLYMPUS FUND,
on behalf of its series,
PAINEWEBBER GROWTH FUND
By: /s/ Gregory K. Todd /s/ Dianne E. O'Donnell
----------------------- ------------------------------
Assistant Secretary Vice President
ATTEST: PAINEWEBBER OLYMPUS FUND,
on behalf of its series,
PAINEWEBBER COMMUNICATIONS & TECHNOLOGY
GROWTH FUND
By: /s/ Gregory K. Todd /s/ Joan L. Cohen
----------------------- ------------------------------
Assistant Secretary Vice President
B-20
<PAGE>
The Fund is a series of PaineWebber Olympus Fund ("Trust"). This Prospectus
concisely sets forth information about the Fund a prospective investor should
know before investing. Please retain this Prospectus for future reference. A
Statement of Additional Information dated January 1, 1995 (which is
incorporated by reference herein) has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting the Fund, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
Professional Management
Portfolio Diversification
Dividend and Capital Gain Reinvestment
Flexible Pricingsm
Low Minimum Investment
Automatic Investment Plan
Systematic Withdrawal Plan
Exchange Privileges
Suitable For Retirement Plans
------------------------------------------------------------
PaineWebber Growth Fund
1285 Avenue of the Americas, New York, New York 10019
Prospectus - January 1, 1995
- -------------------------------------------------------------------------------
------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospective Wisconsin investors should note that the Fund may invest up to 10%
of its net assets in restricted securities (other than Rule 144A securities
determined to be liquid by the Trust's board of trustees). Investment in
restricted securities (other than such Rule 144A securities) in excess of 5% of
the Fund's total assets may be considered a speculative activity and
may result in greater risk and increased Fund expenses.
Prospectus Page 1
------------------------
----------
<PAGE>
Page
----
Prospectus Summary................. 3
Financial Highlights............... 6
Flexible Pricing System............ 7
Investment Objective and Policies.. 9
Purchases.......................... 11
Exchanges.......................... 14
Redemptions........................ 15
Conversion of Class B Shares....... 16
Other Services and Information..... 16
Dividends and Taxes................ 17
Valuation of Shares................ 18
Management......................... 18
Performance Information............ 20
General Information................ 20
Appendix........................... 22
Table of Contents
- -------------------------------------------------------------------------------
Prospectus Page 2
-----------------
----------
PAINEWEBBER GROWTH FUND
<PAGE>
See the body of the Prospectus for more information on the topics discussed in
this summary.
The Fund:
PaineWebber Growth Fund ("Fund") is a diversified series of an open-end
management investment company.
Investment Objective and
Policies:
Long-term capital appreciation; invests primarily in common stocks issued by
companies deemed by the Fund's investment adviser to have substantial potential
for capital growth.
Total Net Assets:
$269.1 million at November 30, 1994.
Investment Adviser and
Administrator:
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset ma
nagement subsidiary of PaineWebber Incorporated ("PaineWebber"), manages
approximately $35.3 billion in assets. See "Management."
Purchases:
Shares of beneficial interest are available exclusively through PaineWebber and
its correspondent firms for investors who are clients of PaineWebber or those
firms ("PaineWebber clients") and, for other investors, through PFPC Inc., the
Fund's transfer agent ("Transfer Agent").
Flexible Pricing System:
Investors may select Class A, Class B or Class D shares, each with a public
offering price that reflects different sales charges and expense levels. See
"Flexible Pricing System," "Purchases," "Redemptions" and "Conversion of Class
B Shares."
Class A Shares
Offered at net asset value plus any applicable sales charge (maximum is 4.5% of
public offering price).
Class B Shares
Offered at net asset value (a maximum contingent deferred sales charge of 5% of
redemption proceeds is imposed on certain redemptions made within six years of
date of purchase). Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) approximately six years after purchase.
Class D Shares
Offered at net asset value without an initial or contingent deferred sales
charge. Class D shares pay higher ongoing expenses than Class A shares and do
not convert into another Class.
Exchanges:
Shares may be exchanged for shares of the corresponding Class of most
PaineWebber mutual funds.
Redemptions:
PaineWebber clients may redeem through PaineWebber; other shareholders must
redeem through the Transfer Agent.
Dividends:
Declared and paid annually; net capital gain also is distributed annually. See
"Dividends and Taxes."
Reinvestment:
All dividends and capital gain distributions are paid in Fund shares of the
same Class at net asset value unless the shareholder has requested cash.
Minimum Purchase:
$1,000 for the first purchase; $100 for subsequent purchases.
Other Features:
Class A Shares
Automatic investment plan
Quantity discounts on initial sales
charge
Systematic withdrawal plan
365-day reinstatement privilege
Rights of accumulation
Class B Shares
Automatic investment plan
Systematic withdrawal plan
Class D Shares
Automatic investment plan
Systematic withdrawal plan
Prospectus Summary
- -------------------------------------------------------------------------------
Prospectus Page 3
-----------------
----------
-----------------
PAINEWEBBER GROWTH FUND
<PAGE>
Who Should Invest. The Fund invests primarily in common stocks that Mitchell
Hutchins believes have substantial potential for capital growth. The Fund has
the flexibility to commit its assets to both larger growth companies and
smaller issuers with greater appreciation potential and a correspondingly
higher level of risk. While the Fund is not intended to provide a complete or
balanced investment program, it can serve as one component of an investor's
long-term program to accumulate assets for retirement, college tuition or other
major goals.
Risk Factors. There can be no assurance that the Fund will achieve its
investment objective, and the Fund's net asset value will fluctuate based upon
changes in the value of its portfolio securities. Certain investment grade debt
securities in which the Fund may invest have speculative
characteristics. The Fund is permitted to purchase high yield, high risk debt
securities rated lower than investment grade by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") or comparably rated by
another nationally recognized statistical rating organization ("NRSRO"), which
may be subject to greater risks of default and price fluctuation than
investment grade securities and are considered predominantly speculative. The
Fund's ability to invest in U.S. dollar-denominated foreign securities and its
use of options and futures contracts involves special risks.
Expenses of Investing in the Fund. The following tables are intended to assist
investors in understanding the expenses associated with investing in the Fund.
<TABLE><CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum sales charge on purchases of shares (as a percentage of public offering
price)......................................................................... 4.5% None None
Sales charge on reinvested dividends........................................... None None None
Exchange fee................................................................... $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a percentage of redemption
proceeds)...................................................................... None 5% None
Annual Fund Operating Expenses(2)
(as a percentage of average net assets)
Management fees................................................................ 0.75% 0.75% 0.75%
12b-1 fees(3).................................................................. 0.21 1.00 1.00
Other expenses................................................................. 0.25 0.25 0.23
------- ------- -------
Total operating expenses....................................................... 1.21% 2.00% 1.98%
======= ======= =======
</TABLE>
Prospectus Summary
(Continued)
- -------------------------------------------------------------------------------
Prospectus Page 4
-----------------
----------
-----------------
PAINEWEBBER GROWTH FUND
<PAGE>
Example of Effect of Fund Expenses
An investor would directly or indirectly pay the following expenses on a $1,000
investment in the Fund, assuming a 5% annual return:
<TABLE><CAPTION>
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares(4) $57 $82 $108 $185
Class B Shares:
Assuming a complete redemption at end of period(5)(6).. $70 $93 $128 $194
Assuming no redemption(6).............................. $20 $63 $108 $194
Class D Shares........................................... $20 $62 $107 $231
</TABLE>
This Example assumes that all dividends and other distributions are reinvested
and that the percentage amounts listed under Annual Fund Operating Expenses
remain the same in the years shown. The above tables and the assumption in the
Example of a 5% annual return are required by regulations of the Securities and
Exchange Commission ("SEC") applicable to all mutual funds; the assumed 5%
annual return is not a prediction of, and does not represent, the projected or
actual performance of any Class of the Fund's shares.
The Example should not be considered a representation of past or future
expenses, and the Fund's actual expenses may be more or less than those shown.
The actual expenses attributable to each Class of the Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which the Fund incurs variable expenses, such as transfer agency costs.
(1) Sales charge waivers are available for Class A and Class B shares, reduced
sales charge purchase plans are available for Class A shares and exchange
fee waivers are available for all three Classes. The maximum 5% contingent
deferred sales charge on Class B shares applies to redemptions during the
first year after purchase; the charge generally declines by 1% annually
thereafter, reaching zero after six years. See "Purchases."
(2) See "Management" for additional information. The management fee payable to
Mitchell Hutchins is greater than the management fee paid by most funds.
All expenses are those actually incurred for the fiscal year ended August
31, 1994.
(3) 12b-1 fees have two components, as follows:
Class A Class B Class D
------- ------- -------
12b-1 service fees....... 0.21% 0.25% 0.25%
12b-1 distribution fees.. 0.00 0.75 0.75
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class D shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of
Securities Dealers, Inc. The 12b-1 service fees for Class A shares
reflect a blended annual rate of the Fund's average daily net assets of
0.25% and 0.15% representing shares sold on or after December 2, 1988 and
shares sold prior to that date, respectively.
(4) Assumes deduction at the time of purchase of the maximum 4.5% initial sales
charge.
(5) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(6) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.
Prospectus Summary
(Continued)
- -------------------------------------------------------------------------------
Prospectus Page 5
-----------------
----------
-----------------
PAINEWEBBER GROWTH FUND
<PAGE>
<TABLE><CAPTION>
Class A
-----------------------------------------------------------------------------------------------
For the Years Ended August 31,
-----------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- ---------- ---------- -------- --------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $20.60 $16.78 $17.50 $13.43 $15.57 $11.21 $15.30 $12.52 $9.70
--------- ---------- ---------- -------- --------- ------------- ---------- --------- ---------
Income (loss) from investment
operations:
Net investment income........... - 0.07 - 0.02 0.17 0.06 0.13 0.03 0.16
Net realized and
unrealized gains (losses)
from investment
transactions.................... 0.51 4.37 (0.11) 4.68 (1.16) 4.40 (2.73) 3.26 2.79
--------- ---------- ---------- -------- --------- ------------- ---------- --------- ---------
Total income (loss) from
investment operations........... 0.51 4.44 (0.11) 4.70 (0.99) 4.46 (2.60) 3.29 2.95
--------- ---------- ---------- -------- --------- ------------- ---------- --------- ---------
Less dividends and
distributions:
Dividends from net
investment income............... - - (0.01) (0.17) - (0.10) (0.08) (0.20) (0.13)
Distributions from net
realized gains on
investments..................... (1.07) (0.62) (0.60) (0.46) (1.15) - (1.41) (0.31) -
--------- ---------- ---------- -------- --------- ------------- ---------- --------- ---------
Total dividends and
distributions................... (1.07) (0.62) (0.61) (0.63) (1.15) (0.10) (1.49) (0.51) (0.13)
--------- ---------- ---------- -------- --------- ------------- ---------- --------- ---------
Net asset value, end of period.. $20.04 $20.60 $16.78 $17.50 $13.43 $15.57 $11.21 $15.30 $12.52
========= ========== ========== ======== ========= ============= ========== ========= =========
Total return(1)................. 2.33% 26.97% (0.85)% 37.02% (7.05)% 40.10% (15.37)% 27.78% 30.83%
========= ========== ========== ======== ========= ============= ========== ========= =========
Ratios/Supplemental data:
Net assets, end of period
(000's)......................... $141,342 $130,353 $102,640 $96,796 $72,805 $71,681 $70,551 $140,523 $124,182
Ratio of expenses to
average net assets**............ 1.21% 1.22% 1.43% 1.56% 1.59% 1.37% 1.22% 1.13% 1.23%
Ratio of net investment
income (loss) to average
net assets**.................... 0.06% 0.38% 0.00% 0.10% 2.96% 0.14% 0.82% 0.25% 1.31%
Portfolio turnover.............. 24.41% 35.81% 32.49% 28.59% 39.16% 43.68% 59.07% 66.15% 71.64%
<CAPTION>
Class A
----------------
For the Period
March 18, 1985~
to
August 31, 1985
---------------
<S> <C>
Net asset value, beginning of
period.......................... $9.15
---------------
Income (loss) from investment
operations:
Net investment income........... 0.18
Net realized and
unrealized gains (losses)
from investment
transactions.................... 0.37
---------------
Total income (loss) from
investment operations........... 0.55
---------------
Less dividends and
distributions:
Dividends from net
investment income............... -
Distributions from net
realized gains on
investments..................... -
---------------
Total dividends and
distributions................... -
---------------
Net asset value, end of period.. $9.70
===============
Total return(1)................. 5.90%
===============
Ratios/Supplemental data:
Net assets, end of period
(000's)......................... $37,475
Ratio of expenses to
average net assets**............ 1.06%*
Ratio of net investment
income (loss) to average
net assets**.................... 4.10%*
Portfolio turnover.............. 24.62%
- ------
</TABLE>
* Annualized.
** During certain periods presented, PaineWebber/Mitchell Hutchins waived fees
or reimbursed the Fund for portions of its operating expenses. If such
waivers or reimbursements had not been made for the Class A shares, the
annualized ratio of expenses to average net assets and the annualized ratio
of net investment income (loss) to average net assets would have been 1.76%
and (0.25)%, respectively, for the year ended August 31, 1989, 1.41% and
0.63%, respectively, for the year ended August 31, 1988, 1.25% and 1.29%,
respectively, for the year ended August 31, 1986 and 1.82% and 3.33%,
respectively, for the period March 18, 1985 (commencement of offering of
shares) to August 31, 1985. For the years ended August 31, 1994, 1993, 1992,
1991, 1990 and 1987, there were no fee waivers or reimbursements and, for
the year ended August 31, 1986, amounts reimbursed had no significant impact
on the ratios presented above.
~ Commencement of offering of shares.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and capital gain
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Class A shares would be lower if sales
charges were included. Total return information for periods less than one
year are not annualized.
The tables below provide selected per share data and ratios for one Class A
share, one Class B share and one Class D share of the Fund for each of the
periods shown. This information is supplemented by the financial statements and
accompanying notes appearing in the Fund's Annual Report to Shareholders for
the fiscal year ended August 31, 1994, which are incorporated by reference into
the Statement of Additional Information. The financial statements and notes, as
well as the information in the tables appearing below insofar as it relates to
the five years in the period ended August 31, 1994, have been audited by Ernst
& Young LLP, independent auditors, whose report thereon is included in the
Annual Report to Shareholders. Further information about the performance of the
Fund is also included in the Annual Report to Shareholders, which may be
obtained without charge. The information appearing below for periods prior to
the year ended August 31, 1990 also has been audited by Ernst & Young LLP,
whose reports thereon were unqualified.
Financial Highlights
- -------------------------------------------------------------------------------
Prospectus Page 6
-----------------
----------
-----------------
PAINEWEBBER GROWTH FUND
<PAGE>
<TABLE><CAPTION>
Class B Class D
-------------------------------------- ------------------------------
For the Years Ended For the For the Years Ended For the
August 31, Period August 31, Period
----------------------------- July 1, --------------------- July 2,
1991 to 1992 to
August 31, August 31,
1994 1993 1992 1991 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............. $20.25 $16.64 $17.48 $15.63 $20.38 $16.75 $17.04
--------- --------- --------- ------------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income (loss)..................... (0.06) (0.05) (0.06) (0.02) (0.08) (0.06) (0.01)
Net realized and unrealized gains (losses)
from investment transactions...................... 0.41 4.28 (0.18) 1.87 0.44 4.31 (0.28)
--------- --------- --------- ------------- --------- --------- ---------
Total income (loss) from investment operations... 0.35 4.23 (0.24) 1.85 0.36 4.25 (0.29)
--------- --------- --------- ------------- --------- --------- ---------
Less dividends and distributions:
Dividends from net investment income............. - - - - - - -
Distributions from net realized gains on
investments..................................... (1.07) (0.62) (0.60) - (1.07) (0.62) -
--------- --------- --------- ------------- --------- --------- ---------
Total dividends and distributions................ (1.07) (0.62) (0.60) - (1.07) (0.62) -
--------- --------- --------- ------------- --------- --------- ---------
Net asset value, end of period................... $19.53 $20.25 $16.64 $17.48 $19.67 $20.38 $16.75
========= ========= ========= ============= ========= ========= =========
Total return(1).................................. 1.55% 25.91% (1.58)% 11.84% 1.59% 25.86% (2.95)%
========= ========= ========= ============= ========= ========= =========
Ratios/Supplemental data:
Net assets, end of period (000's)................ $97,272 $60,280 $35,867 $3,804 $28,561 $16,474 $2,275
Ratio of expenses to average net assets.......... 2.00% 2.02% 2.20% 2.24%* 1.98% 2.06% 1.98%*
Ratio of net investment income (loss) to
average net assets............................... (0.66)% (0.46)% (0.70)% (0.81)%* (0.65)% (0.69)% (0.65)%*
Portfolio turnover............................... 24.41% 35.81% 32.49% 28.59% 24.41% 35.81% 32.49%
- ------
</TABLE>
* Annualized.
Commencement of offering of shares.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and capital gain
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Class B shares would be lower if sales
charges were included. Total return information for periods less than one
year are not annualized.
- -------------------------------------------------------------------------------
Flexible Pricing System
- -------------------------------------------------------------------------------
DIFFERENCES AMONG THE CLASSES
The primary distinctions among the Classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in
the form of distribution fees. These differences are summarized in the table
below. Each Class has distinct advantages and disadvantages for different
investors, and investors may choose the Class that best suits their
circumstances and objectives.
<TABLE><CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
-------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Maximum initial sales Service fee of up Initial sales charge waived
charge of 4.5% of the to 0.25% or reduced for certain
Class A public offering price purchases
Maximum contingent Service fee of 0.25%; Shares convert to Class A
deferred sales charge distribution fee of shares approximately six
of 5% of redemption 0.75% years after issuance
proceeds; declines to
Class B zero after six years
Class D None Service fee of 0.25%; -
distribution fee of
0.75%
</TABLE>
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
Prospectus Page 7
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PAINEWEBBER GROWTH FUND
<PAGE>
FACTORS TO CONSIDER IN CHOOSING A
CLASS OF SHARES
In deciding which Class of shares to purchase, investors should consider the
cost of sales charges together with the cost of the ongoing annual expenses
described below, as well as any other relevant facts and circumstances.
Sales Charges. Class A shares are sold at net asset value plus an initial sales
charge of up to 4.5% of the public offering price. Because of this initial
sales charge, not all of a Class A shareholder's purchase price is invested in
the Fund. Class B shares are sold with no initial sales charge, but a
contingent deferred sales charge of up to 5% of the redemption proceeds applies
to redemptions made within six years of purchase. Class D shareholders pay no
initial or contingent deferred sales charges. Thus, the entire amount of a
Class B or Class D shareholder's purchase price is immediately invested in the
Fund.
Waivers and Reductions of Class A Sales Charges. Class A share purchases over
$50,000 and Class A share purchases made under the Fund's reduced sales charge
plan may be made at a reduced sales charge. In considering the combined cost of
sales charges and ongoing annual expenses, investors should take into account
any reduced sales charges on Class A shares for which they may be eligible.
The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class D shares, investors eligible for complete waivers
should purchase Class A shares.
Ongoing Annual Expenses. All three Classes of Fund shares pay an annual 12b-1
service fee of up to 0.25% of average daily net assets. Class B and Class D
shares pay an annual 12b-1 distribution fee of 0.75% of average daily net
assets. Annual 12b-1 distribution fees are a form of asset-based sales charge.
An investor should consider both ongoing annual expenses and initial or
contingent deferred sales charges in estimating the costs of investing in the
respective Classes of Fund shares over various time periods.
For example, assuming a constant net asset value, the cumulative distribution
fees on the Fund's Class B or Class D shares and the 4.5% maximum
initial sales charge on the Fund's Class A shares would all be approximately
equal if the shares were held for six years. Because Class B shares convert to
Class A shares (which do not bear the expense of ongoing distribution fees)
approximately six years after purchase, an investor expecting to hold Fund
shares for longer than six years would generally pay lower cumulative expenses
by purchasing Class A or Class B shares than by purchasing Class D shares. An
investor expecting to hold Fund shares for less than six years would generally
pay lower cumulative expenses by purchasing Class D shares than by purchasing
Class A shares and, due to the contingent deferred sales charges that would
become payable on redemption of Class B shares, such an investor would
generally pay lower cumulative expenses by purchasing Class D shares than Class
B shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net
asset value of Fund shares, which will affect the actual amount of expenses
paid. Expenses borne by Classes may differ slightly because of the allocation
of other Class-specific expenses. The "Example of Effect of Fund Expenses"
under "Prospectus Summary" shows the cumulative expenses an investor would pay
over time on a hypothetical investment in each Class of Fund shares, assuming
an annual return of 5%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of compensation
for selling one particular Class of Fund shares rather than another. Investors
should understand that distribution fees and initial and contingent deferred
sales charges all are intended to compensate Mitchell Hutchins for distribution
services.
See "Purchases," "Redemptions" and "Management" for a more complete description
of the initial and contingent sales charges, service fees and distribution fees
for the three Classes of Fund shares. See also "Conversion of Class B Shares,"
"Dividends and Taxes," "Valuation of Shares" and "General Information" for
other differences among the three Classes.
Prospectus Page 8
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PAINEWEBBER GROWTH FUND
<PAGE>
- -------------------------------------------------------------------------------
Investment Objective and Policies
- -------------------------------------------------------------------------------
The Fund's investment objective is to provide long-term capital appreciation.
The Fund seeks to achieve this objective by investing primarily in common
stocks issued by companies that, in the judgment of Mitchell Hutchins, have
substantial potential for capital growth.
In selecting stocks for investment by the Fund, Mitchell Hutchins considers all
those factors it believes affect potential capital appreciation, including an
issuer's current and projected revenues, earnings, cash flow and assets, as
well as general market conditions in relevant industries. Under normal
circumstances, at least 65% of the Fund's assets is invested in common stocks.
The Fund may invest up to 35%, and for temporary purposes more than 35%, of its
assets in U.S. government securities and convertible and non-convertible
corporate debt securities. In seeking capital appreciation, the Fund would
invest in debt securities when, for instance, Mitchell Hutchins anticipates
that market interest rates may decline or credit factors or ratings affecting
particular issues may improve. The Fund may invest in corporate debt securities
rated lower than investment grade. See "Other Investment Policies and Risk
Factors-Debt Securities."
There can be no assurance that the Fund will achieve its investment objective.
The Fund's net asset value fluctuates based upon changes in the value of its
portfolio securities. The Fund's investment objective and certain investment
limitations as described in the Statement of Additional Information are
fundamental policies that may not be changed without shareholder approval. All
other investment policies may be changed by the Trust's board of trustees
without shareholder approval.
OTHER INVESTMENT POLICIES
AND RISK FACTORS
Debt Securities. The Fund is permitted to purchase investment grade corporate
debt securities. Securities rated BBB by S&P, Baa by Moody's or comparably
rated by another NRSRO are investment grade but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for such securities to make principal and interest payments than is
the case for higher-rated debt securities. The Fund is also permitted to invest
up to 35% of its total assets in debt securities rated as low as B+ by S&P, B1
by Moody's or comparably rated by another NRSRO. These securities are deemed by
those NRSROs to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal and may involve major risk
exposure to adverse conditions. Such securities are commonly referred to as
"junk bonds." The Fund is also permitted to purchase debt securities that are
not rated by S&P, Moody's or another NRSRO but that Mitchell Hutchins
determines to be of comparable quality to that of rated securities in which the
Fund may invest. Such securities are included in the computation of any
percentage limitations applicable to the comparable rated securities. See the
Statement of Additional Information for more information about S&P and Moody's
ratings.
Ratings of debt securities represent the NRSROs' opinions regarding their
quality, are not a guarantee of quality and may be reduced after the Fund has
acquired the security. Mitchell Hutchins will consider such an event in
determining whether the Fund should continue to hold the security but is not
required to dispose of it. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security. Also, NRSROs may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
Lower rated debt securities generally offer a higher current yield than that
available for higher grade issues, but they involve higher risks, in that they
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest
Prospectus Page 9
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PAINEWEBBER GROWTH FUND
<PAGE>
rates. During periods of economic downturn or rising interest rates, highly
leveraged issuers may experience financial stress which could adversely affect
their ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them, and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
The market for lower rated debt securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated debt securities declined substantially, reflecting
an expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can be no
assurance that such declines will not recur. The market for lower-rated debt
issues generally is thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
U.S. government securities in which the Fund may invest include direct
obligations of the U.S. Treasury as well as obligations of U.S. government
agencies and instrumentalities backed by the U.S. Treasury or primarily or
solely by the credit of the issuer.
Dollar-Denominated Foreign Securities. The Fund may invest up to 25% of its
total assets in U.S. dollar-denominated securities of foreign issuers that are
traded on recognized U.S. exchanges or in the U.S. over-the-counter ("OTC")
market. These investments may involve special risks, arising both from
political and economic developments abroad and differences between foreign and
U.S. regulatory systems. Foreign securities may be less liquid and their
prices more volatile than comparable U.S. securities. The prices of these
securities may also be affected by fluctuations in the values of foreign
currencies.
Hedging Strategies. The Fund may attempt to reduce the overall risk of its
investments (hedge) by using options (both exchange-traded and OTC) and futures
contracts. The Fund's ability to use these instruments may be limited by market
conditions, regulatory limits and tax considerations. The Appendix to this
Prospectus describes the hedging instruments the Fund may use. The Statement of
Additional Information contains further information on these strategies.
The Fund may write (sell) covered put and call options or buy put and call
options on securities in which it may invest and on stock indices. In addition,
the Fund may buy and sell stock index futures contracts and interest rate
futures contracts and may write covered put and call options or buy put and
call options on such futures contracts. Because the Fund intends to use options
and futures for hedging purposes, the Fund may enter into options and futures
contracts that approximate (but do not exceed) the full value of its portfolio.
The Fund might not employ any of the strategies described above, and there can
be no assurance that any strategy used will succeed. If Mitchell Hutchins
incorrectly forecasts interest rates, market values or other economic factors
in utilizing a hedging strategy for the Fund, the Fund would be in a better
position had it not hedged at all. The use of these strategies involves certain
special risks, including (1) the fact that skills needed to use hedging
instruments are different from those needed to select the Fund's securities,
(2) possible imperfect correlation, or even no correlation, between price
movements of hedging instruments and price movements of the investments being
hedged, (3) the fact that, while hedging strategies can reduce the risk of
loss, they can also reduce the opportunity for gain, or even result in losses,
by offsetting favorable price movements in hedged investments and (4) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need
for the Fund to sell a portfolio security at a disadvantageous time, due to the
need for the Fund to maintain "cover" or to segregate securities in connection
with hedging transactions and the possible inability of the Fund to close out
or to liquidate its hedged position.
Prospectus Page 10
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PAINEWEBBER GROWTH FUND
<PAGE>
New financial products and risk management techniques continue to be developed.
The Fund may use these instruments and techniques to the extent consistent with
its investment objective and regulatory and federal tax considerations.
Illiquid Securities. The Fund may invest up to 10% of its net assets in
illiquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws (other than
"Rule 144A securities" Mitchell Hutchins has determined to be liquid under
procedures approved by the Trust's trustees). Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act of 1933 ("1933
Act"). Institutional markets for restricted securities have developed as a
result of Rule 144A, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment to satisfy
share redemption orders. 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.
Other Information. When Mitchell Hutchins believes unusual circumstances
warrant a defensive posture, the Fund temporarily may commit all or a portion
of its assets to cash or money market instruments, including repurchase
agreements. The Fund may also engage in short sales of securities "against the
box" to defer realization of gains or losses for tax or other purposes. The
Fund may borrow money for temporary purposes, but not in excess of 10% of its
total assets.
- -------------------------------------------------------------------------------
Purchases
- -------------------------------------------------------------------------------
General. Class A shares of the Fund are sold to investors subject to an initial
sales charge. Class B shares of the Fund are sold without an initial sales
charge but are subject to higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares approximately six years after
issuance. Class D shares are sold without an initial or a contingent deferred
sales charge but are subject to higher ongoing expenses than Class A shares and
do not convert into another Class. See "Flexible Pricing System" and
"Conversion of Class B Shares."
Shares of the Fund are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the
Transfer Agent. Investors may contact a local PaineWebber office to open an
account. The minimum initial investment for the Fund is $1,000, and the minimum
for additional purchases is $100. These minimums may be waived or reduced for
investments by employees of PaineWebber or its affiliates, certain pension
plans and retirement accounts and participants in the Fund's automatic
investment plan. Purchase orders will be priced at the net asset value per
share next determined (see "Valuation of
Shares") after the order is received by PaineWebber's New York City offices or
by the Transfer Agent, plus any applicable sales charge for Class A shares. The
Fund and Mitchell Hutchins reserve the right to reject any purchase order and
to suspend the offering of Fund shares for a period of time.
When placing purchase orders, investors should specify whether the order is for
Class A, Class B or Class D shares. All share purchase orders that fail to
specify a Class will automatically be invested in Class A shares.
Purchases Through PaineWebber or Correspondent Firms. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due on
the fifth Business Day after the order is received at PaineWebber's New York
City offices. A "Business Day" is any day, Monday through
Prospectus Page 11
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PAINEWEBBER GROWTH FUND
<PAGE>
Friday, on which the New York Stock Exchange, Inc. ("NYSE") is open for
business.
Purchases Through the Transfer Agent. Investors who are not PaineWebber clients
may purchase shares of the Fund through the Transfer Agent. Shares of the Fund
may be purchased, and an account with the Fund established, by completing and
signing the purchase application at the end of this Prospectus and mailing it,
together with a check to cover the purchase, to the Transfer Agent: PFPC Inc.,
Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899.
Subsequent investments need not be accompanied by an application.
Initial Sales Charge-Class A Shares. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the following
table:
INITIAL SALES CHARGE SCHEDULE-
CLASS A SHARES
Sales Charge as a
Percentage of Discount to
------------------- Selected
Dealers as a Net Amount
Percentage Invested
of Offering Offering (Net Asset
Amount of Purchase Price Price Value)
- ------------------------- ------------ -------- ----------
Less than $50,000 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.50 3.63 3.25
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00
- ------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources.
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for the Fund's shares, than those shown above.
To the extent PaineWebber or any dealer receives 90% or more of the sales
charge, it may be deemed an "underwriter" under the 1933 Act.
Sales Charge Waivers-Class A Shares. Class A shares of the Fund are available
without a sales charge through exchanges for Class A shares of most other
PaineWebber mutual funds. See "Exchanges." In addition, Class A shares may be
purchased without a sales charge, and exchanges of any Class of shares made
without the $5.00 exchange fee, by employees, directors and officers
of PaineWebber or its affiliates, directors or trustees and officers of any
PaineWebber funds, their spouses, parents and children and advisory clients of
Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the purchase is
made through a PaineWebber investment executive who formerly was employed as a
broker with another firm registered as a broker-dealer with the SEC, provided
(1) the purchaser was the investment executive's client at the competing
brokerage firm, (2) within 90 days of the purchase of Class A shares the
purchaser redeemed shares of one or more mutual funds for which that competing
firm or its affiliates was principal underwriter, provided the purchaser either
paid a sales charge to invest in those funds, paid a contingent deferred sales
charge upon redemption or held shares of those funds for the period required
not to pay the otherwise applicable contingent deferred sales charge and (3)
the total amount of shares of all PaineWebber funds purchased under this sales
charge waiver does not exceed the amount of the purchaser's redemption proceeds
from the competing firm's funds. To take advantage of this waiver, an investor
must provide satisfactory evidence that all the above-noted conditions are met.
Qualifying investors should contact their PaineWebber investment executives for
more information.
Certificate holders of unit investment trusts ("UITs") sponsored by PaineWebber
may acquire Class A shares of the Fund without regard to minimum investment
requirements and without sales charges by electing to have dividends and other
distributions from their UIT investment automatically invested in Class A
shares.
Reduced Sales Charge Plans-Class A Shares. If an investor or eligible group of
related Fund investors purchases Class A shares of the Fund concurrently with
Class A shares of other PaineWebber mutual funds, the purchases may be combined
to take advantage of the reduced sales charge applicable to larger purchases.
In addition, the right of accumulation permits the Fund investor or eligible
group of related Fund investors to pay the lower sales charge applicable to
larger purchases by basing the sales charge on the dollar amount of Class A
shares currently being purchased, plus the net asset value of the investor's or
group's total existing Class A shareholdings in other PaineWebber mutual funds.
Prospectus Page 12
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PAINEWEBBER GROWTH FUND
<PAGE>
An "eligible group of related Fund investors" includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ("IRA"), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to
Minors Act/Uniform Transfers to Minors Act accounts created by the individual
or eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes a group of
related employers and one or more qualified retirement plans of such employers.
For more information, an investor should consult the State-ment of Additional
Information or contact a PaineWebber investment executive or correspondent firm
or the Transfer Agent.
Contingent Deferred Sales Charge-Class B Shares. The public offering price of
the Class B shares of the Fund is the next determined net asset value, and no
initial sales charge is imposed. A contingent deferred sales charge, however,
is imposed upon certain redemptions of Class B shares.
Class B shares that are redeemed will not be subject to a contingent deferred
sales charge to the extent that the value of such shares represents (1) capital
appreciation of Fund assets, (2) reinvestment of dividends or capital gain
distributions or (3) shares redeemed more than six years after their purchase.
Otherwise, redemption of Class B shares of the Fund will be subject to a
contingent deferred sales charge. The amount of any applicable contingent
deferred sales charge will be calculated by multiplying the net asset value of
such shares at the time of redemption by the applicable percentage shown in the
table below:
Contingent
Deferred
Sales Charge as a
Percentage of
Redemption Net Asset Value
During at Redemption
- ------------------------- -----------------
1st Year Since Purchase.. 5%
2nd Year Since Purchase.. 4
3rd Year Since Purchase.. 3
4th Year Since Purchase.. 2
5th Year Since Purchase.. 2
6th Year Since Purchase.. 1
7th Year Since Purchase.. None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of Class B shares
representing capital appreciation, next of shares representing the reinvestment
of dividends
and capital gain distributions and finally of other shares held by the
shareholder for the longest period of time. The holding period of Class B
shares acquired through an exchange with another PaineWebber mutual fund will
be calculated from the date that the Class B shares were initially acquired in
one of the other PaineWebber funds, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gain distribution reinvestments in such other funds. This will result
in any contingent deferred sales charge being imposed at the lowest possible
rate. For federal income tax purposes, the amount of the contingent deferred
sales charge will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any contingent deferred sales
charge will be paid to Mitchell Hutchins.
Sales Charge Waivers-Class B Shares. The contingent deferred sales charge will
be waived for exchanges, as described below, and for redemptions in connection
with the Fund's systematic withdrawal plan. In addition, the contingent
deferred sales charge will be waived for a total or partial redemption made
within one year of 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. The contingent deferred sales charge will also be waived in
connection with a lump-sum or other distribution in the case of an IRA, a
self-employed individual retirement plan (so-called "Keogh Plan") or a
custodial account under Section 403(b) of the Internal Revenue Code following
attainment of age 591/2; a total or partial redemption resulting from any
distribution following retirement in the case of a tax-qualified retirement
plan; and a redemption resulting from a tax-free return of an excess
contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation (by PaineWebber in the case of shareholders who are PaineWebber
clients or by the Transfer Agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
Purchase of Class D Shares. The public offering price of the Class D shares of
the Fund is the next determined net asset value. No initial or contingent
deferred sales charge is imposed.
Prospectus Page 13
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<PAGE>
- -------------------------------------------------------------------------------
Exchanges
- -------------------------------------------------------------------------------
Shares of the Fund may be exchanged for shares of the corresponding Class of
other PaineWebber mutual funds, or may be acquired through an exchange of
shares of the corresponding Class of those funds. No initial sales charge is
imposed on the shares being acquired, and no contingent deferred sales charge
is imposed on the shares being disposed of, through an exchange. However,
contingent deferred sales charges may apply to redemptions of Class B shares
acquired through an exchange. A $5.00 exchange fee is charged for each
exchange, and exchanges may be subject to minimum investment requirements of
the fund into which exchanges are made.
The other PaineWebber funds with which Fund
shares may be exchanged include:
PaineWebber Income Funds
Global Income Fund
High Income Fund
Investment Grade Income Fund
Short-Term U.S. Government Income
Fund
Short-Term U.S. Government Income
Fund for Credit Unions
Strategic Income Fund
U.S. Government Income Fund
PaineWebber Tax-Free Income Funds
California Tax-Free Income Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund
PaineWebber Growth Funds
Atlas Global Growth Fund
Blue Chip Growth Fund
Capital Appreciation Fund
Communications & Technology Growth
Fund
Europe Growth Fund
Regional Financial Growth Fund
Small Cap Value Fund
PaineWebber Growth and Income Funds
Asset Allocation Fund
Dividend Growth Fund
Global Energy Fund
Global Growth and Income Fund
Utility Income Fund
PaineWebber Money Market Fund
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms unless the shares to be exchanged
are held in certificate form. Shareholders who are not PaineWebber clients or
who hold their shares in certificate form must place exchange orders in writing
with the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, Delaware 19899. All exchanges will be effected based on the
relative net asset values per share next determined after the exchange order is
received at PaineWebber's New York City offices or by the Transfer Agent. See
"Valuation of Shares." Shares of the Fund purchased through PaineWebber or its
correspondent firms may be exchanged only after the settlement date has passed
and payment for such shares has been made.
Other Exchange Information. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is available only in those jurisdictions where
the sale of the PaineWebber fund shares to be acquired may be legally made.
Before making any exchange, shareholders should contact their PaineWebber
investment executives or correspondent firms or the Transfer Agent to obtain
more information and prospectuses of the PaineWebber funds to be acquired
through the exchange.
Prospectus Page 14
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PAINEWEBBER GROWTH FUND
<PAGE>
- -------------------------------------------------------------------------------
Redemptions
- -------------------------------------------------------------------------------
As described below, Fund shares may be redeemed at their net asset value
(subject to any applicable contingent deferred sales charge) and redemption
proceeds will be paid within seven days of the receipt of a redemption request.
PaineWebber clients may redeem non-certificated shares through PaineWebber or
its correspondent firms; all other shareholders must redeem through the
Transfer Agent. If a redeeming shareholder owns shares of more than one Class,
the shares will be redeemed in the following order unless the shareholder
specifically requests otherwise: Class D shares, then Class A shares, and
finally Class B shares.
Redemption Through PaineWebber or Correspondent Firms. PaineWebber clients may
submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. Within seven days, repurchase
proceeds (less any applicable contingent deferred sales charge) will be paid by
check or credited to the shareholder's brokerage account at the election of the
shareholder. PaineWebber investment executives and correspondent firms are
responsible for promptly forwarding redemption requests to PaineWebber's New
York City offices.
PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.
Redemption Through the Transfer Agent. Fund shareholders who are not
PaineWebber clients or who wish to redeem certificated shares must redeem their
shares through the Transfer Agent by mail; other shareholders also may redeem
Fund shares through the Transfer Agent. Shareholders should mail redemption
requests directly to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual
Funds, P.O. Box 8950, Wilmington, Delaware 19899. A redemption request will be
executed at the net asset value
next computed after it is received in "good order." "Good order" means that the
request must be accompanied by the following: (1) a letter of instruction or a
stock assignment specifying the number of shares or amount of investment to be
redeemed (or that all shares credited to the Fund account be redeemed), signed
by all registered owners of the shares in the exact names in which they are
registered, (2) a guarantee of the signature of each registered owner by an
eligible institution acceptable to the Transfer Agent and in accordance with
SEC rules, such as a commercial bank, trust company or member of a recognized
stock exchange, (3) other supporting legal documents for estates, trusts,
guardianships, custodianships, partnerships and corporations and (4) duly
endorsed share certificates, if any. Shareholders are responsible for ensuring
that a request for redemption is received in "good order."
Additional Information on Redemptions. A shareholder who holds non-certificated
Fund shares may have redemption proceeds of $1 million or more wired to the
shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's PaineWebber
investment executive or correspondent firm, or to the Transfer Agent if the
shares are not held in a PaineWebber brokerage account. If a shareholder
requests redemption of shares which were purchased recently, the Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, it reserves the right to redeem all Fund shares in any shareholder
account of less than $500 net asset value. If the Fund elects to do so, it will
notify the shareholder and provide the shareholder the opportunity to increase
the amount invested to $500 or more within 60 days of the notice. The Fund will
not redeem accounts that fall below $500 solely as a result of a reduction in
net asset value per share.
Prospectus Page 15
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PAINEWEBBER GROWTH FUND
<PAGE>
Shareholders who have redeemed Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount redeemed by purchasing Class A
shares of the Fund within 365 days after the redemption. To take advantage of
this reinstatement privilege, shareholders must notify their PaineWebber
investment executive or correspondent firm at the time the privilege is
exercised.
- -------------------------------------------------------------------------------
Conversion of Class B Shares
- -------------------------------------------------------------------------------
A shareholder's Class B shares will automatically convert to Class A shares of
the Fund approximately six years after the date of issuance, together with a
pro rata portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares. The Class B shares so
converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the
relative net asset values per share of the two Classes on the first Business
Day of the month in which the sixth anniversary of the issuance of the Class B
shares occurs. If a shareholder effects one or more exchanges among Class B
shares of the PaineWebber mutual funds during the six-year period, the holding
periods for the shares so exchanged will be counted toward the six-year period.
- -------------------------------------------------------------------------------
Other Services and Information
- -------------------------------------------------------------------------------
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll-free at 1-800-647-1568.
Automatic Investment Plan. Shareholders may purchase shares of the Fund through
an automatic investment plan, under which an amount specified by the
shareholder of $50 or more each month will be sent to the Transfer Agent from
the shareholder's bank for investment in the Fund. In addition to providing a
convenient and disciplined manner of investing, participation in the automatic
investment plan enables the investor to use the technique of "dollar cost
averaging." When under the plan a shareholder invests the same dollar amount
each month, the shareholder 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, a shareholder's average purchase price per share
over any given period will be lower than if the shareholder purchased a fixed
number of shares on a monthly basis during the period.
Systematic Withdrawal Plan. Shareholders who own non-certificated Class A or
Class D shares of
the Fund with a value of $5,000 or more or Class B shares of the Fund with a
value of $20,000 or more may have PaineWebber redeem a portion of their shares
monthly, quarterly or semi-annually under the systematic withdrawal plan. No
contingent deferred sales charge will be imposed on such withdrawals for Class
B shares. The minimum amount for all withdrawals of Class A or Class D shares
is $100, and minimum monthly, quarterly and semi-annual withdrawal amounts for
Class B shares are $200, $400 and $600, respectively. Quarterly withdrawals are
made in March, June, September and December, and semi-annual withdrawals are
made in June and December. A Class B shareholder of the Fund may not withdraw
an amount exceeding 12% annually of his or her "Initial Account Balance," a
term that means the value of the Fund account at the time the shareholder
elects to participate in the systematic withdrawal plan. A Class B
shareholder's participation in the systematic withdrawal plan will terminate
automatically if the Initial Account Balance (plus the net asset value on the
date of purchase of Fund shares acquired after the election to participate in
the systematic withdrawal plan), less aggregate redemptions made other than
pursuant to the systematic withdrawal plan, is less than $20,000. Shareholders
who receive dividends or other
Prospectus Page 16
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PAINEWEBBER GROWTH FUND
<PAGE>
distributions in cash may not participate in the systematic withdrawal plan.
Purchases of additional shares of the Fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, sales charges.
Individual Retirement Accounts. Shares of the Fund may be purchased through
IRAs available through the Fund. In addition, a Self-Directed IRA is available
through PaineWebber under which investments may be made in the Fund as well as
in other investments available through
PaineWebber. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.
Transfer of Accounts. If a shareholder holding shares of the Fund in a
PaineWebber brokerage account transfers his brokerage account to another firm,
the Fund shares will be transferred to an account with the Transfer Agent.
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.
- -------------------------------------------------------------------------------
Dividends and Taxes
- -------------------------------------------------------------------------------
Dividends. The Fund pays an annual dividend from net investment income and net
short-term capital gain, if any. The Fund also distributes annually
substantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss). The Fund may make additional
distributions if necessary to avoid a 4% excise tax on certain undistributed
income and capital gain. Dividends and other distributions paid on each Class
of shares of the Fund are calculated at the same time and in the same manner.
Dividends on Class B and Class D shares of the Fund are expected to be lower
than those for its Class A shares because of the higher expenses resulting from
distribution fees borne by the Class B and Class D shares. Dividends on each
Class also might be affected differently by the allocation of other
Class-specific expenses. See "Valuation of Shares."
The Fund's dividends and capital gain distributions are paid in additional Fund
shares of the same Class at net asset value unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
capital gain distributions in cash, either mailed to the shareholder by check
or credited to the shareholder's PaineWebber account, should contact their
PaineWebber investment executives or correspondent firms or complete the
appropriate section of the application form.
Taxes. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting
generally of net investment income and net short-term capital gain) and net
capital gain that is distributed to its shareholders.
Dividends paid by the Fund (whether in cash or in additional shares) generally
are taxable to shareholders as ordinary income. Distributions of the Fund's net
capital gain (whether paid in cash or in additional shares) are taxable to
shareholders as long-term capital gain, regardless of how long they have held
their Fund shares. Shareholders not subject to tax on their income generally
will not be required to pay tax on amounts distributed to them.
The Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year and of any portion of those dividends that qualifies for the
corporate dividends-received deduction.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends and
capital gain distributions is also required for those shareholders who
otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the redeeming
shareholder, depending upon whether the redemption proceeds payable to the
shareholder are more or less than the shareholder's adjusted basis for the
redeemed shares (which normally includes any
Prospectus Page 17
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----------
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PAINEWEBBER GROWTH FUND
<PAGE>
initial sales charge paid on Class A shares). An exchange of Fund shares for
shares of another PaineWebber fund generally will have similar tax
consequences. However, special tax rules apply when a shareholder (1) disposes
of Class A shares through a redemption or exchange within 90 days of purchase
and (2) subsequently acquires Class A shares of a PaineWebber fund without
paying a sales charge due to the 365-day reinstatement privilege or the
exchange privilege. In these cases, any gain on the disposition of the original
Class A shares would be increased, or loss decreased, by the amount of the
sales charge paid when those shares were acquired, and that amount will
increase the basis of the PaineWebber fund shares subsequently acquired. In
addition, if Fund shares are purchased within 30 days before or after
redeeming other Fund shares (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.
No gain or loss will be recognized to a shareholder as a result of a conversion
of Class B shares into Class A shares.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be
other federal, state or local tax considerations applicable to a particular
investor. Prospective shareholders are therefore urged to consult their tax
advisers.
- -------------------------------------------------------------------------------
Valuation of Shares
- -------------------------------------------------------------------------------
The net asset value of the Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the NYSE
(currently 4:00 p.m., eastern time) each Business Day. The Fund's net asset
value per share is determined by dividing the value of the securities held by
the Fund plus any cash or other assets minus all liabilities by the total
number of Fund shares outstanding.
The Fund values its assets based on their current market value when market
quotations are readily
available. If such value cannot be established, assets are valued at fair value
as determined in good faith by or under the direction of the Trust's board of
trustees. The amortized cost method of valuation generally is used to value
debt obligations with 60 days or less remaining to maturity, unless the board
of trustees determines that this does not represent fair value. It should be
recognized that judgment plays a greater role in valuing lower rated debt
securities in which the Fund may invest, because there is less reliable,
objective data available.
- -------------------------------------------------------------------------------
Management
- -------------------------------------------------------------------------------
The Trust's board of trustees, as part of its overall management
responsibility, oversees various organizations responsible for the Fund's
day-to-day management. Mitchell Hutchins, investment adviser and administrator
of the Fund, makes and implements all investment decisions and supervises all
aspects of the Fund's operations. Brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board of trustees.
Mitchell Hutchins receives a monthly fee for these services at the annual rate
of 0.75% of average
daily net assets of the Fund. The advisory fees for the Fund are higher than
those paid by most investment companies to their advisers, but Mitchell
Hutchins believes the fees are comparable to the advisory fees paid by other
funds with similar investment objectives and policies.
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. The Fund incurs other expenses and, for the fiscal year ended August 31,
Prospectus Page 18
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PAINEWEBBER GROWTH FUND
<PAGE>
1994, the Fund's total expenses for its Class A, Class B and Class D shares,
stated as a percentage of net assets, were 1.21%, 2.00% and 1.98%,
respectively.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New York
10019. It is a wholly owned subsidiary of PaineWebber, which is in turn wholly
owned by Paine Webber Group Inc., a publicly owned financial services holding
company. At November 30, 1994, Mitchell Hutchins was adviser or subadviser of
29 investment companies with 55 separate portfolios and aggregate assets of
approximately $23 billion.
Ellen R. Harris has been primarily responsible for the day-to-day portfolio
management of the Fund since its inception. Ms. Harris is a vice president of
the Trust and chief domestic equity strategist, a managing director and chief
investment officer-domestic of Mitchell Hutchins. Prior to joining Mitchell
Hutchins in 1983 as a portfolio manager, Ms. Harris served as a vice president
and portfolio manager at American General Capital Management (now American
Capital Management).
Other members of Mitchell Hutchins' domestic equities and fixed income groups
provide input on market outlook, interest rate forecasts and other
considerations pertaining to domestic equity and fixed income investments.
Distribution Arrangements. Mitchell Hutchins is the distributor of the Fund's
shares and has appointed PaineWebber as the exclusive dealer for the sale of
those shares. Under separate plans of distribution pertaining to the Class A
shares, the Class B shares and Class D shares ("Class A Plan," "Class B Plan"
and "Class D Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins
monthly service fees at the annual rate of up to 0.25% of the average daily net
assets of each Class of shares and monthly distribution fees at the annual rate
of 0.75% of the average daily net assets of the Class B and Class D shares.
Under all three Plans, Mitchell Hutchins uses the service fees primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of up to
0.25% of the aggregate investment amounts maintained in the Fund by PaineWebber
clients. PaineWebber passes on a portion of these fees to its investment
executives to compensate them for shareholder servicing that they perform and
retains the remainder to offset its own
expenses in servicing and maintaining shareholder accounts. These expenses may
include costs of the PaineWebber branch office in which the investment
executive is based, such as rent, communications equipment, employee salaries
and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class D
Plans to offset the commissions it pays to PaineWebber for selling the Fund's
Class B and Class D shares. PaineWebber passes on to its investment executives
a portion of these commissions and retains the remainder to offset its expenses
in selling Class B and Class D shares. These expenses may include the branch
office costs noted above. In addition, Mitchell Hutchins uses the distribution
fees under the Class B and Class D Plans to offset the Fund's marketing costs
attributable to such Classes, such as preparation of sales literature,
advertising and printing and distributing prospectuses and other shareholder
materials to prospective investors. Mitchell Hutchins also may use the
distribution fees to pay additional compensation to PaineWebber and other costs
allocated to Mitchell Hutchins' and PaineWebber's distribution activities,
including employee salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives
at the time of sale of Class D shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class D shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class D shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and the contingent deferred sales charge paid
upon certain redemptions of Class B shares, and may use these proceeds for any
of the distribution expenses described above. See "Purchases."
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ("Distribution Contracts")
obligate the Fund to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred.
Prospectus Page 19
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PAINEWEBBER GROWTH FUND
<PAGE>
Thus, even if Mitchell Hutchins' expenses exceed its service or distribution
fees for the Fund, it will not be obligated to pay more than those fees and, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. The Fund will pay the service and distribution fees
to Mitchell Hutchins until either the applicable Plan or Distribution Contract
is terminated or not renewed. In that event,
Mitchell Hutchins' expenses in excess of service and distribution fees received
or accrued through the termination date will be Mitchell Hutchins' sole
responsibility and not obligations of the Fund. In their annual consideration
of the continuation of the Plans, the trustees will review the Plan and
Mitchell Hutchins' corresponding expenses for each Class separately from the
Plans and corresponding expenses for the other two Classes.
- -------------------------------------------------------------------------------
Performance Information
- -------------------------------------------------------------------------------
The Fund performs a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for the Class
A shares of the Fund reflects deduction of the Fund's maximum initial sales
charge at the time of purchase, and standardized return for the Class B shares
of the Fund reflects deduction of the applicable contingent deferred sales
charge imposed on a redemption of shares held for the period. One-, five-and
ten-year periods will be shown, unless the Class has been in existence for a
shorter period. Total return calculations assume reinvestment of dividends and
other distributions.
The Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were included.
The Fund will include performance data for all three Classes of Fund shares in
any advertisements or promotional materials including Fund performance data.
Total return information reflects past performance and does not necessarily
indicate future results. Investment return and principal values will fluctuate,
and proceeds upon redemption may be more or less than a shareholder's cost.
- -------------------------------------------------------------------------------
General Information
- -------------------------------------------------------------------------------
Organization. PaineWebber Olympus Fund is registered with the SEC as an
open-end management investment company and was organized as a business trust
under the laws of the Commonwealth of Massachusetts by Declaration of Trust
dated October 31, 1986. The trustees have authority to issue an unlimited
number of shares of beneficial interest of separate series, par value $.001 per
share. In addition to the Fund, shares of one other series have been
authorized.
The shares of beneficial interest of the Fund are divided into four Classes,
designated Class A shares, Class B shares, Class C shares and Class D shares.
Each Class represents interests in the
same assets of the Fund. The Classes differ as follows: (1) each Class of
shares has exclusive voting rights on matters pertaining to its plan of
distribution, (2) Class A shares are subject to an initial sales charge, (3)
Class B shares bear ongoing distribution fees, are subject to a contingent
deferred sales charge upon certain redemptions and will automatically convert
to Class A shares approximately six years after issuance, (4) Class D shares
are subject to neither an initial nor a contingent deferred sales charge, bear
ongoing distribution fees and do not convert into another Class, (5) Class C
shares, which may be offered only to a limited class of institutional
investors, are subject to neither an initial or contingent deferred sales
charge nor ongoing
Prospectus Page 20
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PAINEWEBBER GROWTH FUND
<PAGE>
service or distribution fees, and (6) each Class may bear differing amounts of
certain Class-
specific expenses. The board of trustees of the Trust does not anticipate that
there will be any conflicts among the interests of the holders of each Class of
Fund shares. On an ongoing basis, the board of trustees will consider whether
any such conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be no
meetings of shareholders to elect trustees unless fewer than a majority of the
trustees of the Trust holding office have been elected by shareholders.
Shareholders of record holding at least two-thirds of the outstanding shares of
the Trust may remove a trustee by votes cast in person or by proxy at a meeting
called for that purpose. The trustees are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee when so requested in writing by the shareholders of record holding at
least 10% of the Trust's outstanding shares. Each share of the Fund has equal
voting rights, except as noted above. Each share of the Fund is entitled to
participate equally in dividends and other distributions and the proceeds of
any liquidation, except that, due to the differing expenses borne by the four
classes, dividends and liquidation proceeds of Class B and Class D shares are
likely to be lower than for the Class A shares and are likely to be lower for
the Class A, Class B and Class D shares than for Class C shares. The
shares of each series of the Trust will be voted separately except when an
aggregate vote of all series is required by the Investment Company Act of 1940.
To avoid additional operating costs and for investor convenience, the Fund does
not issue share certificates. Ownership of shares of the Fund is recorded on a
stock register by the Transfer Agent and shareholders have the same rights of
ownership with respect to such shares as if certificates had been issued.
Custodian and Transfer Agent. State Street Bank and Trust Company, One Heritage
Drive, North Quincy, Massachusetts 02171, is custodian for the Fund. PFPC Inc.,
a subsidiary of PNC Bank, National Association, whose principal address is 400
Bellevue Parkway, Wilmington, Delaware 19809, is the Fund's transfer and
dividend disbursing agent.
Confirmations and Statements. Shareholders receive confirmations of purchases
and redemptions of shares of the Fund. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Fund.
Prospectus Page 21
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PAINEWEBBER GROWTH FUND
<PAGE>
The Fund may use the hedging instruments described below:
Options on Equity and Debt Securities-A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any
time during the term of the option. The writer of the call option, who receives
the premium, has the obligation, upon exercise of the option during the option
term, to deliver the underlying security against payment of the exercise price.
A put option is a similar contract that gives its purchaser, in return for a
premium, the right to sell the underlying security at a specified price during
the option term. The writer of the put option, who receives the premium, has
the obligation, upon exercise of the option during the option term, to buy the
underlying security at the exercise price.
Options on Stock Indexes-A stock index assigns relative values to the stocks
included in the index and fluctuates with changes in the market values of those
stocks. A stock index option operates in the same way as a more traditional
stock option, except that exercise of a stock index option is effected with
cash payment and does not involve delivery of securities. Thus, upon exercise
of a stock index option, the purchaser will realize, and the writer will pay,
an amount based on the difference between the exercise price and the closing
price of the stock index.
Stock Index Futures Contracts-A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.
Interest Rate Futures Contracts-Interest rate futures contracts are bilateral
agreements pursuant to which one party agrees to make, and the other party
agrees to accept, delivery of a specified type of debt security at a specified
future time and at a specified price. Although such futures contracts by their
terms call for actual delivery or acceptance of debt securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery.
Options on Futures Contracts-Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the
option, the delivery of the futures position to the holder of the option will
be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the future. The writer of an option, upon exercise, will assume a
short position in the case of a call and a long position in the case of a put.
Appendix
- -------------------------------------------------------------------------------
Prospectus Page 22
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PAINEWEBBER GROWTH FUND
<PAGE>
Application Form
The PaineWebber
Mutual Funds
-
-
PaineWebber Account No.
- -------------------------------------------------------------------------------
INSTRUCTIONS
DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED THROUGH
PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT EXECUTIVE (OR YOUR LOCAL
PAINEWEBBER OFFICE TO OPEN AN ACCOUNT).
ALSO, DO NOT USE THIS FORM TO OPEN A RETIREMENT PLAN ACCOUNT. FOR RETIREMENT
PLAN FORMS OR FOR ASSISTANCE IN COMPLETING THIS FORM CONTACT PFPC INC. AT
1-800-647-1568.
Return this completed form to: PFPC Inc. P.O. Box 8950 Wilmington, Delaware
19899 ATTN: PaineWebber Mutual Funds
PLEASE PRINT
- -------------------------------------------------------------------------------
1
INITIAL INVESTMENT ($1,000 MINIMUM)
ENCLOSED IS A CHECK FOR:
$(payable to PaineWebber Growth Fund) to purchase Class A Class B or
Class D shares
(Check one Class; if no Class is specified Class A shares will be purchased)
2
ACCOUNT REGISTRATION
Not valid without signature and
Soc. Sec. or Tax ID #
- -As joint tenants, use Lines 1 and 2
- -As custodian for a minor, use Lines 1
and 3
- -In the name of a corporation, trust or other organization or any fiduciary
capacity, use Line 4
1. Individual
- ----------
- ------------
/ /
- ---------
First Name
Last Name MI
Soc. Sec. No.
2. Joint Tenancy
- ---------
- ------------
/ /
- ---------
First Name
Last Name MI
Soc. Sec. No.
("Joint Tenants with Rights of Survivorship" unless otherwise specified)
3. Gifts to Minors
- ---------------------
/ /
- ---------
Minor's Name
Soc. Sec. No.
Under the
State of Residence of Minor
Uniform Gifts
to Minors Act
/
Uniform Transfers
to Minors Act
4. Other Registrations
- -------------------
- ---------
Name
Tax Ident. No.
5. If Trust, Date of Trust Instrument:
3
ADDRESS
- ----------------------
U.S. Citizen Yes No*
Street
- ----------------------
- ---------------
City State Zip Code
*Country of Citizenship
4
DISTRIBUTION OPTIONS See Prospectus
Please select one of the following:
Reinvest both dividends and capital gain distributions in additional shares
Pay dividends to my address above; reinvest capital gain distributions
Pay both dividends and capital gain distributions in cash to my address above
Reinvest dividends and pay capital gain distributions in cash to my address
above
NOTE: If a selection is not made, both dividends and capital gain distributions
will be paid in additional Fund shares of the same Class.
<PAGE>
5
SPECIAL OPTIONS (For More Information-Check Appropriate Box)
Automatic Investment Plan
Prototype IRA Application
Systematic Withdrawal Plan
6
RIGHTS OF ACCUMULATION-CLASS A SHARES (See Prospectus)
Indicate here any other account(s) in the group of funds that would qualify for
the cumulative quantity discount as outlined in the Prospectus.
- -----------------
- ---------
- -----------------
Fund Name
Account No.
Registered Owner
- -----------------
- ---------
- -----------------
Fund Name
Account No.
Registered Owner
- -----------------
- ---------
- -----------------
Fund Name
Account No.
Registered Owner
7
PLEASE INDICATE BELOW IF YOU ARE AFFILIATED WITH PAINEWEBBER
"Affiliated" persons are defined as officers, directors/trustees and employees
of the PaineWebber funds, PaineWebber or its affiliates, and their parents,
spouses and children.
- ---------------------------------------
Nature of Relationship
8
SIGNATURE (S) AND TAX CERTIFICATION (S)
I warrant that I have full authority and am of legal age to purchase shares of
the Fund and have received and read a current Prospectus of the Fund and agree
to its terms. The Fund and its Transfer Agent will not be liable for acting
upon instructions or inquiries believed genuine. Under penalties of perjury, I
certify that (1) my taxpayer identification number provided in this application
is correct and (2) I am not subject to backup withholding because (i) I have
not been notified that I am subject to backup withholding as a result of
failure to report interest or dividends or (ii) the IRS has notified me that I
am no longer subject to backup withholding (strike out clause (2) if
incorrect).
- ------------------
- ------------------
- --------
Individual (or Custodian)
Joint Registrant (if any)
Date
- ------------------
- ------------------
- --------
Corporate Officer, Partner, Trustee, etc.
Title
Date
9
INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed By Investment Executive
Only)
- ----------------------
- ----------------------
Broker No./Name
Branch Wire Code
( )
- ----------------------
- ----------------------
Branch Address
Telephone
10
CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Correspondent Firm Only)
- ----------------------
- ----------------------
Name
Address
- ----------------------
- ----------------------
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE OR CORRESPONDENT
FIRM OR TO: PFPC INC., P.O. BOX 8950, WILMINGTON, DELAWARE 19899.
<PAGE>
Shares of the Fund can be exchanged for shares of the following other
PaineWebber Mutual Funds:
PaineWebber Income Funds
Global Income Fund
High Income Fund
Investment Grade Income Fund
Short-Term U.S. Government Income Fund
Short-Term U.S. Government Income Fund for
Credit Unions
Strategic Income Fund
U.S. Government Income Fund
PaineWebber Tax-Free Income Funds
California Tax-Free Income Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund
PaineWebber Growth Funds
Atlas Global Growth Fund
Blue Chip Growth Fund
Capital Appreciation Fund
Communications & Technology Growth Fund
Europe Growth Fund
Regional Financial Growth Fund
Small Cap Value Fund
PaineWebber Growth and Income Funds
Asset Allocation Fund
Dividend Growth Fund
Global Energy Fund
Global Growth and Income Fund
Utility Income Fund
PaineWebber Money Market Fund
------------
A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read it carefully before investing.
(C) 1995 PaineWebber Incorporated
Recycled
Paper
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PaineWebber
Growth Fund
h
No person has been authorized to give any information or make any
representations not contained in this Prospectus in connection with the
offering made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund
or its distributor. This Prospectus does not constitute an offering by the Fund
or its distributor in any jurisdiction in which such offering may not lawfully
be made.
Prospectus
January 1, 1995
<PAGE>
The Fund is a series of PaineWebber Olympus Fund ("Trust"). This Prospectus
concisely sets forth information about the Fund a prospective investor should
know before investing. Please retain this Prospectus for future reference. A
Statement of Additional Information dated January 1, 1995 (which is
incorporated by reference herein) has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting the Fund,
your PaineWebber investment executive or PaineWebber's correspondent firms or
by calling toll-free 1-800-647-1568.
PaineWebber
Communications
& Technology
Growth Fund
1285 Avenue of the Americas
New York, New York 10019
Prospectus
January 1, 1995
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Prospective Wisconsin investors should note that the Fund may invest up to 10%
of its net assets in restricted securities (other than Rule 144A securities
determined to be liquid by the Trust's board of trustees). Investment in
restricted securities (other than such Rule 144A securities) in excess of 5%
of the Fund's total assets may be considered a speculative activity and may
result in greater risk and increased Fund expenses.
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TABLE OF CONTENTS
Page
---
Prospectus Summary..................... 2
Financial Highlights................... 6
Flexible Pricing System................ 7
Investment Objective and Policies...... 8
Purchases.............................. 13
Exchanges.............................. 16
Redemptions............................ 17
Conversion of Class B Shares........... 18
Other Services and Information......... 18
Dividends and Taxes.................... 19
Valuation of Shares.................... 21
Management............................. 21
Performance Information................ 23
General Information.................... 23
Appendix............................... 25
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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A PaineWebber Mutual Fund
<PAGE>
No person has been authorized to give any information or make any
representations not contained in this Prospectus in connection with the
offering made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund
or its distributor. This Prospectus does not constitute an offering by the
Fund or its distributor in any jurisdiction in which such offering may not
lawfully be made.
-----------------------------
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics
discussed in this summary.
The Fund: PaineWebber Communications & Technology Growth
Fund ("Fund") is a diversified series of an
open-end management investment company.
Investment Objective and
Policies: The Fund's investment objective is long-term
capital appreciation. The Fund seeks to achieve
this objective by investing in equity
securities of companies primarily engaged in
communications or technology, including
companies primarily engaged in information
production, distribution or use (including
content owners, content providers, content
distributors and content subscribers), as well
as new information technology development
companies. Under normal circumstances, the Fund
invests at least 65% of its total assets in
such securities.
Total Net Assets: $71 million at November 30, 1994.
Investment Adviser and
Administrator: Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"), an asset management
subsidiary of PaineWebber Incorporated
("PaineWebber"), manages approximately $35.3
billion in assets. See "Management."
Purchases: Shares of beneficial interest are available
exclusively through PaineWebber and its
correspondent firms for investors who are
clients of PaineWebber or those firms
("PaineWebber clients") and, for other
investors, through PFPC Inc., the Fund's
transfer agent ("Transfer Agent").
Flexible Pricing System: Investors may select Class A, Class B or Class
D shares, each with a public offering price
that reflects different sales charges and
expense levels. See "Flexible Pricing System,"
"Purchases," "Redemptions" and "Conversion of
Class B Shares."
Class A Shares Offered at net asset value plus any applicable
sales charge (maximum is 4.5% of public
offering price).
2
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<TABLE>
<S> <C>
Class B Shares Offered at net asset value (a maximum
contingent deferred sales charge of 5% of
redemption proceeds is imposed on certain
redemptions made within six years of date of
purchase). Class B shares automatically convert
into Class A shares (which pay lower ongoing
expenses) approximately six years after
purchase.
Class D Shares Offered at net asset value without an initial
or contingent deferred sales charge. Class D
shares pay higher ongoing expenses than Class A
shares and do not convert into another Class.
Exchanges: Shares may be exchanged for shares of the
corresponding Class of most PaineWebber mutual
funds.
Redemptions: PaineWebber clients may redeem through
PaineWebber; other shareholders must redeem
through the Transfer Agent.
Dividends: Declared and paid annually; net capital gain is
also distributed annually. See "Dividends and
Taxes."
Reinvestment: All dividends and capital gain distributions
are paid in Fund shares of the same Class at
net asset value unless the shareholder has
requested cash.
Minimum Purchase: $1,000 for the first purchase; $100 for
subsequent purchases.
Other Features:
Class A Shares Automatic investment plan Quantity discounts on initial
Systematic withdrawal plan sales charge
Rights of accumulation 365-day reinstatement privilege
Class B Shares Automatic investment plan Systematic withdrawal plan
Class D shares Automatic investment plan Systematic withdrawal plan
</TABLE>
Who Should Invest. Under normal circumstances, the Fund invests at least
65% of its total assets in the equity securities of companies primarily
engaged in communications or technology, including companies primarily engaged
in information production, distribution or use, as well as new information
technology development companies. Accordingly, the Fund is designed for
investors who are seeking capital appreciation potential and who can assume
the risks of greater fluctuation of market value resulting from investment in
a portfolio comprised of securities of companies in these industries.
While the Fund is not intended to provide a complete or balanced
investment program, it can serve as one component of an investor's long-term
program to accumulate assets for retirement, college tuition or other major
goals.
Risk Factors. There can be no assurance that the Fund will achieve its
investment objective, and the Fund's net asset value will fluctuate based upon
changes in the value of its portfolio securities. The Fund's emphasis on
companies primarily engaged in communications or technology, including
companies primarily engaged in information production, distribution or use, as
well as
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new information technology development companies, subjects its shares to
greater risk than the shares of a fund whose portfolio is not so limited, and,
in particular, its shares will be affected by economic and regulatory
developments in those industries. The Fund is permitted to purchase high
yield, high risk debt securities rated lower than investment grade by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P")
or comparably rated by another nationally recognized statistical rating
organization ("NRSRO"), which may be subject to greater risks of default and
price fluctuation than investment grade securities and are considered
predominantly speculative. The Fund's ability to invest in U.S.
dollar-denominated foreign securities and its use of options and futures
contracts also involve special risks.
Expenses of Investing in the Fund. The following tables are intended to
assist investors in understanding the expenses associated with investing in
the Fund.
<TABLE><CAPTION>
Shareholder Transaction Expenses(1)
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares (as a percentage of
public offering price)......................................... 4.5% None None
Sales charge on reinvested dividends............................. None None None
Exchange fee..................................................... $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a percentage of
redemption proceeds)........................................... None 5% None
<CAPTION>
Annual Fund Operating Expenses(2)
(as a percentage of average net assets)
Class Class Class
A B D
---- ---- ----
<S> <C> <C> <C>
Management fees.................................................. 0.75% 0.75% 0.75%
12b-1 fees(3).................................................... 0.25 1.00 1.00
Other expenses................................................... 0.54 0.53 0.54
---- ---- ----
Total operating expenses......................................... 1.54% 2.28% 2.29%
==== ==== ====
</TABLE>
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(1) Sales charge waivers are available for Class A and Class B shares, reduced
sales charge purchase plans are available for Class A shares and exchange
fee waivers are available for all three Classes. The maximum 5% contingent
deferred sales charge on Class B shares applies to redemptions during the
first year after purchase; the charge generally declines by 1% annually
thereafter, reaching zero after six years. See "Purchases."
(2) See "Management" for additional information. The management fee payable to
Mitchell Hutchins is higher than the management fee paid by most funds.
"Other expenses" have been annualized based on actual expenses incurred
for the period November 2, 1993 (commencement of operations) to August 31,
1994.
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(3) 12b-1 fees have two components, as follows:
<TABLE><CAPTION>
Class Class Class
A B D
---- ---- ----
<S> <C> <C> <C>
12b-1 service fees.......................................... 0.25% 0.25% 0.25%
12b-1 distribution fees..................................... 0.00% 0.75% 0.75%
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B
and Class D shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charges permitted by the National Association of
Securities Dealers, Inc.
Example of Effect of Fund Expenses
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE><CAPTION>
One Three
Year Years
--- ----
<S> <C> <C>
Class A Shares(1).......................................................... $60 $ 91
Class B Shares:
Assuming a complete redemption at end of period(2).................... $73 $101
Assuming no redemption................................................ $23 $ 71
Class D Shares............................................................. $23 $ 72
</TABLE>
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(1) Assumes deduction at the time of purchase of the maximum 4.5% initial
sales charge.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the
assumption in the Example of a 5% annual return are required by regulations of
the Securities and Exchange Commission ("SEC") applicable to all mutual funds;
the assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of any Class of the Fund's shares.
The Example should not be considered a representation of past or future
expenses, and the Fund's actual expenses may be more or less than those
shown. The actual expenses attributable to each Class of the Fund's shares
will depend upon, among other things, the level of average net assets and the
extent to which the Fund incurs variable expenses, such as transfer agency
costs, and whether Mitchell Hutchins reimburses all or a portion of the Fund's
expenses and/or waives all or a portion of its advisory and other fees.
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FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one Class
A share, one Class B share and one Class D share of the Fund for the period
shown. This information is supplemented by the financial statements and
accompanying notes appearing in the Fund's Annual Report to Shareholders for
the period November 2, 1993 (commencement of operations) to August 31, 1994,
which are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the tables appearing below, have been audited by Ernst & Young LLP,
independent auditors, whose report thereon is included in the Annual Report to
Shareholders. Further information about the performance of the Fund is also
included in the Annual Report to Shareholders, which may be obtained without
charge.
Class A Class B Class D
------- ------- -------
For the For the For the
period period period
November November November
2, 2, 2,
1993# 1993# 1993#
to to to
August August August
31, 31, 31,
1994 1994 1994
------- ------- -------
Net asset value, beginning of
period................................... $ 10.00 $ 10.00 $ 10.00
------- ------- -------
Net income (loss) from investment
operations:
Net investment loss........................ -- (0.05) (0.05)
Net realized and unrealized losses from
investment transactions.................. (0.68) (0.68) (0.68)
------- ------- -------
Total loss from investment operations...... (0.68) (0.73) (0.73)
------- ------- -------
Net asset value, end of period............. $ 9.32 $ 9.27 $ 9.27
======= ======= =======
Total investment return(1)................. (6.80)% (7.30)% (7.30)%
======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000's).......... $19,119 $47,975 $11,079
Ratio of expenses to average net assets.... 1.54%* 2.28%* 2.29%*
Ratio of net investment income (loss) to
average net assets....................... 0.06%* (0.68)%* (0.68)%*
Portfolio turnover rate.................... 11.92% 11.92% 11.92%
- -------------
# Commencement of operations.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of the period reported, reinvestment of all
dividends and other distributions at net asset value on the payable dates,
and a sale at net asset value on the last day of each period reported. The
figures do not include sales charges; results for Class A and Class B
shares would be lower if sales charges were included. Total investment
returns for less than one year have not been annualized.
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FLEXIBLE PRICING SYSTEM
Differences Among the Classes
The primary distinctions among the Classes of the Fund's shares lie in
their initial and contingent deferred sales charge structures and
in their ongoing expenses, including asset-based sales charges in the form of
distribution fees. These differences are summarized in the table below. Each
Class has distinct advantages and disadvantages for different investors, and
investors may choose the Class that best suits their circumstances and
objectives.
<TABLE><CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Class A Maximum initial sales Service fee of 0.25% Initial sales charge
charge of 4.5% of the waived or reduced for
public offering price certain purchases
Class B Maximum contingent Service fee of 0.25%; Shares convert to Class A
deferred sales charge of distribution fee of 0.75% shares approximately six
5% of redemption proceeds; years after issuance
declines to zero after six
years
Class D None Service fee of 0.25%; --
distribution fee of 0.75%
</TABLE>
Factors to Consider in Choosing
a Class of Shares
In deciding which Class of shares to purchase, investors should consider
the cost of sales charges together with the cost of the ongoing annual
expenses described below, as well as any other relevant facts and
circumstances.
Sales Charges. Class A shares are sold at net asset value plus an
initial sales charge of up to 4.5% of the public offering price. Because of
this initial sales charge, not all of a Class A shareholder's purchase price
is invested in the Fund. Class B shares are sold with no initial sales charge,
but a contingent deferred sales charge of up to 5% of the redemption proceeds
applies to redemptions made within six years of purchase. Class D shareholders
pay no initial or contingent deferred sales charges. Thus, the entire amount
of a Class B or Class D shareholder's purchase price is immediately invested
in the Fund.
Waivers and Reductions of Class A Sales Charges. Class A share purchases
over $50,000 and Class A share purchases made under the Fund's reduced sales
charge plan may be made at a reduced sales charge. In considering the combined
cost of sales charges and ongoing annual expenses, investors should take into
account any reduced sales charges on Class A shares for which they may be
eligible.
The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class D shares, investors eligible for complete waivers
should purchase Class A shares.
Ongoing Annual Expenses. All three Classes of Fund shares pay an annual
12b-1 service fee of 0.25% of average daily net assets. Class B and Class D
shares pay an annual 12b-1 distribution fee of 0.75% of average daily net
assets. Annual 12b-1 distribution fees are a form of asset-based sales charge.
An investor should
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consider both ongoing annual expenses and initial or contingent deferred sales
charges in estimating the costs of investing in the respective Classes of Fund
shares over various time periods.
For example, assuming a constant net asset value, the cumulative
distribution fees on the Fund's Class B or Class D shares and the 4.5%
maximum initial sales charge on the Fund's Class A shares would all be
approximately equal if the shares were held for six years. Because Class B
shares convert to Class A shares (which do not bear the expense of ongoing
distribution fees) approximately six years after purchase, an investor
expecting to hold Fund shares for longer than six years would generally pay
lower cumulative expenses by purchasing Class A or Class B shares than by
purchasing Class D shares. An investor expecting to hold Fund shares for less
than six years would generally pay lower cumulative expenses by purchasing
Class D shares than by purchasing Class A shares and, due to the contingent
deferred sales charges that would become payable on redemption of Class B
shares, such an investor would generally pay lower cumulative expenses by
purchasing Class D shares than Class B shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net
asset value of Fund shares, which will affect the actual amount of expenses
paid. Expenses borne by Classes may differ slightly because of the allocation
of other Class-specific expenses. The "Example of Effect of Fund Expenses"
under "Prospectus Summary" shows the cumulative expenses an investor would pay
over time on a hypothetical investment in each Class of Fund shares, assuming
an annual return of 5%.
Other Information
PaineWebber investment executives may receive different levels of
compensation for selling one particular Class of Fund shares rather than
another. Investors should understand that distribution fees and initial and
contingent deferred sales charges all are intended to compensate Mitchell
Hutchins for distribution services.
See "Purchases," "Redemptions" and "Management" for a more complete
description of the initial and contingent deferred sales charges, service fees
and distribution fees for the three Classes of shares of the Fund. See also
"Conversion of Class B Shares," "Dividends and Taxes," "Valuation of Shares"
and "General Information" for other differences among the three Classes.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective and Primary
Investments
The Fund's investment objective is long-term capital appreciation. The
Fund seeks to achieve this objective by investing in equity securities (common
stocks, preferred stocks and securities convertible into common stocks) of
companies primarily engaged in communications or technology, including
companies primarily engaged in new information technology development or
information production, distribution or use. These companies include companies
that are:
- content owners, such as companies in the entertainment, education,
information services and media industries;
- content providers, such as companies involved in hardware
infrastructure (for example, computer companies, multi-media servers,
interactive services and storage, communications and networking
companies) and in software infrastructure (for
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example, databases, message storage and retrieval and content-based
retrieval);
- content distributors, such as cable television and radio companies,
cellular, local, regional and long-distance telephone companies,
providers of local area networks, satellite and radio paging companies,
as well as order entry, billing and accounting system companies; and
- content subscribers, such as home television providers, portable,
desktop and other computer companies, computer peripheral companies and
telephone equipment manufacturers.
Under normal circumstances, the Fund invests at least 65% of its total assets
in the equity securities of such companies. While the Fund's emphasis is on
companies primarily engaged in communications or technology, those companies
encompass a number of different industries. The Fund will not concentrate in
any one industry.
The Fund may invest up to 35% of its total assets in equity securities of
other companies (including companies that will benefit from these new
technologies such as companies in the financial services, retailing and health
care industries), as well as convertible debt securities, convertible
preferred stocks, U.S. government securities, corporate debt securities and
money market instruments. See "Other Investment Policies and Risk
Factors--Debt Securities." The Fund invests in instruments other than common
stocks when, in the opinion of Mitchell Hutchins, their projected total return
is equal to or greater than that of common stocks or when such holdings might
reduce the volatility of the Fund's portfolio.
Mitchell Hutchins invests the Fund's assets in equity securities that, in
Mitchell Hutchins' judgment, provide the potential for long-term capital
appreciation. In selecting equity securities for investment, Mitchell Hutchins
considers all those factors that it believes are relevant in determining the
potential for capital appreciation, including the issuer's current and
anticipated revenues, earnings, cash flow and asset values, as well as general
market conditions and new developments in the foregoing industries.
There can be no assurance that the Fund will achieve its investment
objective. The Fund's net asset value fluctuates based upon changes in the
value of its portfolio securities. The Fund's investment objective and certain
investment limitations as described in the Statement of Additional Information
are fundamental policies that may not be changed without shareholder approval.
All other investment policies may be changed by the Trust's board of trustees
without shareholder approval.
Other Investment Policies and Risk Factors
Risk Factors. The Fund invests substantially all of its assets in
companies primarily engaged in communications or technology, including
companies primarily engaged in information production, distribution or use, as
well as new information technology development companies. For these purposes,
"primarily engaged" means that more than 50% of a company's revenues or more
than 50% of a company's operating income before interest, depreciation,
amortization and taxes, is derived from its communications or technology
business.
Many companies in these businesses are suppliers of products or services
used by other companies in the same or similar businesses. Therefore, a
technological, regulatory or other problem experienced by one type of company
in one of these businesses could also have an effect on other companies in one
or more of these businesses.
Many companies in these businesses, particularly those involved in the
development of new information technologies, often need continuous sources of
capital. Therefore, those companies are susceptible to the risk that capital
will not be
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<PAGE>
available to them in the market or that the costs of such capital will be
excessive. Moreover, a substantial number of the companies in which the Fund
will invest may have lower than average market capitalizations, whose stock
price volatility typically is greater, and whose liquidity is lower, than
securities of issuers with larger capitalizations.
Although many of the companies in these businesses may be in the
forefront of technological development, many technologies may become quickly
obsolete so that the rewards of being a leader may be short-lived. Because of
the fast pace of developments (technological and otherwise) in these
industries, it will be necessary for Mitchell Hutchins to evaluate the
technology of each company and the ability of each company's management to
respond to the fast pace of development.
Convertible Securities. The Fund may invest in convertible securities. A
convertible security is preferred stock or debt or other equity security that
may be converted into or exchanged for a prescribed amount of common stock of
the same or a different issuer within a particular period of time at a
specified price or formula. A convertible security entitles the holder to
receive dividends paid on preferred stock or interest paid or accrued on the
debt security until the convertible security matures or is redeemed, converted
or exchanged. Convertible securities have unique investment characteristics in
that they generally (1) have higher yields than common stock, but lower yields
than comparable non-convertible securities, (2) are less subject to
fluctuation in value than the underlying stock because they have fixed income
characteristics, and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases. While no securities
investment is without some risk, investments in convertible securities
generally entail less risk than the issuer's common stock, although the extent
to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income
security.
Debt Securities. The Fund is permitted to purchase investment grade
corporate debt securities. Securities rated BBB by S&P, Baa by Moody's or
comparably rated by another NRSRO are investment grade but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for such securities to make principal and interest payments than is
the case for higher-rated debt securities. The Fund is also permitted to
purchase debt securities rated as low as B+ by S&P, B1 by Moody's or
comparably rated by another NRSRO. These securities are deemed by those NRSROs
to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and may involve major risk exposure to adverse
conditions. Such securities are commonly referred to as "junk bonds." The Fund
is also permitted to purchase debt securities that are not rated by S&P,
Moody's or another NRSRO but that Mitchell Hutchins determines to be of
comparable quality to that of rated securities in which the Fund may invest.
See the Statement of Additional Information for more information about S&P's
and Moody's ratings.
The market value of debt securities generally varies inversely with
interest rate changes. Ratings of debt securities represent the NRSROs'
opinions regarding their quality, are not a guarantee of quality and may be
reduced after the Fund has acquired the security. Mitchell Hutchins will
consider such an event in determining whether the Fund should continue to hold
a security but is not required to dispose of it. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not reflect an
assessment of the volatility of the security's market value or the liquidity
of an investment in the security. Also, NRSROs may fail to make timely changes
in credit ratings in
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response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
Lower grade debt securities generally offer a higher current yield than
that available for higher grade issues, but they involve higher risks, in that
they are especially subject to adverse changes in general economic conditions
and in the industries in which the issuers are engaged, to changes in the
financial condition of the issuers and to price fluctuation in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress,
which could adversely affect their ability to make payments of interest and
principal and increase the possibility of default. In addition, such issuers
may not have more traditional methods of financing available to them, and may
be unable to repay debt at maturity by refinancing. The risk of loss due to
default by such issuers is significantly greater because such securities
frequently are unsecured and subordinated to the prior payment of senior
indebtedness.
The market for lower grade debt securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower grade debt securities declined substantially, reflecting
an expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower grade debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There
can be no assurance that such declines will not recur. The market for lower
grade debt issues generally is thinner and less active than that for higher
quality securities. This may limit the Fund's ability to sell such securities
at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
grade securities, especially in a thinly traded market.
U.S. government securities in which the Fund may invest include direct
obligations of the U.S. Treasury as well as obligations of U.S. government
agencies and instrumentalities backed by the U.S. Treasury or primarily or
solely by the credit of the issuer.
Dollar-Denominated Foreign Securities. The Fund may invest up to 25% of
its total assets in U.S. dollar-denominated securities of foreign issuers that
are traded on recognized U.S. exchanges or in the U.S. over-the-counter
("OTC") market. These investments may involve special risks, arising both from
political and economic developments abroad and differences between foreign and
U.S. regulatory systems. Foreign securities may be less liquid and their
prices more volatile than comparable U.S. securities. The prices of these
securities may also be affected by fluctuations in the values of foreign
currencies.
Hedging Strategies. The Fund may attempt to reduce the overall risk of
its investments (hedge) by using options (both exchange-traded and OTC) and
futures contracts. The Fund's ability to use these instruments may be limited
by market conditions, regulatory limits and tax considerations. The Appendix
to this Prospectus describes the hedging instruments the Fund may use. The
Statement of Additional Information contains further information on these
strategies.
The Fund may write (sell) covered put and call options or buy put and
call options on securities in which it may invest and on securities indices.
In addition, the Fund may buy and sell securities index futures contracts and
may write covered put and call options or buy put and call options on such
futures contracts. Because the Fund intends to use options and fu-
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<PAGE>
tures for hedging purposes, the Fund may enter into options and futures
contracts that approximate (but do not exceed) the full value of its
portfolio.
The Fund might not employ any of the strategies described above, and no
assurance can be given that any strategy used will succeed. If Mitchell
Hutchins incorrectly forecasts market values or other economic factors in
utilizing a hedging strategy for the Fund, the Fund would be in a better
position had it not hedged at all. The use of these strategies involves
certain special risks, including (1) the fact that skills needed to use
hedging instruments are different from those needed to select the Fund's
securities, (2) possible imperfect correlation, or even no correlation,
between price movements of hedging instruments and price movements of the
investments being hedged, (3) the fact that, while hedging strategies can
reduce the risk of loss, they can also reduce the opportunity for gain, or
even result in losses, by offsetting favorable price movements in hedged
investments and (4) the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions and the possible
inability of the Fund to close out or to liquidate its hedged position.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objective and regulatory and federal tax
considerations.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws (other than
"Rule 144A securities" Mitchell Hutchins has determined to be liquid under
procedures approved by the Trust's trustees). Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act of 1933
("1933 Act"). Institutional markets for restricted securities have developed
as a result of Rule 144A, providing both readily ascertainable values for
restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. 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.
Other Information. When Mitchell Hutchins believes unusual circumstances
warrant a defensive posture, the Fund temporarily may commit all or a portion
of its assets to cash or money market instruments, including repurchase
agreements. Repurchase agreements are transactions in which the Fund purchases
securities from a bank or recognized securities dealer and simultaneously
commits to resell the securities to the bank or dealer at an agreed-upon date
and price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. Although repurchase agreements carry
certain risks not associated with direct investments in securities, including
possible decline in the market value of the underlying securities and delays
and costs to the Fund if the other party to the repurchase agreement becomes
insolvent, the Fund intends to enter into repurchase agreements only with
banks and dealers in transactions believed by Mitchell Hutchins to present
minimal credit risks in accordance with guidelines established by the Trust's
board of trustees. The Fund may also engage in short sales of securities
"against the box" to defer realization of gains or losses for tax or other
purposes. The
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Fund may borrow money for temporary purposes, but not in excess of 10% of its
total assets.
PURCHASES
General. Class A shares of the Fund are sold to investors subject to an
initial sales charge. Class B shares of the Fund are sold without an initial
sales charge but are subject to higher ongoing expenses than Class A shares
and a contingent deferred sales charge payable upon certain redemptions. Class
B shares automatically convert to Class A shares approximately six years after
issuance. Class D shares are sold without an initial or a contingent deferred
sales charge but are subject to higher ongoing expenses than Class A shares
and do not convert into another Class. See "Flexible Pricing System" and
"Conversion of Class B Shares."
Shares of the Fund are available through PaineWebber and its
correspondent firms or, for shareholders who are not PaineWebber clients,
through the Transfer Agent. Investors may contact a local PaineWebber office
to open an account. The minimum initial investment for the Fund is $1,000, and
the minimum for additional purchases is $100. These minimums may be waived or
reduced for investments by employees of PaineWebber or its affiliates, certain
pension plans and retirement accounts and participants in the Fund's automatic
investment plan. Purchase orders will be priced at the net asset value per
share next determined (see "Valuation of Shares") after the order is received
by PaineWebber's New York City offices or by the Transfer Agent, plus any
applicable sales charge for Class A shares. The Fund and Mitchell Hutchins
reserve the right to reject any purchase order and to suspend the offering of
Fund shares for a period of time.
When placing purchase orders, investors should specify whether the order
is for Class A, Class B or Class D shares. All share purchase orders that fail
to specify a Class will automatically be invested in Class A shares.
Purchases Through PaineWebber or Correspondent Firms. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due
on the fifth Business Day after the order is received at PaineWebber's New
York City offices. A "Business Day" is any day, Monday through Friday, on
which the New York Stock Exchange, Inc. ("NYSE") is open for business.
Purchases Through the Transfer Agent. Investors who are not PaineWebber
clients may purchase shares of the Fund through the Transfer Agent. Shares of
the Fund may be purchased, and an account with the Fund established, by
completing and signing the purchase application at the end of this Prospectus
and mailing it, together with a check to cover the purchase, to the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. Subsequent investments need not be accompanied by an
application.
Initial Sales Charge--Class A Shares. The public offering price of Class
A shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the
following table:
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<TABLE><CAPTION>
Initial Sales Charge Schedule--Class A Shares
Sales Charge as a Percentage of
------------------------------------------- Discount to Selected
Offering Net Amount Invested Dealers as a Percentage of
Amount of Purchase Price (Net Asset Value) Offering Price
- ------------------------- ------------------- ------------------- --------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.50 3.63 3.25
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00
</TABLE>
- -------------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources.
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for the Fund's shares, than those shown
above. To the extent PaineWebber or any dealer receives 90% or more of the
sales charge, it may be deemed an "underwriter" under the 1933 Act.
Sales Charges Waivers--Class A Shares. Class A shares of the Fund are
available without a sales charge through exchanges for Class A shares of most
other PaineWebber mutual funds. See "Exchanges." In addition, Class A shares
may be purchased without a sales charge, and exchanges of any Class of shares
made without the $5.00 exchange fee, by employees, directors and officers of
PaineWebber or its affiliates, directors or trustees and officers of any
PaineWebber funds, their spouses, parents and children and advisory clients of
Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the
purchase is made through a PaineWebber investment executive who formerly was
employed as a broker with another firm registered as a broker-dealer with the
SEC, provided (1) the purchaser was the investment executive's client at the
competing brokerage firm, (2) within 90 days of the purchase of Class A shares
the purchaser redeemed shares of one or more mutual funds for which that
competing firm or its affiliates was principal underwriter, provided the
purchaser either paid a sales charge to invest in those funds, paid a
contingent deferred sales charge upon redemption or held shares of those funds
for the period required not to pay the otherwise applicable contingent
deferred sales charge and (3) the total amount of shares of all PaineWebber
funds purchased under this sales charge waiver does not exceed the amount of
the purchaser's redemption proceeds from the competing firm's funds. To take
advantage of this waiver, an investor must provide satisfactory evidence that
all the above-noted conditions are met. Qualifying investors should contact
their PaineWebber investment executives for more information.
Certificate holders of unit investment trusts ("UITs") sponsored by
PaineWebber may acquire Class A shares of the Fund without regard to minimum
investment requirements and without sales charges by electing to have
dividends and other distributions from their UIT investment automatically
invested in Class A shares.
Reduced Sales Charge Plans--Class A Shares. If an investor or eligible
group of related Fund investors purchases Class A shares of the Fund
concurrently with Class A shares of other PaineWebber mutual funds, the
purchases may be combined to take advantage of the re-
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<PAGE>
duced sales charge applicable to larger purchases. In addition, the right of
accumulation permits a Fund investor or eligible group of related Fund
investors to pay the lower sales charge applicable to larger purchases by
basing the sales charge on the dollar amount of Class A shares currently being
purchased, plus the net asset value of the investor's or group's total
existing Class A shareholdings in other PaineWebber mutual funds.
An "eligible group of related Fund investors" includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ("IRA"), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to
Minors Act/Uniform Transfers to Minors Act accounts created by the individual
or eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes a group of
related employers and one or more qualified retirement plans of such
employers. For more information, an investor should consult the Statement of
Additional Information or contact a PaineWebber investment executive or
correspondent firm or the Transfer Agent.
Contingent Deferred Sales Charge--Class B Shares. The public offering
price of the Class B shares of the Fund is the next determined net asset
value, and no initial sales charge is imposed. A contingent deferred sales
charge, however, is imposed upon certain redemptions of Class B shares.
Class B shares that are redeemed will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents
(1) capital appreciation of Fund assets, (2) reinvestment of dividends or
capital gain distributions or (3) shares redeemed more than six years after
their purchase. Otherwise, redemptions of Class B shares of the Fund will be
subject to a contingent deferred sales charge. The amount of any applicable
contingent deferred sales charge will be calculated by multiplying the net
asset value of such shares at the time of redemption by the applicable
percentage shown in the table below:
Contingent
Deferred
Sales Charge as a
Percentage of
Redemption Net Asset Value
During at Redemption
- ----------------------------- -----------------
1st Year Since Purchase...... 5%
2nd Year Since Purchase...... 4
3rd Year Since Purchase...... 3
4th Year Since Purchase...... 2
5th Year Since Purchase...... 2
6th Year Since Purchase...... 1
7th Year Since Purchase...... None
In determining the applicability and rate of any contingent deferred
sales charge, it will be assumed that a redemption is made first of Class B
shares representing capital appreciation, next of shares representing the
reinvestment of dividends and capital gain distributions and finally of other
shares held by the shareholder for the longest period of time. The holding
period of Class B shares acquired through an exchange with another PaineWebber
mutual fund will be calculated from the date that the Class B shares were
initially acquired in one of the other PaineWebber funds, and Class B shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. This will result in any contingent deferred sales charge being
imposed at the lowest possible rate. The amount of any contingent deferred
sales charge will be paid to Mitchell Hutchins.
Sales Charge Waivers--Class B Shares. The contingent deferred sales
charge will be waived for exchanges, as described below, and
15
<PAGE>
for redemptions in connection with the Fund's systematic withdrawal plan. The
contingent deferred sales charge will be waived for a total or partial
redemption made within one year of 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. The contingent deferred sales
charge will also be waived in connection with a lump-sum or other distribution
in the case of an IRA, a self-employed individual retirement plan (so-called
"Keogh Plan") or a custodial account under Section 403(b) of the Internal
Revenue Code following attainment of age 59 1/2; a total or partial redemption
resulting from any distribution following retirement in the case of a tax-
qualified retirement plan; and a redemption resulting from a tax-free return
of an excess contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation (by PaineWebber in the case of shareholders who are PaineWebber
clients or by the Transfer Agent in the case of all other shareholders) of the
shareholders' status or holdings, as the case may be.
Purchase of Class D Shares. The public offering price of the Class D
shares of the Fund is the next determined net asset value. No initial or
contingent deferred sales charge is imposed.
EXCHANGES
Shares of the Fund may be exchanged for shares of the corresponding Class
of other PaineWebber mutual funds, or may be acquired through an exchange of
shares of the corresponding Class of those funds. No initial sales charge is
imposed on the shares acquired, and no contingent deferred sales charge is
imposed on the shares being disposed of, through an exchange. However,
contingent deferred sales charges may apply to redemptions of Class B shares
acquired through an exchange. A $5.00 exchange fee is charged for each
exchange, and exchanges may be subject to minimum investment requirements of
the fund into which exchanges are made.
The other PaineWebber funds with which Fund shares may be exchanged
include:
PaineWebber Income Funds
- Global Income Fund
- High Income Fund
- Investment Grade Income Fund
- Short-Term U.S. Government Income Fund
- Short-Term U.S. Government Income Fund for Credit Unions
- Strategic Income Fund
- U.S. Government Income Fund
PaineWebber Tax-Free Income Funds
- California Tax-Free Income Fund
- Municipal High Income Fund
- National Tax-Free Income Fund
- New York Tax-Free Income Fund
PaineWebber Growth Funds
- Atlas Global Growth Fund
- Blue Chip Growth Fund
- Capital Appreciation Fund
- Europe Growth Fund
- Growth Fund
- Regional Financial Growth Fund
- Small Cap Value Fund
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<PAGE>
PaineWebber Growth and Income Funds
- Asset Allocation Fund
- Dividend Growth Fund
- Global Energy Fund
- Global Growth and Income Fund
- Utility Income Fund
PaineWebber Money Market Fund
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms. Shareholders who are not
PaineWebber clients must place exchange orders in writing with the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. All exchanges will be effected based on the relative net asset
values per share next determined after the exchange order is received at
PaineWebber's New York City offices or by the Transfer Agent. See "Valuation
of Shares." Shares of the Fund purchased through PaineWebber or its
correspondent firms may be exchanged only after the settlement date has passed
and payment for such shares has been made.
Other Exchange Information. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is available only in those jurisdictions
where the sale of the PaineWebber fund shares to be acquired may be legally
made. Before making any exchange, shareholders should contact their
PaineWebber investment executives or correspondent firms or the Transfer Agent
to obtain more information and prospectuses of the PaineWebber funds to be
acquired through the exchange.
REDEMPTIONS
As described below, Fund shares may be redeemed at their net asset value
(subject to any applicable contingent deferred sales charge) and redemption
proceeds will be paid within seven days of the receipt of a redemption
request. PaineWebber clients may redeem shares through PaineWebber or its
correspondent firms; all other shareholders must redeem through the Transfer
Agent. If a redeeming shareholder owns shares of more than one Class, the
shares will be redeemed in the following order unless the shareholder
specifically requests otherwise: Class D shares, then Class A shares, and
finally Class B shares.
Redemption Through PaineWebber or Correspondent Firms. PaineWebber
clients may submit redemption requests to their investment executives or
correspondent firms in person or by telephone, mail or wire. As the Fund's
agent, PaineWebber may honor a redemption request by repurchasing Fund shares
from a redeeming shareholder at the shares' net asset value next determined
after receipt of the request by PaineWebber's New York City offices. Within
seven days, repurchase proceeds (less any applicable contingent deferred sales
charge) will be paid by check or credited to the shareholder's brokerage
account at the election of the shareholder. PaineWebber investment executives
and correspondent firms are responsible for promptly forwarding redemption
requests to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor any redemption request, in
which case PaineWebber promptly will forward the request to the Transfer Agent
for treatment as described below.
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<PAGE>
Redemption Through the Transfer Agent. Fund shareholders who are not
PaineWebber clients must redeem their shares through the Transfer Agent by
mail; other shareholders also may redeem Fund shares through the Transfer
Agent. Shareholders should mail redemption requests directly to the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. A redemption request will be executed at the net asset value
next computed after it is received in "good order." "Good order" means that
the request must be accompanied by the following: (1) a letter of instruction
or a stock assignment specifying number of shares or amount of investment to
be redeemed (or that all shares credited to the Fund account be redeemed),
signed by all registered owners of the shares in the exact names in which they
are registered, (2) a guarantee of the signature of each registered owner by
an eligible institution acceptable to the Transfer Agent and in accordance
with SEC rules, such as a commercial bank, trust company or member of a
recognized stock exchange and (3) other supporting legal documents for
estates, trusts, guardianships, custodianships, partnerships and corporations.
Shareholders are responsible for ensuring that a request for redemption is
received in "good order."
Additional Information on Redemptions. Redemption proceeds of $1 million
or more may be wired to the shareholder's PaineWebber brokerage account or a
commercial bank account designated by the shareholder. Questions about this
option, or redemption requirements generally, should be referred to the
shareholder's PaineWebber investment executive or correspondent firm, or to
the Transfer Agent if the shares are not held in a PaineWebber brokerage
account. If a shareholder requests redemption of shares that were purchased
recently, the Fund may delay payment until it is assured that good payment has
been received. In the case of purchases by check, this can take up to 15 days.
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, it reserves the right to redeem all Fund shares in any shareholder
account of less than $500 net asset value. If the Fund elects to do so, it
will notify the shareholder and provide the shareholder the opportunity to
increase the amount invested to $500 or more within 60 days of the notice. The
Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund
account without a sales charge up to the dollar amount redeemed by purchasing
Class A shares within 365 days after the redemption. To take advantage of this
reinstatement privilege, shareholders must notify their PaineWebber investment
executive or correspondent firm at the time the privilege is exercised.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A
shares of the Fund approximately six years after the date of issuance,
together with a pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares. The Class B shares
so converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net asset values per
share of the two Classes on the first Business Day of the month in which the
sixth anniversary of the issuance of the Class B shares occurs. If a
shareholder effects one or more exchanges among Class B shares of the
PaineWebber mutual funds during the six-year period, the holding periods for
the shares so exchanged will be counted toward the six-year period.
OTHER SERVICES AND INFORMATION
Investors interested in the services described below should consult their
PaineWebber
18
<PAGE>
investment executives or correspondent firms or call the Transfer Agent
toll-free at 1-800-647-1568.
Automatic Investment Plan. Shareholders may purchase shares of the Fund
through an automatic investment plan, under which an amount specified by the
shareholder of $50 or more each month will be sent to the Transfer Agent from
the shareholder's bank for investment in the Fund. In addition to providing a
convenient and disciplined manner of investing, participation in the automatic
investment plan enables the investor to use the technique of "dollar cost
averaging." When under the plan a shareholder invests the same dollar amount
each month, the shareholder 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, a shareholder's average purchase price
per share over any given period will be lower than if the shareholder
purchased a fixed number of shares on a monthly basis during the period.
Systematic Withdrawal Plan. Shareholders who own Class A or Class D
shares of the Fund with a value of $5,000 or more or Class B shares of the
Fund with a value of $20,000 or more may have PaineWebber redeem a portion of
their shares monthly, quarterly or semi-annually under the systematic
withdrawal plan. No contingent deferred sales charge will be imposed on such
withdrawals for Class B shares. The minimum amount for all withdrawals of
Class A or Class D shares is $100, and minimum monthly, quarterly and
semi-annual withdrawal amounts for Class B shares are $200, $400 and $600,
respectively. Quarterly withdrawals are made in March, June, September and
December, and semi-annual withdrawals are made in June and December. A Class B
shareholder of the Fund may not withdraw an amount exceeding 12% annually of
his or her "Initial Account Balance," a term that means the value of the Fund
account at the time the shareholder elects to participate in the systematic
withdrawal plan. A Class B shareholder's participation in the systematic
withdrawal plan will terminate automatically if the Initial Account Balance
(plus the net asset value on the date of purchase of Fund shares acquired
after the election to participate in the systematic withdrawal plan), less
aggregate redemptions made other than pursuant to the systematic withdrawal
plan, is less than $20,000. Shareholders who receive dividends or other
distributions in cash may not participate in the systematic withdrawal plan.
Purchases of additional shares of the Fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, sales charges.
Individual Retirement Accounts. Shares of the Fund may be purchased
through IRAs available through the Fund. In addition, a Self-Directed IRA is
available through PaineWebber under which investments may be made in the Fund
as well as in other investments available through PaineWebber. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.
Transfer of Accounts. If a shareholder holding shares of the Fund in a
PaineWebber brokerage account transfers his or her brokerage account to
another firm, the Fund shares normally will be transferred to an account with
the Transfer Agent. 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.
DIVIDENDS AND TAXES
Dividends. The Fund pays an annual dividend from its net investment
income and net short-term capital gain, if any. The Fund also distributes
substantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss) with the regular annual dividend. The
Fund may make additional distributions if necessary to avoid a 4% excise tax
19
<PAGE>
on certain undistributed income and capital gains. Dividends and capital gain
distributions paid on all Classes of Fund shares are calculated at the same
time and in the same manner. Dividends on Class B and Class D shares of the
Fund are expected to be lower than those for its Class A shares because of the
higher expenses resulting from distribution fees borne by the Class B and
Class D shares. Dividends on each Class also might be affected differently by
the allocation of other Class-specific expenses. See "Valuation of Shares."
Dividends and capital gain distributions are paid in additional Fund
shares of the same Class at net asset value unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
capital gain distributions in cash, either mailed to the shareholder by check
or credited to the shareholder's PaineWebber account, should contact their
PaineWebber investment executives or correspondent firms or complete the
appropriate section of the application form.
Taxes. The Fund intends to continue to qualify for treatment as a
regulated investment company under the Internal Revenue Code so that it will
be relieved of federal income tax on that part of its investment company
taxable income (consisting generally of net investment income and net
short-term capital gain) and net capital gain that is distributed to its
shareholders.
Dividends from the Fund's investment company taxable income (whether paid
in cash or in additional shares) generally are taxable to shareholders as
ordinary income. Distributions of the Fund's net capital gain (whether paid in
cash or in additional shares) are taxable to its shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Shareholders not subject to tax on their income will not be required to pay
taxes on amounts distributed to them.
The Fund notifies its shareholders following the end of each calendar
year of the amounts of dividends and capital gain distributions paid (or
deemed paid) that year and of any portion of those dividends that qualifies
for the corporate dividends-received deduction.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends and
capital gain distributions is also required for those shareholders who
otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the redemption proceeds payable
to the shareholder are more or less than the shareholder's adjusted basis for
the redeemed shares (which normally includes any initial sales charge paid on
Class A shares). An exchange of Fund shares for shares of another PaineWebber
fund generally will have similar tax consequences. However, special tax rules
apply when a shareholder (1) disposes of Class A shares through a redemption
or exchange within 90 days of purchase and (2) subsequently acquires Class A
shares of a PaineWebber fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the disposition of the original Class A shares would be increased, or loss
decreased, by the amount of the sales charge paid when those shares were
acquired, and that amount will increase the basis of the PaineWebber fund
shares subsequently acquired. In addition, if shares of the Fund are purchased
within 30 days before or after redeeming other Fund shares (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.
20
<PAGE>
No gain or loss will be recognized to a shareholder as a result of a
conversion of Class B shares into Class A shares.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be
other federal, state or local tax considerations applicable to a particular
investor. Prospective shareholders are therefore urged to consult their tax
advisers.
VALUATION OF SHARES
The net asset value of the Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the NYSE
(currently 4:00 p.m., eastern time) each Business Day. The Fund's net asset
value per share is determined by dividing the value of the securities held by
the Fund plus any cash or other assets minus all liabilities by the total
number of Fund shares outstanding.
The Fund values its assets based on their current market value when
market quotations are readily available. If such value cannot be established,
assets are valued at fair value as determined in good faith by or under the
direction of the Trust's board of trustees. The amortized cost method of
valuation generally is used to value debt obligations with 60 days or less
remaining to maturity, unless the board of trustees determines that this does
not represent fair value. It should be recognized that judgment plays a
greater role in valuing lower rated debt securities in which the Fund may
invest, because there is less reliable, objective data available.
MANAGEMENT
The Trust's board of trustees, as part of its overall management
responsibility, oversees various organizations responsible for the Fund's
day-to-day management. Mitchell Hutchins, investment adviser and administrator
of the Fund, makes and implements all investment decisions and supervises all
aspects of the Fund's operations. Brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates, in accordance with procedures
adopted by the Trust's board of trustees.
Mitchell Hutchins receives a monthly fee for these services at the annual
rate of 0.75% of average daily net assets of the Fund. The advisory fees for
the Fund are higher than those paid by most investment companies to their
advisers, but Mitchell Hutchins believes the fees are comparable to the
advisory fees paid to their advisers by other funds with similar investment
objectives and policies.
The Fund also pays PaineWebber an annual fee of $4.00 per active
shareholder account held at PaineWebber for certain services not provided by
the Transfer Agent. The Fund also incurs other expenses in its operations,
such as custody and transfer agency fees, brokerage commissions, professional
fees, expenses of board and shareholder meetings, fees and expenses relating
to registration of its shares, taxes and governmental fees, fees and expenses
of the trustees, costs of obtaining insurance, expenses of printing and
distributing shareholder materials, organizational expenses and extraordinary
expenses, including costs or losses in any litigation. For the period November
2, 1993 (commencement of operations) to August 31, 1994, the Fund's total
expenses for its Class A, Class B and Class D shares, stated as a percentage
of net assets and annualized, were 1.54%, 2.28% and 2.29%, respectively.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York,
New York 10019. It is a wholly owned subsidiary of PaineWebber, which is in
turn wholly owned by Paine Webber Group Inc., a publicly owned financial
services holding company. As of November 30, 1994, Mitchell Hutchins was
adviser or subadviser of 29 investment companies with 55 separate port-
21
<PAGE>
folios and aggregate assets of approximately $23 billion.
Ellen R. Harris has been primarily responsible for the day-to-day
portfolio management of the Fund since its inception. Ms. Harris is a vice
president of the Trust and chief domestic equity strategist, a managing
director and chief investment officer--domestic of Mitchell Hutchins. Prior to
joining Mitchell Hutchins in 1983 as a portfolio manager, Ms. Harris served as
a vice president and portfolio manager at American General Capital Management
(now American Capital Management).
Other members of Mitchell Hutchins equities and fixed income groups
provide input on market outlook, interest rate forecasts and other
considerations pertaining to equity and fixed income investments.
Distribution Arrangements. Mitchell Hutchins is the distributor of the
Fund's shares and has appointed PaineWebber as the exclusive dealer for the
sale of those shares. Under separate plans of distribution pertaining to the
Class A shares, the Class B shares and Class D shares ("Class A Plan," "Class
B Plan" and "Class D Plan," collectively, "Plans"), the Fund pays Mitchell
Hutchins monthly service fees at the annual rate of 0.25% of the average daily
net assets of each Class of shares and monthly distribution fees at the annual
rate of 0.75% of the average daily net assets of the Class B and Class D
shares.
Under all three Plans, Mitchell Hutchins uses the service fees 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 passes on a portion of these fees to its
investment executives to compensate them for shareholder servicing that they
perform and retains the remainder to offset its own expenses in servicing and
maintaining shareholder accounts. These expenses may include costs of the
PaineWebber branch office in which the investment executive is based, such as
rent, communications equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class
D Plans to offset the commissions it pays to PaineWebber for selling the
Fund's Class B and Class D shares. PaineWebber passes on to its investment
executives a portion of these commissions and retains the remainder to offset
its expenses in selling Class B and Class D shares. These expenses may include
the branch office costs noted above. In addition, Mitchell Hutchins uses the
distribution fees under the Class B and Class D Plans to offset the Fund's
marketing costs attributable to such Classes, such as preparation of sales
literature, advertising and printing and distributing prospectuses and other
shareholder materials to prospective investors. Mitchell Hutchins also may use
the distribution fees to pay additional compensation to PaineWebber and other
costs allocated to Mitchell Hutchins' and PaineWebber's distribution
activities, including employee salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives
at the time of sale of Class D shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class D shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class D shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid
upon the purchase of Class A shares and the contingent deferred sales charge
paid upon certain redemptions of Class B shares, and may use these proceeds
for any of the distribution expenses described above. See "Purchases."
22
<PAGE>
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ("Distribution Contracts")
obligate the Fund to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. Thus, even if Mitchell Hutchins' expenses
exceed its service or distribution fees for the Fund, it will not be obligated
to pay more than those fees, and, if Mitchell Hutchins' expenses are less than
such fees, it will retain its full fees and realize a profit. The Fund will
pay the service and distribution fees to Mitchell Hutchins until either the
applicable Plan or Distribution Contract is terminated or not renewed. In that
event, Mitchell Hutchins' expenses in excess of service and distribution fees
received or accrued through the termination date will be Mitchell Hutchins'
sole responsibility and not obligations of the Fund. In their annual
consideration of the continuation of the Plans, the trustees will review the
Plan and Mitchell Hutchins' corresponding expenses for each Class separately
from the Plans and corresponding expenses for the other two Classes.
PERFORMANCE INFORMATION
The Fund performs a standardized computation of annualized total return
and may show this return in advertisements or promotional materials.
Standardized return shows the change in value of an investment in the Fund as
a steady compound annual rate of return. Actual year-by-year returns fluctuate
and may be higher or lower than standardized return. Standardized return for
the Class A shares of the Fund reflects deduction of the Fund's maximum
initial sales charge at the time of purchase, and standardized return for the
Class B shares of the Fund reflects deduction of the applicable contingent
deferred sales charge imposed on a redemption of shares held for the period.
One-, five- and ten-year periods will be shown, unless the Class has been in
existence for a shorter period. Total return calculations assume reinvestment
of dividends and other distributions.
The Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average
annual rates, actual year-by-year rates or any combination thereof.
Non-standardized return does not reflect initial or contingent deferred sales
charges and would be lower if such charges were included.
The Fund will include performance data for all three Classes of Fund
shares in any advertisements or promotional materials, including Fund
performance data. Total return information reflects past performance and does
not necessarily indicate future results. Investment return and principal
values will fluctuate, and proceeds upon redemption may be more or less than a
shareholder's cost.
GENERAL INFORMATION
Organization. PaineWebber Olympus Fund is registered with the SEC as an
open-end management investment company and was organized as a business trust
under the laws of the Commonwealth of Massachusetts by Declaration of Trust
dated October 31, 1986. The trustees have authority to issue an unlimited
number of shares of beneficial interest of separate series, par value $.001
per share, of the Trust. In addition to the Fund, shares of one other series
have been authorized.
The shares of beneficial interest of the Fund are divided into three
Classes, designated Class A shares, Class B shares and Class D shares. Each
Class represents interests in the same assets of the Fund. The Classes differ
as follows: (1) each Class of shares has exclusive voting rights on matters
pertaining to its plan of distribution, (2) Class A shares are subject to an
initial sales charge, (3) Class B shares bear ongo-
23
<PAGE>
ing distribution fees, are subject to a contingent deferred sales charge upon
certain redemptions and will automatically convert to Class A shares
approximately six years after issuance, (4) Class D shares are subject to
neither an initial nor a contingent deferred sales charge, bear ongoing
distribution fees and do not convert into another Class and (5) each Class may
bear differing amounts of certain Class-specific expenses. The board of
trustees of the Trust does not anticipate that there will be any conflicts
among the interests of the holders of each Class of Fund shares. On an ongoing
basis, the board of trustees will consider whether any such conflict exists
and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will
be no meetings of shareholders to elect trustees unless fewer than a majority
of the trustees of the Trust holding office have been elected by shareholders.
Shareholders of record holding at least two-thirds of the outstanding shares
of the Trust may remove a trustee by votes cast in person or by proxy at a
meeting called for that purpose. The trustees are required to call a meeting
of shareholders for the purpose of voting upon the question of removal of any
trustee when so requested in writing by the shareholders of record holding at
least 10% of the Trust's outstanding shares. Each share of the Fund has equal
voting rights, except as noted above. Each share of the Fund is entitled to
participate equally in dividends and other distributions and the proceeds of
any liquidation, except that, due to the differing expenses borne by the three
Classes, dividends and liquidation proceeds of Class B and Class D shares are
likely to be lower than for the Class A shares. The shares of each series of
the Trust will be voted separately except when an aggregate vote of all series
is required by the Investment Company Act of 1940.
To avoid additional operating costs and for investor convenience, the
Fund does not issue share certificates. Ownership of shares of the Fund is
recorded on a stock register by the Transfer Agent and shareholders have the
same rights of ownership with respect to such shares as if certificates had
been issued.
Custodian and Transfer Agent. State Street Bank and Trust Company, One
Heritage Drive, North Quincy, Massachusetts 02171, is custodian for the Fund.
PFPC Inc., a subsidiary of PNC Bank, National Association, whose business
address is 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Fund's
transfer and dividend disbursing agent.
Confirmations and Statements. Shareholders receive confirmations of
purchases and redemptions of shares of the Fund. PaineWebber clients receive
statements at least quarterly that report their Fund activity and consolidated
year-end statements that show all Fund transactions for that year.
Shareholders who are not PaineWebber clients receive quarterly statements from
the Transfer Agent. Shareholders also receive audited annual and unaudited
semi-annual financial statements of the Fund.
24
<PAGE>
APPENDIX
The Fund may use the hedging instruments described below:
Options on Equity and Debt Securities--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a
premium, has the right to buy the security underlying the option at a
specified price at any time during the term of the option. The writer of the
call option, who receives the premium, has the obligation, upon exercise of
the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives
its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the option term. The writer of the put
option, who receives the premium, has the obligation, upon the exercise of the
option during the option term, to buy the underlying security at the exercise
price.
Options on Stock Indexes--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values
of those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.
Stock Index Futures Contracts--A stock index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close
of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.
Interest Rate Futures Contracts--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security 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
debt securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
Options on Futures Contracts--Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the
option, the delivery of the futures position to the holder of the option will
be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the future. The writer of an option, upon exercise, will assume a
short position in the case of a call and a long position in the case of a put.
25
<PAGE>
<TABLE><CAPTION>
Application Form
<S> <C>
____ ____ ____ ____ ____ ____ ____ ____ ____
/___/ /___/ - /___/ /___/ /___/ /___/ /___/ - /___/ /___/
The PaineWebber PaineWebber Account No.
Mutual Funds
_____________________________________________________________________________________________________________
INSTRUCTIONS DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED THROUGH PAINEWEBBER. INSTEAD,
CALL YOUR PAINEWEBBER INVESTMENT EXECUTIVE (OR YOUR LOCAL PAINEWEBBER OFFICE TO OPEN AN
ACCOUNT).
ALSO, DO NOT USE THIS FORM TO OPEN A RETIREMENT PLAN ACCOUNT. FOR RETIREMENT PLAN FORMS OR
FOR ASSISTANCE IN COMPLETING THIS FORM CONTACT PFPC INC. AT 1-800-647-1568.
Return this completed form to:
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19899
PLEASE PRINT ATTN: PaineWebber Mutual Funds
_____________________________________________________________________________________________________________
/ 1 /
- -------------------------------------------------------------------------------------------------------------
INITIAL INVESTMENT ($1,000 MINIMUM)
- -------------------------------------------------------------------------------------------------------------
ENCLOSED IS A CHECK FOR $_______ (payable to "PaineWebber Communications & Technology Growth Fund") to
purchase
Class A / / Class B / / or Class D / / shares
(Check one Class; if no Class is specified Class A shares will be purchased)
/ 2 /
- -------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION
- -------------------------------------------------------------------------------------------------------------
1. Individual _________________ _______________________ _________/_________ /__________
First Name Last Name MI Soc. Sec. No.
2. Joint Tenancy _______________ _______________________ ________ /________ /___________
First Name Last Name MI Soc. Sec. No.
("Joint Tenants with Rights of Survivorship" unless otherwise specified)
3. Gifts to Minors_______________________________________ ________ /_______ /____________
Minor's Name Soc. Sec. No.
Under the ____________________________________________ Uniform Gifts / Uniform Transfers
State of Residence of Minor to Minors Act / to Minors Act
4. Other Registrations __________________________________ _______________________________
Name Tax Ident. No.
<PAGE>
5. If Trust, Date of Trust Instrument _____________________________________________________
Not valid without signature and Soc. Sec. or Tax ID #
- -- As joint tenants, use Lines 1 and 2
- -- As custodian for a minor, use Lines 1 and 3
- -- In the name of a corporation, trust or other organization or any fiduciary capacity, use Line 4
/ 3 /
- -------------------------------------------------------------------------------------------------------------
ADDRESS
- -------------------------------------------------------------------------------------------------------------
_______________________________________________ U.S. Citizen / / Yes / / No*
Street
_______________________________________________ __________________________________
City State Zip Code *Country of Citizenship
/ 4 /
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTION OPTIONS (See Prospectus)<SF>
- -------------------------------------------------------------------------------------------------------------
Please select one of the following:
/ / Reinvest both dividends and capital gain distributions in additional shares
/ / Pay dividends to my address above; reinvest capital gain distributions
/ / Pay both dividends and capital gain distributions in cash to my address above
/ / Reinvest dividends and pay capital gain distributions in cash to my address above
NOTE: If a selection is not made, both dividends and capital gain distributions will be paid in
additional Fund shares of the same Class.
<PAGE>
/ 5 /
- -------------------------------------------------------------------------------------------------------------
SPECIAL OPTIONS (For More Information Check Appropriate Box)
- -------------------------------------------------------------------------------------------------------------
/ / Automatic Investment Plan / / Prototype IRA Application / / Systematic Withdrawal Plan
/ 6 /
- -------------------------------------------------------------------------------------------------------------
RIGHTS OF ACCUMULATION CLASS A SHARES (See Prospectus)
- -------------------------------------------------------------------------------------------------------------
Indicate here any other account(s) in the group of funds that would qualify for the cumulative quantity
discount as outlined in the Prospectus.
_____________ _______________ _______________
Fund Name Account No. Registered Owner
_______________ _______________ _______________
Fund Name Account No. Registered Owner
_______________ _______________ _______________
Fund Name Account No. Registered Owner
/ 7 /
- -------------------------------------------------------------------------------------------------------------
PLEASE INDICATE BELOW IF YOU ARE AFFILIATED WITH PAINEWEBBER
- -------------------------------------------------------------------------------------------------------------
"Affiliated" persons are defined as officers, directors/ trustees and employees of the PaineWebber funds,
PaineWebber or its affiliates, and their parents, spouses and children.
____________________________________________________________________________________________________________
Nature of Relationship
/ 8 /
- -------------------------------------------------------------------------------------------------------------
SIGNATURE(S) AND TAX CERTIFICATION(S)
- -------------------------------------------------------------------------------------------------------------
I warrant that I have full authority and am of legal age to purchase shares of the Fund and have received and
read a current Prospectus of the Fund and agree to its terms. The Fund and its Transfer Agent will not be
liable for acting upon instructions or inquiries believed genuine. Under penalties of perjury, I certify that
(1) my taxpayer identification number provided in this application is correct and (2) I am not subject to
backup withholding because (i) I have not been notified that I am subject to backup withholding as a result
of failure to report interest or dividends or (ii) the IRS has notified me that I am no longer subject to
backup withholding (strike out clause (2) if incorrect).
___________________________________________ ___________________________ _______________
Individual (or Custodian) Joint Registrant (if any) Date
___________________________________________ ___________________________ _______________
Corporate Officer, Partner, Trustee, etc. Title Date
<PAGE>
/ 9 /
- -------------------------------------------------------------------------------------------------------------
INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed By Investment Executive Only)
- -------------------------------------------------------------------------------------------------------------
_____________________________________ _________________________________________________
Broker No./Name Branch Wire Code
_____________________________________ _(___________)_____________________________________
Branch Address Telephone
/ 10 /
- -------------------------------------------------------------------------------------------------------------
CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Correspondent Firm Only)
- -------------------------------------------------------------------------------------------------------------
_____________________________________ _________________________________________________
Name Address
_____________________________________ _________________________________________________
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE OR CORRESPONDENT
FIRM OR TO PFPC INC., P.O. BOX 8950, WILMINGTON, DELAWARE 19899.
</TABLE>
<PAGE>
Shares of the Fund can be exchanged for shares of the following PaineWebber
Mutual Funds:
PaineWebber Income Funds
. Global Income Fund
. High Income Fund
. Investment Grade Income Fund
. Short-Term U.S. Government Income Fund
. Short-Term U.S. Government Income Fund
for Credit Unions
. Strategic Income Fund
. U.S. Government Income Fund
PaineWebber Tax-Free Income Funds
. California Tax-Free Income Fund
. Municipal High Income Fund
. National Tax-Free Income Fund
. New York Tax-Free Income Fund
PaineWebber Growth Funds
. Atlas Global Growth Fund
. Blue Chip Growth Fund
. Capital Appreciation Fund
. Europe Growth Fund
. Growth Fund
. Regional Financial Growth Fund
. Small Cap Value Fund
PaineWebber Growth and Income Funds
. Asset Allocation Fund
. Dividend Growth Fund
. Global Energy Fund
. Global Growth and Income Fund
. Utility Income Fund
PaineWebber Money Market Fund
_______________
A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read it carefully before investing.
(C) 1995 PaineWebber Incorporated
[RECYCLE LOGO] Recycled
Paper
PaineWebber
Communications
& Technology
Growth Fund
- - Professional Management
- - Portfolio Diversification
- - Dividend and Capital Gain
Reinvestment
- - Flexible Pricing (SM)
- - Low Minimum Investment
- - Automatic Investment Plan
- - Systematic Withdrawal Plan
- - Exchange Privileges
- - Suitable for Retirement Plans
Prospectus
January 1, 1995
<PAGE>
PAINEWEBBER COMMUNICATIONS & TECHNOLOGY GROWTH FUND
Supplement to Prospectus Dated October 28, 1993
Prospective Wisconsin investors should note that, for so long as required by
Wisconsin regulations, the Fund undertakes not to invest more than 10% of its
total assets in restricted securities (other than Rule 144A securities
determined to be liquid by the Trust's Board of Trustees). It is the
opinion of the Wisconsin Securities Commissioner that investments in restricted
securities (other than such Rule 144A securities) in excess of 5% of the Fund's
total assets may be considered a speculative activity and may involve greater
risk and may increase Fund expenses.
Wisconsin Dated October 28, 1993
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PaineWebber Blue Chip
Growth Fund
1285 Avenue of the Americas
New York, New York 10019
Professional Management
Portfolio Diversification
Dividend and Capital Gain
Reinvestment
Flexible PricingSM
Low Minimum Investment
Automatic Investment Plan
Systematic Withdrawal Plan
Exchange Privileges
Suitable for Retirement Plans
The Fund is a series of PaineWebber Master Series, Inc. ("Corporation"). The
board of directors of the Corporation has approved a proposed Reorganization
for submission to the Fund's shareholders at a special meeting to be held on
July , 1995. See "General Information-Proposed Reorganization." This
Prospectus concisely sets forth information about the Fund a prospective
investor should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information dated July , 1995 (which is
incorporated by reference herein) has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting the Fund, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospective Wisconsin investors should note that the Fund may invest up to 10%
of its net assets in restricted securities (other than Rule 144A securities
determined to be liquid by the Corporation's board of directors). Investment in
restricted securities (other than such Rule 144A securities) in excess of 5% of
the Fund's total assets may be considered a speculative activity and may result
in greater risk and increased Fund expenses.
------------
The date of this Prospectus is July , 1995.
PaineWebber Mutual Funds
<PAGE>
No person has been authorized to give any information or make any
representations not contained in this Prospectus in connection with the
offering made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund
or their distributor. This Prospectus does not constitute an offering by the
Fund or its distributor in any jurisdiction in which such offering may
not lawfully be made.
------------
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed
in this summary.
The Fund:
PaineWebber Blue Chip Growth Fund ("Fund") is a diversified series of
PaineWebber Master Series, Inc. ("Corporation"), an open-end management in
vestment company.
The board of directors of the Corporation has approved a proposed Plan of
Reorganization and Termination ("Reorganization") for submission to the Fund's
shareholders at a special meeting to be held on July , 1995. If the proposed
Reorganization is approved and implemented, the Fund's assets would be acquired
and its liabilities assumed by PaineWebber Growth Fund, a series of another
open-end management investment company. As a result of the Reorganization, each
Fund shareholder would receive a number of full and fractional shares of the
corresponding Class of PaineWebber Growth Fund shares having an aggregate value
equal to the value of the shareholder's holdings in the Fund. See "General
Information."
Investment Objective and
Policies:
Capital appreciation; invests primarily in equity securities of large,
established U.S. companies.
Total Net Assets at
June , 1995:
$ million
Investment Adviser:
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber" or "PW"),
manages over $36.9 billion in assets. See "Management."
Purchases:
Shares of common stock are available exclusively through PaineWebber and its
correspondent firms for investors who are clients of PaineWebber or those firms
("PaineWebber clients") and, for other investors, through PFPC Inc., the Funds'
transfer agent ("Transfer Agent").
Flexible Pricing System:
Investors may select Class A, Class B or Class D shares, each with a public
offering price that reflects different sales charges and expense levels. See
"Flexible Pricing System," "Purchases," "Redemptions" and "Conversion of Class
B Shares."
2
<PAGE>
Class A Shares
Offered at net asset value plus any applicable sales charge (maximum is 4.5% of
public offering price).
Class B Shares
Offered at net asset value (a maximum contingent deferred sales charge of 5% of
redemption proceeds is imposed on certain redemptions made within six years of
date of purchase). Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) approximately six years after purchase.
Class D Shares
Offered at net asset value without an initial or contingent deferred sales
charge. Class D shares pay higher ongoing expenses than Class A shares and do
not convert into another Class.
Exchanges:
Shares may be exchanged for shares of the corresponding Class of most
PaineWebber and Mitchell Hutchins/Kidder, Peabody ("MH/KP") mutual funds.
Redemptions:
PaineWebber clients may redeem through PaineWebber; other shareholders must
redeem through the Transfer Agent.
Dividends:
Declared and paid annually; net capital gain also is distributed annually. See
"Dividends and Taxes."
Reinvestment:
All dividends and capital gain distributions are paid in Fund shares of the
same Class at net asset value unless the shareholder has requested cash.
Minimum Purchase:
$1,000 for first purchase; $100 for subsequent purchases.
Other Features:
Class A Shares
Automatic investment plan
Systematic withdrawal plan
Rights of accumulation
Quantity discounts on initial sales charge
365-day reinstatement privilege
Class B Shares
Automatic investment plan
Systematic withdrawal plan
Class D Shares
Automatic investment plan
Systematic withdrawal plan
Who Should Invest. The Fund invests primarily in equity securities of large,
established U.S. companies and is designed for investors who are seeking
capital appreciation. The Fund has its own suitability considerations and risk
factors, as summarized below and described in more detail under "Investment
Objective and Risk Factors." While the Fund is not intended to provide a
complete or balanced investment program, it can serve as one component of an
investor's long-term program to accumulate assets for retirement, college
tuition or other major goals.
Risk Factors. There can be no assurance that the Fund will achieve its
investment objective, and the Fund's net asset value will fluctuate based upon
changes in the value of its portfolio securities. Certain investment grade debt
securities in which the Fund may invest have speculative characteristics. The
Fund's use of options and futures instruments also entails special risks.
3
<PAGE>
Expenses of Investing in the Fund. The following tables are intended to
assist investors in understanding the expenses associated with investing in the
Fund.
Shareholder Transaction Expenses(1)
Class A Class B Class D
------- ------- -------
Maximum sales charge on purchases of shares (as a
percentage of public offering price)................. 4.5% None None
Sales charge on reinvested dividends................. None None None
Exchange fee......................................... $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a
percentage of redemption proceeds)................... None 5% None
Annual Fund Operating Expenses(2)
(as a percentage of average net assets)
Class A Class B Class D
------- ------- -------
Management fees........... 0.75% 0.75% 0.75%
12b-1 fees(3)............. 0.25 1.00 1.00
Other expenses............ 0.36 0.37 0.39
------- ------- -------
Total operating expenses.. 1.36% 2.12% 2.14%
======= ======= =======
- ------
(1) Sales charge waivers are available for Class A and Class B shares,
reduced sales charge purchase plans are available for Class A shares and
exchange fee waivers are available for all three Classes. The maximum 5%
contingent deferred sales charge on Class B shares applies to redemptions du
ring the first year after purchase; the charge generally declines by 1%
annually thereafter, reaching zero after six years. See "Purchases."
(2) See "Management" for additional information. All expenses are those
actually incurred for the fiscal year ended February 28, 1995.
(3) 12b-1 fees have two components, as follows:
Class A Class B Class D
------- ------- -------
12b-1 service fees....... 0.25% 0.25% 0.25%
12b-1 distribution fees.. 0.00 0.75 0.75
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class D shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities De
alers, Inc.
4
<PAGE>
Example of Effect of Fund Expenses
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
Class A Shares(1)...................................... $58 $86 $116 $201
Class B Shares:
Assuming a complete redemption at end of period(2)(3).. $72 $96 $134 $208
Assuming no redemption(3).............................. $22 $66 $114 $208
Class D Shares......................................... $22 $67 $115 $247
- ------
(1) Assumes deduction at the time of purchase of the maximum 4.5% initial sales
charge.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(3) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the
assumption in the Example of a 5% annual return are required by regulations of
the Securities and Exchange Commission ("SEC") applicable to all mutual funds;
the assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of any Class of the Fund's shares.
The Example should not be considered a representation of past or future
expenses, and the Fund's actual expenses may be more or less than those shown.
The actual expenses attributable to each Class of the Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which the Fund incurs variable expenses, such as transfer agency costs.
5
<PAGE>
<TABLE><CAPTION>
FINANCIAL HIGHLIGHTS
Class A Class B
- ------------------------------------------------------------------- -------------------------------------------
For the Years Ended For the For the Years Ended
February 28, Period February 28 or 29,
- ------------------------------------------------------------------- July 1, ------------------------------
1991 to
February 29,
------------
1995 1994 1993 1995 1994 1993 1992
------- ------- ------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $15.71 $15.56 $16.78 $14.40 $15.33 $15.34 $16.71
------- ------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss)............. 0.07 - 0.02 0.02 (0.16) (0.27) (0.21)
Net realized and unrealized gains
from investment transactions............. 0.03 1.97 0.81 2.40 0.14 2.08 0.89
------- ------- ------- ------- ------- ------- -------
Total income (loss) from investment
operations............................... 0.10 1.97 0.83 2.42 (0.02) 1.81 0.68
------- ------- ------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income.................... - - - - - - -
Net realized gains on investments........ (1.27) (1.82) (2.05) (0.04) (1.27) (1.82) (2.05)
------- ------- ------- ------- ------- ------- -------
Total dividends and distributions........ (1.27) (1.82) (2.05) (0.04) (1.27) (1.82) (2.05)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of period........... $14.54 $15.71 $15.56 $16.78 $14.04 $15.33 $15.34
======= ======= ====== ======= ======= ======= =======
Total return(1).......................... 1.08% 12.89% 5.15% 16.82% 0.21% 12.00% 4.25%
======= ======= ====== ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000's omit-
ted)..................................... $50,445 $60,204 $46,371 $1,561 $32,772 $43,622 $61,100
Ratio of expenses to average net assets.. 1.36% 1.32% 1.26% 1.18%* 2.12% 2.10% 2.02%
Ratio of net investment income (loss)
<PAGE>
to average net assets.................... 0.27% (0.01)% 0.07% 0.44%* (0.50)% (0.78)% (0.57)%
Portfolio turnover....................... 9.28% 24.84 % 41.07% 34.05% 9.28% 24.84% 41.07%
- ------
</TABLE>
* Annualized.
** Dividends in excess of net investment income for financial reporting
purposes represent amounts required to be distributed under the minimum
distribution requirements of the Internal Revenue Code.
Commencement of offering of shares.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends and capital gains distributions at net asset value on the payable
dates, and a sale at net asset value on the last day of each period
reported. The figures do not include sales charges; results of Class A and
Class B shares would be lower if sales charges were included. Total
investment returns for periods of less than one year have not been
annualized.
(2) For the year ended February 28, 1989, Mitchell Hutchins waived
approximately $2,300 of the Fund's advisory and administration fees. If
such waiver had not been made, the presentation of the ratio of expenses to
average net assets and the ratio of net investment income to average net
assets would have been unchanged. During the period from July 18, 1986
(commencement of issuance of Class B shares) to February 28, 1987,
PaineWebber waived approximately $95,000 and $10,000 of the Fund's advisory
and administration and service fees, respectively. If such waivers had not
been made, the annualized ratio of expenses to average net assets and the
annualized ratio of net investment income to average net assets would have
been 2.33% and 0.77%, respectively.
The tables on the following pages provide selected per share data and ratios
for one Class A share, one Class B share and one Class D share of the Fund for
each of the periods shown. This information is supplemented by the financial
statements and accompanying notes appearing in the Fund's Annual Report to
Shareholders for the fiscal year ended February 28, 1995, which are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes,
and the financial information appearing in the tables below insofar as it
relates to each of the five years in the period ended February 28, 1995, have
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon is included in the Annual Report to Shareholders. Further information
about the Fund's performance is also included in the Annual Report to
Shareholders, which may be obtained without charge.
6
<PAGE>
<TABLE><CAPTION>
Class B Class D
- ----------------------------------------------------- -----------------------------------------------------
For the
For the Years Ended For the Year Ended For the
February 28 or 29, Period February 28 Period
- ---------------------------------------------------------- July 18, -------------------- July 2,
1986 to 1992 to
February 28, February 28,
-------------- -----------
1987 1993 1992 1991 1990 1989 1988 1995 1994
- ---------- ----------- -------- --------------- ---------- -------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$14.32 $13.01 $11.63 $10.04 $11.28 $10.00 $15.50 $15.48 $15.51
---------
- ---------- ----------- -------- --------------- ---------- -------------- --------- ----------- ---------
(0.07) - - (0.02) - 0.05 (0.07) (0.05) (0.03)
2.50 1.35 1.38 1.61 (1.16) 1.23 0.04 1.89 2.05
---------
- ---------- ----------- -------- --------------- ---------- -------------- --------- ----------- ---------
2.43 1.35 1.38 1.59 (1.16) 1.28 (0.03) 1.84 2.02
---------
- ---------- ----------- -------- --------------- ---------- -------------- --------- ----------- ---------
- (0.04)** - - (0.05) - - - -
(0.04) - - - (0.03) - (1.27) (1.82) (2.05)
---------
- ---------- ----------- -------- --------------- ---------- -------------- --------- ----------- ---------
(0.04) (0.04) - - (0.08) - (1.27) (1.82) (2.05)
---------
- ---------- ----------- -------- --------------- ---------- -------------- --------- ----------- ---------
$16.71 $14.32 $13.01 $11.63 $ 10.04 $11.28 $14.20 $15.50 $15.48
========== =========== ======== =============== ========== ============== ========= ========= ===========
16.93% 10.43% 11.87% 15.84% (10.36)% 20.67% 0.14% 12.10% 13.22%
========== =========== ======== =============== ========== ============== ========= ========= ===========
$112,897 $101,573 $91,758 $72,899 $98,979 $115,013 $3,446 $4,030 $1,228
2.19% 2.15% 1.87% 2.21%(2) 2.05% 2.13%*(2) 2.14 % 2.08% 2.01%*
(0.43)% 0.01% (0.01)% (0.16)%(2) 0.03% 0.97%*(2) (0.51)% (0.79)% (0.78)%*
34.05% 24.47% 43.22% 38.00% 96.70% 56.32% 9.28 % 24.84% 41.07%
</TABLE>
7
<PAGE>
FLEXIBLE PRICING SYSTEM
Differences Among the Classes
The primary distinctions among the Classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures
and in their ongoing expenses, including asset-based sales charges in the form
of distribution fees. These differences are summarized in the table below. Each
Class has distinct advantages and disadvantages for different investors, and
investors may choose the Class that best suits their circumstances and
objectives.
<TABLE><CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
- ------- -------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Maximum initial sales Initial sales charge waived
charge of 4.5% of the or reduced for certain
Class A public offering price Service fee of 0.25% purchases
Maximum contingent
deferred sales charge of
5% of redemption Shares convert to Class A
proceeds; declines to zero Service fee of 0.25%; shares approximately six
Class B after six years distribution fee of 0.75% years after issuance
Service fee of 0.25%;
Class D None distribution fee of 0.75% -
</TABLE>
Factors to Consider in Choosing a Class of
Shares
In deciding which Class of shares to purchase, investors should consider the
cost of sales charges together with the cost of the ongoing annual expenses
described below, as well as any other relevant facts and circumstances:
Sales Charges. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.5% of the public offering price. Because of this
initial sales charge, not all of a Class A shareholder's purchase price is
invested in the Fund. Class B shares are sold with no initial sales charge, but
a contingent deferred sales
charge of up to 5% of the redemption proceeds applies to redemptions made
within six years of purchase. Class D shareholders pay no initial or contingent
deferred sales charges. Thus, the entire amount of a Class B or Class D
shareholder's purchase price is immediately invested in the Fund.
Waivers and Reductions of Class A Sales Charges. Class A share purchases over
$50,000 and Class A share purchases made under a Fund's reduced sales charge
plan may be made at a reduced sales charge. In considering the combined cost of
sales charges and ongoing annual expenses, investors should take into account an
y reduced sales charges on Class A shares for which they may be eligible.
8
<PAGE>
The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class D shares, investors eligible for complete waivers
should purchase Class A shares.
Ongoing Annual Expenses. All three Classes of Fund shares pay an annual 12b-1
service fee of 0.25% of average daily net assets. Class B and Class D shares
pay an annual 12b-1 distribution fee of 0.75% of average daily net assets.
Annual 12b-1 distribution fees are a form of asset-based sales charge. An
investor should consider both ongoing annual expenses and initial or contingent
deferred sales charges in estimating the costs of investing in the respective Cl
asses of Fund shares over various time periods.
For example, assuming a constant net asset value, the cumulative distribution
fees on the Class B or Class D shares and the 4.5% maximum initial sales charge
on the Class A shares would all be approximately equal if the shares were held
for six years. Because Class B shares convert to Class A shares (which do not
bear the expense of ongoing distribution fees) approximately six years after
purchase, an investor expecting to hold shares of the Fund for longer than six
years would generally pay lower cumulative expenses by purchasing Class A or
Class B shares than by purchasing Class D shares. An investor expecting to hold
shares of the Fund for less than six years would generally pay lower cumulative
expenses by purchasing Class D shares than by purchasing Class A shares, and,
due to the contingent deferred sales charges that would become payable on
redemption of Class B shares, such an investor would generally pay lower
cumulative expenses by purchasing Class D shares than Class B shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of
bearing sales charges or distribution fees at the time of purchase, upon
redemption or over time, nor can they reflect fluctuations in the net asset
value of Fund shares, which will affect the actual amount of expenses paid.
Expenses borne by Classes may differ slightly because of the allocation of
other Class-specific expenses. The "Example of Effect of Fund Expenses" under "P
rospectus Summary" shows the cumulative expenses an investor would pay over
time on a hypothetical investment in each Class of Fund shares, assuming an
annual return of 5%.
Other Information
PaineWebber investment executives may receive different levels of
compensation for selling one particular Class of Fund shares rather than
another. Investors should understand that distribution fees and initial and
contingent deferred sales charges all are intended to compensate Mitchell
Hutchins for distribution services.
See "Purchases," "Redemptions" and "Management" for a more complete
description of the initial and contingent deferred sales charges, service fees
and distribution fees for the three Classes of shares. See also "Conversion of
Class B Shares," "Dividends and Taxes," "Valuation of Shares" and "General
Information" for other differences among the three Classes.
INVESTMENT OBJECTIVE AND
POLICIES
Investment Objective and Primary
Investments
The Fund's investment objective is capital appreciation. The Fund seeks to
achieve this objective by investing primarily in equity securities of large,
established U.S. companies with a market capitalization of at least $300
million.
9
<PAGE>
There can be no assurance that the Fund will achieve its investment
objective. The Fund's net asset value will fluctuate based upon changes in the
value of its portfolio securities. The Fund's investment objective and certain
investment limitations, as described in the Statement of Additional
Information, are fundamental policies and may not be changed without
shareholder approval. All other investment policies may be changed by the
Corporation's board of directors without shareholder approval.
At least 65% of the Fund's assets normally are invested in equity securities
of large, established U.S. companies with a market capitalization of at least
$300 million. In selecting equity securities for the Fund, Mitchell Hutchins
purchases stocks it considers to be "blue chip," after taking into account all
those factors that it believes will affect potential for capital
appreciation, including but not limited to each issuer's current and
anticipated revenues, earnings and cash flow, the condition of its balance
sheet, the strength of its industry and its competitive position within that
industry. The Fund may invest up to 35% of its assets in other equity
securities, including stocks of companies with lower market capitalization
levels, convertible securities, investment grade debt securities of U.S.
companies and debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Investment grade bonds are those bonds that, at the time of purchase, have been
assigned one of the four highest grades by S&P or Moody's, comparably rated by
another NRSRO or, if unrated, have been determined by Mitchell Hutchins to be
of comparable quality. The Fund also may invest up to 25% of its assets in U.S.
dollar-denominated securities of foreign issuers that are traded on recognized
U.S. exchanges or in the U.S. over-the-counter ("OTC") market. The Fund may
seek to reduce the risks associated with ownership of the secu-
rities in which it invests through the use of options, futures contracts and
options on futures contracts.
Over the past 65 years, the total return of equity investments, as measured
by the Stan-dard & Poor's 500 Composite Stock Index ("S&P 500"), has exceeded
the inflation rate, as measured by the Consumer Price Index, as well as total
return on long-term Treasury bonds, long-term corporate bonds and short-term
Treasury bills. However, year-to-year fluctuations in each of these indices and
instruments have been significant, and total return for the S&P 500 for some
periods has been negative. Furthermore, there can be no assurance that this
trend will continue.
Other Investment Policies and Risk Factors
U.S. Government Securities. The U.S. government securities in which the Fund
may invest include direct obligations of the U.S. government (such as Treasury
bills, notes and bonds) and obligations issued or guaranteed by U.S. government
agencies and instrumentalities. The Fund may invest in U.S. government
securities that are supported by the full faith and credit of the U.S.
government, such as securities issued by the Government National Mortgage
Association ("Ginnie Mae"), securities that are supported primarily or solely
by the creditworthiness of the issuer, such as securities issued by the
Resolution Funding Corporation and the Tennessee Valley Authority, and
securities that are supported primarily or solely by specific pools of assets
and the creditworthiness of a U.S. government-related issuer, such as
mortgage-backed securities issued by the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured
10
<PAGE>
by real property and include single- and multi-class pass-through securities
and collateralized mortgage obligations ("CMOs"). The U.S. government mo
rtgage-backed securities in which the Fund may invest include mortgage-backed
securities issued or guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac. For
more information concerning these mortgage-backed securities, see the Statement
of Additional Information.
Convertible Securities. The Fund may invest in convertible securities. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the
holder to receive interest paid or accrued on debt or dividends paid on
preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock because they
have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. Wh
ile no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed
income security.
Risk Factors. The investment income of the Fund is based on the income earned
on the securities it holds, less expenses incurred; thus, the Fund's investment
income may be expected to fluctuate in response to changes in
such expenses or income. For example, the investment income of the Fund may be
affected if it experiences a net inflow of new money that is then invested in
securities whose yield is higher or lower than that earned on then-current in
vestments. Generally, the value of the debt securities held by the Fund, and
thus its net asset value per share, will rise when interest rates decline.
Conversely, when interest rates rise, the value of fixed income securities, and
thus the Fund's net asset value per share, may be expected to decline.
-Risks of Mortgage-Backed Securities. The yield characteristics of the
mortgage-backed securities in which the Fund may invest differ from those of
traditional debt securities. Among the major differences are that interest and
principal payments on mortgage-backed securities are made more frequently
(usually monthly), and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if the Fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity. Amounts
available for reinvestment are likely to be greater during a period of
declining interest rates and, as a result, are likely to be reinvested at lower
interest rates than during a period of rising interest rates. Accelerated pr
epayments on securities purchased by the Fund at a premium also impose a risk
of loss of principal because the premium may not have been fully amortized at
the time the principal is repaid in full.
-Risks of Debt Securities. The Fund is permitted to purchase investment grade
debt
11
<PAGE>
securities. In selecting securities for the Fund, Mitchell Hutchins reviews and
monitors the creditworthiness of each issuer and issue and analyzes interest
rate trends and specific developments which may affect individual issuers, in
addition to relying on ratings assigned by S&P, Moody's or another NRSRO as
indicators of quality. Debt securities rated Baa by Moody's or BBB by S&P are
investment grade, although Moody's considers securities rated Baa to have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for such
securities to make principal and interest payments than is the case for higher
grade debt securities. The Fund is also permitted to purchase debt securities
that are not rated by S&P, Moody's or another NRSRO but that Mitchell Hutchins
determines to be of comparable quality to that of rated securities in which the
Fund may invest. Such securities are included in the computation of any
percentage limitations applicable to the comparable rated securities.
Ratings of debt securities represent the rating agencies' opinions regarding
their quality, are not a guarantee of quality and may be reduced after the Fund
has acquired the security. Mitchell Hutchins will consider such an event in
determining whether the Fund should continue to hold the security but is not
required to dispose of it. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security. Also, NRSROs may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates. See the Statement
of Additional Information for more information about S&P's and Moody's ratings.
Foreign Securities. The Fund may invest up to 25% of its assets in U.S.
dollar-denomi-
nated securities of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S. OTC market. These investments may involve special
risks arising both from political and economic developments abroad and
differences between foreign and U.S. regulatory systems. These risks may
include expropriation, confiscatory taxation, withholding taxes on dividends an
d interest, limitations on the use 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.
Securities of many foreign companies may be less liquid and their prices more
volatile than securities of comparable U.S. companies.
Repurchase Agreements. The Fund may enter into repurchase agreements.
Repurchase agreements are transactions in which the Fund purchases securities
from a bank or recognized securities dealer and simultaneously commits to
resell the securities to the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon rate or maturity
of the purchased securities. Repurchase agreements carry certain risks not
associated with direct investments in securities, including possible decline in
the market value of the underlying securities and delays and costs to the Fund
if the other party to the repurchase agreement becomes insolvent. The Fund
intends to enter into repurchase agreements only with banks and dealers in
transactions believed by Mitchell Hutchins to present minimum credit risks in
accordance with guidelines established by the Corporation's board of directors.
Hedging Strategies. The Fund may attempt to reduce the overall risk of its
investments (hedge) by using options (both exchange-
12
<PAGE>
traded and over-the-counter) and futures contracts. The Fund's ability to use
these instruments may be limited by market conditions, regulatory limits and
tax considerations. Appendix A to this Prospectus describes the hedging
instruments that the Fund may use and the Statement of Additional Information
contains further information on these strategies.
The Fund may write (sell) covered put and call options, buy put and call
options, buy and write stock index futures contracts and interest rate futures
contracts and buy put and call options or write covered put and call options on
such futures contracts. Because the Fund intends to use options and futures for
hedging purposes, the Fund may enter into options and futures that approximate
(but do not exceed) the full value of its portfolio.
The Fund might not employ any of the strategies described above, and there
can be no assurance that any strategy used will succeed. If Mitchell Hutchins
incorrectly forecasts interest rates, market values or other economic factors
in utilizing a strategy for the Fund, the Fund would be in a better position if
it had not hedged at all. The use of these strategies involves certain special
risks, including (1) the fact that skills needed to use hedging instruments are
different from those needed to select the Fund's securities, (2) possible
imperfect correlation, or even no correlation, between price movements of
hedging instruments and price movements of the investments being hedged, (3)
the fact that, while hedging strategies can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments and (4) the possible inability
of the Fund to purchase or sell a portfolio security at a time that otherwise
would be favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain
"cover" or to segregate securities in connection with hedging transactions and
the possible inability of the Fund to close out or to liquidate its hedged
position.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objective and regulatory and federal tax
considerations.
When-Issued and Delayed Delivery Securities. The Fund may purchase debt
securities, including mortgage-backed securities on a "when-issued basis" or
may purchase or sell securities for delayed delivery. In such transactions, de
livery of the securities occurs beyond normal settlement periods, but the Fund
generally would not pay for such securities or start earning interest on them
until they are delivered. However, when the Fund undertakes a when-issued or
delayed delivery commitment, it immediately assumes the risks of ownership,
including the risk of price fluctuation. Failure to deliver a security
purchased by the Fund on a when-issued or delayed delivery basis may result in
the Fund's incurring a loss or missing an opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed-delivery
securities held by the Fund, exceed its net assets.
Illiquid Securities. The Fund may invest up to 10% of its net assets in
illiquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws (other than
"Rule 144A" securities Mitchell Hutchins has determined to be liquid under
procedures approved
13
<PAGE>
by the Corporation's board of directors). Rule 144A establishes a "safe harbor"
from the registration requirements of the Securities Act of 1933 ("1933 Act").
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. 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 se
curities and the Fund might be unable to dispose of such securities promptly or
at favorable prices.
Other Information. When Mitchell Hutchins believes unusual circumstances
warrant a defensive posture, the Fund temporarily may commit all or a portion
of its assets to cash or money market instruments, including repurchase ag
reements. The Fund also may engage in short sales of securities "against the
box" to defer realization of gains or losses for tax or other purposes and may
borrow money for temporary purposes, but not in excess of 10% of its total
assets.
PURCHASES
General. Class A shares are sold to investors subject to an initial sales
charge. Class B shares are sold without an initial sales charge but are subject
to higher ongoing expenses than Class A shares and a contingent deferred sales
charge payable upon certain redemptions. Class B shares automatically convert
to Class A shares approximately six years after issuance. Class D shares are
sold without an initial or a contingent deferred sales charge but are subject
to higher ongoing expenses than Class A shares and do not convert into another
Class. See "Flexible Pricing System" and "Conversion of Class B Shares."
Shares of the Fund are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the
Transfer Agent. Investors may contact a local PaineWebber office to open an
account. The minimum initial investment is $1,000, and the minimum for
additional purchases is $100. These minimums may be waived or reduced for
investments by employees of PaineWebber or its affiliates, certain pension pl
ans and retirement accounts and participants in the Fund's automatic investment
plan. Purchase orders will be priced at the net asset value per share next
determined (see "Valuation of Shares") after the order is received by
PaineWebber's New York City offices or by the Transfer Agent, plus any
applicable sales charge for Class A shares. The Fund and Mitchell Hutchins
reserve the right to reject any purchase order and to suspend the offering of
Fund shares for a period of time.
When placing purchase orders, investors should specify whether the order is
for Class A, Class B or Class D shares. All share purchase orders that fail to
specify a Class will automatically be invested in Class A shares.
Purchases Through PaineWebber or Correspondent Firms. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due on
the fifth Business Day after the order is received at PaineWebber's New York
City offices. A "Business Day" is any day, Monday through Friday, on which the
New York Stock Exchange, Inc. ("NYSE") is open for business.
14
<PAGE>
Purchases Through the Transfer Agent. Investors who are not PaineWebber
clients may purchase shares of the Fund through the Transfer Agent. Shares of
the Fund may be purchased, and an account with the Fund established, by
completing and signing the purchase application at the end of this Prospectus
and mailing it, together with a check to cover the purchase, to the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. Subsequent investments need not be accompanied by an
application.
Initial Sales Charge-Class A Shares. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the table
below.
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for the Fund's shares, than those shown in the
table below. To the extent PaineWebber or any dealer receives 90% or more of
the sales charge, it may be deemed an ''underwriter" under the 1933 Act.
Initial Sales Charge Schedule-Class A Shares
<TABLE><CAPTION>
Sales Charge as a Percentage of
------------------------------- Discount to Selected
Dealers as a Percentage of Offering Net Amount Invested
Amount of Purchase Offering Price Price (Net Asset Value)
- ------------------------ -------------------------- ---------- --------------------
<S> <C> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.50 3.63 3.25
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over (1) None None 1.00
</TABLE>
- ------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources.
Sales Charge Waivers-Class A Shares. Class A shares are available without a
sales charge through exchanges for Class A shares of most other PaineWebber and
MH/KP mutual funds. See "Exchanges." In addition, Class A shares may be
purchased without a sales charge, and exchanges of any Class of shares made
without the $5.00 exchange fee, by employees, directors and officers of
PaineWebber or its affiliates, directors or trustees and officers of any
PaineWebber or MH/KP fund, their spouses, parents and children and advisory
clients of Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the purchase
is made through a PaineWebber investment executive
who formerly was employed as a broker with another firm registered as a
broker-dealer with the SEC, provided (1) the purchaser was the investment
executive's client at the competing brokerage firm, (2) within 90 days of the
purchase of Class A shares the purchaser redeemed shares of one or more mutual
funds for which that competing firm or its affiliates was principal
underwriter, provided the purchaser either paid a sales charge to invest in
those funds, paid a contingent deferred sales charge upon redemption or held
shares of those funds for the period required not to pay the otherwise ap
plicable contingent deferred sales charge and (3) the total amount of shares of
all PaineWebber funds purchased under this sales charge waiver does not exceed
the amount of
15
<PAGE>
the purchaser's redemption proceeds from the competing firm's funds. To take
advantage of this waiver, an investor must provide satisfactory evidence that
all the above-noted conditions are met. Qualifying investors should contact
their PaineWebber investment executives for more information.
Certificate holders of unit investment trusts ("UITs") sponsored by
PaineWebber may acquire Class A shares of the Fund without regard to minimum
investment requirements and without sales charges by electing to have dividends
and other distributions from their UIT investment automatically invested in
Class A shares.
Reduced Sales Charge Plans-Class A Shares. If an investor or eligible group
of related Fund investors purchases Class A shares of the Fund concurrently
with Class A shares of other PaineWebber or MH/KP mutual funds, the purchases
may be combined to take advantage of the reduced sales charge applicable to
larger purchases. In addition, the right of accumulation permits a Fund
investor or eligible group of related Fund investors to pay the lower sales
charge applicable to larger purchases by basing the sales charge on the dollar
amount of Class A shares currently being purchased, plus the net asset value of
the investor's or group's total existing Class A shareholdings in other
PaineWebber or MH/KP mutual funds.
An "eligible group of related Fund investors" includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ("IRA"), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to
Minors Act/Uniform Transfers to Minors Act accounts created by the individual
or eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or chil-
dren. The term also includes a group of related employers and one or more
qualified retirement plans of such employers. For more information, an investor
should consult the Statement of Additional Information or contact a PaineWebber
investment executive or correspondent firm or the Transfer Agent.
Contingent Deferred Sales Charge-Class B Shares. The public offering price of
the Class B shares of the Fund is the next determined net asset value, and no
initial sales charge is imposed. A contingent deferred sales charge, however,
is imposed upon certain redemptions of Class B shares.
Class B shares that are redeemed will not be subject to a contingent deferred
sales charge to the extent that the value of such shares represents (1) capital
appreciation of Fund assets, (2) reinvestment of dividends or capital gain
distributions or (3) shares redeemed more than six years after their
purchase. Otherwise, redemptions of Class B shares will be subject to a
contingent deferred sales charge. The amount of any applicable contingent
deferred sales charge will be calculated by multiplying the net asset value of
such shares at the time of redemption by the applicable percentage shown in the
table below:
Contingent Deferred
Sales Charge as a
Percentage of Net
Asset Value at
Redemption During Redemption
- ------------------------- -------------------
1st Year Since Purchase.. 5%
2nd Year Since Purchase.. 4
3rd Year Since Purchase.. 3
4th Year Since Purchase.. 2
5th Year Since Purchase.. 2
6th Year Since Purchase.. 1
7th Year Since Purchase.. None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of
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<PAGE>
Class B shares representing capital appreciation, next of shares representing
the reinvestment of dividends and capital gain distributions and finally of
other shares held by the shareholder for the longest period of time. The
holding period of Class B shares acquired through an exchange with another
PaineWebber mutual fund will be calculated from the date that the Class B
shares were initially acquired in one of the other PaineWebber funds, and Class
B shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. This will result in any contingent deferred sales charge being
imposed at the lowest possible rate. For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, realized on the redemption. The amount
of any contingent deferred sales charge will be paid to Mitchell Hutchins.
Sales Charge Waivers-Class B Shares. The contingent deferred sales charge
will be waived for exchanges, as described below, and for redemptions in
connection with the Fund's systematic withdrawal plan. In addition, the
contingent deferred sales charge will be waived for a total or partial
redemption made within one year of 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. The contingent deferred sales charge will also be waived in
connection with a lump-sum or other distribution in the case of an IRA, a
self-employed individual retirement plan (socalled "Keogh Plan") or a custodial
account under Section 403(b) of the Internal Revenue Code following attainment
of age 591/2; any
total or partial redemption resulting from a distribution following retirement
in the case of a tax-qualified retirement plan; and a redemption resulting from
a tax-free return of an excess contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation (by PaineWebber in the case of shareholders who are PaineWebber
clients or by the Transfer Agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
Purchases of Class D Shares. The public offering price of the Class D shares
is the next determined net asset value. No initial or contingent deferred sales
charge is imposed.
EXCHANGES
Shares of the Fund may be exchanged for shares of the corresponding Class of
the PaineWebber and MH/KP mutual funds listed below, or may be acquired through
an exchange of shares of the corresponding Class of those funds. No initial
sales charge is imposed on the shares being acquired, and no contingent de
ferred sales charge is imposed on the shares being disposed of, through an
exchange. However, contingent deferred sales charges may apply to redemptions
of Class B shares acquired through an exchange. Class B shares of MH/KP mutual
funds differ from those of PaineWebber mutual funds. Class B shares of MH/KP
mutual funds are equivalent to Class D shares of PaineWeber mutual funds. Thus,
contingent deferred sales charges are not applicable to redemptions of the
Class B shares of MH/KP mutual funds. A $5.00 exchange fee is charged for each
exchange, and exchanges may be subject to minimum investment requirements of
the fund into which exchanges are made.
17
<PAGE>
Exchanges are permitted between the Funds and with other PaineWebber MH/KP
mutual funds, including:
Income Funds
~ MH/KP Adjustable Rate Government
Fund
~ MH/KP Global Fixed Income Fund
~ MH/KP Government Income Fund
~ MH/KP Intermediate Fixed Income
Fund
~ PW Global Income Fund
~ PW High Income Fund
~ PW Investment Grade Income Fund
~ PW Short-Term U.S. Government
Income Fund
~ PW Short-Term U.S. Government
Income Fund for Credit Unions
~ PW Strategic Income Fund
~ PW U.S. Government Income Fund
Tax-Free Income Funds
~ MH/KP Municipal Bond Fund
~ PW California Tax-Free Income Fund
~ PW Municipal High Income Fund
~ PW National Tax-Free Income Fund
~ PW New York Tax-Free Income Fund
Growth Funds
~ MH/KP Emerging Markets Equity
Fund
~ MH/KP Global Equity Fund
~ MH/KP Small Cap Growth Fund
~ PW Atlas Global Growth Fund
~ PW Capital Appreciation Fund
~ PW Communications & Technology
Growth Fund
~ PW Europe Growth Fund
~ PW Growth Fund
~ PW Regional Financial Growth Fund
~ PW Small Cap Value Fund
Growth and Income Funds
~ MH/KP Asset Allocation Fund
MH/KP Equity Income Fund
~ PW Asset Allocation Fund
~ PW Global Energy Fund
~ PW Global Growth and Income Fund
~ PW Growth and Income Fund
~ PW Utility Income Fund
PaineWebber Money Market Fund
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms unless the shares to be exchanged
are held in certificated form. Shareholders who are not PaineWebber clients or
who hold their shares in certificated form must place exchange orders in
writing with the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual Funds,
P.O. Box 8950, Wilmington, Delaware 19899. All exchanges will be effected based
on the relative net asset values per share next determined after the exchange or
der is received at PaineWebber's New York City offices or by the Transfer
Agent. See "Valuation of Shares." Shares of the Fund purchased through
PaineWebber or its correspondent firms may be exchanged only after the
settlement date has passed and payment for such shares has been made.
Other Exchange Information. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is avail-
18
<PAGE>
able only in those jurisdictions where the sale of the PaineWebber and MH/KP
fund shares to be acquired may be legally made. Before making any exchange,
shareholders should contact their PaineWebber investment executives or
correspondent firms or the Transfer Agent to obtain more information and
prospectuses of the PaineWebber and MH/KP funds to be acquired through the
exchange.
REDEMPTIONS
As described below, Fund shares may be redeemed at their net asset value
(subject to any applicable contingent deferred sales charge) and redemption
proceeds will be paid within seven days of the receipt of a redemption request.
PaineWebber clients may redeem non-certificated shares through PaineWebber or
its correspondent firms; all other shareholders must redeem through the
Transfer Agent. If a redeeming shareholder owns shares of more than one Class,
the shares will be redeemed in the following order unless the shareholder
specifically requests otherwise: Class D shares, then Class A shares, and
finally Class B shares.
Redemption Through PaineWebber or Correspondent Firms. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. Within seven days, repurchase
proceeds (less any applicable contingent deferred sales charge) will be paid by
check or credited to the shareholder's brokerage account at the election of the
shareholder. PaineWebber investment executives and correspondent firms are
responsible for promptly forwarding redemption requests to PaineWebber's New
York City offices.
PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.
Redemption Through the Transfer Agent. Fund shareholders who are not
PaineWebber clients or who wish to redeem certificated shares must redeem their
shares through the Transfer Agent by mail; other shareholders also may redeem
Fund shares through the Transfer Agent. Shareholders should mail redemption
requests directly to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual
Funds, P.O. Box 8950, Wilmington, Delaware 19899. A redemption request will be
executed at the net asset value next computed after it is received in "good
order." "Good order" means that the request must be accompanied by the
following: (1) a letter of instruction or a stock assignment specifying the
number of shares or amount of investment to be redeemed (or that all shares
credited to a Fund account be redeemed), signed by all registered owners of the
shares in the exact names in which they are registered, (2) a guarantee of the
signature of each registered owner by an eligible institution acceptable to the
Transfer Agent and in accordance with SEC rules, such as a commercial bank,
trust company or member of a recognized stock exchange, (3) other supporting
legal documents for estates, trusts, guardianships, custodianships,
partnerships and corporations and (4) duly endorsed share certificates, if any.
Shareholders are responsible for ensuring that a request for redemption is
received in "good order."
Additional Information on Redemptions. A shareholder who holds
non-certificated Fund
19
<PAGE>
shares may have redemption proceeds of $1 million or more wired to the
shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's PaineWebber
investment executive or correspondent firm, or to the Transfer Agent if the
shares are not held in a PaineWebber brokerage account. If a shareholder re
quests redemption of shares which were purchased recently, the Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, the Fund reserves the right to redeem all Fund shares in any
shareholder account of less than $500 net asset value. If the Fund elects to do
so, it will notify the shareholder and provide the shareholder the opportunity
to increase the amount invested to $500 or more within 60 days of the notice.
The Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund
account without a sales charge up to the dollar amount redeemed by purchasing
Class A Fund shares within 365 days of the redemption. To take advantage of
this reinstatement privilege, shareholders must notify their PaineWebber
investment executive or correspondent firm at the time the privilege is
exercised.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A shares
approximately six years after the date of issuance, together with a pro rata
portion of all Class B
shares representing dividends and other distributions paid in additional Class
B shares. The Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. The conversion will be effected at the
relative net asset values per share of the two Classes on the first Business
Day of the month in which the sixth anniversary of the issuance of the Class B
shares occurs. See "Valuation of Shares." If a shareholder effects one or more
exchanges among Class B shares of the PaineWebber mutual funds during the
six-year period, the holding periods for the shares so exchanged will be
counted toward the six-year period.
OTHER SERVICES AND INFORMATION
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll-free at 1-800-647-1568.
Automatic Investment Plan. Shareholders may purchase shares of the Fund
through an automatic investment plan, under which an amount specified by the
shareholder of $50 or more each month will be sent to the Transfer Agent from
the shareholder's bank for investment in the Fund. In addition to providing a
convenient and disciplined manner of investing, participation in the automatic
investment plan enables the investor to use the technique of "dollar cost
averaging." When under the plan a shareholder invests the same dollar amount
each month, the shareholder 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, a shareholder's average purchase price per share
over any given period will be lower than if the shareholder purchased a fixed
number of shares on a monthly basis during the
20
<PAGE>
period. Of course, investing through the automatic investment plan does not
assure a profit or protect against loss in declining markets. Additionally, si
nce 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 low price levels.
Systematic Withdrawal Plan. Shareholders who own Class A or Class D shares
with a value of $5,000 or more or non-certificated Class B shares with a value
of $20,000 or more may have PaineWebber redeem a portion of their shares
monthly, quarterly or semi-annually under the systematic withdrawal plan. No
contingent deferred sales charge will be imposed on such withdrawals for Class
B shares. The minimum amount for all withdrawals of Class A or Class D shares
is $100, and minimum monthly, quarterly and semi-annual withdrawal amounts for
Class B shares are $200, $400 and $600, respectively. Quarterly withdrawals are
made in March, June, September and December, and semi-annual withdrawals are
made in June and December. A Class B shareholder may not withdraw an amount
exceeding 12% annually of his or her "Initial Account Balance," a term that
means the value of the Fund account at the time the shareholder elects to
participate in the systematic withdrawal plan. A Class B shareholder's
participation in the systematic withdrawal plan will terminate automatically if
the Initial Account Balance (plus the net asset value on the date of purchase
of Fund shares acquired after the election to participate in the systematic
withdrawal plan), less aggregate redemptions made other than pursuant to the
systematic withdrawal plan, is less than $20,000. Shareholders who receive
dividends or other distributions in cash may not participate in the systematic
withdrawal plan. Purchases of additional Fund shares concurrently with
withdrawals are ordinarily disadvantageous to shareholders because
of tax liabilities and, for Class A shares, sales
charges.
Individual Retirement Accounts. Shares of the Fund may be purchased through
IRAs available through the Fund. In addition, a Self-Directed IRA is available
through PaineWebber under which investments may be made in the Fund as well as
in other investments available through PaineWebber. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.
Transfer of Accounts. If a shareholder holding shares of the Fund in a
PaineWebber brokerage account transfers his brokerage account to another firm,
the Fund shares normally will be transferred to an account with the Transfer
Agent. 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.
DIVIDENDS AND TAXES
Dividends. The Fund pays an annual dividend from its net investment income
and net short-term capital gain, if any. Net investment income includes accrued
interest and discount, less amortization of premium and accrued expenses. Su
bstantially all of the Fund's net capital gain (the excess of net long-term
capital gain over net short-term capital loss), if any, also is distributed at
least annually. The Fund may make additional distributions if necessary to
avoid income or excise taxes.
Dividends and other distributions paid on all Classes of Fund shares are
calculated at the same time and in the same manner. Dividends on Class B and
Class D shares are expected to be lower than those for the Class A shares
because of the higher expenses resulting from the
21
<PAGE>
distribution fees borne by Class B and Class D shares. Dividends on each Class
also might be affected differently by the allocation of other Class-specific
expenses. See "Valuation of Shares."
The Fund's dividends and capital gain distributions are paid in additional
Fund shares of the same Class at net asset value unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
capital gain distributions in cash, either mailed to the shareholder by check
or credited to the shareholder's PaineWebber account, should contact their
PaineWebber investment executives or correspondent firms or complete the
appropriate section of the application form.
Taxes. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income (c
onsisting generally of net investment income and net short-term capital gain)
and net capital gain that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) generally are taxable to shareholders as
ordinary income. Distributions of the Fund's net capital gain (whether paid in
cash or in additional Fund shares) are taxable to shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.
The Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year and any portion of those dividends that qualifies for the corporate
dividends-received deduction.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends and
capital gain distributions also is required for those shareholders who
otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the redemption proceeds payable
to the shareholder are more or less than the shareholder's adjusted basis for
the redeemed shares (which normally includes any initial sales charge paid on
Class A shares). An exchange of Fund shares for shares of another PaineWebber
or MH/KP fund generally will have similar tax consequences. However, special
tax rules apply when a shareholder (1) disposes of Class A shares through a
redemption or exchange within 90 days of purchase and (2) subsequently acquires
Class A shares of a PaineWebber or MH/KP fund without paying a sales charge due
to the 365-day reinstatement privilege or the exchange privilege. In these
cases, any gain on the disposition of the original Class A shares will be
increased, or loss decreased, by the amount of the sales charge paid when the
shares were acquired, and that amount will increase the basis of the
PaineWebber or MH/KP fund shares subsequently acquired. In addition, if Fund
shares are purchased within 30 days before or after redeeming Fund shares
(regardless of Class) at a loss, that loss will not be deductible to the extent
the redemption proceeds are reinvested and will increase the basis of the newly
purchased shares.
No gain or loss will be recognized to a shareholder as a result of a
conversion of Class B shares into Class A shares.
22
<PAGE>
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be
other federal, state or local tax considerations applicable to a particular
investor. Prospective shareholders are urged to consult their tax advisers.
VALUATION OF SHARES
The net asset value of the Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the NYSE
(currently 4:00 p.m., eastern time) each Business Day. The Fund's net asset
value per share is determined by dividing the value of the securities held by
the Fund plus any cash or other assets minus all liabilities by the total
number of Fund shares outstanding.
The Fund values its assets based on their current market value when market
quotations are readily available. If such value cannot be established, assets
are valued at fair value as determined in good faith by or under the
direction of the Corporation's board of directors. The amortized cost method of
valuation generally is used to value debt obligations with 60 days or less
remaining to maturity, unless the board of directors determines that this does
not represent fair value.
MANAGEMENT
The Corporation's board of directors, as part of its overall management
responsibility, oversees various organizations responsible for the Fund's
day-to-day management. Mitchell Hutchins, the Fund's investment adviser and
administrator makes and implements all investment decisions and supervises all
aspects of
the Fund's operations. Mitchell Hutchins receives a monthly fee for these
services at the annual rate of 0.75% of the Fund's average daily net assets.
The investment advisory fees paid by the Fund are higher than those paid by
most investment companies, but Mitchell Hutchins believes the fees are
comparable to advisory fees paid by funds with similar investment objectives
and policies.
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. The Fund incurs other expenses and, for the fiscal year ended February
28, 1995, the Fund's total expenses for its Class A, Class B and Class D
shares, respectively, stated as a percentage of average net assets were as
follows: 1.36%, 2.12% and 2.14%.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New
York 10019. It is a wholly owned subsidiary of PaineWebber, which is in turn
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. As of May 31, 1995, Mitchell Hutchins was adviser or
sub-adviser of investment companies with separate portfolios and
aggregate assets of over $ billion.
Ellen R. Harris and Karen L. Finkel are primarily responsible for the
day-to-day management of the Fund's equity securities and jointly determine the
allocation of the Fund assets between equity and debt securities. Ms. Harris has
been a portfolio manager of the Fund since December 1994 and is a vice president
of the Trust and chief domestic equity strategist and a managing director of
Mitchell Hutchins. She has been employed by Mitchell Hutchins as a portfolio
manager since 1983. Mrs. Finkel has been a portfolio manager of the Fund since
March 1985 and is a first vice president of Mitchell Hutchins. She has been
employed by Mitchell Hutchins as a portfolio manager since 1988.
Other members of Mitchell Hutchins' domestic equity and domestic fixed income
investments groups provide input on market
23
<PAGE>
outlook, interest rate forecasts, investment research and other considerations
pertaining to the Funds' investments.
Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics which establishes
procedures for personal investing and restricts certain transactions.
Distribution Arrangements. Mitchell Hutchins is the distributor of Fund
shares and has appointed PaineWebber as the exclusive dealer for the sale of
those shares. Under separate plans of distribution pertaining to the Class A
shares, Class B shares and Class D shares ("Class A Plan," "Class B Plan" and
"Class D Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins monthly
service fees at the annual rate of 0.25% of the average daily net assets of
each Class of shares. The Fund pays Mitchell Hutchins monthly distribution fees
at the annual rate of 0.75% of the average daily net assets of the Class B
shares and the Class D shares.
Under all three Plans, Mitchell Hutchins uses the service fees 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 passes on a portion of these fees to its investment ex
ecutives to compensate them for shareholder servicing that they perform and
retains the remainder to offset its own expenses in servicing and maintaining
shareholder accounts. These expenses may include costs of the PaineWebber
branch office in which the investment executive is based, such as rent,
communications equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class D
Plans to
offset the commissions it pays to PaineWebber for selling the Fund's Class B
and Class D shares. PaineWebber passes on to its investment executives a
portion of these commissions and retains the remainder to offset its expenses
in selling Class B and Class D shares. These expenses may include the branch
office costs noted above. In addition, Mitchell Hutchins uses the distribution
fees under the Class B and Class D Plans to offset the Fund's marketing costs
attributable to such Classes, such as preparation of sales literature,
advertising and printing and distributing prospectuses and other shareholder
materials to prospective investors. Mitchell Hutchins also may use the
distribution fees to pay additional compensation to PaineWebber and other costs
allocated to Mitchell Hutchins' and PaineWebber's distribution activities,
including employee salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives
at the time of sale of Class D shares of one or more of the Fund. If
PaineWebber makes such payments, it will retain the service and distribution
fees on Class D shares until it has been reimbursed for its sales commissions
and thereafter will pass a portion of the service and distribution fees on
Class D shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and the contingent deferred sales charge paid
upon certain redemptions of Class B shares, and may use these proceeds for any
of the distribution expenses described above. See "Purchases."
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ("Distribution Contracts")
obligate the Fund to pay service
24
<PAGE>
and distribution fees to Mitchell Hutchins as compensation for its service and
distribution activities, not as reimbursement for specific expenses incurred.
Thus, even if Mitchell Hutchins' expenses exceed its service or distribution fe
es, the Fund will not be obligated to pay more than those fees and, if Mitchell
Hutchins' expenses are less than such fees, it will retain its full fees and
realize a profit. The Fund will pay the service and distribution fees to
Mitchell Hutchins until either the applicable Plan or Distribution Contract is
terminated or not renewed. In that event, Mitchell Hutchins' expenses in excess
of service and distribution fees received or accrued through the termination da
te will be Mitchell Hutchins' sole responsibility and not obligations of the
Fund. In their annual consideration of the continuation of the Fund's Plans,
the directors will review the Plan and Mitchell Hutchins' corresponding
expenses for each Class separately from the Plans and corresponding expenses
for the other two Classes.
PERFORMANCE INFORMATION
The Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for the Class
A shares reflects deduction of the Fund's maximum initial sales charge at the
time of purchase, and standardized return for the Class B shares reflects
deduction of the applicable contingent deferred sales charge imposed on a
redemption of shares held for the period. One-, five- and ten-year periods will
be shown, unless the Class has been in existence for a shorter period. Total
return calculations assume reinvestment of dividends and other distributions.
The Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were included.
The Fund will include performance data for all three Classes of Fund shares
in any advertisements or promotional materials including Fund performance data.
Total return and yield information reflects past performance and does not
necessarily indicate future results. Investment return and principal values
will fluctuate, and proceeds upon redemption may be more or less than a
shareholder's cost.
GENERAL INFORMATION
Proposed Reorganization. The Corporation's board of directors has approved a
proposed Reorganization for submission to the Fund's shareholders at a special
meeting to be held on July , 1995. If the proposed Reorganization is approved
and implemented, the Fund's assets will be acquired and its liabilities assumed
by PaineWebber Growth Fund, a series of PaineWebber Olympus Fund, another
open-end management investment company organized as a business trust under the
laws of the Commonwealth of Massachusetts. As a result of the Reorganization,
the two funds' assets would be combined and each Fund shareholder would, on the
closing date of the transaction, receive a number of full and fractional shares
of the corresponding class of shares of PaineWebber Growth Fund having an
aggregate value equal to the value of the shareholder's holdings in the Fund.
Following the Reorganization, the Fund would have neither assets, liabilities
or shareholders, and it would be terminated as soon as practicable.
25
<PAGE>
There can be no assurance that the Fund's shareholders will approve the
Reorganization. If the Reorganization is approved, purchases of all Classes of
Fund shares will cease on July , 1995, so that fund shares will no longer be
available for purchase or redemption starting on July , 1995. Redemptions of
Fund shares and exchanges of Fund shares for shares of another PaineWebber or
Mitchell Hutchins/Kidder, Peabody mutual fund ("exchange redemptions") may be
effected through the closing date of the Reorganization. Effective , 1995,
the $5.00 service fee on exchange will be waived on all exchange redemptions.
Further information concerning the proposed Reorganization is contained in a
prospectus/proxy statement that has been filed with the SEC and sent to the
Fund's shareholders of record as of , 1995, the record date for the special
meeting of Fund shareholders.
Organization. The Corporation is registered with the SEC as a diversified,
open-end management investment company and was incorporated in Maryland on
October 29, 1985. The Corporation commenced operations as an investment company
on March 27, 1986. The Corporation has authority to issue 10 billion shares of
common stock of separate series, par value $.001 per share; three billion of
these shares are classified as shares of the Fund, and the remaining shares are
classified as shares of the Corporation's other series.
The shares of common stock of the Fund are divided into three Classes,
designated Class A shares, Class B shares and Class D shares. Each Class
represents interests in the same assets of each Fund. The Classes differ as
follows: (1) each Class of shares has exclusive voting rights on matters
pertaining to its plan of distribution; (2) Class A shares are subject to
an initial sales charge; (3) Class B shares bear ongoing distribution fees, are
subject to a contingent deferred sales charge upon certain redemptions and will
automatically convert to Class A shares approximately six years after
is-suance; (4) Class D shares are subject to neither an initial nor a
contingent deferred sales charge, bear ongoing distribution fees and do not
convert into another Class; and (5) each Class may bear differing amounts of
certain Class-specific expenses. The Corporation's board of directors does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes of shares. On an ongoing basis, the board of directors
will consider whether any such conflict exists and, if so, take appropriate
action.
The Corporation does not hold annual shareholder meetings. There will
normally be no meetings of shareholders to elect directors unless fewer than a
majority of the directors holding office have been elected by shareholders. Sh
areholders of record holding at least two-thirds of the outstanding shares of
the Corporation may remove a director by votes cast in person or by proxy at a
meeting called for that purpose. The directors are required to call a meeting
of shareholders for the purpose of voting upon the question of removal of any
director when so requested in writing by the shareholders of record holding at
least 10% of the Corporation's outstanding shares. Each share of the Fund has
equal voting rights, except as noted above. Each share of the Fund is entitled
to participate equally in dividends and other distributions and the proceeds of
any liquidation except that, due to the differing expenses borne by the three
Classes, dividends and liquidation proceeds of Class B and Class D shares are
likely to be lower than for the Class A shares. The shares of each series of
the Corporation will be voted separately except when an aggregate vote of all
series is required by the Investment Company Act of 1940.
26
<PAGE>
To avoid additional operating costs and for investor convenience, the Fund no
longer issues share certificates. Ownership of shares of the Fund is recorded
on a stock register by the Transfer Agent and shareholders have the same rights
of ownership with respect to such shares as if certificates had been issued.
Custodian and Transfer Agent. PNC Bank, National Association, whose principal
business address is Broad & Chestnut Streets, Land Title Bldg., Philadelphia,
Pennsylvania 19101, serves as custodian of the Fund's assets. PFPC Inc., a
subsidiary of PNC Bank, National Association, whose principal business address
is 400 Bellevue Parkway, Wilmington, Delaware
19809, is the Fund's transfer and dividend dis-
bursing agent.
Confirmations and Statements. Shareholders receive confirmations of purchases
and redemptions of shares of the Fund. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Fund.
27
<PAGE>
[This page intentionally left blank]
<PAGE>
APPENDIX A
The Fund may use the following hedging in-
struments:
Options on Equity and Debt Securities. A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any
time during the term of the option. The writer of the call option, who receives
the premium, has the obligation, upon exercise of the option during the option
term, to deliver the underlying security against payment of the exercise price.
A put option is a similar contract which gives its purchaser, in return for a
premium, the right to sell the underlying security at a specified price during
the term of the option. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security at the exercise price.
Options on Stock Indices. An index assigns relative values to the securities
included in the index and fluctuates with changes in the market values of such
securities. Index options operate in the same way as more traditional options
except that exercises of index options are effected with cash payment and do
not involve delivery of securities. Thus, upon exercise of an 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 index.
Stock Index Futures Contracts. A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar amount
times the difference between the stock index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the stocks comprising the index is made. Generally,
contracts are closed out prior to the expiration date of the contract.
Interest Rate Futures Contracts. An interest rate futures contract is a
bilateral agree-ment pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of debt security called
for in the contract at a specified future time and at a specified price.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of debt securities, in most cases thecontracts 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 a premium paid, 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.
A-1
<PAGE>
Application Form
The PaineWebber
Mutual Funds
-
-
PaineWebber Account No.
- -------------------------------------------------------------------------------
INSTRUCTIONS
DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED THROUGH
PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT EXECUTIVE (OR YOUR LOCAL
PAINEWEBBER OFFICE TO OPEN AN ACCOUNT).
ALSO, DO NOT USE THIS FORM TO OPEN A RETIREMENT PLAN ACCOUNT. FOR RETIREMENT
PLAN FORMS OR FOR ASSISTANCE IN COMPLETING THIS FORM CONTACT PFPC INC. AT
1-800-647-1568.
Return this completed form to:
PFPC Inc.
P.O. Box 8950
Wilmington, DE 19899
ATTN: PaineWebber Mutual Funds
PLEASE PRINT
- -------------------------------------------------------------------------------
1
INITIAL INVESTMENT ($1,000 MINIMUM)
ENCLOSED IS A CHECK FOR:
$ (payable to PaineWebber Blue Chip Growth Fund) to purchase Class A
or Class B or Class D shares.
(Check one Class; if no Class is specified Class A shares will be purchased)
A separate check is required for your investment in each Fund.
2
ACCOUNT REGISTRATION
Not valid without signature and Soc.
Sec. or Tax ID # on accompanying
Form W-9.
- -As joint tenants, use Lines 1 and 2.
- -As custodian for a minor, use
Lines 1 and 3.
- -In the name of a corporation, trust or other organization or any fiduciary
capacity, use Line 4.
1. Individual
- ----------
- ------------
/ /
- ---------
First Name
Last Name MI
Soc. Sec. No.
2. Joint Tenancy
- ---------
- ------------
/ /
- ---------
First Name
Last Name MI
Soc. Sec. No.
("Joint Tenants with Rights of Survivorship" unless otherwise specified)
3. Gifts to Minors
- ---------------------
/ /
- ---------
Minor's Name
Soc. Sec. No.
Under the
State of Residence of Minor
Uniform Gifts
to Minors Act
/
Uniform Transfers
to Minors Act
4. Other Registrations
- -------------------
- ---------
Name
Tax Ident. No.
5. If Trust, Date of Trust Instrument:
3
ADDRESS
- ----------------------
U.S. Citizen Yes No*
Street
- ----------------------
- ---------------
City State Zip Code
*Country of Citizenship
4
DISTRIBUTION OPTIONS See Prospectus
Please select one of the following:
Reinvest both dividends and capital gain distributions in additional shares.
Pay dividends to my address above; reinvest capital gain distributions.
Pay both dividends and capital gain distributions in cash to my address above.
Reinvest dividends and pay capital gain distributions in cash to my address
above.
NOTE: If a selection is not made, both dividends and capital gain distributions
will be paid in additional Fund shares of the same Class.
5
SPECIAL OPTIONS (For More Information-Check Appropriate Box)
Prototype IRA Application
Automatic Investment Plan
Systematic Withdrawal Plan
6
RIGHTS OF ACCUMULATION-CLASS A SHARES See Prospectus
Indicate here any other account(s) in the group of funds that would qualify for
the cumulative quantity discount as outlined in the Prospectus.
- -----------------
- ---------
- -----------------
Fund Name
Account No.
Registered Owner
- -----------------
- ---------
- -----------------
Fund Name
Account No.
Registered Owner
- -----------------
- ---------
- -----------------
Fund Name
Account No.
Registered Owner
7
PLEASE INDICATE BELOW IF YOU ARE AFFILIATED WITH PAINEWEBBER
"Affiliated" persons are defined as officers, directors/trustees and employees
of the PaineWebber funds, PaineWebber or its affiliates, and their parents,
spouses and children.
- -----------------------------------------------
Nature of Relationship
8
SIGNATURE (S) AND TAX CERTIFICATION
I warrant that I have full authority and am of legal age to purchase shares of
the Fund and have received and read a current Prospectus of the Fund and agree
to its terms. The Fund and its Transfer Agent will not be liable for acting
upon instructions or inquiries believed genuine. Under penalties of perjury, I
certify that (1) my taxpayer identification number provided in this application
is correct and (2) I am not subject to backup withholding because (i) I have
not been notified that I am subject to backup withholding as a result of
failure to report interest or dividends or (ii) the IRS has notified me that I
am no longer subject to backup withholding (strike out clause (2) if
incorrect).
- ------------------
- ------------------
- --------
Individual (or Custodian)
Joint Registrant (if any)
Date
- ------------------
- ------------------
- --------
Corporate Officer, Partner, Trustee, etc.
Title
Date
9
INVESTMENT EXECUTIVE IDENTIFICATION (To be Completed By Investment Executive
Only)
- ----------------------
- ----------------------
Broker No./Name
Branch Wire Code
( )
- ----------------------
- ----------------------
Branch Address
Telephone
10
CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Correspondent Firm Only)
- ----------------------
- ----------------------
Name
Address
- ----------------------
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE OR CORRESPONDENT
FIRM OR TO: PFPC INC., P.O. BOX 8950, WILMINGTON, DELAWARE 19899.
<PAGE>
Shares of the Funds can be exchanged for shares of the following PaineWebber
("PW") and Mitchell Hutchins/Kidder, Peabody ("MH/KP") Mutual Funds:
Income Funds
~ MH/KP Adjustable Rate Government Fund
~ MH/KP Global Fixed Income Fund
~ MH/KP Government Income Fund
~ MH/KP Intermediate Fixed Income Fund
~ PW Global Income Fund
~ PW High Income Fund
~ PW Investment Grade Income Fund
~ PW Short-Term U.S. Government Income Fund
~ PW Short-Term U.S. Government Income Fund
for Credit Unions
~ PW Strategic Income Fund
~ PW U.S. Government Income Fund
Tax-Free Income Funds
~ MH/KP Municipal Bond Fund
~ PW California Tax-Free Income Fund
~ PW Municipal High Income Fund
~ PW National Tax-Free Income Fund
~ PW New York Tax-Free Income Fund
Growth Funds
~ MH/KP Emerging Markets Equity Fund
~ MH/KP Global Equity Fund
~ MH/KP Small Cap Growth Fund
~ PW Atlas Global Growth Fund
~ PW Capital Appreciation Fund
~ PW Communications & Technology Growth
Fund
~ PW Europe Growth Fund
~ PW Growth Fund
~ PW Regional Financial Growth Fund
~ PW Small Cap Value Fund
Growth and Income Funds
~ MH/KP Asset Allocation Fund
~ MH/KP Equity Income Fund
~ PW Asset Allocation Fund
~ PW Global Energy Fund
~ PW Global Growth and Income Fund
~ PW Growth and Income Fund
~ PW Utility Income Fund
PaineWebber Money Market Fund
------------
A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read the prospectus carefully before
investing.
(C) 1995 PaineWebber Incorporated
Recycled
Paper
- -------------------------
PaineWebber
h
Blue Chip Growth Fund
------------
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary................. 2
Financial Highlights............... 6
Flexible Pricing System............ 10
Investment Objective and Policies.. 11
Purchases ......................... 16
Exchanges.......................... 19
Redemptions........................ 21
Conversion of Class B Shares....... 22
Other Services and Information..... 22
Dividends and Taxes................ 23
Valuation of Shares................ 25
Management......................... 25
Performance Information............ 27
General Information................ 27
Appendix A......................... A-1
Prospectus
July , 1995
<PAGE>
PAINEWEBBER GROWTH FUND
PAINEWEBBER COMMUNICATIONS AND TECHNOLOGY
GROWTH FUND
(each a series of PaineWebber Olympus Fund)
PAINEWEBBER BLUE CHIP GROWTH FUND
(a series of PaineWebber Master Series, Inc.)
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates specifically to
two proposed reorganizations whereby PaineWebber Growth Fund ("Growth
Fund), a series of PaineWebber Olympus Fund ("Trust") would acquire
the assets of each of PaineWebber Communications and Technology
Growth Fund ("ComTech Growth Fund"), a series of the Trust, and of
PaineWebber Blue Chip Growth Fund ("Blue Chip Growth Fund"), a series
of PaineWebber Master Series, Inc. ("Corporation"), in exchange
solely for shares of beneficial interest in Growth Fund and the
assumption by Growth Fund of ComTech Growth Fund's and Blue Chip
Growth Fund's liabilities. This Statement of Additional Information
consists of this cover page and the following described documents,
each of which is attached hereto, except as noted, and are
incorporated herein by this reference:
(1) The Statements of Additional Information of Growth Fund and
ComTech Growth Fund, each dated January 1, 1995, and Blue Chip
Growth Fund, dated July , 1995.
(2) The Annual Reports to Shareholders of Growth Fund and
ComTech Growth Fund, each dated August 31, 1994.
(3) The Annual Report to Shareholders of Blue Chip Growth Fund,
dated February 28, 1995, File No. 811-4448 filed May 3, 1995,
SEC EDGAR accession no. 950117-95-000133.
(4) The Semi-Annual Reports to Shareholders of PaineWebber
Growth Fund and ComTech Growth Fund, each for the six
months ended February 28, 1995, File No. 811-41890, filed
May 9, 1995, SEC EDGAR accession no. 950130-95-000915.
(5) Pro Forma Financial Statements for the period ended February
28, 1995.
This Statement of Additional Information is not a prospectus and
should be read only in conjunction with the prospectus/proxy
statement dated June , 1995 relating to the above-referenced
transactions. A copy of the prospectus/proxy statement may be
obtained by calling any PaineWebber investment executive or
correspondent firm or by calling toll-free 1-800-647-1568. This
Statement of Additional Information is dated June , 1995.
<PAGE>
PaineWebber Growth Fund
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Growth Fund ("Fund") is a diversified series of PaineWebber
Olympus Fund ("Trust"), a professionally managed, open-end investment company
organized as a Massachusetts business trust. The Fund seeks long-term capital
appreciation; it invests primarily in common stocks issued by companies deemed
by the Fund's investment adviser to have substantial potential for capital
growth. The Fund's investment adviser, administrator and distributor is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
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 is
not a prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated January 1, 1995. A copy of the Prospectus may be obtained by
calling any PaineWebber investment executive or correspondent firm or by
calling toll-free 1-800-647-1568. This Statement of Additional Information is
dated January 1, 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
Yield Factors and Ratings. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P") and other nationally recognized
statistical rating organizations ("NRSROs") are private services that provide
ratings of the credit quality of debt obligations. A description of the ratings
assigned to corporate debt obligations by Moody's and S&P is included in the
Appendix to this Statement of Additional Information. The Fund may use these
ratings in determining whether to purchase, sell or hold a security. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices.
Special Considerations Relating to Foreign Securities. To the extent that the
Fund invests in U.S. dollar-denominated securities of foreign issuers, these
securities may not be registered with the Securities and Exchange Commission
("SEC"), nor may the issuers thereof be subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the Fund than is available
<PAGE>
concerning U.S. companies. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
The Fund may invest in foreign securities by purchasing American Depository
Receipts ("ADRs"). Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. For purposes of the Fund's investment policies,
ADRs are deemed to have the same classification as the underlying securities
they represent. Thus, an ADR representing ownership of common stock will be
treated as common stock.
Investment income on certain foreign securities in which the Fund may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.
Illiquid Securities. The Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased over-the-counter ("OTC")
options, repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the Trust's board of trustees. The assets
used as cover for OTC options written by the Fund will be considered illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC option it writes at a maximum price to be calculated by
a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. Illiquid restricted securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933
("1933 Act"). Where registration is required, the Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
2
<PAGE>
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. ("NASD"). 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 Trust's board of trustees has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of factors
in reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4)
the number of other potential purchasers and (5) the nature of the security and
how trading is effected (e.g., the time needed to sell the security, how offers
are solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of restricted securities in 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 from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such securities. If the value of these securities
is less than the repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral so that at all
times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the securities and the price that was paid by the
Fund upon acquisition is accrued as interest and included in its net investment
income. Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party
to a repurchase agreement becomes insolvent.
The Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins to present minimal credit
risks in accordance with guidelines established by the Trust's board of
trustees. Mitchell Hutchins reviews and monitors the creditworthiness of those
institutions under the board's general supervision.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of its total assets. Such agreements involve the sale of
securities held by the Fund subject to its agreement to repurchase the
securities at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary purposes.
3
<PAGE>
While a reverse repurchase agreement is outstanding, the Fund's custodian
segregates assets to cover the Fund's obligations under the reverse repurchase
agreement. See "Investment Policies and Restrictions-Segregated Accounts."
Lending of Portfolio Securities. Although the Fund has no intention of doing
so during the coming year, it is authorized to lend up to 10% of the total
value of its portfolio securities to broker-dealers or institutional investors
that Mitchell Hutchins deems qualified, but only when the borrower maintains
with the Fund's custodian bank collateral either in cash or money market
instruments in an amount, marked to market daily, at least equal to the market
value of the securities loaned, plus accrued interest and dividends. 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 loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The Fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the Fund's
interest.
Segregated Accounts. When the Fund enters into certain transactions to make
future payments to third parties, including reverse repurchase agreements, it
will maintain with an approved custodian in a segregated account cash, U.S.
government securities or other liquid high-grade debt securities, marked to
market daily, in an amount at least equal to the Fund's obligation or
commitment under such transactions. As described below under "Hedging
Strategies," segregated accounts may also be required in connection with
certain transactions involving options and futures contracts.
Investment Limitations of the Fund
The Fund may not (1) issue senior securities or borrow money, except from
banks for temporary purposes and except for reverse repurchase agreements, and
then in an aggregate amount not in excess of 10% of the Fund's total assets;
provided further that the Fund will not purchase securities while borrowings
(including reverse repurchase agreements) in excess of 5% of the Fund's total
assets are outstanding; (2) make an investment in any one industry if the
investment would cause the aggregate value of the Fund's investments in such
industry to exceed 25% of the Fund's total assets; (3) purchase securities of
any one issuer (except U.S. government securities) if as a result more than 5%
of the Fund's total assets would be invested in such issuer or the Fund would
own or hold more than 10% of the outstanding voting securities of that issuer,
provided, however, that up to 25% of the value of the Fund's total assets may
be invested without regard to these limitations; (4) 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 options, futures contracts and options on futures contracts;
(5) underwrite securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be deemed
an underwriter under federal securities laws; (6) make short sales of
securities or
4
<PAGE>
maintain a short position, except that the Fund may (a) make short sales and
may maintain short positions in connection with its use of options, futures
contracts and options on future contracts and (b) sell short "against the box";
(7) purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued by companies
that invest in real estate or interests therein; (8) purchase or sell
commodities or commodity contracts, except that the Fund may purchase or sell
stock index futures and interest rate futures and options thereon; (9) invest
in oil, gas or mineral-related programs or leases; (10) make loans, except
through loans of portfolio securities as described herein and except through
repurchase agreements; provided that for purposes of this restriction the
acquisition of bonds, debentures or other corporate debt securities and
investments in government obligations, short-term commercial paper,
certificates of deposit and bankers' acceptances shall not be deemed to be the
making of loans; or (11) purchase any securities issued by any other investment
company, except by purchase in the open market where no commission or profit,
other than a customary brokers' commission, is earned by any sponsor or dealer
associated with the investment company whose shares are acquired as a result of
such purchase, provided that such securities in the aggregate do not represent
more than 10% of the Fund's total assets, and except in connection with the
merger, consolidation or acquisition of all the securities or assets of such an
issuer.
The foregoing fundamental investment limitations cannot be changed 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 present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.
The following investment restrictions may be changed by the Trust's board of
trustees without shareholder approval: the Fund may not (1) purchase or retain
the securities of any issuer if, to the knowledge of the Fund's management, the
officers and trustees of the Trust and the officers and directors of Mitchell
Hutchins (each owning beneficially more than 0.5% of the outstanding securities
of an issuer) own in the aggregate more than 5% of the securities of the
issuer; (2) purchase any security if as a result more than 5% of its total
assets would be invested in securities of companies that together with any
predecessors have been in continuous operation for less than three years; (3)
invest more than 10% of its net assets in illiquid securities, a term which
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which it has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days; (4) make investments in warrants if such investments,
valued at the lower of cost or market, exceed 5% of the value of its net
assets, which amount may include warrants that are not listed on the New York
or American Stock Exchanges, provided that such unlisted warrants, valued at
the lower of cost or market, do not exceed 2% of its net assets, and further
provided that this restriction does not apply to warrants attached to, or sold
as a unit with, other securities. For purposes of this restriction, the term
"warrants" does not include options on securities, stock or bond indices or
futures contracts; or (5) invest more than 35% of its total assets in debt
securities rated Ba or lower by Moody's or BB or lower by S&P, comparably rated
by another NRSRO or determined by Mitchell Hutchins to be of comparable
quality. This non-fundamental policy (5) can be changed only upon 30 days'
advance notice to shareholders. The
5
<PAGE>
Fund will continue to interpret fundamental investment limitation (7) to
prohibit investment in real estate limited partnerships.
HEDGING STRATEGIES
General Description of Hedging Strategies. As discussed in the Prospectus,
Mitchell Hutchins may use a variety of financial instruments ("Hedging
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures") and options on futures contracts, to attempt to hedge the
Fund's portfolio. The particular Hedging Instruments are described in the
Appendix to the Prospectus.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
to partially or fully offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example,
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 transactions
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, 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 Hedging 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 Hedging 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 transactions
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which the Fund has invested or expects to invest. Hedging
Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxes."
6
<PAGE>
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Fund's investment objective and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks of Hedging Strategies. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the ability of
Mitchell Hutchins to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded.
The effectiveness of hedges using Hedging Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(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 Hedging Instrument. Moreover, if the price of the
Hedging 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 Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required
7
<PAGE>
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 Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of a contra party to enter into a transaction closing
out the position. Therefore, there is no assurance that any hedging position
can be closed out at a time and price that is favorable to the Fund.
Cover for Hedging Strategies. The Fund will not use Hedging Instruments for
speculative purposes or for purposes of leverage. Transactions using Hedging
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, other options
or futures contracts or (2) cash and short-term liquid debt securities, with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. The Fund will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so
require, set aside cash, U.S. government securities or other liquid, high-grade
debt securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. The Fund may purchase put and call options, and write (sell) covered
put or call options, on equity and debt securities and stock indices. The
purchase of call options serves as a long hedge, and the purchase of put
options serves as a short hedge. Writing covered call options serves as a
limited short hedge, because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security appreciates to a price higher than the exercise price
of the call option, it can be expected that the option will be exercised and
the Fund will be obligated to sell the security at less than its market value.
Writing covered put options serves as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value. The securities or other assets used as
cover for OTC options written by the Fund would be considered illiquid to the
extent described under "Investment Policies 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. Options that expire unexercised have no value.
8
<PAGE>
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.
The Fund may purchase and write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities exist but are relatively new, and these
instruments are primarily traded on the OTC market. Exchange-traded options in
the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed which, in effect, guarantees completion
of every exchange-traded option transaction. In contrast, OTC options are
contracts between the Fund and its contra party (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when the Fund purchases
or writes an OTC option, it relies on the contra party to make or take delivery
of the underlying investment upon exercise of the option. Failure by the contra
party to do so would result in the loss of any premium paid by the Fund as well
as the loss of any expected benefit of the transaction. The Fund will enter
into OTC option transactions only with contra parties that have a net worth of
at least $20 million.
Generally, the OTC debt options used by the Fund are European style options.
This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option.
The 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
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with contra parties 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 OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, the Fund might be unable to close out an OTC 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.
Limitations on the Use of Options. The Fund's use of options is governed by
the following guidelines, which can be changed by the Trust's board of trustees
without shareholder vote:
(1) The Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
9
<PAGE>
(2) The aggregate value of securities underlying put options written by the
Fund, determined as of the date the put options are written, will not exceed
50% of the Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities and stock or bond indices and options on futures contracts)
purchased by the Fund that are held at any time will not exceed 20% of the
Fund's net assets.
Futures. The Fund may purchase and sell stock index futures contracts and
interest rate futures contracts. The Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon
can serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices.
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, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is returned to 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.
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
10
<PAGE>
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. The Fund's use of futures is governed by
the following guidelines, which can be changed by the Trust's board of trustees
without shareholder vote:
(1) To the extent the Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the Fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities and stock or bond indices and options on futures contracts)
purchased by the Fund that are held at any time will not exceed 20% of the
Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's total
assets.
11
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their business addresses
and principal occupations during the past five years are:
Position with Business Experience;
Name and Address* the Trust Other Directorships
- ------------------------ ----------------- -------------------------------------
Mr. Bewkes is a director of Paine
Webber Group Inc. ("PW Group")
(holding company of PaineWebber
and Mitchell Hutchins) and a con-
sultant to PW Group. Prior to 1988,
he was chairman of the board, pres-
ident and chief executive officer of
American Bakeries Company. Mr.
Bewkes is also a director of Inter-
state Bakeries Corporation and a di-
rector or trustee of other invest-
Trustee and ment companies for which Mitchell
Chairman of the Hutchins or PaineWebber serves as
E. Garrett Bewkes, Jr.** Board of Trustees investment adviser.
Mr. Feldberg is Dean and Professor of
Management of the Graduate
School of Business, Columbia Uni-
versity. Prior to 1989, he was presi-
dent of the Illinois Institute of
Technology. Dean Feldberg is also
a director of AMSCO International
Inc., Federated Department Stores,
Inc., Inco Homes Corporation and
New World Communications
Group Incorporated and a director
Meyer Feldberg or trustee of other investment com-
Columbia University panies for which Mitchell Hutchins
101 Uris Hall or PaineWebber serves as invest-
New York, New York 10027 Trustee ment adviser.
12
<PAGE>
<TABLE><CAPTION>
Position with Business Experience;
Name and Address* the Trust Other Directorships
- ------------------------ --------------------- --------------------------------------
<S> <C> <C>
Mr. Gowen is a partner in the law firm
of Dunnington, Bartholow & Miller.
Prior to May 1994, he was a partner
in the law firm of Fryer, Ross &
Gowen. Mr. Gowen is also a direc-
tor of Columbia Real Estate Invest-
ments, Inc. and a director or trustee
of other investment companies for
George W. Gowen which Mitchell Hutchins or
666 Third Avenue PaineWebber serves as investment
New York, New York 10017 Trustee adviser.
Mr. Guenther is president and a di-
rector of PW Group and Mitchell
Hutchins and a director of
PaineWebber. Mr. Guenther is also
president and a director or trustee
of other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
Paul B. Guenther** Trustee and President adviser.
</TABLE>
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<PAGE>
Position with Business Experience;
Name and Address* the Trust Other Directorships
- ---------------------- ------------- --------------------------------------
Mr. Malek is chairman of Thayer Cap-
ital Partners (investment bank) and
a co-chairman and director of CB
Commercial Group Inc. (real es-
tate). From January 1992 to No-
vember 1992, he was campaign
manager of Bush-Quayle '92. From
1990 to 1992, he was vice chairman,
and from 1989 to 1990, he was pres-
ident of Northwest Airlines Inc.,
NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of
NWA Inc.). Prior to 1989, he was
employed by the Marriott Corpora-
tion (hotels, restaurants, airline ca-
tering and contract feeding), where
he most recently was an executive
vice president and president of
Marriott Hotels and Resorts. Mr.
Malek is also a director of American
Management Systems, Inc., Auto-
matic Data Processing, Inc., Avis,
Inc., FPL Group, Inc., ICF Interna-
tional, Manor Care, Inc. and Na-
tional Education Corporation and a
Frederic V. Malek director or trustee of other invest-
901 15th Street, N.W. ment companies for which Mitchell
Suite 300 Hutchins or PaineWebber serves as
Washington, D.C. 20005 Trustee investment adviser.
Mr. Minard is chairman and chief ex-
ecutive officer of Mitchell Hutchins,
chairman of the board of Mitchell
Hutchins Institutional Investors
Inc. and an executive vice presi-
dent of PW Group. Prior to 1993,
Mr. Minard was managing director
of Oppenheimer Capital in New
York and Director of Oppenheimer
Capital Ltd. in London. Mr. Minard
is also a director or trustee of other
investment companies for which
Mitchell Hutchins or PaineWebber
Frank P. L. Minard** Trustee serves as investment adviser.
14
<PAGE>
<TABLE><CAPTION>
Position with Business Experience;
Name and Address* the Trust Other Directorships
- ------------------------- ------------------- -----------------------------------------------------------------
<S> <C> <C>
Mrs. Moyers is president of Public Af-
fairs Television, Inc., an educational
consultant and a home economist.
Mrs. Moyers is also a director of
Ogden Corporation and a director
Judith Davidson Moyers or trustee of other investment com-
Public Affairs Television panies for which Mitchell Hutchins
356 W. 58th Street or PaineWebber serves as invest-
New York, New York 10019 Trustee ment adviser.
Mr. Murray is a real estate and finan-
cial consultant. Mr. Murray is also a
director and chairman of American
Continental Properties, Inc., a
trustee of Prudential Realty Trust
and a director or trustee of other
Thomas F. Murray investment companies for which
400 Park Avenue Mitchell Hutchins or PaineWebber
New York, New York 10022 Trustee serves as investment adviser.
Ms. Boyle is a vice president and man-
ager-advisory administration of
Mitchell Hutchins. Prior to Novem-
ber 1993, she was compliance man-
ager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993, Ms. Boyle
was a vice president and manager-legal
administration of Mitchell
Hutchins. Ms. Boyle is also a vice
president of other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as invest-
Teresa M. Boyle Vice President ment adviser.
Ms. Cohen is a vice president and at-
torney of Mitchell Hutchins. Prior
to December 1993, she was an asso-
ciate at the law firm of Seward &
Kissel. Ms. Cohen is also a vice pres-
ident and assistant secretary of
other investment companies for
which Mitchell Hutchins or
Vice President and PaineWebber serves as investment
Joan L. Cohen Assistant Secretary adviser.
15
</TABLE>
<PAGE>
Position with Business Experience;
Name and Address* the Trust Other Directorships
- ------------------- ------------------- ----------------------------------------
Ms. Harris is chief domestic equity
strategist and a managing director
and chief investment officer-do-
mestic of Mitchell Hutchins. Ms.
Harris is also a vice president of
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
Ellen R. Harris Vice President adviser.
Mr. Kirsch is a first vice president and
associate general counsel of Mitch-
ell Hutchins. Prior to March 1994,
he was an assistant director in the
Division of Investment Manage-
ment at the SEC. Mr. Kirsch is also
a vice president and assistant secre-
tary of other investment companies
for which Mitchell Hutchins or
Vice President and PaineWebber serves as investment
Clifford E. Kirsch Assistant Secretary adviser.
Ms. Moran is a vice president of
Mitchell Hutchins. Ms. Moran is also
a vice president and assistant trea-
surer of other investment compa-
nies for which Mitchell Hutchins or
Vice President and PaineWebber serves as investment
Ann E. Moran Assistant Treasurer adviser.
Ms. O'Donnell is a first vice president
and senior associate general counsel
of Mitchell Hutchins. Ms.
O'Donnell is also a vice president
and secretary of other investment
companies for which Mitchell
Vice President and Hutchins or PaineWebber serves as
Dianne E. O'Donnell Secretary investment adviser.
16
<PAGE>
Position with Business Experience;
Name and Address* the Trust Other Directorships
- --------------------- ------------------- --------------------------------------
Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Prior to
April 1990, she was a partner in the
law firm of Shereff, Friedman, Hoff-
man & Goodman. Ms. Schonfeld is
also a vice president of other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
Victoria E. Schonfeld Vice President investment adviser.
Mr. Schubert is a vice president of
Mitchell Hutchins. From August
1992 to August 1994, he was a vice
president at BlackRock Financial
Management, L.P. Prior to August
1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert
is also a vice president and assistant
treasurer of other investment com-
panies for which Mitchell Hutchins
Vice President and or PaineWebber serves as invest-
Paul H. Schubert Assistant Treasurer ment adviser.
Ms. Slezak is a vice president of
Mitchell Hutchins. From Septem-
ber 1991 to April 1992, she was a
fundraising director for a U.S. Sen-
ate campaign. Prior to September
1991, she was a tax manager with
Arthur Andersen & Co. Ms. Slezak
is also a vice president and assistant
treasurer of other investment com-
panies for which Mitchell Hutchins
Vice President and or PaineWebber serves as invest-
Martha J. Slezak Assistant Treasurer ment adviser.
17
<PAGE>
Position with Business Experience;
Name and Address* the Trust Other Directorships
- ------------------ ------------------- ---------------------------------------
Mr. Sluyters is a senior vice president
and the director of the mutual fund
finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a
vice president and treasurer of
other investment companies for
which Mitchell Hutchins or
Vice President and PaineWebber serves as investment
Julian F. Sluyters Treasurer adviser.
Mr. Todd is a first vice president and
associate general counsel of Mitch-
ell Hutchins. Prior to 1993, he was
a partner in the law firm of Shereff,
Friedman, Hoffman & Goodman.
Mr. Todd is also a vice president
and assistant secretary of other in-
vestment companies for which
Vice President and Mitchell Hutchins or PaineWebber
Gregory K. Todd Assistant Secretary serves as investment adviser.
- ------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes, Guenther and Minard are "interested persons" of the Trust as
defined in the Investment Company Act of 1940 ("1940 Act") by virtue of
their positions with PW Group, PaineWebber and/or Mitchell Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust $2,000
annually and $250 per meeting of the board or any committee thereof. Trustees
also are reimbursed for any expenses incurred in attending meetings. Trustees
and officers of the Trust 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, 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.
18
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
Investment Advisory Arrangements. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract with the Trust
dated March 1, 1989 ("Advisory Contract"). Under the Advisory Contract, the
Fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the
annual rate of 0.75% of the Fund's daily net assets.
For the fiscal years ended August 31, 1994, August 31, 1993 and August 31,
1992, the Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $2,069,033, $1,402,141 and $1,017,798, respectively.
Under a service agreement with the Trust pursuant to which PaineWebber
provides certain services to the Fund not otherwise provided by the Fund's
transfer agent, which agreement is reviewed by the Trust's board of trustees
annually, during the fiscal years ended August 31, 1994, August 31, 1993 and
August 31, 1992, the Fund paid (or accrued) to PaineWebber service fees of
$103,435, $75,713 and $59,969.
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) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to trustees and officers who are not interested
persons (as defined in the 1940 Act) of the Fund or Mitchell Hutchins; (6) all
expenses incurred in connection with the trustees' services, including travel
expenses; (7) taxes (including any income or franchise taxes) and governmental
fees; (8) costs of any liability, uncollectable items of deposit and other
insurance or fidelity bonds; (9) any costs, expenses or losses arising out of a
liability of or claim for damages or other relief asserted against the Trust or
Fund for violation of any law; (10) legal, accounting and auditing expenses,
including legal fees of special counsel for the independent trustees; (11)
charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates; (13) expenses of setting in type and printing
prospectuses, statements of additional information and supplements thereto,
reports and proxy materials for existing shareholders, and costs of mailing
such materials to shareholders; (14) any extraordinary expenses (including fees
and disbursements of counsel) incurred by the Fund; (15) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (16) costs of mailing and tabulating proxies
and costs of meetings of shareholders, the 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.
As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage
19
<PAGE>
commissions, taxes, interest, distribution fees and extraordinary items, are
excluded from this limitation. For the fiscal years ended August 31, 1994,
August 31, 1993 and August 31, 1992, no reimbursements were required pursuant
to such limitation.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the board of trustees or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.
The following table shows the approximate net assets as of November 30, 1994,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
Investment Net
Category Assets
- --------------------------------------- --------
($ mil)
Domestic (excluding Money Market)...... $5,662.8
Global................................. 3,257.6
Equity/Balanced........................ 2,538.9
Fixed Income (excluding Money Market).. 6,381.5
Taxable Fixed Income................... 4,666.7
Tax-Free Fixed Income.................. 1,714.8
Money Market Funds..................... 14,061.6
Distribution Arrangements. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class D shares under separate distribution contracts with
the Trust dated July 7, 1993 (collectively, "Distribution Contracts") that
require 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 dated July 7, 1993 relating to the Class A, Class B
and Class D shares (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 D shares adopted by the Trust in the manner prescribed under Rule 12b-1
under the 1940 Act ("Class A Plan," "Class B Plan" and "Class D Plan,"
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, except that the Class A Plan for the Fund
provides that the service fee paid with respect to shares sold prior to
December 2, 1988 ("Old Shares") is paid at the annual rate of 0.15% of the
Fund's net assets represented by such Old Shares. Shares acquired through new
purchases, reinvestment of dividends and other distributions and exchanges on
or after December 2, 1988 are not considered "Old Shares" for this purpose.
Under the Class B Plan and
20
<PAGE>
the Class D Plan, the Fund pays Mitchell Hutchins a distribution fee, accrued
daily and payable monthly, at the annual rate of 0.75% of the average daily net
assets of the Class B shares and Class D shares, respectively.
Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the Trust's board of trustees at least quarterly, and the trustees will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect
only so long as it is approved at least annually, and any material amendment
thereto is approved, by the board of trustees, including those trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan, acting in person at a meeting called for that purpose, (3) payments by
the Fund under the Plan shall not be materially increased without the
affirmative vote of the holders of a majority of the outstanding shares of the
relevant class of the Fund and (4) while the Plan remains in effect, the
selection and nomination of trustees who are not "interested persons" of the
Trust shall be committed to the discretion of the trustees who are not
"interested persons" of the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each Class of Fund
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 Fund shares
will not be used to subsidize the sale of any other Class of Fund shares.
For the fiscal year ended August 31, 1994, the Fund paid (or accrued) the
following fees to Mitchell Hutchins under the Plans:
Class A.. $294,533
Class B.. $837,161
Class D.. $259,279
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Fund during the fiscal year ended August 31, 1994:
Class A
Marketing and advertising............................... $33,078
Printing of prospectuses and statements of additional
information............................................. 1,842
Branch network costs allocated and interest expense..... 355,004
Service fees paid to PaineWebber investment executives.. 132,540
Class B
Marketing and advertising............................... $60,926
Amortization of commissions............................. 317,843
Printing of prospectuses and statements of additional
information............................................. 1,251
Branch network costs allocated and interest expense..... 676,503
Service fees paid to PaineWebber investment executives.. 94,181
21
<PAGE>
Class D
Marketing and advertising............................... $31,405
Amortization of commissions............................. 100,818
Printing of prospectuses and statements of additional
information............................................. 383
Branch network costs allocated and interest expense..... 340,523
Service fees paid to PaineWebber investment executives.. 20,667
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund 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 Pricing SM system of distribution,
the Trust's board of trustees considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in 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 trustees considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the 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 trustees 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 the
Fund purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales commissions when Class B shares are sold and continuing
service fees thereafter while their customers invest their entire purchase
payments immediately in Class B shares would prove attractive to the investment
executives and correspondent firms, resulting in greater growth of 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
22
<PAGE>
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder serviceand distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class D Plan, the trustees considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from the Fund's 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 and paying for distribution on an
ongoing basis, (3) Mitchell Hutchins' belief that the ability of PaineWebber
investment executives and correspondent firms to receive sales compensation for
their sales of Class D shares on an ongoing basis, along with continuing
service fees, while their customers invest their entire purchase payments
immediately in Class D shares and do not face contingent deferred sales
charges, would prove attractive to the investment executives and correspondent
firms, resulting in greater growth to the Fund than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (5) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (6)
the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement
with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives without the concomitant receipt by Mitchell Hutchins of initial
sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class D Plan.
With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that
Mitchell Hutchins would receive service, distribution and advisory fees which
are calculated based upon a percentage of the average net assets of the Fund,
which fees would increase if the Plan were successful and the Fund attained and
maintained significant asset levels.
Under the Distribution Contract for the Class A shares and similar prior
distribution contracts, for the fiscal years set forth below, Mitchell Hutchins
earned the following approximate amounts of sales charges and retained the
following approximate amounts, net of concessions to PaineWebber as exclusive
dealer.
Fiscal Year Ended August 31,
----------------------------
1994 1993 1992
--------- --------- --------
Earned.... $367,454 $246,569 $537,439
Retained.. 26,176 15,757 32,616
For the fiscal year ended August 31, 1994, Mitchell Hutchins earned and
retained $235,285 in contingent deferred sales charges paid upon certain
redemptions of Class B shares.
23
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Trust's board of trustees, 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. Prices paid to dealers in
principal transactions, through which most debt securities and some equity
securities are traded, generally include a "spread," which is the difference
between the prices at which the dealer is willing to purchase and sell a
specific security at the time. The Fund may invest in securities traded in the
OTC market and will engage primarily in transactions directly with the dealers
who make markets in such securities, unless a better price or execution could
be obtained by using a broker. While Mitchell Hutchins generally seeks
reasonably competitive commission rates and dealer spreads, payment of the
lowest commission or spread is not necessarily consistent with obtaining the
best net results. For the fiscal years ended August 31, 1994, August 31, 1993
and August 31, 1992, the Fund paid $222,490, $150,432 and $804,066,
respectively, in brokerage commissions.
The Fund has no obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may
be conducted through Mitchell Hutchins or its affiliates, including
PaineWebber. The Trust's board of trustees has adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions
paid to Mitchell Hutchins or its affiliates 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. For the fiscal year ended August 31, 1994, the Fund paid $9,326 in
brokerage commissions to PaineWebber, which represented 4.19% of the total
brokerage commissions paid by the Fund and 2.04% of the total dollar amount of
transactions involving payment of commissions. For the fiscal years ended
August 31, 1993 and August 31, 1992, the Fund paid $3,500 and $5,260,
respectively, in brokerage commissions to PaineWebber.
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.
Consistent with the interests of the Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase and
sell portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins determines in good faith that such
commission is reasonable in terms either of that particular transaction or of
the overall responsibility of Mitchell Hutchins to the Fund and its other
clients and that the total commissions paid by the Fund will be
24
<PAGE>
reasonable in relation to the benefits to the Fund over the long term. Research
services furnished by brokers through which the Fund effects securities
transactions may be used by Mitchell Hutchins in advising other funds or
accounts it advises and, conversely, research services furnished to Mitchell
Hutchins in connection with other funds or accounts Mitchell Hutchins advises
may be used by Mitchell Hutchins in advising the Fund. Information and research
received from brokers will be in addition to, and not in lieu of, the services
required to be performed by Mitchell Hutchins under the Advisory Contract. For
the fiscal year ended August 31, 1994, Mitchell Hutchins directed $3,459,145 in
portfolio transactions to brokers chosen because they provided research
services, for which the Fund paid $13,789 in commissions. The Fund may purchase
and sell portfolio securities to and from dealers who provide the Fund with
research services. Portfolio transactions will not be directed by the Fund to
dealers solely on the basis of research services provided. The Fund will not
purchase portfolio securities at a higher price or sell such securities at a
lower price in connection with transactions effected with a dealer, acting as
principal, who furnishes research services to Mitchell Hutchins than would be
the case if no weight were given by Mitchell Hutchins to the dealer's
furnishing of such services. Research services furnished by the dealers through
which or with which the Fund effects securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts it advises and,
conversely, research services furnished to Mitchell Hutchins 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 of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s)
as to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the
underwriting or selling group, except pursuant to procedures adopted by the
Trust's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among
other things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, the purchase be at not
more than the public offering price prior to the end of the first business day
after the date of the public offering and that Mitchell Hutchins or any
affiliate thereof not participate in or benefit from the sale to the Fund.
Portfolio Turnover. The Fund's annual portfolio turnover rate may vary
greatly from year to year, but it 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. For the fiscal years ended August
31, 1994 and August 31, 1993, the Fund's portfolio turnover rates were 24.41%
and 35.81%, respectively.
25
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION AND OTHER
SERVICES
Combined Purchase Privilege-Class A Shares. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the 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");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more employee
benefit plans of a company controlled by individual(s);
(e) an individual (or eligible group of individuals) and a trust created by
the individual(s), the beneficiaries of which are the individual and/or the
individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse; or
(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).
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.
Waivers of Sales Charges-Class B Shares. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the individual shareholder or owns the shares with his or
her spouse as a joint tenant with right of survivorship. This waiver applies
only to redemption of shares held at the time of death.
26
<PAGE>
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing System
on July 1, 1991 ("CDSC Funds"). The contingent deferred sales charge is waived
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 by officers, directors (trustees) or employees of the CDSC Funds,
Mitchell Hutchins or their affiliates (or their spouses and children under age
21). In addition, the contingent deferred sales charge will be reduced by 50%
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 with a net asset value at the time of purchase of at least $1
million. If Class B shares of a CDSC Fund purchased prior to July 1, 1991 are
exchanged for Class B shares of the Fund, any waiver or reduction of the
contingent deferred sales charge that applied to the Class B Shares of the CDSC
Fund will apply to the Class B shares of the Fund acquired through the
exchange.
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. This exchange
privilege is available only in those jurisdictions where the sale of the
PaineWebber fund shares to be acquired through such exchange may be legally
made. Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or 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. If payment is
made in securities, a shareholder may incur brokerage expenses in converting
these securities into cash. The Trust has elected, however, to be governed by
Rule 18f-1 under the 1940 Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund 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, Inc. ("NYSE") is closed or trading on the
NYSE is restricted as determined by the SEC, (2) when an emergency exists, as
defined by the SEC, that makes it not reasonably practicable for the Fund to
dispose of securities owned by it or fairly to determine the value of its
assets or (3) as the SEC may otherwise permit. The redemption price may be more
or less than the shareholder's cost, depending on the market value of the
Fund's portfolio at the time.
Systematic Withdrawal Plan. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or
semi-annual plans, PaineWebber will arrange for redemption by the Fund of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Fund's systematic withdrawal plan. The payment generally is
mailed approximately five business days after the redemption date. Withdrawal
payments should not be considered dividends, but redemption proceeds, with the
tax consequences described under "Dividends and Taxes" in the Prospectus. If
periodic withdrawals continually exceed reinvested dividends, a shareholder's
investment may be correspondingly reduced. A shareholder may change
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the amount of the systematic withdrawal or terminate participation in the
systematic withdrawal plan at any time without charge or penalty by written
instructions with signatures guaranteed to PaineWebber or PFPC Inc. ("Transfer
Agent"). Instructions to participate in the plan, change the withdrawal amount
or terminate participation in the plan will not be effective until five days
after written instructions with signatures guaranteed are received by the
Transfer Agent. Shareholders may request the forms needed to establish a
systematic withdrawal plan from their PaineWebber investment executives,
correspondent firms or the Transfer Agent at 1-800-647-1568.
Reinstatement Privilege-Class A Shares. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in the Fund without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption.
The reinstatement will be made at the net asset value per share next computed
after the notice of reinstatement and check are received. The amount of a
purchase under this reinstatement privilege cannot exceed the amount of the
redemption proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to
the shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal
income tax purposes by the amount of any sales charge paid on Class A shares,
under the circumstances and to the extent described in "Dividends and Taxes" in
the Prospectus.
PaineWebber RMA Resource Accumulation Plan SM;
PaineWebber Resource Management Account (R)(RMA (R))
Shares of the 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 five business days after the trade date, and
the purchase price of the shares is withdrawn from the investor's RMA account
on the settlement date from the following sources and in the following order:
uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to enrolling
in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may take
up to two weeks to become effective.
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The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
Periodic Investing and Dollar Cost Averaging.
Periodic investing in the PW Funds or other mutual funds, whether through the
Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of "dollar cost averaging." By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of low share prices. However, over time, dollar cost averaging
generally results in a lower average original investment cost than if an
investor invested a larger dollar amount in a mutual fund at one time.
PaineWebber's Resource Management Account.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold MasterCard (R)
transactions during the period, and provide unrealized and realized gain and
loss estimates for most securities held in the account;
comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
automatic "sweep" of uninvested cash into the RMA accountholder's choice of
one of the five RMA money market funds-RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money Fund
and RMA New York Municipal Money Fund. Each money market fund attempts to
maintain a stable price per share of $1.00, although there can be no
assurance that it will be able to do so. Investments in the money market
funds are not insured or guaranteed by the U.S. government;
check writing, with no per-check usage charge, no minimum amount on checks
and no maximum number of checks that can be written. RMA accountholders can
code their checks to classify expenditures. All canceled checks are returned
each month;
Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to remain
invested for a longer period of time;
24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
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expanded account protection to $25 million in the event of the liquidation of
PaineWebber. This protection does not apply to shares of the RMA money market
funds or the PW Funds because those shares are held at the transfer agent and
not through PaineWebber; and
automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Fund will automatically convert to Class A shares,
based on the relative net asset values per share of the two Classes, as of the
close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversary of the initial issuance of
such Class B shares of the Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (i) the date on which such Class B shares were issued, or
(ii) for Class B shares obtained through an exchange, or a series of exchanges,
the date on which the original Class B shares were issued. If the shareholder
acquired Class B shares of the Fund through an exchange of Class B shares of a
CDSC Fund that were acquired prior to July 1, 1991, the shareholder's holding
period for purposes of conversion will be determined based on the date the CDSC
Fund shares were initially issued. For purposes of conversion into Class A,
Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A, a pro rata portion of
the Class B shares in the sub-account will also convert to Class A. The portion
will be determined by the ratio that the shareholder's Class B shares
converting to Class A bears to the shareholder's total Class B shares not
acquired through dividends and other distributions.
The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends
and other distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and (2) the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the Class B shares
beyond six years from the date of purchase. Mitchell Hutchins has no reason to
believe that these conditions for the availability of the conversion feature
will not continue to be met.
VALUATION OF SHARES
The Fund determines the net asset value per share separately for each Class
of shares as of the close of regular trading (currently 4:00 p.m., eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently the NYSE is closed on the observance of
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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Securities that are listed on U.S. exchanges are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day,
at the last available bid price. In cases where securities are traded on more
than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
OTC market and listed on Nasdaq are valued at the last trade price on Nasdaq at
4:00 p.m., eastern time; other OTC securities are valued at the last bid price
available prior to valuation. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trust's board of trustees. In valuing lower
rated corporate debt securities it should be recognized that judgment often
plays a greater role than is the case with respect to securities for which a
broader range of dealer quotations and last-sale information is available.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Total Return Calculations. Average annual total return quotes ("Standardized
Return") used in the Fund's Performance Advertisements are calculated according
to the following formula:
P(1 + T)n
= ERV
where: P
= a hypothetical initial payment of $1,000 to purchase shares of a specified
Class
T
= average annual total return of shares of that Class
n
= number of years
ERV
= ending redeemable value of a hypothetical $1,000 payment at the beginning of
that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge is deducted from the initial $1,000 payment and, for
Class B shares, the applicable contingent deferred sales charge imposed on a
redemption of Class B 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
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<PAGE>
charges are taken into account in calculating Non-Standardized Return; the
inclusion of those charges would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B
and Class D shares of the Fund for the periods indicated. All returns for
periods of more than one year are expressed as an average return.
Class A Class B Class D
--------- --------- -------
Fiscal year ended August 31, 1994:
Standardized Return*.............. (2.27)% (3.45)% 1.59%
Non-Standardized Return........... 2.33% 1.55% 1.59%
Five years ended August 31, 1994:
Standardized Return*.............. 9.40% NA NA
Non-Standardized Return........... 10.40% NA NA
Inception** to August 31, 1994:
Standardized Return*.............. 13.42% 10.37% 11.13%
Non-Standardized Return........... 13.98% 11.38% 11.13%
- ------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. Until December 2, 1988, the maximum
sales charge imposed on purchases of Class A shares was 8.5%. This higher
sales charge is not reflected in the Standardized Return set forth above. All
Standardized Return figures for Class B shares reflect deduction of the
applicable contingent deferred sales charges imposed on a redemption of
shares held for the period. Class D shares do not impose an initial or
contingent deferred sales charge; therefore, Non-Standardized Return is
identical to Standardized Return.
** The inception date for each Class of shares is as follows: Class A-March 18,
1985, Class B- July 1, 1991 and Class D-July 2, 1992.
Other Information. In Performance Advertisements, the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies, Inc.
("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"), Investment
Company Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), with
the performance of recognized stock and other indices, including (but not
limited to) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"),
the Dow Jones Industrial Average, the Nasdaq Composite Index, the Russell 2000
Index, the Wilshire 5000 Index, the Lehman Bond Index, 30-year and 10-year U.S.
Treasury bonds, the Morgan Stanley Capital International World Index and
changes in the Consumer Price Index as published by the U.S. Department of
Commerce. The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper, CDA, Wiesenberger, ICD or Morningstar. Performance
Advertisements also may refer to discussions of the Fund and comparative mutual
fund data and ratings reported in independent periodicals, including (but not
limited to) THE WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK,
FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE,
THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in Performance
Advertisements may be in graphic form.
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<PAGE>
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 Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote(R) Money
Markets. In comparing the Fund's performance to CD performance, investors
should keep in mind that bank CDs are insured in whole or in part by an agency
of the U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Shares of the Fund
are not insured or guaranteed by the U.S. government and returns and net asset
value will fluctuate. The securities held by the Fund generally have longer
maturities than most CDs and may reflect interest rate fluctuations for longer
term securities. An investment in the Fund involves greater risks than an
investment in either a money market fund or a CD.
The Fund may also compare its performance to general trends in the stock and
bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
[MAC ART]
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<PAGE>
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1926 to 1993, stocks beat all
other traditional asset classes. A $10 investment in the S&P 500 grew to
$8,001, significantly more than any other investment.
The chart shown is for illustrative purposes only and does not represent the
Fund's performance and should not be considered an indication or guarantee of
future results. Year-to-year fluctuations of the S&P 500 have been significant,
and total return for some periods has been negative. The S&P 500 includes
companies with larger market capitalizations than those in which the Fund
invests. Unlike investors in bonds and Treasury bills, common stock investors
do not receive fixed income payments and are not entitled to repayment of
principal. These differences contribute to investment risk. Returns shown for
long-term government bonds are based on Treasury bonds with 20-year maturities.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net
short-term capital gain, ("Distribution Requirement") and must meet several
additional requirements. Among these requirements are the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities, or other income (including gains
from options or futures) derived with respect to its business of investing in
securities ("Income Requirement"); (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities, options or futures that were held for less than three months
("Short-Short Limitation"); (3) at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. government securities, securities of other RICs
and other securities, with these other securities limited, in respect of any
one issuer, to an amount that does not exceed 5% of the value of the Fund's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (4) 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.
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 any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the Fund's investment company taxable income
(whether paid in cash or reinvested in additional Fund shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends received by 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 alternative minimum tax.
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<PAGE>
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 on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back
as a taxable distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs") if such stock is denominated in U.S. dollars and otherwise is a
permissible investment. A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain from disposition of such stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital
gain over net short-term capital loss)-which would have to be distributed to
satisfy the Distribution Requirement and avoid imposition of the Excise
Tax-even if those earnings and gain are not distributed to the Fund. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The "Tax Simplification and Technical Corrections Bill of 1993," passed in
May 1994 by the House of Representatives, would substantially modify the
taxation of U.S. shareholders of foreign corporations, including eliminating
the provisions described above dealing with PFICs and replacing them (and other
provisions) with a regulatory scheme involving entities called "passive foreign
corporations." Three similar bills were passed by Congress in 1991 and 1992 and
vetoed. It is unclear at this time whether, and in what form, the proposed
modifications may be enacted into law.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was in
effect).
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<PAGE>
The use of hedging strategies, such as writing ("selling") and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the character and timing of recognition of the gains and
losses the Fund realizes in connection therewith. Income from transactions in
options and futures derived by the Fund with respect to its business of
investing in securities will qualify as permissible income under the Income
Requirement. However, income from the disposition of options and futures
contracts will be subject to the Short-Short Limitation if they are held for
less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
OTHER INFORMATION
PaineWebber Olympus Fund is an entity of the type commonly known as a
"Massachusetts business trust." Effective July 1, 1991, the name of the Fund
was changed from "PaineWebber Classic Growth Fund" to its current name. Under
Massachusetts law, shareholders of the Fund could, under certain circumstances,
be held personally liable for the obligations of the Trust or Fund. However,
the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust or the Fund and requires that notice of such
disclaimer be given in each note, bond, contract, instrument, certificate or
undertaking made or issued by the trustees or by any officers or officer by or
on behalf of the Trust or the Fund, the trustees or any of them in connection
with the Trust. The Declaration of Trust provides for indemnification from the
Fund's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations,
a possibility that Mitchell Hutchins believes is remote and not material. Upon
payment of any liability incurred by a shareholder solely by reason of being or
having been a shareholder, the shareholder paying such liability will be
entitled to reimbursement from the general assets of the Fund. The trustees
intend to conduct the operations of the Fund in such a way as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Fund.
Class-Specific Expenses. The Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A or Class D shares. The higher fee is imposed due to the higher
costs
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<PAGE>
incurred by the transfer agent in tracking shares subject to a contingent
deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the transfer
agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
Counsel. The law firm of Kirkpatrick & Lockhart, 1800 M Street, N.W.,
Washington, D.C., 20036-5891, counsel to the Fund, has passed upon the legality
of the shares offered by the Prospectus. Kirkpatrick & Lockhart also acts as
counsel to PaineWebber and Mitchell Hutchins in connection with other matters.
Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended August 31,
1994 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
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APPENDIX
Description of Moody's Investors Services, Inc. ("Moody's") Corporate Bond
Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as a
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; Aa. Bonds which are
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities; A. Bonds which are
rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future; Baa. Bonds which are rated
Baa are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; Caa. Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest; Ca. Bonds which are
rated Ca represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C. Bonds which
are rated C are the lowest rated class of bonds and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Ratings Group ("S&P") Corporate Debt Ratings
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the higher
rated issues only in small degree; A. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher
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<PAGE>
rated categories; BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories;
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions; C1. The rating C1 is reserved for income bonds on which no interest
is being paid; D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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No person has been authorized to give any information or to make any
representations not contained in the Prospectus or in this Statement of
Additional Information in connection with the offering made by the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Fund or its distributor. The Prospectus
and this Statement of Additional Information do not constitute an offering by
the Fund or by the distributor in any jurisdiction in which such offering may
not lawfully be made.
---------
TABLE OF CONTENTS
Page
----
Investment Policies and Restrictions.. 1
Hedging Strategies.................... 6
Trustees and Officers................. 12
Investment Advisory and Distribution
Arrangements.......................... 19
Portfolio Transactions................ 24
Reduced Sales Charges, Additional
Exchange and Redemption
Information and Other Services........ 26
Conversion of Class B Shares.......... 30
Valuation of Shares................... 30
Performance Information............... 31
Taxes................................. 34
Other Information..................... 36
Financial Statements.................. 37
Appendix ............................. 38
(C) 1995 Paine Webber Incorporated
Recycled Paper
Paine Webber
Growth Fund
- -------------------------------------------------------------------------------
Statement of Additional Information
January 1, 1995
- -------------------------------------------------------------------------------
Paine Webber
<PAGE>
PaineWebber Communications
& Technology Growth Fund
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Communications & Technology Growth Fund ("Fund") is a
diversified series of PaineWebber Olympus Fund ("Trust"), a professionally
managed, open-end investment company organized as a Massachusetts business
trust. The Fund's investment objective is long-term capital appreciation. The
Fund seeks to achieve this objective by investing in equity securities of
companies primarily engaged in communications or technology, including
companies primarily engaged in information production, distribution or use
(including content owners, content providers, content distributors and content
subscribers), as well as new information technology development companies. The
Fund's investment adviser, administrator and distributor is Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned 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 is not a
prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated January 1, 1995. A copy of the Prospectus may be obtained by
calling any PaineWebber investment executive or correspondent firm or by
calling toll-free 1-800-647-1568. This Statement of Additional Information is
dated January 1, 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
Yield Factors and Ratings. Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Ratings Group ("S&P") and other nationally recognized
statistical rating organizations ("NRSROs") are private services that provide
ratings of the credit quality of debt obligations. A description of the
ratings assigned to corporate debt obligations by Moody's and S&P is included
in the Appendix to this Statement of Additional Information. The Fund may use
these ratings in determining whether to purchase, sell or hold a security. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, securities with the same maturity,
interest rate and rating may have different market prices.
<PAGE>
Special Considerations Relating to Foreign Securities. Although the Fund
is authorized to invest in foreign securities denominated in foreign
currencies or in securities that are not traded in the United States it has no
intention of doing so in the coming year. The Fund will not invest in such
instruments until they have been sufficiently described in the Prospectus or a
supplement thereto.
Many of the foreign securities in which the Fund may invest are not
registered with the Securities and Exchange Commission ("SEC"), nor are the
issuers thereof 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.
In addition to purchasing securities of foreign issuers in foreign
markets, the Fund may invest in American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") or other securities convertible into
securities of corporations based in foreign countries. These securities may
not necessarily be denominated in the same currency as the securities into
which they may be converted. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets and EDRs, in bearer form, may be denominated in other currencies and
are designed for use in European securities markets. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. EDRs are European receipts evidencing a similar
arrangement. For purposes of the Fund's investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR evidencing ownership of common stock will be
treated as common stock.
Investments in foreign securities involve risks relating to political and
economic developments abroad as well as those that may result from the
differences between the regulation to which U.S. issuers are subject and that
which is applicable to foreign issuers. These risks may include expropriation,
confiscatory taxation, withholding taxes on dividends, limitations on the use
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. Securities of many foreign companies may be
less liquid and their prices more volatile than securities issued by
comparable U.S. companies. While the Fund generally invests only in securities
that are traded on recognized exchanges or in over-the-counter ("OTC")
markets, from time to time foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts.
The Fund anticipates that its brokerage transactions involving securities
of companies headquartered in countries other than the United States will be
conducted primarily on the principal exchanges of such countries. Foreign
security 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. Transactions on foreign exchanges are usually subject
to fixed commissions that are generally higher than negotiated commissions on
U.S. transactions, although the Fund will endeavor to achieve the best net
results in effecting its portfolio transactions. There is generally less
government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.
2
<PAGE>
Because foreign securities ordinarily are denominated in currencies other
than the U.S. dollar (as are some securities of U.S. issuers), changes in
foreign currency exchange rates will affect the Fund's net asset value, the
value of dividends earned, gains and losses realized on the sale of securities
and net investment income and capital gain, if any, to be distributed to
shareholders by the Fund. If the value of a foreign currency rises against the
U.S. dollar, the value of the Fund's assets denominated in that currency will
increase; correspondingly, if the value of a foreign currency declines against
the U.S. dollar, the value of the Fund's assets denominated in that currency
will decrease. The exchange rates between the U.S. dollar and other currencies
are determined by supply and demand in the currency exchange markets,
international balances of payments, speculation and other economic and
political conditions. In addition, some foreign currency values may be
volatile and there is the possibility of governmental controls on currency
exchange or governmental intervention in the currency markets. Any of these
factors could adversely affect the Fund.
The costs attributed to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing. For
example, the costs of maintaining custody of securities in foreign countries
exceed custodian costs related to domestic securities.
Foreign Currency Transactions. Although authorized to do so, the Fund
will not invest in foreign currencies until they have been sufficiently
described in the Prospectus or a supplement thereto.
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.
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. Although foreign exchange dealers generally do not charge a
stated commission or fee for conversion, the prices posted generally include a
"spread," which is the difference between the prices at which the dealers are
buying and selling foreign currencies. The Fund has no intention of investing
in foreign currencies in the coming year.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased OTC options, repurchase
agreements maturing in more than seven days and restricted securities other
than those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the Trust's boards of trustees. The assets used as cover for
OTC options written by the Fund will be considered illiquid unless the OTC
options are sold to qualified dealers who agree that the Fund may repurchase
any OTC option it writes at a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC option written subject to
this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Illiquid restricted securities may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933 ("1933
Act"). Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse
3
<PAGE>
market conditions were to develop, the Fund might obtain a less favorable
price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because the
securities are sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities
of domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by the 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 Trust's board of trustees has delegated the function of making
day-to-day determinations of liquidity to Mitchell Hutchins, pursuant to
guidelines approved by the board. Mitchell Hutchins takes into account a
number of factors in reaching liquidity decisions, including (1) the frequency
of trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in
the security, (4) the number of other potential purchasers and (5) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of restricted securities in 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 from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date
agreed to is, in effect, secured by such securities. If the value of these
securities is less than the repurchase price, plus any agreed-upon additional
amount, the other party to the agreement must provide additional collateral so
that at all times the collateral is at least equal to the repurchase price,
plus any agreed-upon additional amount. The difference between the total
amount to be received upon repurchase of the securities and the price that was
paid by the Fund upon acquisition is accrued as interest and included in the
Fund's net investment income. Repurchase agreements carry certain risks not
associated with direct investments in securities, including possible
4
<PAGE>
declines in the market value of the underlying securities and delays and costs
to the Fund if the other party to a repurchase agreement becomes insolvent.
The Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins to present minimal
credit risks in accordance with guidelines established by the Trust's board of
trustees. Mitchell Hutchins will review and monitor the creditworthiness of
those institutions under the board's general supervision.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with banks and securities dealers up to an aggregate
value of not more than 5% of its total assets. Such agreements involve the
sale of securities held by the Fund subject to its agreement to repurchase the
securities at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary purposes. While a reverse repurchase agreement is
outstanding, the Fund's custodian segregates assets to cover the Fund's
obligations under the reverse repurchase agreement. See "Investment Policies
and Restrictions--Segregated Accounts."
Segregated Accounts. When the Fund enters into certain transactions to
make future payments to third parties, including reverse repurchase
agreements, it will maintain with an approved custodian in a segregated cash
account, U.S. government securities or other liquid high-grade debt
securities, marked to market daily, in an amount at least equal to the Fund's
obligation or commitment under such transactions. As described below under
"Hedging Strategies," segregated accounts may also be required in connection
with certain transactions involving options, futures contracts and forward
currency contracts.
Lending of Portfolio Securities. Although the Fund has no intention of
doing so during the coming year, it is authorized to lend up to 10% of the
total value of its portfolio securities to broker-dealers or institutional
investors that Mitchell Hutchins deems qualified, but only when the borrower
maintains with the Fund's custodian bank collateral either in cash or money
market instruments in an amount marked to market daily at least equal to the
market value of the securities loaned, plus accrued interest and dividends. 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 loans at any time. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or money market instruments held as collateral
to the borrower or placing broker. The Fund will receive reasonable interest
on the loan or a flat fee from the borrower and amounts equivalent to any
dividends, interest or other distributions on the securities loaned. The Fund
will regain record ownership of loaned securities to exercise beneficial
rights, such as voting and subscription rights and rights to dividends,
interest or other distributions, when regaining such rights is considered to
be in the Fund's interest.
Investment Limitations of the Fund. The Fund may not (1) issue senior
securities or borrow money, except from banks for temporary purposes and
except for reverse repurchase agreements, and then in an aggregate amount not
in excess of 10% of the Fund's total assets; provided further that the Fund
will not purchase securities while borrowings (including reverse repurchase
agreements) in excess of 5% of the Fund's total assets are outstanding; (2)
purchase securities if, as a result of the
5
<PAGE>
purchase, the Fund would have more than 25% of the value of its total assets
invested in securities of issuers in any one industry, except that this
limitation does not apply to obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; (3) purchase securities of any
issuer if as a result more than 5% of the Fund's total assets would be
invested in that issuer or the Fund would own or hold more than 10% of the
outstanding voting securities of that issuer; provided, however, that
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities are not subject to these limitations and further provided
that up to 25% of the value of the Fund's total assets may be invested without
regard to these limitations; (4) underwrite securities of other issuers,
except to the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed an underwriter under federal securities
laws; (5) purchase securities on margin, make short sales of securities or
maintain a short position in any security, except that the Fund may (a) make
margin deposits, make short sales and may maintain short positions in
connection with its use of options, futures contracts, options on futures
contracts and forward contracts and (b) sell short "against the box"; (6)
purchase or sell real estate (including real estate limited partnerships);
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein; (7) purchase or sell commodities or commodity contracts,
except that the Fund may purchase or sell financial futures contracts, such as
stock index and foreign currency futures contracts, options and forward
contracts; (8) invest in oil, gas or mineral exploration or development
programs or leases, except that the Fund may invest in issuers that invest in
such programs or leases; (9) make loans, except through loans of portfolio
securities as described herein and except through repurchase agreements;
provided that for purposes of this restriction the acquisition of bonds,
debentures or other corporate debt securities and investments in government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed to be the making of loans or (10) purchase any
securities issued by any other investment company, except by purchase in the
open market where no commission or profit, other than a customary brokers'
commission, is earned by any sponsor or dealer associated with the investment
company whose shares are acquired as a result of such purchase (provided that
such securities in the aggregate do not represent more than 10% of the Fund's
total assets) and except in connection with the merger, consolidation or
acquisition of all the securities or assets of such an issuer.
The foregoing fundamental investment limitations cannot be changed
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 present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. If a percentage restriction
is adhered to at the time of an investment or transaction, a later increase or
decrease in percentage resulting from a change in values of portfolio
securities or amount of total assets will not be considered a violation of any
of the foregoing limitations.
The following investment restrictions may be changed by the Trust's board
of trustees without shareholder approval: the Fund may not (1) purchase or
retain the securities of any issuer if, to the knowledge of the Fund's
management, the officers and trustees of the Trust and the officers and
directors of Mitchell Hutchins (each owning beneficially more than 0.5% of the
outstanding securities of the issuer) own in the aggregate more than 5% of the
securities of the issuer; (2) purchase any security if as a result more than
5% of its total assets would be invested in securities of companies that
together with any predecessors have been in continuous operation for less than
three years; (3) invest more than 15% of its net assets in illiquid
securities, a term that means securities that cannot be
6
<PAGE>
disposed of within seven days in the ordinary course of business at
approximately the amount at which it has valued the securities and includes,
among other things, repurchase agreements maturing in more than seven days or
(4) make investments in warrants, valued at the lower of cost or market, in
excess of 5% of the value of its net assets, which amount may include warrants
that are not listed on the New York or American Stock Exchanges; provided that
such unlisted warrants, valued at the lower of cost or market, do not exceed
2% of its net assets, and further provided that this restriction does not
apply to warrants attached to, or sold as a unit with, other securities. For
purposes of this restriction, the term "warrants" does not include options on
securities, currencies, stock or bond indices, or futures contracts. In
addition, for so long as required by applicable state securities regulation,
the Fund will not (a) invest more than 15% of its total assets in securities
of issuers that are restricted as to disposition and (b) invest more than 10%
of its total assets in restricted securities (other than Rule 144A securities
determined to be liquid by the Trust's board of trustees).
HEDGING STRATEGIES
General Description of Hedging Strategies. As discussed in the
Prospectus, Mitchell Hutchins may use a variety of financial instruments
("Hedging Instruments"), including certain options, futures contracts
(sometimes referred to as "futures"), options on futures contracts and forward
currency contracts, to attempt to hedge the Fund's portfolio. The particular
Hedging Instruments that the Fund currently may use are described in the
Appendix to the Prospectus. The Fund has no intention of using options on
foreign currencies, futures contracts on foreign currencies, options on such
futures contracts or forward currency contracts in the coming year. The Fund
will not invest in such instruments until they have been sufficiently
described in the Prospectus or a supplement thereto.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
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 Hedging 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 Hedging 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 Hedging 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.
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<PAGE>
Hedging 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. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which the Fund has invested or expects to invest.
The use of Hedging Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded,
the Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the Fund's ability to use Hedging Instruments will
be limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins expects to discover additional opportunities
in connection with options, futures contracts, forward currency contracts and
other hedging techniques. These new opportunities may become available as
Mitchell Hutchins develops new techniques, as regulatory authorities broaden
the range of permitted transactions and as new options, futures contracts,
forward currency contracts or other techniques are developed. Mitchell
Hutchins may utilize these opportunities to the extent that they are
consistent with the Fund's investment objective and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks of Hedging Strategies. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks
pertaining to particular Hedging Instruments are described in the sections
that follow.
(1) Successful use of most Hedging Instruments depends upon the ability
of Mitchell Hutchins to predict movements of the overall securities and
currency markets, which requires different skills than predicting changes in
the prices of individual securities. While Mitchell Hutchins is experienced in
the use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which Hedging Instruments are traded. The effectiveness of hedges
using Hedging Instruments on indices will depend on the degree of correlation
between price movements in the index and price movements in the investments
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 Hedging Instrument. Moreover, if the price of the
Hedging Instrument
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<PAGE>
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 Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. The 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 Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of the other party to the transaction ("contra
party") to enter into a transaction closing out the position. Therefore, there
is no assurance that any hedging position can be closed out at a time and
price that is favorable to the Fund.
Cover for Hedging Strategies. Transactions using Hedging 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, futures or forward currency contracts or (2) cash and
short-term liquid debt securities with a value sufficient at all times to
cover its potential obligations to the extent not covered as provided in (1)
above. The Fund will comply with SEC guidelines regarding cover for hedging
transactions and will, if the guidelines so require, set aside cash, U.S.
government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion
of the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. The Fund may purchase put and call options, and write (sell)
covered put or call options, on equity securities, foreign currencies and
stock indices. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing covered call options
serves as a limited short hedge because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security at less than its
market value. Writing covered put options serves as a limited long hedge
because increases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the Fund
will be obligated to purchase the security at more than its market value. The
securities or other assets used as cover for OTC options written by the Fund
would be considered illiquid to the extent described under "Investment
Policies and Restrictions-- Illiquid Securities." 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
9
<PAGE>
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 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 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 the profit or limit the loss on an option position prior to
its exercise or expiration.
The Fund may purchase and write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities and foreign currencies exist but are
relatively new, and these instruments are primarily traded on the OTC market.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Fund purchases or writes an OTC option, it relies on
the contra party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party to do so would result in
the loss of any premium paid by the Fund as well as the loss of any expected
benefit of the transaction. The Fund will enter into OTC option transactions
only with contra parties that have a net worth of at least $20 million.
Generally, the OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The 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 OTC options only by negotiating directly with the
contra party, or by a transaction in the secondary market if any such market
exists. Although the Fund will enter into OTC options only with contra parties
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
OTC option position at a favorable price prior to expiration. In the event of
insolvency of the contra party, the Fund might be unable to close out an OTC
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
10
<PAGE>
the Fund would be unable to sell the investment used as cover for the written
option until the option expires or is exercised.
Limitations on the Use of Options. The Fund's use of options is governed
by the following guidelines, which can be changed by the Trust's board of
trustees without shareholder vote:
(1) The Fund may purchase a put or call option, including any straddles
or spreads, only if the value of its premium, when aggregated with the
premiums on all other options held by the Fund, does not exceed 5% of the
Fund's total assets.
(2) The aggregate value of securities underlying put options written by
the Fund, determined as of the date the put options are written, will not
exceed 50% of the Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by the Fund that are held at any time will not
exceed 20% of the Fund's net assets.
Futures. The Fund may purchase and sell foreign currency and stock index
futures contracts and purchase put and call options, and write covered put and
call options, on such futures contracts. 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, foreign currencies or indices.
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, U.S. government securities or other liquid, high-grade debt securities,
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put 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.
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 or put 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
11
<PAGE>
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 option on a futures contract 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 option on a futures
contract 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 options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or options on futures
contracts positions whose prices are moving unfavorably to avoid being subject
to further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin deposit
requirements in the futures market are less onerous than margin requirements
in the securities markets, there might be increased participation by
speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
Limitations on the Use of Futures. The Fund's use of futures is governed
by the following guidelines, which can be changed by the Trust's board of
trustees without shareholder vote:
(1) To the extent the Fund enters into futures contracts, options on
futures positions and options on foreign currencies traded on a commodities
exchange 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 the Fund's
net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by the Fund that are held at any time will not
exceed 20% of the Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's net
assets.
Foreign Currency Hedging Strategies--Special Considerations. The Fund
may use options and futures on foreign currencies, as described above, and
foreign currency forward contracts, as described
12
<PAGE>
below, to hedge against movements in the values of the foreign currencies in
which the Fund's securities may be denominated. Such currency hedges can
protect against price movements in a security that the 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 Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on another foreign
currency or a basket of currencies, the values of which Mitchell Hutchins
believes will have a positive correlation to the value of the currency being
hedged. The risk that movements in the price of the Hedging Instrument will
not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
The value of Hedging 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 Hedging
Instruments, the 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 Hedging Instruments
until they reopen.
Settlement of hedging transactions 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.
As noted above, the Fund may seek to hedge against changes in the value
of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which Mitchell Hutchins
believes will have a positive correlation to the values of the currency being
hedged.
13
<PAGE>
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 owns securities denominated in a foreign currency and Mitchell Hutchins
believes that currency will 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 Hedging Instrument will not correlate or will
correlate unfavorably with the foreign currency being hedged.
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 contra party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. 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 contra party. Thus, there can be no assurance
that the 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 contra party, the 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 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 maintains cash, U.S. government
securities or liquid, high-grade debt securities in a segregated account 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.
14
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their business
addresses and principal occupations during the past five years are:
<TABLE><CAPTION>
Position Business Experience;
Name and Address* with the Trust Other Directorships
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.** Trustee and Chairman Mr. Bewkes is a director of Paine
of the Board of Trustees Webber Group Inc. ("PW Group")
(holding company of PaineWebber and
Mitchell Hutchins) and a consultant
to PW Group. Prior to 1988, he was
chairman of the board, president and
chief executive officer of American
Bakeries Company. Mr. Bewkes is also
a director of Interstate Bakeries
Corporation and a director or
trustee of other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Meyer Feldberg Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior
New York, New York 10027 to 1989, he was president of the
Illinois Institute of Technology.
Dean Feldberg is also a director of
AMSCO International Inc., Federated
Department Stores, Inc., Inco Homes
Corporation and New World
Communications Group Incorporated
and a director or trustee of other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
George W. Gowen Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, New York 10017 Prior to May 1994, he was a partner
in the law firm of Fryer, Ross &
Gowen. Mr. Gowen is also a director
of Columbia Real Estate Investments,
Inc. and a director or trustee of
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
15
<PAGE>
<CAPTION>
Position Business Experience;
Name and Address* with the Trust Other Directorships
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
Paul B. Guenther** Trustee and President Mr. Guenther is president and a
director of PW Group and Mitchell
Hutchins and a director of
PaineWebber. Mr. Guenther is also
president and a director or trustee
of other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Frederic V. Malek Trustee Mr. Malek is chairman of Thayer
901 15th Street, N.W. Capital Partners (investment bank)
Suite 300 and a co- chairman and director of
Washington, D.C. 20005 CB Commercial Group Inc. (real
estate). From January 1992 to
November 1992, he was campaign
manager of Bush-Quayle '92. From
1990 to 1992, he was vice chairman,
and from 1989 to 1990, he was
president of Northwest Airlines
Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of
NWA Inc.). Prior to 1989, he was
employed by the Marriott Corporation
(hotels, restaurants, airline
catering and contract feeding),
where he most recently was an
executive vice president and presi-
dent of Marriott Hotels and Resorts.
Mr. Malek is also a director of
American Management Systems, Inc.,
Automatic Data Processing, Inc.,
Avis, Inc., FPL Group, Inc., ICF
International, Manor Care, Inc. and
National Education Corporation and a
director or trustee of other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frank P. L. Minard** Trustee Mr. Minard is chairman and chief
executive officer of Mitchell
Hutchins, chairman of the board of
Mitchell Hutchins Institutional
Investors Inc. and an executive vice
president of PW Group. Prior to
1993, Mr. Minard was Managing Di-
rector of Oppenheimer Capital in
16
<PAGE>
<CAPTION>
Position Business Experience;
Name and Address* with the Trust Other Directorships
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
New York and Director of Oppen-
heimer Capital Ltd. in London. Mr.
Minard is also a director or trustee
of other investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment adviser.
Judith Davidson Moyers Trustee Mrs. Moyers is president of Public
Public Affairs Television Affairs Television, Inc., an
356 W. 58th Street educational consultant and a home
New York, New York 10019 economist. Mrs. Moyers is also a
director of Ogden Corporation and a
director or trustee of other in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Thomas F. Murray Trustee Mr. Murray is a real estate and
400 Park Avenue financial consultant. Mr. Murray is
New York, New York 10022 also a director and chairman of
American Continental Properties,
Inc., a trustee of Prudential Realty
Trust and a director or trustee of
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle Vice President Ms. Boyle is a vice president and man-
ager--advisory administration of
Mitchell Hutchins. Prior to November
1993, she was compliance manager of
Hyperion Capital Management, Inc.,
an investment advisory firm. Prior
to April 1993, Ms. Boyle was a vice
president and manager--legal
administration of Mitchell Hutchins.
Ms. Boyle is also a vice president
of other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Joan L. Cohen Vice President and Ms. Cohen is a vice president and
Assistant Secretary attorney of Mitchell Hutchins. Prior
to December 1993, she was an
associate at the law firm of Seward
& Kissel. Ms. Cohen is also a vice
president and assistant secretary of
other investment
17
<PAGE>
<CAPTION>
Position Business Experience;
Name and Address* with the Trust Other Directorships
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ellen R. Harris Vice President Ms. Harris is chief domestic equity
strategist, a managing director and
chief investment officer--domestic
of Mitchell Hutchins. Ms. Harris is
also a vice president of other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Clifford E. Kirsch Vice President and Mr. Kirsch is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to March
1994, he was an assistant director
in the Division of Investment
Management at the SEC. Mr. Kirsch is
also a vice president and assistant
secretary of other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is also
a vice president and assistant
treasurer of other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell Vice President and Ms. O'Donnell is a first vice
Secretary president and senior associate
general counsel of Mitchell
Hutchins. Ms. O'Donnell is also a
vice president and secretary of
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Prior to
April 1990, she was a partner in the
law firm of Shereff,
18
<PAGE>
<CAPTION>
Position Business Experience;
Name and Address* with the Trust Other Directorships
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
Friedman, Hoffman & Goodman. Ms.
Schonfeld is also a vice president
of other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Paul H. Schubert Vice President and Mr. Schubert is a vice president of
Assistant Treasurer Mitchell Hutchins. From August 1992
to August 1994, he was a vice
president at BlackRock Financial
Management, L.P. Prior to August
1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is
also a vice president and assistant
treasurer of other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Martha J. Slezak Vice President and Ms. Slezak is a vice president of
Assistant Treasurer Mitchell Hutchins. From September
1991 to April 1992, she was a
fundraising director for a U.S.
Senate campaign. Prior to September
1991, she was a tax manager with
Arthur Andersen & Co. Ms. Slezak is
also a vice president and assistant
treasurer of other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Julian F. Sluyters Vice President and Mr. Sluyters is a senior vice
Treasurer president and the director of the
mutual fund finance division of
Mitchell Hutchins. Prior to 1991, he
was an audit senior manager with
Ernst & Young LLP. Mr. Sluyters is
also a vice president and treasurer
of other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Gregory K. Todd Vice President and Mr. Todd is a first vice president and
Assistant Secretary associate general counsel of
Mitchell Hutchins. Prior to 1993, he
was a partner in the law firm of
Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is
19
<PAGE>
<CAPTION>
Position Business Experience;
Name and Address* with the Trust Other Directorships
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
also a vice president and assistant
secretary of other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- ---------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes, Guenther and Minard are "interested persons" of the Trust
as defined in the Investment Company Act of 1940, as amended ("1940 Act"),
by virtue of their positions with PW Group, PaineWebber and/or Mitchell
Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust
$2,000 annually and $250 per meeting of the board or any committee thereof.
Trustees also are reimbursed for any expenses incurred in attending meetings.
Trustees and officers of the Trust 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,
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.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
Investment Advisory Arrangements. Mitchell Hutchins acts as the
investment adviser and administrator of the Fund pursuant to a contract dated
March 1, 1989, as supplemented by a Fee Agreement dated October 28, 1993 with
the Trust ("Advisory Contract"). Under the Advisory Contract, the Fund pays
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate
of 0.75% of the Fund's daily net assets.
For the period November 2, 1993 (commencement of operations) to August
31, 1994, the Fund paid (or accrued) to Mitchell Hutchins investment advisory
and administration fees of $473,641.
Under a service agreement with the Trust, pursuant to which PaineWebber
provides certain services to the Fund not otherwise provided by the Fund's
transfer agent, which agreement is reviewed by the Trust's board of trustees
annually, for the period November 2, 1993 (commencement of operations) to
August 31, 1994, the Fund paid (or accrued) to PaineWebber service fees of
$35,189.
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) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to trustees and officers who are not interested
persons (as defined in the 1940 Act) of the Fund or Mitchell Hutchins; (6) all
expenses incurred in connection with the trustees' services, including travel
expenses; (7) taxes
20
<PAGE>
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectable items of deposit and other insurance or fidelity
bonds; (9) any costs, expenses or losses arising out of a liability of or
claim for damages or other relief asserted against the Trust or 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,
statements of additional information and supplements thereto, reports and
proxy materials for existing shareholders, and costs of mailing such materials
to shareholders; (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the Fund; (15) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (16) costs of mailing and tabulating proxies
and costs of meetings of shareholders, the 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.
As required by state regulation, Mitchell Hutchins will reimburse the
Fund if and to the extent that the aggregate operating expenses of the Fund in
any fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily
net assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees, certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. For the period
November 2, 1993 (commencement of operations) to August 31, 1994, no
reimbursement was required pursuant to such limitation.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the board of trustees or by vote of the holders of a majority of
the Fund's outstanding voting securities on 60 days' written notice to
Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written notice to the
Fund.
The following table shows the approximate net assets as of November 30,
1994, sorted by category of investment objective, of the investment companies
as to which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below.
Net
Assets
Investment ---------
Category
- -------------------------------------------------------------- ($ mil)
Domestic (excluding Money Market)............................. $ 5,662.8
Global........................................................ 3,257.6
Equity/Balanced............................................... 2,538.9
Fixed Income (excluding Money Market)......................... 6,381.5
Taxable Fixed Income..................................... 4,666.7
Tax-Free Fixed Income.................................... 1,714.8
Money Market Funds............................................ 14,061.6
21
<PAGE>
Distribution Arrangements. Mitchell Hutchins acts as the distributor of
the Class A, Class B and Class D shares of the Fund under separate
distribution contracts with the Trust dated July 7, 1993 (collectively,
"Distribution Contracts") that require 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 dated July 7, 1993
relating to the Class A, Class B and Class D 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 D shares of the Fund adopted by the Trust in the manner prescribed
under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class
D Plan," 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 D Plan, the Fund pays Mitchell Hutchins a distribution fee, accrued
daily and payable monthly, at the annual rate of 0.75% of the average daily
net assets of the Class B shares and Class D shares, respectively.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the Trust's board of trustees at least quarterly, and the trustees
will review, reports regarding all amounts expended under the Plan and the
purposes for which such expenditures were made, (2) the Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the Trust's board of trustees, including
those trustees who are not "interested persons" of the Trust and who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related to the Plan, acting in person at a meeting called for that
purpose, (3) payments by 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 trustees who are not "interested
persons" of the Trust shall be committed to the discretion of the trustees who
are not "interested persons" of the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each Class of Fund
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 Fund
shares will not be used to subsidize the sale of any other Class of Fund
shares.
For the period November 2, 1993 (commencement of operations) to August
31, 1994, the Fund paid (or accrued) the following fees to Mitchell Hutchins
under the Plans:
Class A.................................. $ 39,016
Class B.................................. $384,326
Class D.................................. $ 91,135
22
<PAGE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the Fund during the period
November 2, 1993 (commencement of operations) to August 31, 1994:
<TABLE><CAPTION>
Class A
<S> <C>
Marketing and advertising.......................................................... $70,844
Printing of prospectuses and statements of additional information.................. 8,188
Branch network costs allocated and interest expense................................ 96,962
Service fees paid to PaineWebber investment executives............................. 17,557
<CAPTION>
Class B
<S> <C>
Marketing and advertising......................................................... $182,681
Amortization of commissions....................................................... 154,802
Printing of prospectuses and statements of additional information................. 20,547
Branch network costs allocated and interest expense............................... 259,616
Service fees paid to PaineWebber investment executives............................ 43,237
<CAPTION>
Class D
<S> <C>
Marketing and advertising.......................................................... $52,644
Amortization of commissions........................................................ 29,890
Printing of prospectuses and statements of additional information.................. 4,745
Branch network costs allocated and interest expense................................ 62,461
Service fees paid to PaineWebber investment executives............................. 10,253
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts in distributing Fund 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
Fund shares, including the PaineWebber retail branch system.
In approving the Fund's overall Flexible PricingSM system of
distribution, the Trust's board of trustees considered several factors,
including that implementation of Flexible Pricing would (1) enable investors
to choose the purchasing option best suited to their individual situation,
thereby encouraging current shareholders to make additional investments in 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 trustees 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 load combined with a service fee would
be attractive to PaineWebber investment executives and correspondent firms,
resulting in a
23
<PAGE>
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 trustees considered all the features
of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from Fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive
to the investment executives and correspondent firms, resulting in greater
growth of the Fund than might otherwise be the case; (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon
its expectation of being compensated under the Class B Plan.
In approving the Class D Plan, the trustees 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 and paying for distribution on an
ongoing basis, (3) Mitchell Hutchins' belief that the ability of PaineWebber
investment executives and correspondent firms to receive sales compensation
for their sales of Class D shares on an ongoing basis, along with continuing
service fees, while their customers invest their entire purchase payments
immediately in Class D shares without facing contingent deferred sales
charges, would prove attractive to the investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (5) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (6)
the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service- and distribution-related expenses and costs. The trustees also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and
its investment executives, without the concomitant receipt by Mitchell
Hutchins of initial sales charges or contingent deferred sales charges upon
redemption, was conditioned upon its expectation of being compensated under
the Class D Plan.
With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that
Mitchell Hutchins would
24
<PAGE>
receive service, distribution and advisory fees that are calculated based upon
a percentage of the average net assets of the Fund, which fees would increase
if the Plan were successful and the Fund attained and maintained significant
asset levels.
Under the Distribution Contract for the Class A shares for the period
November 2, 1993 (commencement of operations) to August 31, 1994, Mitchell
Hutchins earned approximately $800,661 and retained approximately $45,954 in
sales charges, net of concessions to PaineWebber as exclusive dealer.
For the period November 2, 1993 (commencement of operations) to August
31, 1994, Mitchell Hutchins earned and retained approximately $133,844 in
contingent deferred sales charges paid upon certain redemptions of Class B
shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Trust's board of trustees,
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. Prices paid to
dealers in principal transactions, through which most debt securities and some
equity securities are traded, generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The Fund may invest in securities traded
in the OTC market and will engage primarily in transactions directly with the
dealers who make markets in such securities, unless a better price or
execution could be obtained by using a broker. While Mitchell Hutchins
generally seeks reasonably competitive commission rates and dealer spreads,
payment of the lowest commission or spread is not necessarily consistent with
obtaining the best net results. For the period November 2, 1993 (commencement
of operations) to August 31, 1994, the Fund paid $45,210 in brokerage
commissions.
The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The Trust's board of trustees has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to Mitchell Hutchins or its affiliates are reasonable and
fair. Specific provisions in the Advisory Contract authorize Mitchell Hutchins
and any of its affiliates that are members of a national securities exchange
to effect portfolio transactions for the Fund on such exchange and to retain
compensation in connection with such transactions. Any such transactions will
be effected and related compensation paid only in accordance with applicable
SEC regulations. For the period November 2, 1993 (commencement of operations)
to August 31, 1994, no brokerage commissions were paid by the Fund to
PaineWebber or any other Mitchell Hutchins affiliate.
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
25
<PAGE>
Hutchins and its affiliates, are similar to those in effect with respect to
brokerage transactions in securities.
Consistent with the Fund's interests and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase
and sell portfolio securities through brokers who provide the Fund with
research, analysis, advice and similar services. In return for such services,
the Fund may pay to those brokers a higher commission than may be charged by
other brokers, provided that Mitchell Hutchins determines in good faith that
such commission is reasonable in terms either of that particular transaction
or of the overall responsibility of Mitchell Hutchins to the Fund and its
other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term.
Research services furnished by brokers through which the Fund effects
securities transactions may be used by Mitchell Hutchins in advising other
funds or accounts it advises and, conversely, research services furnished to
Mitchell Hutchins in connection with other funds or accounts Mitchell Hutchins
advises may be used by Mitchell Hutchins in advising the Fund. Information and
research received from brokers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contract. For the period November 2, 1993 (commencement of operations) to
August 31, 1994, Mitchell Hutchins directed $2,375,670 in portfolio
transactions to brokers chosen because they provided research services, for
which the Fund paid $2,170 in commissions. The Fund may purchase and sell
portfolio securities to and from dealers who provide the Fund with research
services. Portfolio transactions will not be directed by the Fund to dealers
solely on the basis of research services provided. The Fund will not purchase
portfolio securities at a higher price or sell such securities at a lower
price in connection with transactions effected with a dealer, acting as
principal, who furnishes research services to Mitchell Hutchins than would be
the case if no weight were given by Mitchell Hutchins to the dealer's
furnishing of such services. Research services furnished by the dealers
through which or with which the Fund effects securities transactions may be
used by Mitchell Hutchins in advising other funds or accounts it advises and,
conversely, research services furnished to Mitchell Hutchins 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 independent 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 of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between the
Fund and such other account(s) as to amount according to a formula deemed
equitable to the Fund and such account(s). While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as the Fund is concerned, or upon its ability to complete its entire order, in
other cases it is believed that coordination and the ability to participate in
volume transactions will be beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings
in which Mitchell Hutchins or any of its affiliates is a member of the
underwriting or selling group, except pursuant to procedures adopted by the
Trust's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among
other things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, the purchase be at not
more than the public offering price prior to the end of the first business day
after the date of the public offering and that Mitchell Hutchins or any
affiliate thereof not participate in or benefit from the sale to the Fund.
26
<PAGE>
Portfolio Turnover. The Fund's annual portfolio turnover rate may vary
greatly from year to year, but it 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. For the period
November 2, 1993 (commencement of operations) to August 31, 1994, the Fund's
portfolio turnover rate was 11.92%.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
Combined Purchase Privilege--Class A Shares. Investors and eligible
groups of related Fund investors may combine purchases of Class A shares of
the 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");
(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; or
(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).
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
27
<PAGE>
permit confirmation of his or her holdings, and the acceptance of the purchase
order is subject to such confirmation. The right of accumulation may be
amended or terminated at any time.
Waivers of Sales Charges--Class B Shares. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where
the decedent is either the individual shareholder or owns the shares with his
or her spouse as a joint tenant with right of survivorship. This waiver
applies only to redemption of shares held at the time of death.
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing
System on July 1, 1991 ("CDSC Funds"). The contingent deferred sales charge is
waived with respect to redemptions of Class B shares of CDSC Funds purchased
prior to July 1, 1991 by officers, directors (trustees) or employees of the
CDSC Funds, Mitchell Hutchins or their affiliates (or their spouses and
children under age 21). In addition, the contingent deferred sales charge will
be reduced by 50% with respect to redemptions of Class B shares of CDSC Funds
purchased prior to July 1, 1991 with a net asset value at the time of purchase
of at least $1 million. If Class B shares of a CDSC Fund purchased prior to
July 1, 1991 are exchanged for Class B shares of the Fund, any waiver or
reduction of the contingent deferred sales charge that applied to the Class B
Shares of the CDSC Fund will apply to the Class B shares of the Fund acquired
through the exchange.
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. Shareholders will
receive at least 60 days' notice of any termination or material modification
of the exchange offer, except no notice need be given of an amendment whose
only material effect is to reduce the exchange fee and no notice need be given
if, under extraordinary circumstances, either redemptions are suspended under
the circumstances described below or 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.
If payment is made in securities, a shareholder may incur brokerage expenses
in converting these securities into cash. The Trust has elected, however, to
be governed by Rule 18f-1 under the 1940 Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund 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, Inc. ("NYSE")
is closed or trading on the NYSE is restricted as determined by the SEC, (2)
when an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the Fund's portfolio at the time.
28
<PAGE>
Systematic Withdrawal Plan. On or about the 15th of each month for
monthly plans and on or about the 15th of the months selected for quarterly or
semi-annual plans, PaineWebber will arrange for redemption by the Fund of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Fund's systematic withdrawal plan. The payment generally
is mailed approximately five business days after the redemption date.
Withdrawal payments should not be considered dividends, but redemption
proceeds, with the tax consequences described under "Dividends and Taxes" in
the Prospectus. If periodic withdrawals continually exceed reinvested
dividends, a shareholder's investment may be correspondingly reduced. A
shareholder may change the amount of the systematic withdrawal or terminate
participation in the systematic withdrawal plan at any time without charge or
penalty by written instructions with signatures guaranteed to PaineWebber or
PFPC Inc. ("Transfer Agent"). Instructions to participate in the plan, change
the withdrawal amount or terminate participation in the plan will not be
effective until five days after written instructions with signatures
guaranteed are received by the Transfer Agent. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
investment executives, correspondent firms or the Transfer Agent at
1-800-647-1568.
Reinstatement Privilege--Class A Shares. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their
account in the Fund without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the
date of redemption. The reinstatement will be made at the net asset value per
share next computed after the notice of reinstatement and check are received.
The amount of a purchase under this reinstatement privilege cannot exceed the
amount of the redemption proceeds. Gain on a redemption is taxable regardless
of whether the reinstatement privilege is exercised; however, a loss arising
out of a redemption will not be deductible to the extent the redemption
proceeds are reinvested within 30 days after redemption, and an adjustment
will be made to the shareholder's tax basis for shares acquired pursuant to
the reinstatement privilege. Gain or loss on a redemption also will be
adjusted for federal income tax purposes by the amount of any sales charge
paid on Class A shares, under the circumstances and to the extent described in
"Dividends and Taxes" in the Prospectus.
PaineWebber RMA Resource Accumulation PlansSM;
PaineWebber Resource Management Account(R)(RMA(R))
Shares of the 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 five business days
after the trade date, and the purchase price of the shares is withdrawn from
the investor's RMA account on the settlement date from the following sources
and in the following order: uninvested cash balances, balances in RMA money
market funds, or margin borrowing power, if applicable to the account.
29
<PAGE>
To participate in the Plan, an investor must be an RMA accountholder,
must have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to
enrolling in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may
take up to two weeks to become effective.
The terms of the Plan or an RMA accountholder's participation in the Plan
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
Periodic Investing and Dollar Cost Averaging.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an
investor to take advantage of "dollar cost averaging." By investing a fixed
amount in mutual fund shares at established intervals, an investor purchases
more shares when the price is lower and fewer shares when the price is higher,
thereby increasing his or her earning potential. Of course, dollar cost
averaging does not guarantee a profit or protect against a loss in a declining
market, and an investor should consider his or her financial ability to
continue investing through periods of low share prices. However, over time,
dollar cost averaging generally results in a lower average original investment
cost than if an investor invested a larger dollar amount in a mutual fund at
one time.
PaineWebber's Resource Management Account.
In order to enroll in the Plan, an investor must have opened an RMA
account with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following;
- monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(R) transactions during the period, and provide unrealized and
realized gain and loss estimates for most securities held in the account;
- comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
- automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the five RMA money market funds--RMA Money Market Portfolio, RMA
U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund and RMA New York Municipal Money Fund. Each money market fund
attempts to maintain a stable price per share of $1.00, although there can
be no assurance that it will be able to do so. Investments in the money
market funds are not insured or guaranteed by the U.S. government;
30
<PAGE>
- check writing, with no per-check usage charge, no minimum amount on checks
and no maximum number of checks that can be written. RMA accountholders
can code their checks to classify expenditures. All canceled checks are
returned each month;
- Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
- 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
- expanded account protection to $25 million in the event of the liquidation
of PaineWebber. This protection does not apply to shares of the RMA money
market funds or the PW Funds because those shares are held at the transfer
agent and not through PaineWebber; and
- automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Fund will automatically convert to Class A shares,
based on the relative net asset values per share of the two Classes, as of the
close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversary of the initial issuance
of such Class B shares of the Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (i) the date on which such Class B shares were issued, or
(ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. If the
shareholder acquired Class B shares of the Fund through an exchange of Class B
shares of a CDSC Fund that were acquired prior to July 1, 1991, the
shareholder's holding period for purposes of conversion will be determined
based on the date the CDSC Fund shares were initially issued. For purposes of
conversion into Class A, Class B shares purchased through the reinvestment of
dividends and other distributions paid in respect of Class B shares will be
held in a separate sub-account. Each time any Class B shares in the
shareholder's regular account (other than those in the sub-account) convert to
Class A, a pro rata portion of the Class B shares in the sub-account will also
convert to Class A. The portion will be determined by the ratio that the
shareholder's Class B shares converting to Class A bears to the shareholder's
total Class B shares not acquired through dividends and other distributions.
The availability of the conversion feature is subject to (1) the
continuing applicability of a ruling of the Internal Revenue Service that the
dividends and other distributions paid on Class A and Class B shares will not
result in "preferential dividends" under the Internal Revenue Code and (2) the
continuing availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares of the Fund would not be
converted and would continue to be subject to the higher ongoing expenses of
the
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<PAGE>
Class B shares beyond six years from the date of purchase. Mitchell Hutchins
has no reason to believe that these conditions for the availability of the
conversion feature will not continue to be met.
VALUATION OF SHARES
The Fund determines the net asset value per share separately for each
Class of shares as of the close of regular trading (currently 4:00 p.m.,
eastern time) on the NYSE on each Business Day, which is defined as each
Monday through Friday when the NYSE is open. Currently the NYSE is closed on
the observance of the following holidays: New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are valued
at the last sale price on the day the securities are valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on
the exchange considered by Mitchell Hutchins as the primary market. Securities
traded in the OTC market and listed on Nasdaq are valued at the last trade
price on Nasdaq at 4:00 p.m., eastern time; other OTC securities are valued at
the last bid price available prior to valuation. Futures contracts, forward
contracts and options are valued on the basis of market quotations, if any.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Trust's board of trustees. All investments quoted in foreign currency
are 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 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 will
not be reflected in a computation of the 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 Trust's board of trustees. 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.
This rate under normal market conditions differs from the prevailing exchange
rate in an amount generally less than one-tenth of one percent due to the
costs of converting from one currency to another.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and are
not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
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<PAGE>
Total Return Calculations. Average annual total return quotes
("Standardized Return") used in the Fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)(n) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over
the period. In calculating the ending redeemable value, for Class A shares,
the maximum 4.5% sales charge is deducted from the initial $1,000 payment and,
for Class B shares, the applicable contingent deferred sales charge imposed on
a redemption of Class B shares held for the period is deducted. All dividends
and other distributions are assumed to have been reinvested at net asset
value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of those charges
would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years will reflect conversion of the Class B shares to
Class A shares at the end of the sixth year.
The following table shows performance information for the Class A, Class
B and Class D shares of the Fund for the period indicated.
<TABLE><CAPTION>
Class A Class B Class D
-------- -------- -------
<S> <C> <C> <C>
Inception** to August 31, 1994:
Standardized Return*.................................... (10.98)% (12.30)% (7.30)%
Non-Standardized Return................................. (6.80)% (7.30)% (7.30)%
</TABLE>
- ---------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B shares reflect deduction of the applicable contingent deferred
sales charge imposed on a redemption of shares held for the period. Class D
shares do not impose an initial or contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.
** The inception date for the Class A, Class B and Class D shares of the Fund
is November 2, 1993.
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<PAGE>
Other Information. In Performance Advertisements, the Fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies,
Inc. ("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"),
Investment Company Data, Inc. ("ICD") or Morningstar Mutual Funds
("Morningstar"), with the performance of recognized stock and other indices,
including (but not limited to) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), the Dow Jones Industrial Average, the Nasdaq Composite
Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman Bond Index,
30-year and 10-year U.S. Treasury bonds, the Morgan Stanley Capital
International World Index and changes in the Consumer Price Index as published
by the U.S. Department of Commerce. The Fund also may refer in such materials
to mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER
LETTERS. Comparisons in Performance Advertisements may be in graphic form.
The 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 a 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 Investment
Technologies, Inc. Certificate of Deposit Index, the Bank Rate Monitor
National Index and the averages of yields of CDs of major banks published by
Banxquote(R) Money Markets. In comparing the Fund's performance to CD
performance, investors should keep in mind that bank CDs are insured in whole
or in part by an agency of the U.S. government and offer fixed principal and
fixed or variable rates of interest, and that bank CD yields may vary
depending on the financial institution offering the CD and prevailing interest
rates. Shares of the Fund are not insured or guaranteed by the U.S. government
and returns and net asset value will fluctuate. The securities held by the
Fund generally have longer maturities than most CDs and may reflect interest
rate fluctuations for longer term securities. An investment in the Fund
involves greater risks than an investment in either a money market fund or a
CD.
The Fund may also include in its Performance Advertisements statistical
and other information concerning the communications and technology industries
in general. The following graph illustrates the penetration (i.e., the total
value of the number) of cable television, cellular telephones and home PCs
(personal computers) in television households from 1975 through 1994, plus
estimates through year 2000.
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<PAGE>
Paste Up Graph
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.
Paste Up Graph
35
<PAGE>
Over time, stocks have outperformed all other investments by a wide
margin, offering a solid hedge against inflation. From 1926 to 1993, stocks
beat all other traditional asset classes. A $10 investment grew to $8,001,
significantly more than any other investment.
The chart shown is for illustrative purposes only and does not represent
the Fund's performance and should not be considered an indication or guarantee
of future results. Year-to-year fluctuations of the S&P 500 have been
significant, and total return for some periods has been negative. The S&P 500
includes companies with larger market capitalizations than those in which the
Fund invests. Unlike investors in bonds and Treasury bills, common stock
investors do not receive fixed income payments and are not entitled to
repayment of principal. These differences contribute to investment risk.
Returns shown for long-term government bonds are based on Treasury bonds with
20-year maturities.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, 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 gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are 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) the
Fund must derive less than 30% of its gross income each taxable year from the
sale or other disposition of securities, or any of the following, that were
held for less than three months--options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options, futures
or forward contracts thereon) that are not directly related to the Fund's
principal business of investing in securities (or options and futures with
respect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) 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.
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 any of those months will be deemed to have been paid by the Fund and
received by the shareholders on December 31 of that year if the distributions
are paid by the Fund during the following January. Accordingly, those
distributions will be taxed to shareholders for the year in which that
December 31 falls.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted
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<PAGE>
by it pursuant to the dividends-received deduction are subject indirectly to
the 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 on those shares.
Investors also should be aware that if shares are purchased shortly
before the record date for any dividend or capital gain distribution, the
shareholder will pay full price for the shares and receive some portion of the
price back as a taxable distribution.
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, it will be eligible to, and may, file an
election with the Internal Revenue Service that will enable its shareholders,
in effect, to receive the benefit of the foreign tax credit with respect to
any foreign and U.S. possessions income taxes paid by it. Pursuant to the
election, the Fund would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by him or her, his or her proportionate share of
those taxes, (2) treat his or her share of those taxes and of any dividend
paid by the Fund that represents income from foreign or U.S. possessions
sources as his or her own income from those sources and (3) either deduct the
taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his or her federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then, in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital
gain over net short-term capital loss)--which would have to be distributed to
satisfy the Distribution Requirement and avoid
37
<PAGE>
imposition of the Excise Tax--even if those earnings and gains are not
distributed to the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
The "Tax Simplification and Technical Corrections Bill of 1993," passed
in May 1994 by the House of Representatives, would substantially modify the
taxation of U.S. shareholders of foreign corporations, including eliminating
the provisions described above dealing with PFICs and replacing them (and
other provisions) with a regulatory scheme involving entities called "passive
foreign corporations." Three similar bills were passed by Congress in 1991 and
1992 and vetoed. It is unclear at this time whether, and in what form, the
proposed modifications may be enacted into law.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would
be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was
in effect).
The use of hedging strategies, such as writing ("selling") and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Fund realizes
in connection therewith. Income from foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward currency contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures and forward contracts
on foreign currencies, that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the Short-Short Limitation if they are
held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent the Fund does not
qualify for this treatment, it may be forced to defer the closing out of
certain options, futures and forward currency contracts beyond the time when
it otherwise would be advantageous to do so, in order for the Fund to continue
to qualify as a RIC.
OTHER INFORMATION
PaineWebber Olympus Fund 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 Trust or the Fund. However, the 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
38
<PAGE>
undertaking made or issued by the trustees or by any officers or officer by or
on behalf of the Trust or the Fund, the trustees or any of them in connection
with the Trust. The Declaration of Trust provides for indemnification from the
Fund's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its
obligations, a possibility that Mitchell Hutchins believes is remote and not
material. Upon payment of any liability incurred by a shareholder solely by
reason of being or having been a shareholder, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the
Fund. The trustees intend to conduct the operations of the Fund in such a way
as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
Class-Specific Expenses. The Fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A or Class D shares. The higher fee is imposed due to the
higher costs incurred by the Transfer Agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
Counsel. The law firm of Kirkpatrick & Lockhart, 1800 M Street, N.W.,
Washington, D.C., 20036-5891, counsel to the Fund, has passed upon the
legality of the shares offered by the Prospectus. Kirkpatrick & Lockhart also
acts as counsel to PaineWebber and Mitchell Hutchins in connection with other
matters.
Independent Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York,
New York 10019, serves as independent auditors for the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the period from November 2,
1993 (commencement of operations) to August 31, 1994 is a separate document
supplied with this Statement of Additional Information and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference in this Statement of Additional
Information.
39
<PAGE>
APPENDIX
Description of Moody's Investors Service, Inc. ("Moody's") Corporate Bond
Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues; Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities; A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time in the
future; Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well; Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class; B. Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; Caa. Bonds which are
rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest; Ca. Bonds
which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings; C. Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poor's Ratings Group ("S&P") Corporate Debt Ratings
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong; AA. Debt rated AA has
a very strong capacity to pay interest and repay principal and differs from
the higher rated issues only in small degree; A. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated BBB is
regarded as having an adequate capacity to pay interest and
40
<PAGE>
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories; BB, B, CCC, CC, C. Debt rated BB,
B, CCC, CC and C is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; C1. The rating
C1 is reserved for income bonds on which no interest is being paid; D. Debt
rated D is in default, and payment of interest and/or repayment of principal
is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
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<PAGE>
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or in this Statement of
Additional Information in connection with the offering made by the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Fund or its distributor. The Prospectus
and this Statement of Additional Information do not constitute an offering by
the Fund or by the distributor in any jurisdiction in which such offering may
not lawfully be made.
------------------
TABLE OF CONTENTS
Page
----
Investment Policies and
Restrictions........................ 1
Hedging Strategies.................... 7
Trustees and Officers................. 15
Investment Advisory and Distribution
Arrangements........................ 20
Portfolio Transactions................ 25
Reduced Sales Charges, Additional
Exchange and Redemption Information
and Other Services.................. 27
Conversion of Class B Shares.......... 31
Valuation of Shares................... 32
Performance Information............... 32
Taxes................................. 36
Other Information..................... 38
Financial Statements.................. 39
Appendix.............................. 40
(C) 1995 PaineWebber Incorporated
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PaineWebber
Communications
& Technology
Growth Fund
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Statement of Additional Information
January 1, 1995
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PaineWebber
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Paine Webber Blue Chip Growth Fund
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Blue Chip Growth Fund ("Fund") is a diversified series of
PaineWebber Master Series, Inc. ("Corporation"), a professionally managed
mutual fund. The Fund seeks capital appreciation by investing primarily in
equity securities of large, established U.S. companies. The Fund's investment
adviser, administrator and distributor is Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins"), a wholly owned 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 is not a prospectus and should
be read only in conjunction with the Fund's current Prospectus, dated July ,
1995. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated July , 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
Yield Factors and Ratings. Standard & Poor's Ratings Group ("S&P") and
Moody's Investors Service, Inc. ("Moody's") are private services that provide
ratings of the credit quality of debt obligations. A description of the range
of ratings assigned to debt obligations by Moody's and S&P is included in
Appendix A to this Statement of Additional Information. The Fund may use these
ratings in determining whether to purchase, sell or hold a security. These
ratings represent Moody's and S&P's opinions as to the quality of the debt
obligations that they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
debt obligations with the same maturity, interest rate and rating may have
different market prices. Subsequent to its purchase by the Fund, an issue of
debt obligations may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. Mitchell Hutchins will
consider such an event in determining whether the Fund should continue to hold
the obligation but is not required to dispose of it.
In addition to ratings assigned to individual bond issues, Mitchell Hutchins
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which the Fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial condition of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
is a wide variation in the quality of bonds, both within a particular
classification and between classifications. An issuer's obligations under its
bonds are subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and
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remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Mortgage-Backed Securities. The U.S. government securities in which the Fund
may invest include mortgage-backed securities issued or guaranteed by the
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac").
Ginnie Mae guarantees certain mortgage pass-through certificates ("Ginnie Mae
certificates") that are issued by private issuers, generally originators of and
investors in mortgage loans, including savings associations, mortgage bankers,
commercial banks, investment bankers and special purpose entities
(collectively, "Private Mortgage Lenders") and that represent ownership
interests in individual pools of residential mortgage loans. These securities
are designed to provide monthly payments of interest and principal to the
investor. Timely payment of interest and principal is backed by the full faith
and credit of the U.S. government. Each mortgagor's monthly payments to his
lending institution on his residential mortgage are "passed through" to
certificateholders such as a Fund. Mortgage pools consist of whole mortgage
loans or participations in loans. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools.
Lending institutions that originate mortgages for the pools are subject to
certain standards, including credit and other underwriting criteria for
individual mortgages included in the pools.
Fannie Mae facilitates a national secondary market in residential mortgage
loans insured or guaranteed by U.S. government agencies and in privately
insured or uninsured residential mortgage loans (sometimes referred to as
"conventional mortgage loans" or "conventional loans") through its mortgage
purchase and mortgage-backed securities sales activities. Fannie Mae issues
guaranteed mortgage pass-through certificates ("Fannie Mae certificates"),
which represent pro rata shares of all interest and principal payments made and
owed on the underlying pools. Fannie Mae guarantees timely payment of interest
and principal on Fannie Mae certificates. The Fannie Mae guarantee is not
backed by the full faith and credit of the U.S. government.
Freddie Mac also facilitates a national secondary market for conventional
residential and U.S. government-issued mortgage loans through its mortgage
purchase and mortgage-backed securities sales activities. Freddie Mac issues
two types of mortgage pass-through securities: mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC
represents a pro rata share of all interest and principal payments made and
owed on the underlying pool. Freddie Mac generally guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal, but it also
has a PC program under which it guarantees timely payment of both principal and
interest. GMCs also represent a pro rata interest in a pool of mortgages. These
instruments, however, pay interest semi-annually and return principal once a
year in guaranteed minimum payments. The Freddie Mac guarantee is not backed by
the full faith and credit of the U.S. government.
Adjustable Rate and Floating Rate Mortgage-Backed Securities. The Fund may
invest in adjustable rate mortgage ("ARM") and floating rate mortgage-backed
securities. Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
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fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. ARM
mortgage-backed securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally provide that the borrower's mortgage interest rate may not be
adjusted above a specified lifetime maximum rate or, in some cases, below a
minimum lifetime rate. In addition, certain ARMs provide for limitations on the
maximum amount by which the mortgage interest rate may adjust for any single
adjustment period. ARMs also may provide for limitations on changes in the
maximum amount by which the borrower's monthly payment may adjust for any
single adjustment period. In the event that a monthly payment is not sufficient
to pay the interest accruing on the ARM, any such excess interest is added to
the mortgage loan ("negative amortization"), which is repaid through future
monthly payments. If the monthly payment exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment that
would have been necessary to amortize the outstanding principal balance over
the remaining term of the loan, the excess reduces the principal balance of the
ARM. Borrowers under ARMs experiencing negative amortization may take longer to
build up their equity in the underlying property and may be more likely to
default.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds index ("COFI"), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust
based on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive
to interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
Special Characteristics of Mortgage-Backed Securities. The yield
characteristics of mortgage-backed securities differ from those of traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other obligations
generally may be prepaid at any time. As a result, if the securities are
purchased at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Conversely, if
the securities are purchased at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity. Amounts available for reinvestment are likely to be greater during a
period of declining interest rates and are likely to be reinvested at lower
interest rates than during a period of rising interest rates. Accelerated
prepayments on
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securities purchased at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is repaid in full.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
Repurchase Agreements. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such securities. If the value of such securities
is less than the repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral so that at all
times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the securities and the price that was paid by the
Fund upon their acquisition is accrued as interest and included in the Fund's
net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to a Fund if the other party to
a repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Corporation's board of directors. Mitchell Hutchins will
review and monitor the creditworthiness of those institutions under the board's
general supervision.
Reverse Repurchase Agreements. Although it has no intention of doing so
during the coming year, the Fund may enter into reverse repurchase agreements
with banks and securities dealers up to an aggregate value of not more than 5%
of its total assets. Such agreements involve the sale of securities held by the
Fund subject to the Fund's agreement to repurchase the securities at an
agreed-upon date and price reflecting a market rate of interest. Such
agreements are considered to be borrowings and may be entered into only for
temporary or emergency purposes. While a reverse repurchase agreement is
outstanding, the Fund's custodian segregates assets to cover the Fund's
obligations under the reverse repurchase agreement. See "Investment Policies
and Restrictions-Segregated Accounts."
When-Issued and Delayed Delivery Securities. 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 "Investment Policies and
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Restrictions-Segregated Accounts." The Fund purchases when-issued securities
only with the intention of taking delivery, but may sell the right to acquire
the security prior to delivery if Mitchell Hutchins deems it advantageous to do
so, which may result in a gain or loss to the Fund.
Illiquid Securities. The Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased over-the-counter ("OTC")
options, repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the Corporation's board of directors. The
assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that
the Fund may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an OTC
option written subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. Illiquid restricted securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933
("1933 Act"). Where registration is required, the Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might 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 and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The board of directors 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
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of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited and the mechanics of transfer). Mitchell Hutchins will monitor the
liquidity of restricted securities in the Fund's portfolio and report
periodically on such decisions to the board of directors.
Special Considerations Relating to Foreign Securities. To the extent the Fund
holds securities of foreign issuers, such securities may not be registered with
the Securities and Exchange Commission ("SEC"), nor are the issuers thereof
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.
The Fund invests in securities of foreign issuers only if such securities are
traded in the U.S. securities markets directly or through American Depository
Receipts ("ADRs"). Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. For purposes of the Fund's investment policies,
ADRs are deemed to have the same classification as the underlying securities
they represent. Thus, an ADR evidencing ownership of common stock will be
treated as common stock.
Investment income on certain foreign securities in which the Fund may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.
Convertible Securities. The Fund is permitted to invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Before conversion, convertible securities have
characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are
usually subordinated to comparable non-convertible securities. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed
income security. Convertible securities have unique investment characteristics
in that they generally (1) have higher yields than common stocks, but lower
yields than comparable non-convertible securities, (2) are less subject to
fluctuation in value than the underlying stock because they have fixed income
characteristics and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not
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have a conversion privilege) and its "conversion value" (the security's worth,
at market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates,
with investment value declining as interest rates increase and increasing as
interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value and generally the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price
of the convertible security will be increasingly influenced by its conversion
value. In addition, a convertible security generally will sell at a premium
over its conversion value determined by the extent to which investors place
value on the right to acquire the underlying common stock while holding a fixed
income security.
Short Sales "Against the Box". As indicated in the Prospectus, 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 defer realization of gains or losses for tax or
other purposes. To make delivery to the purchaser in a short sale, the
executing broker borrows the securities being sold short on behalf of the Fund,
and the Fund is obligated to replace the securities borrowed at a date in the
future. When the Fund sells short, it will establish a margin account with the
broker effecting the short sale, and will deposit collateral with the broker.
In addition, the Fund will maintain with its custodian, in a segregated
account, the securities that could be used to cover the short sale. The Fund
will incur 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" in order to hedge against
market risks when Mitchell Hutchins believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the Fund
or a security convertible into or exchangeable for a security owned by the
Fund, or when Mitchell Hutchins wants to sell a security that the Fund owns at
a current price, but also wishes to defer recognition of gain or loss for
federal income tax purposes. In such case, any loss in 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 the securities the Fund owns, either directly or indirectly, and
in the case where the Fund owns convertible securities, changes in the
investment values or conversion premiums of such securities.
Segregated Accounts. When the Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, the Fund will maintain with an approved custodian in a
segregated account cash, U.S. government securities or other liquid high-grade
debt securities, marked to market daily, in an amount at least equal to the
Fund's obligation or commitment under such transactions. As described below
under "Hedging Strategies," segregated accounts may also be required in
connection with certain transactions involving options or futures contacts.
Lending of Portfolio Securities. The Fund is authorized to lend up to 10% of
the total value of its portfolio securities, to broker-dealers or institutional
investors Mitchell Hutchins deems qualified, but only when the borrower
maintains with the Fund's custodian bank collateral either in cash or money
market instruments, marked to market daily, in an amount at least equal to the
market value of the securities loaned plus accrued interest and dividends. In
determining whether
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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 loans at any
time. The Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or equivalent collateral to the borrower or placing broker. The
Fund will receive reasonable interest on the loan or a flat fee from the
borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. The Fund will regain record ownership
of securities loaned in order to exercise beneficial rights, such as voting
rights, subscription rights, and rights to dividends, interest, or other
distributions, when regaining such rights is considered to be in the Fund's
interest. The Fund does not intend to lend portfolio securities in the coming
year.
Investment Limitations
The Fund may not (1) issue senior securities or borrow money, except from
banks for temporary purposes and except for reverse repurchase agreements, and
then in an aggregate amount not in excess of 10% of the total asset value of
the Fund at the time of such borrowing; provided further that the Fund will not
purchase securities while borrowings (including reverse repurchase agreements)
in excess of 5% of the total asset value of the Fund are outstanding; (2) make
an investment in any one industry if the investment would cause the value of
such investments at the time of purchase in such industry to be 25% or more of
the total assets of the Fund taken at market value; (3) purchase securities of
any one issuer if as a result more than 5% of the Fund's total assets would be
invested in such issuer or the Fund would own or hold 10% of the outstanding
securities of that issuer, except that up to 25% of the Fund's total assets may
be invested without regard to this limitation and provided that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities; (4) 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 options,
futures contracts and options on futures contracts; (5) underwrite securities
of other issuers, except to the extent that, in connection with the disposition
of portfolio securities, the Fund may be deemed an underwriter under federal
securities laws; (6) make short sales of securities or maintain a short
position except that the Fund may (a) make short sales and may maintain short
positions in connection with its use of options, futures contracts and options
on futures contracts and (b) sell short ''against the box;" (7) purchase or
sell real estate, provided that the Fund may invest in securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests therein; (8) purchase or sell commodities or commodity
contracts except that the Fund may purchase or sell stock index futures and
interest rate futures and options thereon for hedging purposes; (9) invest in
oil, gas or mineral-related programs or leases; (10) make loans, except through
loans of portfolio securities and except through repurchase agreements,
provided that for purposes of this restriction the acquisition of bonds,
debentures, or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed to be the making of a loan; or (11) purchase
any securities issued by any other investment company, except by purchase in
the open market where no commission or profit, other than a customary broker's
commission, is earned by any sponsor or dealer associated with the investment
company whose shares are acquired as a result of such purchase, provided that
such securities in the aggregate at the time of purchase do not represent more
than 10% of the total assets of the Fund and except in connection, with the
merger, consolidation or acquisition of all the securities or assets of such an
issuer.
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The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.
The following investment restrictions may be changed by the vote of the
Corporation's board of directors without shareholder approval. The Fund may not
(1) purchase or retain the securities of any issuer if, to the knowledge of the
Fund's management, the officers and directors of the Corporation and Mitchell
Hutchins (each owning beneficially more than 1/2 of 1% of the outstanding
securities of the issuer) own in the aggregate more than 5% of the securities
of such issuer; (2) make investments in warrants, if such investments, valued
at the lower of cost or market, exceed 5% of the value of the Fund's net
assets, which amount may include warrants that are not listed on the New York
Stock Exchange, Inc. ("NYSE") or the American Stock Exchange, Inc. ("AMEX"),
provided that such unlisted warrants, valued at the lower of cost or market, do
not exceed 2% of the Fund's net assets, and further provided that this
restriction does not apply to warrants attached to, or sold as a unit with,
other securities; (3) invest more than 10% 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; (4) purchase any
security if as a result more than 5% of the value of the Fund's total assets
would be invested in securities of companies that together with any
predecessors have been in continuous operation for less than three years; or
(5) invest more than 35% of its total assets in debt securities rated Ba or
lower by Moody's or BB or lower by S&P, comparably rated by another NRSRO or
determined by Mitchell Hutchins to be of comparable quality. This
non-fundamental policy (5) can be changed only upon 30 days' advance notice to
shareholders.
The Fund will continue to interpret fundamental investment limitation (7) to
prohibit investment in real estate limited partnerships.
HEDGING STRATEGIES
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ("Hedging Instruments"), including certain options,
futures contracts (sometimes referred to as "futures") and options on futures
contracts, to attempt to hedge the portfolio of the Fund. The particular
Hedging Instruments are described in Appendix A to the Prospectus.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
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 Hedging 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
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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 Hedging 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 Hedging 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.
Hedging 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. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which the Fund has invested or expects to invest. Hedging
Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Fund's investment objective and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks of Hedging Strategies. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value
10
<PAGE>
of the hedged investment, the hedge would not be fully successful. Such a lack
of correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which Hedging Instruments are traded. The effectiveness of hedges using
Hedging Instruments on indices will depend on the degree of correlation between
price movements in the index and price movements in the securities being
hedged.
(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 in 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 Hedging Instrument. Moreover, if the price of the
Hedging 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 Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position 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 Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of a contra party to enter into a transaction closing
out the position. Therefore, there is no assurance that any hedging position
can be closed out at a time and price that is favorable to the Fund.
Cover for Hedging Strategies. Transactions using Hedging Instruments, other
than purchased options, expose the Fund to an obligation to another party. The
Fund will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts or (2) cash and short-term liquid debt securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. The Fund will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so
require, set aside cash, U.S. government securities or other liquid, high-grade
debt securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. The Fund may purchase put and call options, and write (sell) covered
put and call options on debt securities, equity securities and stock indices.
The purchase of call options serves as a long hedge, and the purchase of put
options serves as a short hedge. Writing covered put options serves as a
limited long hedge because increases in the value of the hedged instrument
would be offset to the extent of the premium received for writing the option.
However, if the market price of the
11
<PAGE>
security underlying a covered put option declines to less than the exercise
price of the option, minus the premium received, the Fund would expect to
suffer a loss. 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. The securities or
other assets used as cover for options written by the Fund would be considered
illiquid to the extent described under "Investment Policies and
Restrictions-Illiquid Securities."
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities exist but are relatively new, and these
instruments are primarily traded on the OTC market. Exchange-traded options in
the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed which, in effect, guarantees completion
of every exchange-traded option transaction. In contrast, OTC options are
contracts between the Fund and its contra party (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when the Fund purchases
or writes an OTC option, it relies on the contra party to make or take delivery
of the underlying investment upon exercise of the option. Failure by the contra
party to do so would result in the loss of any premium paid by the Fund as well
as the loss of any expected benefit of the transaction. The Fund will enter
into OTC option transactions only with contra parties that have a net worth of
at least $20 million.
Generally, the OTC debt options used by the Fund are European-style options.
This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option.
The 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
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with contra parties 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 OTC option
position at a favorable
12
<PAGE>
price prior to expiration. In the event of insolvency of the contra party, the
Fund might be unable to close out an OTC 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 transition for a covered 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.
Guidelines for Options. The Fund's use of options is governed by the
following guidelines, which can be changed by the Corporation's board of
directors without shareholder vote:
(1) The Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
(2) The aggregate value of securities underlying put options written by the
Fund, determined as of the date the put options are written, will not exceed
50% of the Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities and stock indices and options on futures contracts) purchased by the
Fund that are held at any time will not exceed 20% of the Fund's net assets.
Futures. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve
as a limited short hedge, and writing covered put options on futures contracts
can serve as a limited long hedge, using a strategy similar to that used for
writing covered options on securities or indices.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract 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, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is returned to 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.
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 put or 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.
13
<PAGE>
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market.
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 futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions.
Guidelines for Futures and Related Options. The Fund's use of futures and
related options is governed by the following guidelines, which can be changed
by the Corporation's board of directors without shareholder vote:
1. To the extent the Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities and stock indices and options on futures contracts) purchased by the
Fund that are held at any time will not exceed 20% of the Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options thereon
held at any time by the Fund will not exceed 5% of the Fund's total assets.
14
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of the Corporation, their business
addresses and principal occupations during the past five years are:
<TABLE><CAPTION>
Position Business Experience;
Name and Address*; Age with the Corporation Other Directorships
- ---------------------------- --------------------- ---------------------------------------
<S> <C> <C>
Mr. Bewkes is a director of Paine
Webber Group Inc. ("PW Group")
(holding company of PaineWebber
and Mitchell Hutchins) and a consul-
tant to PW Group. Prior to 1988, he
was chairman of the board, president
and chief executive officer of Ameri-
can Bakeries Company. Mr. Bewkes
is also a director of Interstate Baker-
ies Corporation and NaPro
BioTherapeutics, Inc. and a director
or trustee of 26 other investment
companies for which Mitchell
Director and Chairman Hutchins or PaineWebber serves as
E. Garrett Bewkes, Jr.; 68** of the Board investment adviser.
Mr. Feldberg is Dean and Professor of
Management of the Graduate School
of Business, Columbia University.
Prior to 1989, he was president of the
Illinois Institute of Technology. Dean
Feldberg is also a director of AMSCO
International Inc., Federated De-
partment Stores Inc., Inco Homes
Corporation and New World Com-
munications Group Incorporated
and he is a director or trustee of 18
Meyer Feldberg; 52 other investment companies for
Columbia University which Mitchell Hutchins or
101 Uris Hall PaineWebber serves as an invest-
New York, New York 10027 Director ment adviser.
Mr. Gowen is a partner in the law firm
of Dunnington, Bartholow & Miller.
Prior to May 1994 he was a partner
in the law firm of Fryer, Ross & Gow-
en. Mr. Gowen is also a director of
Columbia Real Estate Investments,
Inc. and a director or trustee of 16
other investment companies for
George W. Gowen; 65 which Mitchell Hutchins or
666 Third Avenue PaineWebber serves as investment
New York, New York 10017 Director adviser.
15
<PAGE>
Position Business Experience;
Name and Address*; Age with the Corporation Other Directorships
- ------------------------ -------------------- --------------------------------------------------------------------
Mr. Malek is chairman of Thayer Capital
Partners (investment bank) and a co-chairman and director of CB Com-
mercial Group Inc. (real estate). From
January 1992 to November 1992, he
was campaign manager of Bush-Quayle '92. From 1990 to 1992, he
was vice chairman and, from 1989 to
1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding com-
pany of Northwest Airlines Inc.) and
Wings Holdings Inc. (holding com-
pany of NWA Inc.). Prior to 1989, he
was employed by the Marriott Corpo-
ration (hotels, restaurants, airline ca-
tering and contract feeding), where
he most recently was an executive
vice president and president of
Marriott Hotels and Resorts. Mr.
Malek is also a director of American
Management Systems, Inc., Automatic
Data Processing, Inc., Avis, Inc., FPL
Group, Inc., ICF International, Manor
Care, Inc., National Education Corpo-
ration and Northwest Airlinet adviser.
Frederic V. Malek; 58
901 15th Street, N.W.
Suite 300
Washington, D.C. 20005 Director
Mr. Minard is chairman of the board of
Mitchell Hutchins, chairman of the
board of Mitchell Hutchins Institu-
tional Investors Inc. and a director of
PaineWebber. Prior to 1993, Mr.
Minard was managing director of
Oppenheimer Capital in New York
and Director of Oppenheimer Capi-
tal Ltd. in London. Mr. Minard is also
a director or trustee of 30 other in-
vestment companies for which
Mitchell Hutchins or PaineWebber
Frank P. L. Minard; 49** Director serves as investment adviser.
16
<PAGE>
Position Business Experience;
Name and Address*; Age with the Corporation Other Directorships
- -------------------------- -------------------- -----------------------------------------
Mrs. Moyers is president of Public Af-
fairs Television, Inc., an educational
consultant and a home economist.
Mrs. Moyers is also a director of
Ogden Corporation and a director or
Judith Davidson Moyers; 59 trustee of 16 other investment com-
Public Affairs Television panies for which Mitchell Hutchins or
356 W. 58th Street PaineWebber serves as investment
New York, New York 10019 Director adviser.
Mr. Murray is a real estate and financial
consultant. Mr. Murray is also a di-
rector and chairman of American
Continental Properties, Inc., a
trustee of Prudential Realty Trust,
and a director or trustee of 16 other
Thomas F. Murray; 84 investment companies for which
400 Park Avenue Mitchell Hutchins or PaineWebber
New York, New York 10022 Director serves as investment adviser.
Ms. Alexander is president, chief execu-
tive officer and a director of Mitchell
Hutchins. Prior to January 1995, Ms.
Alexander was an executive vice
president of PaineWebber. Ms. Alex-
ander is also president of 26 other
investment companies for which
Mitchell Hutchins or PaineWebber
Margo N. Alexander; 48 President serves as investment adviser.
Ms. Boyle is a first vice president and
manager-advisory administration of
Mitchell Hutchins. Prior to Novem-
ber 1993, she was compliance man-
ager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993, Ms. Boyle
was a vice president and manager-
legal administration of Mitchell
Hutchins. Ms. Boyle is also a vice
president of 39 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
Teresa M. Boyle; 36 Vice President investment adviser.
17
<PAGE>
Position Business Experience;
Name and Address*; Age with the Corporation Other Directorships
- ----------------------- ----------------------- -----------------------------------------
Ms. Cohen is a vice president and attor-
ney of Mitchell Hutchins. Prior to
December 1993, she was an associate
at the law firm of Seward & Kissel.
Ms. Cohen is also a vice president
and assistant secretary of 26 other in-
vestment companies for which
Vice President and Mitchell Hutchins or PaineWebber
Joan L. Cohen; 30 Assistant Secretary serves as investment adviser.
Mrs. Finkel is a first vice president and
portfolio manager of Mitchell
Hutchins. Mrs. Finkel is also a vice
president of one other investment
company for which Mitchell
Hutchins serves as investment
Karen L. Finkel; 37 Vice President adviser.
Ms. Harris is chief domestic equity
strategist and , a managing director of
Mitchell Hutchins. Ms. Harris is also a
vice president of 19 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
Ellen R. Harris; 48 Vice President investment adviser.
Ms. Moran is a vice president of Mitch-
ell Hutchins. Ms. Moran is also a vice
president and assistant treasurer of
39 other investment companies for
which Mitchell Hutchins or
Vice President PaineWebber serves as investment
Ann E. Moran; 37 and Assistant Treasurer adviser.
Ms. O'Donnell is a senior vice presi-
dent and senior associate general
counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice president
and secretary of 39 other investment
companies for which Mitchell
Vice President and Hutchins or PaineWebber serves as
Dianne E. O'Donnell; 42 Secretary investment adviser.
18
<PAGE>
Position Business Experience;
Name and Address*; Age with the Corporation Other Directorships
- ------------------------- ----------------------- ----------------------------------------
Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the New
York office of the law firm of Arnold
& Porter. Prior to April 1990, she
was a partner in the law firm of
Shereff, Friedman, Hoffman &
Goodman. Ms. Schonfeld is also a
vice president of 39 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
Victoria E. Schonfeld; 44 Vice President investment adviser.
Mr. Schubert is a vice president of
Mitchell Hutchins. From August
1992 to August 1994, he was a vice
president of BlackRock Financial
Management, L.P. Prior to August
1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is
also a vice president and assistant
treasurer of 39 other investment
companies for which Mitchell
Vice President Hutchins or PaineWebber serves as
Paul H. Schubert; 32 and Assistant Treasurer investment adviser.
Ms. Slezak is a vice president of Mitch-
ell Hutchins. From September 1991
to April 1992, she was a fundraising
director for a U.S. Senate campaign.
Prior to September 1991, she was a
tax manager with Arthur Andersen
& Co. LLP. Ms. Slezak is also a vice
president and assistant treasurer of
39 other investment companies for
which Mitchell Hutchins or
Vice President PaineWebber serves as investment
Martha J. Slezak; 32 and Assistant Treasurer adviser.
Mr. Sluyters is a senior vice president
and the director of the mutual fund
finance division of Mitchell Hutchins.
Prior to 1991, he was an audit senior
manager with Ernst & Young LLP.
Mr. Sluyters is also a vice president
and treasurer of 39 other investment
companies for which Mitchell
Vice President and Hutchins or PaineWebber serves as
Julian F. Sluyters; 34 Treasurer investment adviser.
19
<PAGE>
Position Business Experience;
Name and Address*; Age with the Corporation Other Directorships
- ---------------------- -------------------- ---------------------------------------
Mr. Todd is a first vice president and
associate general counsel of Mitchell
Hutchins. Prior to 1993, he was a
partner in the law firm of Shereff,
Friedman, Hoffman & Goodman.
Mr. Todd is also a vice president and
assistant secretary of 39 other invest-
ment companies for which Mitchell
Vice President and Hutchins or PaineWebber serve as
Gregory K. Todd; 38 Assistant Secretary investment adviser.
- ------
</TABLE>
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes and Minard are "interested persons" of the Corporation as
defined in the Investment Company Act of 1940 ("1940 Act") by virtue of
their positions with PW Group, Mitchell Hutchins and/or PaineWebber.
The Corporation pays directors who are not interested persons of the
Corporation $4,000 annually and $250 per meeting of the board or any committee
thereof. Directors are reimbursed for any expenses incurred in attending
meetings of the board of directors or any committee thereof. Directors and
officers of the Corporation own in the aggregate less than 1% of the shares of
each Fund. Because PaineWebber and Mitchell Hutchins perform substantially all
of the services necessary for the operation of the Corporation and the Funds,
the Corporation requires no employees. No officer, director or employee of
PaineWebber or Mitchell Hutchins presently receives any compensation from the
Corporation for acting as director or officer.
Compensation Table
<TABLE><CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Part Annual From the
Compensation of the Benefits Corporation
From the Corporation's upon and the
Name of Person, Position Corporation* Expenses Retirement Complex~
- ---------------------------- ------------ --------------- ---------- ------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr. ..... - - - -
Director and Chairman of the
Board of Directors
Meyer Feldberg.............. $ 4,750 - - $ 86,050
Director
George W. Gowen............. $ 4,500 - - $ 71,425
Director
Frederic V. Malek........... $ 4,750 - - $ 77,875 -
Director
Frank P.L. Minard........... - - - -
Director
Judith Davidson Moyers...... $ 4,250 - - $ 71,125
Director
Thomas F. Murray............ $ 4,500 - - $ 71,925
Director
</TABLE>
- ------
* Represents fees paid to each director during the fiscal year ended February
28, 1995.
~ Represents total compensation paid to each director during the calendar year
ended December 31, 1994.
20
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
Investment Advisory Arrangements. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract with the
Corporation dated August 4, 1988 ("Advisory Contract"). Under the Advisory
Contract, the Fund pays Mitchell Hutchins an annual fee, computed daily and
paid monthly, according to the schedule set forth below:
Annual
Average Daily Net Assets Rate
- ---------------------------------------------- -------
Up to $500 million............................ 0.750%
In excess of $500 million up to $1.0 billion.. 0.725
In excess of $1.0 billion up to $1.5 billion.. 0.700
In excess of $1.5 billion up to $2.0 billion.. 0.675
Over $2.0 billion............................. 0.650
During the fiscal years ended February 28, 1995, February 28, 1994 and
February 28, 1993, respectively, the Corporation paid (or accrued) to Mitchell
Hutchins investment advisory and administrative fees of $ , $812,552 and
$790,245 with respect to the Fund.
Under a service agreement with the Corporation that is reviewed by the
Corporation's board of directors annually, PaineWebber provides certain
services to the Fund not otherwise provided by the Fund's transfer agent.
Pursuant to the service agreement, during the fiscal years ended February 28,
1995, February 28, 1994, and February 28, 1993, respectively, PaineWebber
earned fees in the amounts of $41,294, $46,868 and $50,449 with respect to the
Fund.
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Corporation not readily identifiable as
belonging to the Fund or to the Corporation's other series are allocated among
series by or under the direction of the board of directors in such manner as
the board deems to be fair and equitable. Expenses borne by the Fund include
the following (or the Fund's share of the following): (1) the cost (including
brokerage commissions) of securities purchased or sold by the Fund and any
losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares and the Corporation under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to directors who are not interested persons of the
Corporation or Mitchell Hutchins; (6) all expenses incurred in connection with
the directors' 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 Corporation or the Fund for violation of any
law; (10) legal, accounting and auditing expenses, including legal fees of
special counsel for the independent directors; (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 Corporation or the Fund;
(15) fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing
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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 directors and officers; and (18) costs of mailing,
stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund exceed
applicable limits in any fiscal year. Currently the most restrictive such limit
applicable to the Fund is 2.5% of the first $30 million of the Fund's average
daily net assets, 2.0% of the next $70 million of its average daily net assets
and 1.5% of its average daily net assets in excess of $100 million. Certain
expenses, such as brokerage commissions, distribution fees, taxes, interest,
certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. For the fiscal years
ended February 28, 1995, February 28, 1994 and February 28, 1993, no
reimbursements were required pursuant to such limitations for the Fund.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the Corporation's board of directors or by vote of the holders of a
majority of the Fund's outstanding voting securities on 60 days' written notice
to Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written notice to the
Corporation.
The following table shows the approximate net assets as of May 31, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
Investment Category Net Assets ($ mil)
- --------------------------------------- ------------------
Domestic (excluding Money Market)...... $
Global.................................
Equity/Balanced........................
Fixed Income (excluding Money Market)..
Taxable Fixed Income...................
Tax-Free Fixed Income..................
Money Market Funds.....................
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 other PaineWebber and Mitchell Hutchins/Kidder Peabody
("MH/KP") 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 and MH/KP funds and other Mitchell Hutchins advisory
clients.
Distribution Arrangements. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class D shares of the Fund under separate distribution
contracts with the Corporation dated
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July 7, 1993 (collectively, "Distribution Contracts") that require 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 dated
July 7, 1993 relating to the Class A, Class B and Class D 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 D shares of the Fund adopted by the Corporation in the manner prescribed
under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class
D Plan," 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, the Fund pays
Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at the
annual rate of 0.75% of the average daily net assets of the Class B shares.
Under the Class D Plan, the Fund pays Mitchell Hutchins a distribution fee,
accrued daily and payable monthly, at the annual rate of 0.75% of the average
daily net assets of the Class D shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the Corporation's board of directors at least quarterly, and the directors
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 Corporation's board of directors,
including those directors who are not "interested persons" of the Corporation
and who have no direct or indirect financial interest in the operation of the
Plan or any agreement related to the Plan, acting in person at a meeting called
for that purpose, (3) payments by a Fund under the Plan shall not be materially
increased without the affirmative vote of the holders of a majority of the
outstanding shares of the relevant Class and (4) while the Plan remains in
effect, the selection and nomination of directors who are not "interested
persons" of the Corporation shall be committed to the discretion of the
directors who are not interested persons of the Corporation.
In reporting amounts expended under the Plans to the directors, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
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 Fund shares
will not be used to subsidize the sale of any other Class of Fund shares.
For the fiscal year ended February 28, 1995, the Fund paid (or accrued) the
following fees to Mitchell Hutchins under the Class A, Class B and Class D
Plans:
Class A.. $134,800
Class B.. 370,630
Class D.. 36,448
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Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Fund during the fiscal year ended February 28,
1995:
Class A
Marketing and advertising.......................................... $18,927
Amortization of commissions........................................ N/A
Printing of prospectuses and statements of additional information.. 929
Branch network costs allocated and interest expense................ 248,042
Service fees paid to PaineWebber investment executives............. 60,660
Class B
Marketing and advertising.......................................... $28,649
Amortization of commissions........................................ 145,887
Printing of prospectuses and statements of additional information.. 603
Branch network costs allocated and interest expense................ 387,253
Service fees paid to PaineWebber investment executives............. 41,696
Class D
Marketing and advertising.......................................... $9,424
Amortization of commissions........................................ 7,977
Printing of prospectuses and statements of additional information.. 63
Branch network costs allocated and interest expense................ 123,717
Service fees paid to PaineWebber investment executives............. 4,100
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund 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 each Fund's
shares, including the PaineWebber retail branch system.
In approving the Fund's overall Flexible PricingSM system of distribution,
the Corporation's board of directors considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in the Fund and
attracting new investors and assets to the Fund to the benefit of the Fund and
its shareholders; (2) facilitate distribution of the Fund's shares; and (3)
maintain the competitive position of the Fund in relation to other funds that
have implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan for the Fund, the directors considered all the
features of the distribution system, including (1) the conditions under which
initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in a 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
24
<PAGE>
continued growth, (4) the services provided to the Fund and its shareholders by
Mitchell Hutchins, (5) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (6) Mitchell Hutchins'
shareholder service-related expenses and costs.
In approving the Class B Plan for the Fund, the directors 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 the Fund's purchase payments and instead having the entire amount
of their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive
to the investment executives and correspondent firms, resulting in greater
growth of 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 directors also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class D Plan for the Fund, the directors considered all the
features of the distribution system, including (1) the advantage to investors
in having no initial sales charges deducted from the Fund's 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 and paying for distribution
on an ongoing basis, (3) Mitchell Hutchins' belief that the ability of
PaineWebber investment executives and correspondent firms to receive sales
compensation for their sales of Class D shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class D shares and do not face contingent deferred
sales charges, would prove attractive to the investment executives 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 directors also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and
its investment executives, without the concomitant receipt by Mitchell Hutchins
of initial sales charges or contingent deferred sales charges upon redemption,
was conditioned upon its expectation of being compensated under the Class D
Plan.
With respect to each Plan, the directors 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 directors 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
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<PAGE>
based upon a percentage of the average net assets of the Fund, which fees would
increase if the Plan were successful and the Funds attained and maintained
significant asset levels.
Under the Distribution Contract between the Corporation and Mitchell Hutchins
for the Class A shares, Mitchell Hutchins earned the following approximate
amounts of initial sales charges and retained the following approximate
amounts, net of concessions to PaineWebber as exclusive dealer:
Fiscal Year Ended
July 1, 1991 (Commencement of February 28,
Offering of Class A Shares) ----------------------
to February 29, 1992 1993 1994 1995
- ----------------------------- ------ ------- -------
Earned.... $34,642 $7,895 $38,961 $17,277
Retained.. 2,196 1,853 2,243 1,057
For the fiscal years ended February 28, 1993, February 28, 1994 and February
28, 1995, Mitchell Hutchins earned and retained the following contingent
deferred sales charges paid upon certain redemptions of Class B shares:
1993.. $131,333
1994.. 117,324
1995.. 115,968
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of directors, 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 price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved. Generally, bonds are traded on the
OTC market on a "net" basis without a stated commission through dealers acting
for their own account and not as brokers. 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. For the fiscal years ended February 28, 1995, February 28, 1994
and February 28, 1993, the Fund paid $48,561, $77,665 and $378,996,
respectively, in aggregate brokerage commissions.
The Fund has no obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may
be conducted through Mitchell Hutchins or its affiliates, including
PaineWebber. The Corporation's board of directors has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to Mitchell Hutchins and its affiliates are reasonable and
fair. Specific provisions in the Advisory Contract authorize Mitchell Hutchins
and any of its affiliates that are members 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
26
<PAGE>
compensation paid only in accordance with applicable SEC regulations. For the
fiscal year ended February 28, 1995, the Fund paid $ in brokerage
commissions to PaineWebber, which represented % of the total brokerage
commissions paid by that Fund and % of the aggregate dollar amount of
transactions involving the payment of commissions. For the fiscal years ended
February 28, 1993 and February 28, 1993, the Fund paid $6,657 and $0,
respectively, in brokerage commissions to PaineWebber.
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 the Fund's 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.
Consistent with the interest of the Fund and subject to the review of the
board of directors, Mitchell Hutchins may cause the Fund to purchase and sell
portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins determines in good faith that such
commission is reasonable in terms either of that particular transaction or of
the overall responsibility of Mitchell Hutchins to the Fund and its other
clients and that the total commissions paid by the Fund will be reasonable in
relation to the benefits to the Fund over the long term. Research services
furnished by brokers through 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 in
connection with other funds or accounts Mitchell Hutchins advises may be used
by Mitchell Hutchins in advising the Fund. Information and research received
from such brokers will be in addition to, and not in lieu of, the services
required to be performed by Mitchell Hutchins under the Advisory Contract. For
the fiscal year ended February 28, 1995, Mitchell Hutchins directed $ in
portfolio transactions to brokers chosen because they provided research
services, for which the Fund paid $ in commissions. The Fund may purchase
and sell portfolio securities to and from dealers who provide the Fund with
research services. Portfolio transactions will not be directed by the Fund to
dealers solely on the basis of research services provided. The Fund will not
purchase portfolio securities at a higher price or sell such securities at a
lower price in connection with transactions effected with a dealer, acting as
principal, who furnishes research services to Mitchell Hutchins than would be
the case if no weight were given by Mitchell Hutchins to the dealer's
furnishing of such services. Research services furnished by the dealers through
which or with which the Fund effects securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts it advises and,
conversely, research services furnished to Mitchell Hutchins in connection with
other funds or accounts that Mitchell Hutchins 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 of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s)
as to amount according to a formula deemed equitable to the Fund and such other
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as
27
<PAGE>
far as the Fund is concerned or upon its ability to complete its entire order,
in other cases it is believed that coordination and the ability to participate
in volume transactions will be beneficial to the Fund.
The Fund will not purchase securities in underwritings in which Mitchell
Hutchins or any of its affiliates is a member of the underwriting or selling
group, except pursuant to procedures adopted by the Corporation's board of
directors pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the commission or spread paid in connection with such a
purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the date
of the public offering and that Mitchell Hutchins or any affiliate thereof not
participate in or benefit from the sale to the Fund.
Portfolio Turnover. 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 the
securities in the portfolio during the year. For the fiscal years ended
February 28, 1995 and February 28, 1994, the portfolio turnover rates for the
Fund was 9.28% and 24.84%.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION AND OTHER
SERVICES
Combined Purchase Privilege-Class A Shares. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Fund with
concurrent purchases of Class A shares of any other PaineWebber mutual fund and
thus take advantage of the reduced sales charges for Class A shares indicated
in the tables of sales charges in the Prospectus. The sales charge payable on
the purchase of Class A shares of the Funds and Class A shares of such other
funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more employee
benefit plans of a company controlled by the individual(s);
(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; or
(g) an employer (or a 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).
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<PAGE>
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.
Waivers of Sales Charges-Class B Shares. Among other circumstances, the
contingent deferred sales charge on Class B shares of the Fund 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.
The contingent deferred sales charge on Class B shares is waived with respect
to redemptions of shares purchased prior to July 1, 1991 by officers, directors
(or trustees) or employees of the Corporation, Mitchell Hutchins or their
affiliates (or their spouses and children under age 21). The contingent
deferred sales charge will be reduced by 50% with respect to redemptions of
Class B shares that represent shares purchased prior to July 1, 1991 with a net
asset value at time of purchase of at least $1 million.
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. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce the exchange fee and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or 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 which make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing 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 those securities into cash. The Corporation
has elected, however, to be governed by Rule 18f-1 under the 1940 Act, under
which the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund 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 NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for the Fund to dispose of
securities owned by it or fairly to determine the value of its assets, or (3)
as the SEC may otherwise permit. The redemption price may be more or less than
the shareholder's cost, depending on the market value of the Fund's portfolio
at the time.
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<PAGE>
Systematic Withdrawal Plan. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or
semi-annual plans, PaineWebber will arrange for redemption by the Fund of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Fund's systematic withdrawal plan. The payment generally is
mailed approximately five business days after the redemption date. Withdrawal
payments should not be considered dividends, but redemption proceeds, with the
tax consequences described under "Dividends and Taxes" in the Prospectus. If
periodic withdrawals continually exceed reinvested dividends, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. ("Transfer Agent").
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber investment executives, correspondent
firms or the Transfer Agent at 1-800-647-1568.
Reinstatement Privilege-Class A Shares. As described in the Prospectus,
shareholders who have redeemed Class A shares of the Fund may reinstate their
account without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption.
The reinstatement will be made at the net asset value per share next computed
after the notice of reinstatement and check are received. The amount of a
purchase under this reinstatement privilege cannot exceed the amount of the
redemption proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
the shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described in "Dividends and Taxes" in the Prospectus.
PaineWebber RMA Resource Accumulation PlanSM;
PaineWebber Resource Management Account(R) (RMA(R))
Shares of the 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 five business days after the trade date, and
the purchase price of the shares is withdrawn from the investor's RMA account
on the settlement date from the following sources and in the following order:
uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
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<PAGE>
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to enrolling
in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may take
up to two weeks to become effective.
The terms of the Plan or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
Periodic Investing and Dollar Cost Averaging.
Periodic investing in the PW Funds or other mutual funds, whether through the
Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of "dollar cost averaging." By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of low share prices. However, over time, dollar cost averaging
generally results in a lower average original investment cost than if an
investor invested a larger dollar amount in a mutual fund at one time.
PaineWebber's Resource Management Account.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
~ monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold MasterCard(R)
transactions during the period, and provide unrealized and realized gain and
loss estimates for most securities held in the account;
~ comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
~ automatic "sweep" of uninvested cash into the RMA accountholder's choice of
one of the five RMA money market funds-RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money Fund
and RMA New York Municipal Money Fund. Each money market fund attempts to
maintain a stable price per share of $1.00, although there can be no
assurance that it will be able to do so. Investments in the money market
funds are not insured or guaranteed by the U.S. government;
~ 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;
31
<PAGE>
~ Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to remain
invested for a longer period of time;
~ 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
~ expanded account protection to $25 million in the event of the liquidation of
PaineWebber. This protection does not apply to shares of the RMA money market
funds or the PW Funds because those shares are held at the transfer agent and
not through PaineWebber; and
~ automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Fund will automatically convert to Class A shares,
based on the relative net asset values of each of the Classes, as of the close
of business on the first Business Day (as defined below) of the month in which
the sixth anniversary of the initial issuance of such Class B shares of the
Fund occurs. For the purpose of calculating the holding period required for
conversion of Class B shares, the date of initial issuance shall mean (1) the
date on which such Class B shares were issued, or (2) for Class B shares
obtained through an exchange, or a series of exchanges, the date on which the
original Class B shares were issued. For purposes of conversion to Class A,
Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A, a pro rata portion of
the Class B shares in the sub-account will also convert to Class A. The portion
will be determined by the ratio that the shareholder's Class B shares
converting to Class A bears to the shareholder's total Class B shares not
acquired through dividends and other distributions.
The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends
and other distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and (2) the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares of each Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the Class B shares
beyond six years from the date of purchase. Mitchell Hutchins has no reason to
believe that these conditions for the availability of the conversion feature
will not continue to be met.
VALUATION OF SHARES
The Fund determines the net asset value per share separately for each Class
of shares as of the close of regular trading (currently 4:00 p.m., eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently, the NYSE is
32
<PAGE>
closed on the observance of the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Securities that are listed on stock exchanges are valued at the last sale
price on the day the securities are being valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
OTC market and listed on the National Association of Securities Dealers
Automatic Quotation System ("NASDAQ") are valued at the last available sale
price on NASDAQ at 4:00 p.m., eastern time; other OTC securities are valued at
the last bid price available prior to valuation.
Where market quotations are readily available, debt securities are valued
based upon those quotations, provided such quotations adequately reflect, in
Mitchell Hutchins' judgment, fair value of the security. Where such market
quotations are not readily available, such securities are valued based upon
appraisals received from a pricing service using a computerized matrix system,
or based upon appraisals derived from information concerning the security or
similar securities received from recognized dealers in those securities. All
other securities or assets will be valued at fair value as determined in good
faith by or under the direction of the Corporation's board of directors. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining to maturity, unless the Corporation's board of
directors determines that this does not represent fair value.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Total Return. Average annual total return quotes ("Standardized Return") used
in the Fund's Performance Advertisements are calculated according to the
following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a
specified Class
T = average annual total return of shares of that Class
n = number of years
ending redeemable value of a hypothetical $1,000 payment made at
the
ERV = 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
Fund's maximum 4.5% initial sales charge is deducted from the initial $1,000
payment and, for Class B shares, the applicable contingent deferred sales
charge imposed on a redemption of Class B shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
33
<PAGE>
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 the 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 these charges
would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to
Class A shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B
and Class D shares of the Fund for the periods indicated. All returns for
periods of more than one year are expressed as an average return.
Class A Class B Class D
------- ------- -------
Fiscal year ended February 28, 1995:
Standardized Return*................ -3.55% -4.79% 0.14%
Non-Standardized Return............. 1.08% 0.21% 0.14%
Five years ended February 28, 1995:
Standardized Return*................ NA 8.32% NA
Non-Standardized Return............. NA 8.61% NA
Inception** to February 28, 1995:
Standardized Return*................ 8.24% 8.52% 9.42%
Non-Standardized Return............. 9.61% 8.52% 9.42%
- ------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B shares reflect deduction of the applicable contingent deferred sales
charges imposed on a redemption of shares held for the period. Class D
shares do not impose an initial or a contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.
** The inception dates for the Class A shares, Class B shares and Class D
shares of the Fund were July 1, 1991, July 18, 1986 and July 2, 1992,
respectively.
Other Information. In Performance Advertisements, the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper") for growth funds; 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 and other
indexes, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average, the Morgan Stanley
International Capital World Index, the Lehman Brothers 20+ Year Treasury Bond
Index, the Lehman Brothers Government/Corporate Bond Index, the Salomon
Brothers Non-U.S. World Government Bond Index, and changes in the Consumer
Price Index as published by the U.S. Department of Commerce. The Fund also may
refer in such materials to mutual fund performance rankings and other data,
such as comparative asset,
34
<PAGE>
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 (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.
The 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 a Fund investment are reinvested
by being paid 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 deposits (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote (R) Money
Markets. In comparing the Fund's performance to CD performance, investors
should keep in mind that bank CDs are insured in whole or in part by an agency
of the U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon and net asset
value will fluctuate. The debt securities held by the Fund generally have
longer maturities than most CDs and may reflect interest rate fluctuations for
longer term securities. An investment in the Fund involves greater risks than
an investment in either a money market fund or a CD.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net
short-term capital gain) 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 other income (including gains from options or futures) derived
with respect to its business of investing in securities ("Income Requirement");
(2) the Fund must derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities - and options or futures -
held for less than three months ("Short-Short Limitation"); (3) at the close of
each quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the outstanding voting securities of the issuer; and (4) 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.
35
<PAGE>
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 any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the Fund's investment company taxable income
(whether paid in cash or in additional Fund shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by 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
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 on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the price back as a taxable dividend or
capital gain distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs") if such stock is denominated in U.S. dollars and otherwise is a
permissible investment. A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain from disposition of such stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital
gain over net short-term capital loss)-which would have to be distributed to
satisfy the Distribution Requirement and avoid imposition of the Excise
Tax-even if those earnings and gain are not distributed to the Fund. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was in
effect).
36
<PAGE>
The use of hedging and option income strategies by the Fund, such as writing
(selling) and purchasing options and futures, involves complex rules that will
determine for income tax purposes the character and timing of recognition of
the gains and losses the Fund realizes in connection therewith. Income from
transactions in options and futures derived by the Fund with respect to its
business of investing in securities will qualify as permissible income under
the Income Requirement. However, income from the disposition of options and
futures will be subject to the Short-Short Limitation if they are held for less
than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
OTHER INFORMATION
Prior to July 1, 1991, the name of the Fund was "PaineWebber Master Growth
Fund."
The Corporation is authorized to issue Class C shares of the Fund in addition
to Class A, Class B and Class D shares, but the Corporation's board of
directors has no current intention of doing so. Class C shares, if issued,
would bear no service or distribution fees, would be sold with no initial sales
charge and would be redeemable at net asset value without the imposition of a
contingent deferred sales charge. Class C shares would be offered only to a
limited class of institutional purchasers.
Class-Specific Expenses. The Fund might determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares of the Funds bear higher transfer agency fees per shareholder account
than those borne by Class A or Class D shares. The higher fee is imposed due to
the higher costs incurred by the Transfer Agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
Counsel. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C., 20036-5891, counsel to the Corporation, has passed upon the
legality of the shares offered by the Prospectus. Kirkpatrick & Lockhart LLP
also acts as counsel to PaineWebber and Mitchell Hutchins in connection with
other matters.
37
<PAGE>
Independent Accountants. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, N.Y. 10036, serves as the Corporation's independent accountants.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended February
28, 1995 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent accountants appearing therein are incorporated by reference in this
Statement of Additional Information.
38
<PAGE>
APPENDIX A
Description of Moody's Corporate Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; Aa. Bonds which are
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities; A. Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future; Baa. Bonds
which are rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well; Ba. Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class; B.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Description of S&P Corporate Debt Ratings
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree; A. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated BBB is
regarded as having adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic co
nditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than for
debt in higher rated categories; BB, B. Debt rated BB or B is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
A-1
<PAGE>
indicates the lowest degree of speculation and B a somewhat higher degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: "NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Description of Moody's Commercial Paper Ratings
Prime-1. Issuers assigned this highest rating have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well established access to
a range of financial markets and assured sources of alternate liquidity;
Prime-2. Issuers assigned this rating have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Description of S&P Commercial Paper Ratings
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety; A-1. This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation; A-2. Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated A-1.
A-2
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or in this Statement of
Additional Information in connection with the offering made by the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Fund or its distributor. The Prospectus
and this Statement of Additional Information do not constitute an offering by
the Fund or by the distributor in any jurisdiction in which such offering may
not lawfully be made.
---------
TABLE OF CONTENTS
Page
----
Investment Policies and Restrictions.. 1
Hedging Strategies.................... 9
Directors and Officers................ 15
Investment Advisory and Distribution
Arrangements.......................... 21
Portfolio Transactions................ 26
Reduced Sales Charges, Additional
Exchange and Redemption
Information and Other Services........ 28
Conversion of Class B Shares.......... 32
Valuation of Shares................... 32
Performance Information............... 33
Taxes................................. 35
Other Information..................... 37
Financial Statements.................. 38
Appendix A............................ A-1
(C)1995 PaineWebber Incorporated
Recycled Paper
Paine W ebber
Blue Chip Growth Fund
- -------------------------------------------------------------------------------
Statement of Additional Information
July , 1995
- -------------------------------------------------------------------------------
<PAGE>
RECENT PERFORMANCE RESULTS (UNAUDITED)
Net Asset Value Total Return1
-------------------------- -----------------------------
12 Months 6 Months
08/31/94 02/28/94 08/31/93 Ended 08/31/94 Ended 08/31/94
- -----------------------------------------------------------------------
Class A Shares $ 16.33 $17.06 $15.57 9.34% -4.28%
- -----------------------------------------------------------------------
Class B Shares 16.01 16.80 15.36 8.48 -4.76
- -----------------------------------------------------------------------
Class D Shares 16.10 16.89 15.44 8.54 -4.68
- -----------------------------------------------------------------------
Performance Summary Class A Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- -----------------------------------------------------------------------------
12/30/83 - 12/31/84 $9.15 $8.47 - $0.1825 -5.39%
- -----------------------------------------------------------------------------
1985 8.47 13.90 - 0.1125 65.65
- -----------------------------------------------------------------------------
1986 13.90 15.95 $3.0402 0.0911 39.09
- -----------------------------------------------------------------------------
1987 15.95 12.85 3.7770 0.1914 6.60
- -----------------------------------------------------------------------------
1988 12.85 14.46 0.4815 0.4397 19.88
- -----------------------------------------------------------------------------
1989 14.46 15.50 1.6676 0.1138 19.96
- -----------------------------------------------------------------------------
1990 15.50 12.92 1.0440 0.3972 -7.60
- -----------------------------------------------------------------------------
1991 12.92 13.93 - 0.1982 9.38
- -----------------------------------------------------------------------------
1992 13.93 12.72 - - -8.69
- -----------------------------------------------------------------------------
1993 12.72 17.34 0.5560 0.1649 42.12
- -----------------------------------------------------------------------------
01/01/94 - 08/31/94 17.34 16.33 - - -5.82
- -----------------------------------------------------------------------------
Total: $10.5663 $1.8913
- -----------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 312.75%
- -----------------------------------------------------------------------------
Performance Summary Class B Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- -----------------------------------------------------------------------------
07/01/91 - 12/31/91 $13.09 $13.91 - $0.1659 7.55%
- -----------------------------------------------------------------------------
1992 13.91 12.61 - - -9.35
- -----------------------------------------------------------------------------
1993 12.61 17.09 $ 0.5560 0.1245 41.05
- -----------------------------------------------------------------------------
01/01/94 - 08/31/94 17.09 16.01 - - -6.38
- -----------------------------------------------------------------------------
Total: $ 0.5560 $0.2904
- -----------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 28.76%
- -----------------------------------------------------------------------------
Performance Summary Class D Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- -----------------------------------------------------------------------------
07/02/92 - 12/31/92 $13.51 $12.68 - $ - -6.14%
- -----------------------------------------------------------------------------
1993 12.68 17.18 $ 0.5560 0.1313 41.03
- -----------------------------------------------------------------------------
01/01/94 - 08/31/94 17.18 16.10 - - -6.29
- -----------------------------------------------------------------------------
Total: $ 0.5560 $0.1313
- -----------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 24.05%
- -----------------------------------------------------------------------------
1 Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable dates, and do not include sales charges;
results for Class A and Class B shares would be lower if sales charges were
included.
ATLAS GLOBAL GROWTH FUND
Paine Webber
1
<PAGE>
RECENT PERFORMANCE RESULTS (UNAUDITED)
Net Asset Value Total Return1
-------------------------- -----------------------------
12 Months 6 Months
08/31/94 02/28/94 08/31/93 Ended 08/31/94 Ended 08/31/94
- -----------------------------------------------------------------------
Class A Shares $20.43 $20.93 $20.86 -0.58% -1.76%
- -----------------------------------------------------------------------
Class B Shares 20.37 20.86 20.78 -1.31 -2.14
- -----------------------------------------------------------------------
Class D Shares 20.42 20.91 20.83 -1.29 -2.13
- -----------------------------------------------------------------------
Performance Summary Class A Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- --------------------------------------------------------------------------------
12/20/83 - 12/31/84 $12.65 $13.21 - $1.0800 13.72%
- --------------------------------------------------------------------------------
1985 13.21 14.97 $0.1950 0.8850 22.36
- --------------------------------------------------------------------------------
1986 14.97 15.04 1.1380 0.6830 12.68
- --------------------------------------------------------------------------------
1987 15.04 12.05 2.3027 0.7366 -3.16
- --------------------------------------------------------------------------------
1988 12.05 13.67 - 0.5120 17.83
- --------------------------------------------------------------------------------
1989 13.67 16.32 0.1675 0.5178 24.59
- --------------------------------------------------------------------------------
1990 16.32 15.85 - 0.3030 -1.01
- --------------------------------------------------------------------------------
1991 15.85 19.26 - 0.0985 22.15
- --------------------------------------------------------------------------------
1992 19.26 21.74 - 0.2432 3.90
- --------------------------------------------------------------------------------
1993 21.74 20.86 0.0310 0.2818 -2.59
- --------------------------------------------------------------------------------
01/01/94 - 08/31/94 20.86 20.43 - 0.1263 -1.43
- --------------------------------------------------------------------------------
Total: $3.8342 $5.4672
- --------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 197.90%
- --------------------------------------------------------------------------------
Performance Summary Class B Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- --------------------------------------------------------------------------------
07/01/91 - 12/31/91 $18.04 $21.14 - $0.1074 17.85%
- --------------------------------------------------------------------------------
1992 21.14 21.69 - 0.0992 3.09
- --------------------------------------------------------------------------------
1993 21.69 20.81 $0.0310 0.1193 -3.94
- --------------------------------------------------------------------------------
01/01/94 - 08/31/94 20.81 20.37 - 0.0424 -1.95
- --------------------------------------------------------------------------------
Total: $0.0310 $0.3683
- --------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 15.18%
- --------------------------------------------------------------------------------
Performance Summary Class D Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- --------------------------------------------------------------------------------
07/02/92 - 12/31/92 $19.96 $21.75 - $0.1160 9.58%
- --------------------------------------------------------------------------------
1993 21.75 20.87 $0.0310 0.1308 -3.93
- --------------------------------------------------------------------------------
01/01/94 - 08/31/94 20.87 20.42 - 0.0435 -1.94
- --------------------------------------------------------------------------------
Total: $0.0310 $0.2903
- --------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 3.91%
- --------------------------------------------------------------------------------
1 Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable dates, and do not include sales charges;
results for Class A and B shares would be lower if sales charges were
included.
DIVIDEND GROWTH FUND
Paine Webber
2
<PAGE>
RECENT PERFORMANCE RESULTS (UNAUDITED)
Net Asset Value Total Return1
-------------------------- -----------------------------
12 Months 6 Months
08/31/94 02/28/94 08/31/93 Ended 08/31/94 Ended 08/31/94
- -----------------------------------------------------------------------
Class A Shares $20.04 $21.02 $20.60 2.33% -4.66%
- -----------------------------------------------------------------------
Class B Shares 19.53 20.56 20.25 1.55 -5.01
- -----------------------------------------------------------------------
Class D Shares 19.67 20.70 20.38 1.59 -4.98
- -----------------------------------------------------------------------
Performance Summary Class A Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- --------------------------------------------------------------------------------
03/18/85 - 12/31/85 $ 9.15 $10.55 - $0.1275 16.87%
- --------------------------------------------------------------------------------
1986 10.55 10.86 $0.4063 0.1042 7.64
- --------------------------------------------------------------------------------
1987 10.86 9.81 1.4051 0.0847 4.34
- --------------------------------------------------------------------------------
1988 9.81 11.87 - 0.1011 22.05
- --------------------------------------------------------------------------------
1989 11.87 14.79 1.1520 - 34.27
- --------------------------------------------------------------------------------
1990 14.79 12.98 0.4625 0.1625 -7.72
- --------------------------------------------------------------------------------
1991 12.98 18.53 0.6003 0.0072 47.61
- --------------------------------------------------------------------------------
1992 18.53 18.66 0.6235 - 4.15
- --------------------------------------------------------------------------------
1993 18.66 21.14 1.0734 - 19.17
- --------------------------------------------------------------------------------
01/01/94 - 08/31/94 21.14 20.04 - - -5.20
- --------------------------------------------------------------------------------
Total: $5.7231 $0.5872
- --------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 244.74%
- --------------------------------------------------------------------------------
Performance Summary Class B Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- --------------------------------------------------------------------------------
07/01/91 - 12/31/91 $15.63 $18.47 $0.6003 $0.0037 22.18%
- --------------------------------------------------------------------------------
1992 18.47 18.44 0.6235 - 3.30
- --------------------------------------------------------------------------------
1993 18.44 20.71 1.0734 - 18.26
- --------------------------------------------------------------------------------
01/01/94 - 08/31/94 20.71 19.53 - - -5.70
- --------------------------------------------------------------------------------
Total: $2.2972 $0.0037
- --------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 40.75%
- --------------------------------------------------------------------------------
Performance Summary Class D Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- --------------------------------------------------------------------------------
07/02/92 - 12/31/92 $17.04 $18.57 $0.6235 - 12.73%
- --------------------------------------------------------------------------------
1993 18.57 20.85 1.0734 - 18.19
- --------------------------------------------------------------------------------
01/01/94 - 08/31/94 20.85 19.67 - - -5.66
- --------------------------------------------------------------------------------
Total: $1.6969 -
- --------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: 25.69%
- --------------------------------------------------------------------------------
1 Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable dates, and do not include sales charges;
results for Class A and Class B shares would be lower if sales charges were
included.
GROWTH FUND
Paine Webber
3
<PAGE>
PORTFOLIO OF INVESTMENTS
August 31, 1994
Number of
Shares Value
- ------------ ------------
Common Stocks - 77.15%
United States - 27.26%
Biotechnology - 8.01%
200,000 Biogen Inc.*......................... $ 10,075,000
321,000 Calgne Inc*.......................... 3,892,125
365,500 Chiron Corporation*.................. 25,493,625
43,300 Isis Pharmaceuticals Inc*............ 205,675
------------
39,666,425
------------
Computer Systems - 2.91%
780,000 Borland International Inc*........... 10,432,500
820,000 Maxtor Corporation*.................. 3,997,500
------------
14,430,000
------------
Datacommunication - 5.41%
600,000 Digital Equipment Corp*.............. 14,550,000
620,200 General Datacom Industries, Inc.*.... 12,248,950
------------
26,798,950
------------
Electronics & Instrumentation - 9.71%
300,000 Analog Devices, Inc.*................ 9,675,000
505,000 National Semiconducter Corporation*.. 9,405,625
1,397,500 Westinghouse Electric................ 19,739,688
903,400 Zenith Electronics Corp*............. 9,259,850
------------
48,080,163
------------
Foods - 0.73%
227,400 Wholesome & Hearty Foods, Inc*....... 3,638,400
------------
Mining - 0.49%
200,000 Hecla Mining Co*..................... 2,450,000
------------
Total United States Common Stocks................. 135,063,938
------------
Argentina - 2.50%
Infrastructure - 2.50%
3,416,920 Commercial Del Plata................. 12,407,763
------------
Brazil - 4.21%
Electric Utility - 3.24%
39,000,000 Electrobras ON....................... 16,066,592
------------
Telephone - 0.97%
103,763,746 Telebras (ON)........................ 4,801,708
------------
Total Brazil Common Stocks........................ 20,868,300
------------
Canada - 3.69%
Mining - 3.15%
605,600 Echo Bay Mines....................... 7,721,400
227,300 Horsham Corp. ....................... 3,352,675
200,000 Placer Dome Inc. .................... 4,550,000
------------
15,624,075
- ------------
PaineWebber
ATLAS GLOBAL GROWTH FUND
4
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- ------------ ------------
Common Stocks - (continued)
Canada - (continued)
Technology - 0.54%
778,800 Battery Technologies*................ $ 2,677,125
------------
Total Canada Common Stocks........................ 18,301,200
------------
China - 0.11%
Infrastructure - 0.11%
650,000 Shanghai Jinqiao Export B Shares*.... 552,500
------------
Finland - 0.43%
Machinery - 0.43%
19,500 Kone Corp. B Shares.................. 2,112,220
------------
France - 0.86%
Construction - 0.62%
49,050 Legris Industries*................... 3,059,837
------------
Industrial Holdings - 0.24%
39,250 Dynaction*........................... 1,180,653
------------
Total France Common Stocks........................ 4,240,490
------------
Germany - 2.55%
Auto - 2.55%
40,000 Volkswagenwerk....................... 12,628,647
------------
Hong Kong - 10.40%
Aerospace - 2.17%
51,511,200 China Aerospace*..................... 10,731,917
------------
Holding Company - 1.25%
1,500,000 Jardine Strategic Holdings........... 6,211,421
------------
Infrastructure - 4.99%
26,695,000 Hopewell Holdings.................... 24,699,361
------------
Retailing - 1.99%
12,103,000 Dickson Concept International, Ltd... 9,866,959
------------
Total Hong Kong Common Stocks..................... 51,509,658
------------
Indonesia - 2.27%
Consumer Products - 0.17%
219,800 Tigaraksa Satria..................... 819,036
------------
Food - 0.01%
5,679 Mayora Indah......................... 28,738
------------
PaineWebber
ATLAS GLOBAL GROWTH FUND
5
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- ------------- ------------
Common Stocks - (continued)
Indonesia - (continued)
Hotels - 1.22%
4,605,500 Jakarta International Hotels and Development.. $ 6,091,231
------------
Retail - 0.87%
2,333,500 Matahari Putra Prima*......................... 4,293,962
------------
Total Indonesia Common Stocks............................... 11,232,967
------------
Italy - 1.32%
Industrial Holdings - 1.32%
7,823,750 Cofide SPA*................................... 6,539,388
------------
Japan - 0.05%
Electronics - 0.05%
38,000 Chinon Industries Inc......................... 252,523
------------
Luxembourg - 1.04%
Mining - 1.04%
200,000 Minorco ADR................................... 5,159,360
------------
Malaysia - 3.33%
Holding Company - 0.63%
1,000,000 Sime Darby Berhad............................. 3,126,221
------------
Mining - 2.70%
6,176,000 Malaysia Mining Berhad........................ 13,394,607
------------
Total Malaysia Common Stocks................................ 16,520,828
------------
Norway - 2.23%
Machinery & Engineering - 1.73%
180,000 Kvaerner 'B'.................................. 8,555,186
------------
Oil Service - 0.50%
200,000 Aker A/S B Shares............................. 2,484,789
------------
Total Norway Common Stocks.................................. 11,039,975
------------
Pakistan - 1.65%
Banking - 1.65%
923,000 Askari Commercial Bank*....................... 1,922,497
768,200 Bank Al Habib*................................ 1,325,056
512,700 Bank of Pujab*................................ 1,142,978
678,000 Prime Commercial Bank*........................ 926,751
770,000 Soneri Bank Limited*.......................... 1,328,161
984,500 Union Bank Limited*........................... 1,521,926
------------
8,167,369
------------
PaineWebber
ATLAS GLOBAL GROWTH FUND
6
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- ------------- ------------
Common Stocks - (continued)
Poland - 0.08%
Construction - 0.08%
60,000 Mostostal Export Bearer*.................. $ 377,121
------------
South Africa - 2.04%
Investment Companies - 0.71%
71,000 ASA Limited............................... 3,514,500
------------
Mining - 1.33%
187,100 Free State Cons Gold Mines Ord............ 3,073,190
90,000 Goldfields Industrial Corp................ 2,585,746
77,900 Randfontein Estates Goldmine.............. 927,687
------------
6,586,623
------------
Total South Africa Common Stocks........................ 10,101,123
------------
Sweden - 0.73%
Appliances - 0.51%
50,000 Electrolux Ab B Free...................... 2,519,340
------------
Mining - 0.22%
85,000 Trelleborg Ab B Free*..................... 1,100,997
------------
Total Sweden Common Stocks.............................. 3,620,337
------------
Thailand - 0.51%
Distribution - 0.51%
1,150,200 Saha Pathana International Holding Reg'd.. 2,526,398
------------
Turkey - 3.97%
Banking - 2.04%
14,942,500 Akbank.................................... 5,227,697
38,441,000 Yapi Kredi Bank........................... 4,931,207
------------
10,158,904
------------
Machinery - 1.29%
3,942,000 Koc Holdings.............................. 2,873,178
3,930,500 Koc Yatirim............................... 3,495,051
------------
6,368,229
------------
Newspaper - 0.64%
9,449,600 Medya Holdings AS......................... 1,515,242
17,009,280 Medya Holdings New........................ 1,636,461
------------
3,151,703
------------
Total Turkey Common Stocks.............................. 19,678,836
------------
PaineWebber
ATLAS GLOBAL GROWTH FUND
7
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- ------------- ------------
Common Stocks - (continued)
United Kingdom - 5.92%
Holding Company - 3.30%
7,465,800 Lonrho Ord.......................... $ 16,403,284
------------
Mining - 0.98%
1,050,000 Antofagasta Holdings................ 4,839,817
------------
Retailing - 1.64%
1,610,000 Body Shop International............. 5,392,633
1,000,000 Christies International............. 2,719,516
------------
8,112,149
------------
Total United Kingdom Common Stocks................ 29,355,250
------------
Total Common Stocks (cost - $363,842,116)......... 382,256,191
------------
Preferred Stock - 19.67%
Brazil - 14.90%
Bank - 4.75%
1,125,133,221 Banco Bradesco SA................... 11,048,148
222,452,000 Banco de Brasil Preferred Reg'd NV.. 5,824,928
10,000,000 Investimentos Itau.................. 6,659,142
------------
23,532,218
------------
Beverage - 0.42%
6,830,000 Brahma.............................. 2,096,795
------------
Machinery - 1.22%
15,415,000 Brasmotor Preferred Reg'd........... 6,045,951
------------
Mining - 3.51%
273,000,000 Paranapanema........................ 4,794,447
81,000 Vale Do Rio Doce Pfd Reg'd.......... 12,616,254
------------
17,410,701
------------
Oil - 1.68%
47,000,000 Petrobras Preferred Reg'd........... 8,328,442
------------
Paper - 2.43%
874,000 Aracruz Celulose S.A. ADR........... 12,017,500
------------
Retail - 0.45%
10,338,000 Mesbla Preferred Reg'd.............. 2,251,957
------------
Steel - 0.43%
28,190,000 Acesita Cia Acos Espec Itab......... 2,146,067
------------
Telephone - 0.01%
24,142 Telebras Pfd Reg'd.................. 1,425
------------
Total Brazil Preferred Stocks..................... 73,831,056
------------
PaineWebber
ATLAS GLOBAL GROWTH FUND
8
<PAGE>
PORTFOLIO OF INVESTMENTS (concluded)
August 31, 1994
<TABLE><CAPTION>
Number of
Shares Value
- ------------- ------------
<S> <C>
Preferred Stock - (continued)
Germany - 4.77%
Auto - 3.85%
35,500 Porsche AG Non Voting Preferred.......................................... $ 19,110,802
------------
Computer Systems - 0.92%
10,000 Sap AG Preferred......................................................... 4,540,992
------------
Total Germany Preferred Stocks......................................................... 23,651,794
------------
Total Preferred Stocks (cost - $80,387,085)............................................ 97,482,850
------------
Stock Rights - 0.27%
Brazil - 0.01%
Telephone - 0.01%
2,366,054 Telebras PN Rights....................................................... 11,323
------------
Turkey - 0.26%
Banking - 0.26%
3,735,000 Akbank Non-Trading Certificates, Rights issue............................ 1,306,705
------------
Total Stock Rights (cost - $1,276,578)................................................. 1,318,028
------------
Warrants - 0.12%
Hong Kong - 0.12%
Aerospace - 0.12%
8,728,320 China Aero International Holding, expiring 12/31/95 (cost - $1,870,733).. 598,627
------------
</TABLE>
<TABLE><CAPTION>
Principal
Amount Maturity Interest
(000) Date Rate
- --------- -------- --------
<S> <C> <C> <C>
Repurchase Agreement - 0.92%
Repurchase Agreement dated 08/31/94 with Salomon Brothers Inc.
collateralized by $4,766,000 U.S. Treasury Notes, 4.000% due 01/31/96;
$4,570 proceeds: $4,570,597 (cost - $4,570,000).............................. 09/01/94 4.700% 4,570,000
------------
Total Investments (cost - $451,946,512)-98.13%.................................. 486,225,696
Other assets in excess of liabilities-1.87%..................................... 9,274,063
------------
Net Assets-100.00%.............................................................. $495,499,759
============
- ------
</TABLE>
* Non-income producing security
ADR - American Depository Receipts
See accompanying notes to financial statements
PaineWebber
ATLAS GLOBAL GROWTH FUND
9
<PAGE>
PORTFOLIO OF INVESTMENTS
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - 96.91%
Aerospace - 3.09%
169,500 Martin Marietta Corporation..................... $ 8,623,313
27,000 McDonnell Douglas Corporation................... 3,192,750
134,100 Loral Corporation............................... 5,598,675
------------
17,414,738
------------
Auto - Truck - 0.25%
38,200 General Motors Corporation...................... 1,432,500
------------
Banking - 13.18%
166,600 Ahmanson H.F. and Co............................ 3,727,675
184,912 Banc One Corporation............................ 6,425,692
97,900 BankAmerica..................................... 4,833,813
53,900 Bank of New York................................ 1,751,750
152,700 Central Fidelity Banks, Inc..................... 5,077,275
55,300 The Chase Manhattan Corporation................. 2,087,575
282,000 Comerica Incorporated........................... 8,565,750
26,100 First Empire State Corporation.................. 4,110,750
87,200 First Union Corporation......................... 4,022,100
162,330 KeyCorp......................................... 5,336,599
495,900 Marshall and Ilsley Corporation................. 10,041,975
24,500 Michigan National Corporation................... 1,911,000
153,600 NationsBank Corporation......................... 8,563,200
56,800 Norwest Corporation............................. 1,512,300
24,600 Old Kent Financial Corporation.................. 867,150
26,900 Shawmut National Corporation.................... 605,250
93,100 State Street Boston Corporation................. 3,724,000
39,200 UJB Financial Corporation....................... 1,136,800
------------
74,300,654
------------
Chemical - 1.01%
335,200 Methanex Corporation............................ 5,698,400
------------
Computer - 6.04%
184,200 COMPAQ Computer Corporation*~................... 6,884,475
179,600 Computer Associates International Incorporated.. 7,206,450
167,400 Informix Corporation............................ 3,954,825
126,100 International Business Machines Corporation~.... 8,653,613
77,200 Micron Technology Inc........................... 3,107,300
99,300 Oracle Systems Corporation*..................... 4,238,869
------------
34,045,532
------------
Conglomerates - 1.33%
24,500 E.I. dupont de Nemours and Company~............. 1,482,250
97,200 General Electric Company........................ 4,835,700
19,800 Proctor & Gamble Co.~........................... 1,205,325
------------
7,523,275
------------
PaineWebber
DIVIDEND GROWTH FUND
10
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - (continued)
Conglomerates - Diversified - 0.29%
198,000 Laidlaw Inc............................ $ 1,608,750
------------
Construction & Engineering - 1.96%
80,500 Fluor Corporation...................... 4,266,500
190,900 Louisiana Pacific Corporation.......... 6,776,950
------------
11,043,450
------------
Drugs & Medical Products - 5.49%
192,200 Abbott Laboratories.................... 5,766,000
110,300 American Cyanamid...................... 10,643,950
76,000 American Home Products Corporation..... 4,512,500
200,000 Johnson & Johnson...................... 10,025,000
------------
30,947,450
------------
Electronics & Instrumentation - 4.91%
39,200 Altera Corporation..................... 1,195,600
126,900 Circuit City Stores Inc................ 3,013,875
28,900 Texas Instruments Incorporated......... 2,250,588
140,700 Raytheon Company....................... 9,514,838
102,600 Reliance Electric Co................... 2,629,125
185,900 Reynolds & Reynolds Co................. 4,903,113
294,000 Westinghouse Electric Corporation...... 4,152,750
------------
27,659,889
------------
Environmental Services - 2.70%
73,500 Molten Metal Technology Inc............ 1,855,875
107,900 Safety Kleen Corporation............... 1,820,813
385,300 WMX Technologies, Inc.................. 11,559,000
------------
15,235,688
------------
Financial Services - 2.83%
39,500 Beneficial Corporation................. 1,698,500
160,200 Federal National Mortgage Association.. 14,237,775
------------
15,936,275
------------
Foods - 1.37%
236,500 ConAgra, Inc........................... 7,745,375
------------
Healthcare - 2.93%
76,500 Foundation Health Corporation.......... 2,897,438
90,800 Humana Inc............................. 1,929,500
317,100 National Medical Enterprises Inc....... 5,787,075
136,900 U.S. Healthcare, Inc................... 5,920,925
------------
16,534,938
------------
PaineWebber
DIVIDEND GROWTH FUND
11
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - (continued)
Household & Consumer Products - 3.50%
63,700 The Gillette Company............... $ 4,610,288
70,966 Lancaster Colony Corporation....... 2,572,518
117,100 Nike Inc........................... 7,538,313
243,800 Rite Aid Corporation............... 5,028,375
------------
19,749,494
------------
Industrial & Electronic Products - 12.29%
20,600 AMP Incorporated................... 1,496,075
111,700 Atmel Corporation.................. 3,071,750
77,500 Corning Inc........................ 2,392,813
186,800 Donaldson Inc...................... 4,786,750
125,000 Dover Corporation.................. 7,234,375
117,600 Emerson Electric Co................ 7,305,900
161,100 Federal Signal Corporation......... 3,201,863
46,800 Foster Wheeler Corporation......... 1,907,100
57,900 General Dynamics Corporation....... 2,612,738
50,000 Genuine Parts Co................... 1,837,500
107,200 Inland Steel Industries............ 4,435,400
168,500 Integrated Device Technology....... 3,938,688
39,200 Molex Inc.......................... 1,675,800
91,800 Nucor Corporation.................. 6,334,200
129,600 Pentair Inc........................ 5,281,200
44,100 Symbol Technologies................ 1,311,975
485,250 Worthington Industries, Inc........ 10,432,875
------------
69,257,002
------------
Insurance - 6.99%
112,600 AFLAC Incorporated................. 4,039,525
63,700 American International Group Inc... 5,987,800
90,800 Equitable of Iowa Companies........ 3,541,200
35,600 General Re Corporation............. 3,973,850
85,800 Lincoln National Corporation....... 3,303,300
78,700 NWNL Companies..................... 2,479,050
230,700 Providian Corporation.............. 7,757,288
103,400 St. Paul Companies, Inc............ 4,472,050
62,800 The Progressive Corporation........ 2,370,700
41,200 U.S. Life Corporation.............. 1,478,050
------------
39,402,813
------------
Machinery - Machine Tools - 1.03%
34,000 Illinois Tool Works Inc............ 1,470,500
67,100 W.W. Grainger, Inc................. 4,361,500
------------
5,832,000
------------
PaineWebber
DIVIDEND GROWTH FUND
12
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - (continued)
Medical Equipment - 0.98%
56,100 Medtronic, Inc............. $ 5,539,875
------------
Metals & Mining - 0.63%
228,400 Echo Bay Mines Ltd......... 2,912,100
50,000 Hecla Mining............... 612,500
------------
3,524,600
------------
Oil & Gas - 4.57%
78,200 Amoco Corporation.......... 4,525,825
114,700 Chevron Corporation........ 4,860,413
131,700 Duke Power Co.............. 5,103,375
67,500 Mobil Corporation.......... 5,686,875
29,400 Texaco Inc................. 1,815,450
311,700 Weatherford International.. 3,779,363
------------
25,771,301
------------
Printing & Publishing - 2.07%
197,000 Banta Corporation.......... 6,648,750
100,100 Gannett Company Inc........ 5,005,000
------------
11,653,750
------------
Retail - 2.01%
235,700 American Stores Co......... 5,951,425
52,900 Caldor Corporation*........ 1,686,188
198,600 Waban Inc.................. 3,674,100
------------
11,311,713
------------
Retail Food Chains - 1.30%
176,300 Albertson's, Inc........... 5,090,663
79,200 McDonald's Corporation..... 2,237,400
------------
7,328,063
------------
Security Services - 0.36%
73,000 Pittson Services Group..... 2,034,875
------------
Specialty Chemicals - 2.79%
200,000 Hanna M.A. Co.............. 5,425,000
166,800 Lubrizol Corporation....... 5,212,500
245,900 Pall Corporation........... 4,426,200
30,000 Praxair Inc................ 682,500
------------
15,746,200
------------
PaineWebber
DIVIDEND GROWTH FUND
13
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - (concluded)
Specialty Retail - 6.91%
90,100 Dayton Hudson Corporation................... $ 7,635,975
107,100 Diebold Incorporated........................ 4,618,688
72,800 Leggett & Platt Inc......................... 2,693,600
80,400 Loctite Corporation......................... 3,648,150
23,900 Lowes Companies, Inc........................ 863,388
107,700 Nordstrom Inc............................... 5,061,900
286,100 The Pep Boys-Manny, Moe & Jack.............. 9,977,738
72,800 The Sherwin-Williams Company................ 2,411,500
92,900 United States Shoe Corporation.............. 2,043,800
------------
38,954,739
------------
Telecommunications - Services - 1.02%
101,900 Sprint Corporation.......................... 4,037,788
41,100 Tellabs..................................... 1,731,338
------------
5,769,126
------------
Telephone Companies - 1.16%
138,100 Century Telephone Enterprises Incorporated.. 4,160,263
38,000 Telefonos de Mexico, S.A. de C.V., ADS~..... 2,384,500
------------
6,544,763
------------
Tobacco - 1.55%
142,800 Philip Morris Companies Inc................. 8,710,800
------------
Transportation - 0.37%
32,100 Norfolk Southern Corporation................ 2,062,425
------------
Total Common Stocks (cost - $520,423,286)............. 546,320,453
------------
<TABLE><CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
- --------- -------------------- ---------------
<S> <C> <C> <C>
Corporate Bond - 0.42%
Developers Diversified Realty Corporation
$2,400 (cost - $2,396,496).................................. 08/15/99 7.000% 2,370,000
-------------
U.S. Government Obligations - 4.43%
25,000 U.S. Treasury Bills (cost - $24,971,417)............. 09/08/94 to 09/22/94 4.125 to 4.300 24,971,417
-------------
Repurchase Agreement - 1.47%
Repurchase Agreement dated 08/31/94 with State Street
Bank & Trust Co., collateralized by $8,334,000 U.S.
Treasury Notes, 5.875%, due 05/31/96; proceeds:
8,265 $8,266,079 (cost - $8,265,000)....................... 09/01/94 4.700 8,265,000
-------------
Total Investments (cost - $556,056,199)-103.23%................ 581,926,870
Liabilities in excess of other assets-(3.23%).................. (18,227,407)
-------------
Net Assets-100.00%............................................. $563,699,463
=============
</TABLE>
PaineWebber
DIVIDEND GROWTH FUND
14
<PAGE>
PORTFOLIO OF INVESTMENTS (concluded)
August 31, 1994
Written Options Open (See Options Note To Financial Statements)
<TABLE><CAPTION>
Number of Expiration Exercise Unrealized
Options Underlying Contract Date Price Gain/Loss
- --------- --------------------------------------------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Call: 750 Compaq Computer Corporation.................. Sep 94 $35 $(124,128)
Call: 97 Dover Corporation............................ Sep 94 60 1,654
Call: 245 E.I. dupont de Nemours and Company........... Sep 94 60 (675)
Call: 120 International Business Machines Corporation.. Sep 94 65 (35,610)
Call: 23 Nucor Corporation............................ Sep 94 75 2,518
Call: 198 Proctor & Gamble Co.......................... Sep 94 60 (10,495)
Call: 290 Telefonos de Mexico, S.A. de C.V., ADS....... Sep 94 65 36,284
Call: 28 Texas Instruments Incorporated............... Sep 94 85 4,529
-----------
$(125,923)
===========
</TABLE>
- ------
* Non-income producing security
ADS - American Depository Shares
~ A portion of these securities are held in a segregated account in order to
cover the written call options.
See accompanying notes to financial statements
PaineWebber
DIVIDEND GROWTH FUND
15
<PAGE>
PORTFOLIO OF INVESTMENTS
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - 83.75%
Apparel & Footwear - 2.21%
149,000 Authentic Fitness Corporation*...................... $ 2,272,250
72,000 Bell Sports Corp.*.................................. 1,431,000
115,000 Jones Apparel Group, Inc.*.......................... 2,875,000
------------
6,578,250
------------
Auto-Truck - 0.34%
100,000 Team Rental Group, Inc., Class A*................... 1,000,000
------------
Banking - 4.44%
70,000 Bank of Boston Corporation.......................... 1,837,500
70,000 Dauphin Deposit Corporation......................... 1,767,500
84,350 KeyCorp............................................. 2,773,006
60,000 Marshall and Ilsley Corporation..................... 1,215,000
60,000 Mercantile Bancorporation Inc....................... 2,295,000
180,000 Synovus Financial Corp.............................. 3,330,000
------------
13,218,006
------------
Beverages & Bottling - 3.06%
100,000 The Coca-Cola Company............................... 4,600,000
50,000 Coca-Cola FEMSA, S.A. de CV, ADS.................... 1,743,750
120,000 Dr. Pepper/Seven-Up Companies, Inc.*................ 2,775,000
------------
9,118,750
------------
Biotechnology - 0.82%
35,000 Chiron Corporation*................................. 2,441,250
------------
Broadcasting/Cable T.V. - 5.96%
105,000 Comcast Corporation, Class A........................ 1,680,000
112,500 Comcast Corporation, Class A Special................ 1,800,000
185,000 International CableTel Incorporated*................ 5,133,750
87,000 QVC, Inc.*.......................................... 3,915,000
100,000 Tele-Communications, Inc., Class A*................. 2,256,250
75,000 Turner Broadcasting System, Inc., Class B........... 1,359,375
48,000 Viacom Inc., Class B*............................... 1,584,000
------------
17,728,375
------------
Cellular & Paging Communications - 2.37%
50,000 McCaw Cellular Communications, Inc., Class A*....... 2,706,250
125,000 Mobile Telecommunications Technologies Corp.*....... 2,859,375
50,000 Rogers Cantel Mobile Communications Inc., Class B*.. 1,475,000
------------
7,040,625
------------
PaineWebber
GROWTH FUND
16
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - (continued)
Computer Software - 1.39%
340,000 Excalibur Technologies Corporation*............... $ 2,720,000
60,000 Landmark Graphics Corporation*.................... 1,440,000
------------
4,160,000
------------
Conglomerates - 1.58%
430,000 Noel Group, Inc.*................................. 2,660,625
75,000 PEC Israel Economic Corporation*.................. 2,043,750
------------
4,704,375
------------
Construction & Engineering - 0.89%
90,000 Empresas ICA Sociedad Controladora, S.A. de C.V... 2,655,000
------------
Containers & Packaging - 1.30%
110,000 Sealed Air Corporation*........................... 3,877,500
------------
Cosmetics & Toiletries - 0.95%
102,330 Maybelline, Inc................................... 2,839,658
------------
Drugs & Medical Products - 7.60%
32,244 Advanced Therapeutic Systems*..................... 842,375
97,500 Elan Corporation, plc ADS*........................ 3,510,000
60,000 Forest Laboratories, Inc.*........................ 2,820,000
90,000 North American Vaccine Inc.*...................... 1,147,500
120,000 Perrigo Company*.................................. 1,830,000
100,000 R.P. Scherer Corporation*......................... 4,050,000
107,000 Teva Pharmaceutical Industries Ltd., ADS.......... 3,076,250
130,354 VISX, Incorporated*............................... 2,378,961
130,000 Watson Pharmaceuticals, Inc.*..................... 2,973,750
------------
22,628,836
------------
Electronics & Instrumentation - 0.95%
150,000 Lattice Semiconductor Corporation*................ 2,831,250
------------
Fertilizers - 1.55%
100,000 Potash Corporation of Saskatchewan Inc............ 3,425,000
75,000 The Scotts Company, Class A*...................... 1,200,000
------------
4,625,000
------------
Financial Services - 4.15%
157,500 Countrywide Credit Industries, Inc................ 2,342,813
45,000 Federal Home Loan Mortgage Corporation............ 2,795,625
40,000 Federal National Mortgage Association............. 3,555,000
75,000 First Data Corporation............................ 3,656,250
------------
12,349,688
------------
PaineWebber
GROWTH FUND
17
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - (continued)
Foods - 0.11%
168,000 Lincoln Snacks Company*................. $ 315,000
------------
Forest Products - 0.38%
150,000 Universal Forest Products Inc........... 1,125,000
------------
Healthcare - 3.57%
100,000 Humana Inc.............................. 2,125,000
20,000 PacifiCare Health Systems, Inc.*........ 1,375,000
280,000 TDX Corporation*(1)..................... 630,000
70,000 United HealthCare Corporation*.......... 3,657,500
65,500 U.S. Healthcare, Inc.................... 2,832,875
------------
10,620,375
------------
Hotel, Motel or Lodging - 1.48%
150,000 Hospitality Franchise Systems, Inc.*.... 4,406,250
------------
Household & Consumer Products - 4.23%
70,000 Duracell International Inc.............. 3,220,000
165,000 The Forschner Group, Inc.*.............. 1,897,500
80,000 Luxottica Group S.p.A. ADS.............. 2,650,000
150,000 Sunbeam-Oster Company, Inc.............. 3,393,750
80,000 Syratech Corporation*................... 1,430,000
------------
12,591,250
------------
Insurance - 0.79%
150,000 PennCorp Financial Group, Inc........... 2,362,500
------------
Leisure & Entertainment - 7.06%
100,000 Blockbuster Entertainment Corporation... 2,587,500
100,000 Gaylord Entertainment Company, Class A.. 2,275,000
120,000 International Game Technology........... 2,805,000
250,000 Marker International.................... 1,750,000
60,000 Marvel Entertainment Group, Inc.*....... 1,260,000
175,000 Norwood Promotional Products, Inc.*..... 1,837,500
300,000 Savoy Pictures Entertainment, Inc.*..... 3,525,000
60,000 SweetWater, Inc.*....................... 405,000
120,000 Time Warner Inc......................... 4,575,000
------------
21,020,000
------------
Leisure: Gaming - 1.23%
105,000 Mirage Resorts, Incorporated*........... 2,218,125
100,000 Rio Hotel & Casino, Inc.*............... 1,437,500
------------
3,655,625
------------
PaineWebber
GROWTH FUND
18
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- ------------
Common Stocks - (continued)
Medical Equipment - 0.60%
70,000 Sunrise Medical Inc.*.................. $ 1,776,250
------------
Metals & Mining - 1.33%
140,000 Madeco S.A............................. 3,972,500
------------
Oil & Gas - 1.56%
193,235 Garnet Resources Corporation*.......... 628,014
90,000 Hugoton Energy Corporation*............ 1,102,500
100,000 Louis Dreyfus Natural Gas Corp.*....... 1,375,000
100,000 NUMAR Corporation*..................... 1,525,000
------------
4,630,514
------------
Printing & Publishing - 0.55%
30,000 The News Corporation Limited........... 1,627,500
------------
Specialty Chemicals - 1.00%
175,000 Methanex Corporation................... 2,975,000
------------
Specialty Retail - 8.31%
180,000 General Nutrition Companies, Inc.*..... 4,061,250
50,000 The Home Depot, Inc.................... 2,262,500
229,500 Rawlings Sporting Goods Company, Inc... 2,840,063
330,000 The Right Start, Inc.*(1).............. 1,237,500
75,000 Spiegel, Inc., Class A................. 1,453,125
159,750 Staples, Inc*.......................... 4,912,313
60,000 Toys 'R' Us, Inc.*..................... 2,212,500
200,000 Viking Office Products, Inc.*.......... 5,750,000
------------
24,729,251
------------
Steel - 1.05%
220,000 Northwestern Steel and Wire Company*... 1,567,500
130,000 Olympic Steel, Inc.*................... 1,560,000
------------
3,127,500
------------
Telecommunications - 1.08%
150,000 Cable and Wireless plc, ADS............ 3,206,250
------------
Telecommunications-Equipment - 3.46%
80,000 ANTEC Corporation*..................... 3,020,000
185,000 Belden, Inc............................ 3,515,000
70,000 Motorola, Inc.......................... 3,780,000
------------
10,315,000
------------
Telecommunications-Services - 1.69%
25,000 AT & T Corp............................ 1,368,750
151,875 IntelCom Group, Inc.*.................. 2,107,266
44,000 MFS Communications Company, Inc.*...... 1,551,000
------------
5,027,016
------------
PaineWebber
GROWTH FUND
19
<PAGE>
PORTFOLIO OF INVESTMENTS (concluded)
August 31, 1994
Number of
Shares Value
- --------- -----------
Common Stocks - (concluded)
Telephone Companies - 2.16%
45,000 Telefonica de Argentina, S.A., ADS...... $3,279,375
50,000 Telefonos de Mexico, S.A. de C.V., ADS.. 3,137,500
-----------
6,416,875
-----------
Transportation - 2.55%
45,000 Burlington Northern Inc................. 2,362,500
45,000 Conrail Inc............................. 2,475,000
62,000 Johnstown America Industries, Inc.*..... 1,581,000
50,000 Railtex Inc.*........................... 1,200,000
-----------
7,618,500
-----------
Total Common Stocks (cost - $191,963,086)......... 249,314,719
-----------
<TABLE><CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
- --------- -------- ---------------
<S> <C> <C> <C>
Corporate Bonds - 0.83%
Oil & Gas - 0.30%
$ 1,500 Garnet Resources Corporation.................................. 12/21/98 9.500% 886,350
-------------
Telecommunications-Services - 0.53%
2,080 IntelCom Group, Inc.-Convertible.............................. 09/17/98 8.000 1,572,480
-------------
Total Corporate Bonds (cost - $3,580,000)............................... 2,458,830
-------------
U.S. Government Obligations - 13.38%
40,000 U.S. Treasury Bills (cost - $39,834,917)...................... 10/06/94 4.240 to 4.250 39,834,917
-------------
Repurchase Agreement - 3.38%
Repurchase Agreement dated 08/31/94 with Morgan Stanley,
collateralized by $10,430,000 U.S. Treasury Notes, 6.375%, due
10,075 01/15/00; proceeds: $10,076,315 (cost - $10,075,000).......... 09/01/94 4.700 10,075,000
-------------
Total Investments (cost - $245,453,003)-101.34%......................... 301,683,466
Liabilities in excess of other assets-(1.34%)........................... (3,986,771)
-------------
Net Assets-100.00%...................................................... $297,696,695
=============
</TABLE>
- ------
* Non-income producing security
ADS-American Depository Shares
(1) Investment in affiliated company-See notes to the financial statements.
See accompanying notes to financial statements
PaineWebber
GROWTH FUND
20
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
<TABLE><CAPTION>
Atlas
Global Dividend
Growth Growth Growth
Fund Fund Fund
------------- ------------ ------------
<S> <C> <C> <C>
Assets
Investments at value (cost - $451,946,512, $556,056,199 and $245,453,003,
respectively).................................................................... $486,225,696 $581,926,870 $301,683,466
Cash............................................................................. 1,696,130 - -
Cash denominated in foreign currencies (cost - $2,157,820)....................... 2,162,243 - -
Receivable for investments sold.................................................. 78,708,726 39,197,307 630,713
Receivable for shares of beneficial interest sold................................ 2,034,218 523,469 778,016
Dividends and interest receivable................................................ 987,591 1,381,695 285,853
Other assets..................................................................... 86,207 83,215 49,267
------------- ------------ ------------
Total assets..................................................................... 571,900,811 623,112,556 303,427,315
------------- ------------ ------------
Liabilities
Payable for investments purchased................................................ 73,463,410 54,104,047 3,791,573
Payable for shares of beneficial interest repurchased............................ 2,102,868 3,939,157 1,407,278
Payable to affiliates............................................................ 551,392 670,109 327,942
Payable to custodian............................................................. - 13,210 -
Outstanding options written, at value (premium received-$240,683)................ - 366,606 -
Accrued expenses and other liabilities........................................... 283,382 319,964 203,827
------------- ------------ ------------
Total liabilities................................................................ 76,401,052 59,413,093 5,730,620
------------- ------------ ------------
Net Assets
Beneficial interest shares of $0.001 par value outstanding (unlimited amount
authorized)...................................................................... 450,623,732 514,398,491 241,366,969
Accumulated undistributed (overdistributed) net investment income (loss)......... (39,139) 816,845 -
Accumulated net realized gains from investments, futures contracts and other
assets and liabilities denominated in foreign currencies......................... 10,713,772 22,739,394 99,263
Net unrealized appreciation of investments, other assets, liabilities and forward
contracts denominated in foreign currencies...................................... 34,201,394 25,744,733 56,230,463
------------- ------------ ------------
Net assets....................................................................... $495,499,759 $563,699,463 $297,696,695
============= ============ ============
Class A:
Net assets....................................................................... $213,412,735 $222,432,020 $141,341,994
------------- ------------ ------------
Shares outstanding............................................................... 13,067,673 10,886,403 7,051,464
------------- ------------ ------------
Net asset value and redemption value per share................................... $16.33 $20.43 $20.04
============= ============ ============
Maximum offering price per share (net asset value plus sales charge of 4.50%
of offering price)............................................................... $17.10 $21.39 $20.99
============= ============ ============
Class B:
Net assets....................................................................... $166,038,652 $289,290,474 $97,272,378
------------- ------------ ------------
Shares outstanding............................................................... 10,374,074 14,200,805 4,980,331
------------- ------------ ------------
Net asset value and offering price per share..................................... $16.01 $20.37 $19.53
============= ============ ============
Class C:
Net assets....................................................................... $ 38,912,003 $14,690,138 $30,520,964
------------- ------------ ------------
Shares outstanding............................................................... 2,371,031 719,186 1,509,546
------------- ------------ ------------
Net asset value, offering price and redemption value per share................... $16.41 $20.43 $20.22
============= ============ ============
Class D:
Net assets....................................................................... $ 77,136,369 $37,286,831 $28,561,359
------------- ------------ ------------
Shares outstanding............................................................... 4,792,503 1,825,598 1,452,038
------------- ------------ ------------
Net asset value, offering price and redemption value per share................... $16.10 $20.42 $19.67
============= ============ ============
See accompanying notes to financial statements
Paine Webber
21
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended August 31, 1994
</TABLE>
<TABLE><CAPTION>
Atlas
Global Dividend
Growth Growth Growth
Fund Fund Fund
------------- -------------- ------------
<S> <C> <C> <C>
Investment income:
Interest and dividends (net of foreign withholding taxes).......................... $6,361,747 $17,328,492 $3,596,961
------------- -------------- ------------
Expenses:
Investment advisory and administration fees........................................ 3,143,778 4,892,163 2,069,033
Distribution fees-Class A.......................................................... 398,327 637,190 294,533
Distribution fees-Class B.......................................................... 1,271,219 3,590,435 837,161
Distribution fees-Class D.......................................................... 631,019 476,859 259,279
Custody fees....................................................................... 938,623 189,428 132,881
Transfer agency and service fees................................................... 441,359 911,264 274,152
Legal and audit fees............................................................... 141,975 158,567 93,806
Reports and notices to shareholders................................................ 105,508 467,045 79,070
Federal and state registration fees................................................ 91,469 82,534 59,658
Trustees' fees..................................................................... 23,013 21,513 8,125
Other expenses..................................................................... 80,935 16,243 23,234
------------- -------------- ------------
7,267,225 11,443,241 4,130,932
------------- -------------- ------------
Net investment income (loss)....................................................... (905,478) 5,885,251 (533,971)
------------- -------------- ------------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions............................................................ 46,878,125 39,114,080 5,195,790
Foreign currency transactions...................................................... (26,960,620) - -
Net change in unrealized appreciation/depreciation on:
Investments........................................................................ 100,618 (55,515,214) (2,125,984)
Other assets, liabilities and forward contracts denominated in foreign currencies.. 1,495,014 - -
------------- -------------- ------------
Net realized and unrealized gains (losses) from investment activities.............. 21,513,137 (16,401,134) 3,069,806
------------- -------------- ------------
Net increase (decrease) in net assets resulting from operations.................... $20,607,659 $(10,515,883) $2,535,835
============= ============== ============
</TABLE>
See accompanying notes to financial statements
Paine Webber
22
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
For the Years Ended
August 31,
-----------------------------
1994 1993
--------------- -------------
<S> <C> <C>
From operations:
Net investment income (loss)........................................................ $(905,478) $696,751
Net realized gains from investment transactions and forward currency contracts...... 46,878,125 9,773,326
Net realized gains (losses) from foreign currency transactions...................... (26,960,620) 4,292,432
Net change in unrealized appreciation/depreciation of investments................... 100,618 23,096,428
Net change in unrealized appreciation/depreciation of other assets, liabilities and
forward contracts denominated in foreign currencies................................. 1,495,014 1,214,881
--------------- -------------
Net increase in net assets resulting from operations................................ 20,607,659 39,073,818
--------------- -------------
Dividends and distributions to shareholders from:
Net investment income-Class A....................................................... (511,731) -
Net investment income-Class B....................................................... (31,390) -
Net investment income-Class C....................................................... (126,890) -
Net investment income-Class D....................................................... (37,463) -
Net realized gains from foreign currency transactions-Class A....................... (1,343,285) -
Net realized gains from foreign currency transactions-Class B....................... (728,746) -
Net realized gains from foreign currency transactions-Class C....................... (187,552) -
Net realized gains from foreign currency transactions-Class D....................... (376,145) -
Net realized gains from investment transactions-Class A............................. (6,255,164) -
Net realized gains from investment transactions-Class B............................. (3,393,492) -
Net realized gains from investment transactions-Class C............................. (873,357) -
Net realized gains from investment transactions-Class D............................. (1,751,563) -
--------------- -------------
(15,616,778) -
--------------- -------------
From beneficial interest transactions:
Net proceeds from sale of shares.................................................... 321,833,730 119,880,512
Cost of shares repurchased.......................................................... (119,853,879) (53,634,780)
Proceeds from dividends reinvested.................................................. 14,704,209 -
--------------- -------------
Net increase in net assets derived from beneficial interest transactions............ 216,684,060 66,245,732
--------------- -------------
Net increase in net assets.......................................................... 221,674,941 105,319,550
Net assets:
Beginning of period................................................................. 273,824,818 168,505,268
--------------- -------------
End of period (including undistributed net investment income (loss) of ($39,139) and
$2,232,103, respectively)........................................................... $495,499,759 $273,824,818
=============== =============
</TABLE>
See accompanying notes to financial statements
Paine Webber
ATLAS GLOBAL GROWTH FUND
23
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
For the Years Ended
August 31,
-------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
From operations:
Net investment income................................................................ $5,885,251 $8,312,022
Net realized gains (losses) from investment transactions............................. 39,114,080 (4,504,035)
Net change in unrealized appreciation (depreciation) of investments.................. (55,515,214) 12,485,667
--------------- ---------------
Net increase (decrease) in net assets resulting from operations...................... (10,515,883) 16,293,654
--------------- ---------------
Dividends and distributions to shareholders from:
Net investment income-Class A........................................................ (3,856,398) (4,917,875)
Net investment income-Class B........................................................ (1,961,819) (2,409,908)
Net investment income-Class C........................................................ (252,881) (216,900)
Net investment income-Class D........................................................ (271,483) (287,189)
Net realized gains from investment transactions-Class A.............................. (465,992) -
Net realized gains from investment transactions-Class B.............................. (609,981) -
Net realized gains from investment transactions-Class C.............................. (23,298) -
Net realized gains from investment transactions-Class D.............................. (82,066) -
--------------- ---------------
(7,523,918) (7,831,872)
--------------- ---------------
From beneficial interest transactions:
Net proceeds from the sale of shares................................................. 42,483,056 357,184,036
Cost of shares repurchased........................................................... (367,026,971) (242,079,223)
Proceeds from dividends reinvested................................................... 6,947,309 7,272,418
--------------- ---------------
Net increase (decrease) in net assets derived from beneficial interest transactions.. (317,596,606) 122,377,231
--------------- ---------------
Net increase (decrease) in net assets................................................ (335,636,407) 130,839,013
Net assets:
Beginning of period.................................................................. 899,335,870 768,496,857
--------------- ---------------
End of period (including undistributed net investment income of $816,845 and
$1,272,598 respectively)............................................................. $563,699,463 $899,335,870
=============== ===============
</TABLE>
See accompanying notes to financial statements
Paine Webber
DIVIDEND GROWTH FUND
24
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
For the Years Ended
August 31,
---------------------------
1994 1993
------------- -------------
<S> <C> <C>
From operations:
Net investment income (loss)................................................... $(533,971) $270,567
Net realized gains from investment transactions................................ 5,195,790 8,861,198
Net change in unrealized appreciation (depreciation) of investments............ (2,125,984) 34,948,942
------------- -------------
Net increase in net assets resulting from operations........................... 2,535,835 44,080,707
------------- -------------
Distributions to shareholders from:
Net realized gains from investment transactions-Class A........................ (6,987,744) (3,860,142)
Net realized gains from investment transactions-Class B........................ (3,876,826) (1,440,236)
Net realized gains from investment transactions-Class C........................ (1,187,915) (464,415)
Net realized gains from investment transactions-Class D........................ (1,156,865) (205,901)
------------- -------------
(13,209,350) (5,970,694)
------------- -------------
From beneficial interest transactions:
Net proceeds from sale of shares............................................... 136,624,359 73,392,257
Cost of shares repurchased..................................................... (68,709,767) (41,719,365)
Proceeds from dividends reinvested............................................. 12,642,821 5,667,071
------------- -------------
Net increase in net assets derived from beneficial interest transactions....... 80,557,413 37,339,963
------------- -------------
Net increase in net assets..................................................... 69,883,898 75,449,976
Net assets:
Beginning of period............................................................ 227,812,797 152,362,821
------------- -------------
End of period (including undistributed net investment income of $0 and $143,539
respectively).................................................................. $297,696,695 $227,812,797
============= =============
</TABLE>
See accompanying notes to financial statements
Paine Webber
GROWTH FUND
25
<PAGE>
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Atlas Global Growth Fund ("Atlas Global Growth Fund"), PaineWebber
Dividend Growth Fund ("Dividend Growth Fund") and PaineWebber Growth Fund
("Growth Fund") (collectively, the "Funds") are diversified series of
PaineWebber Atlas Fund, PaineWebber America Fund and PaineWebber Olympus Fund
(the "Trusts"), respectively. PaineWebber Olympus Fund also includes
PaineWebber Communications & Technology Growth Fund of which the financial
statements are not included herein. The three Trusts were organized under
separate Declarations of Trust registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended ("1940 Act"),
as diversified open-end investment companies. The trustees have authority to
issue an unlimited number of shares of beneficial interest of separate series
par value $0.001.
Prior to July 1, 1991, each Fund issued only Class A shares. Subsequent to that
date each Fund issued Class A and Class B shares. On August 25, 1991, Growth
Fund and Atlas Global Growth Fund and on February 12, 1992, Dividend Growth
Fund commenced issuing Class C Shares. Class C shares are available only to the
trustee of the PaineWebber Savings Investment Plan on behalf of that Plan. On
July 2, 1992, each Fund commenced issuing Class D shares. Each class represents
interests in the same assets of the applicable Fund and the classes are
identical except for differences in their sales charge structure, ongoing
distribution charges and transfer agency expenses. In addition, Class B shares,
along with their pro-rata reinvested dividends shares, automatically convert to
Class A shares approximately six years after initial issuance. All classes of
shares have equal rights as to voting privileges, except that each class has
exclusive voting rights with respect to its distribution plan.
Valuation of Investments - Securities which are listed on U.S. and foreign
stock exchanges are valued at the last sales price on the day the securities
are being 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 designated by Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), an affiliate and wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber") and investment adviser,
administrator and distributor of the Funds, and Mitchell Hutchins Institutional
Investors Inc., ("MHII") the Sub-Adviser to Dividend Growth Fund, as the
primary market. Securities traded in the over-the-counter ("OTC") market and
listed on the National Association of Securities Dealers Quotation System
("NASDAQ") are valued at the last trade price on NASDAQ prior to the time of
valuation; other OTC securities are valued at the last bid price available in
the OTC market prior to the time of valuation. The amortized cost method of
valuation is used to value short term debt instruments with sixty days or less
remaining to maturity. Securities and assets for which market quotations are
not
Paine Webber
NOTES TO FINANCIAL STATEMENTS
26
<PAGE>
readily available (including restricted securities subject to limitations as to
their sale) are valued at fair value as determined in good faith by or under
the direction of each Trust's Board of Trustees. All investments quoted in
foreign currencies will be valued daily in U.S. dollars on the basis of the
foreign currency exchange rates prevailing at the time such valuation is
determined by each Fund's custodian.
Foreign currency exchange rates are generally determined prior to the close of
the New York Stock Exchange, Inc. ("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 the NYSE, which in the case of Atlas
Global Growth Fund, would not be reflected in a computation of the Funds' net
asset value. If events materially affecting the value of such securities or
currency exchange rates occurred during such time period, the securities will
be valued at their fair value as determined in good faith by or under the
direction of the Trust's Board of Trustees.
Investment Transactions and Investment Income - Investment transactions are
recorded on the trade date. Realized gains and losses on sales of investments,
futures contracts and foreign exchange transactions are calculated using the
identified cost method. Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date (except in the case of
Atlas Global Growth Fund, for certain foreign securities which are recorded as
soon after the ex-date as the Fund becomes aware of such dividend).
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains (losses) are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of
dividend-eligible shares, as appropriate) of each class at the beginning of the
day (after adjusting for current capital share activity of the respective
classes). Class specific expenses are charged directly to the applicable class
of shares.
Foreign Currency Translation - The books and records of Atlas Global Growth
Fund are maintained in U.S. dollars. Foreign currency amounts are translated
into U.S. dollars on the following basis:
(1) market value of investment securities, other assets and liabilities-at the
exchange rates prevailing at the end of the period.
(2) purchases and sales of investment securities, income and expenses-at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets and the market value of Atlas Global Growth Fund are
presented at the foreign exchange rates at the end of the period, Atlas Global
Growth Fund does not generally isolate the effect of unrealized fluctuations in
foreign exchange rates from the effect of the changes in market prices of
securities. However, Atlas Global Growth Fund does isolate the effect of
realized
Paine Webber
NOTES TO FINANCIAL STATEMENTS
(continued)
27
<PAGE>
fluctuations in foreign exchange rates when determining the realized gain or
loss upon the sale or maturity of foreign currency-denominated debt obligations
pursuant to federal income tax regulations. Foreign security and currency
transactions may involve certain considerations and risks not typically
associated with investing in U.S. companies and the U.S. Government. These
risks include re-evaluation of currencies and future adverse political and
economic developments, which could cause securities and their markets to be
less liquid and prices more volatile than those of comparable U.S. companies
and the U.S. Government.
Forward Foreign Currency Contracts - Atlas Global Growth Fund may enter into
forward foreign currency exchange contracts ("forward contracts") in connection
with planned purchases or sales of securities or to hedge the U.S. dollar value
of portfolio securities denominated in a particular currency.
Atlas Global Growth Fund has no specific limitation on the percentage of assets
which may be committed to such contracts. Atlas Global Growth Fund may enter
into forward contracts or maintain a net exposure to forward contracts only if
(1) the consummation of the contracts would not obligate Atlas Global Growth
Fund to deliver an amount of foreign currency in excess of the value of the
positions being hedged by such contracts or (2) Atlas Global Growth Fund
maintains cash, U.S. Government securities or liquid, high-grade debt
securities in a segregated account in an amount not less than the value of its
total assets committed to the consummation of the forward contracts.
Risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their forward contracts and
from unanticipated movements in the value of foreign currencies relative to the
U.S. dollar.
Futures Contracts - Each of the Funds is permitted to use financial futures
contracts to hedge its portfolio. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
U.S. Government securities equal to a certain percentage of the contract
amount. This amount is known as the "initial margin." Subsequent payments,
known as "variation margin," are made or received by the Fund each day,
depending on the daily fluctuations in the value of the underlying financial
futures contract. Such variation margin is recorded for financial statement
purposes on a daily basis as unrealized gain or loss, until the financial
futures contract is closed, at which time the gain or loss is reclassified to
realized.
Using financial futures contracts involves various market risks. The Fund is
subject to a number of guidelines which reduce this risk by seeking to ensure
that financial futures contracts are used solely for hedging purposes and not
for leverage. However, imperfect correlations between financial futures and the
instruments being hedged or market disruptions do not normally permit full
control of these risks at all times. Financial futures contracts in which the
Fund invests does not represent exposure to default or other credit risk.
Paine Webber
NOTES TO FINANCIAL STATEMENTS
(continued)
28
<PAGE>
Option Writing - When a Fund writes a call or a put option, an amount equal to
the premium received by the Fund is included in the Fund's Statements of Assets
and Liabilities as an asset and as an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market value
of the option written. If an option which the Fund has written either expires
on its stipulated expiration date or the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which
the Fund has written is exercised, the Fund realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from the
sale are increased by the premium originally received. If a put option which
the Fund has written is exercised, the amount of the premium originally
received reduces the cost of the security which the Fund purchases upon
exercise of the option.
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.
Repurchase Agreements - Each Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. Each Fund occasionally
participates in joint repurchase agreement transactions with other funds
managed by Mitchell Hutchins.
Paine Webber
NOTES TO FINANCIAL STATEMENTS
(continued)
29
<PAGE>
Federal Tax Status - Each Fund intends to distribute all of its taxable income
and to comply with the other requirements of the Internal Revenue Code
applicable to regulated investment companies. Accordingly, no provision for
federal income taxes is required. In addition, by distributing during each
calendar year substantially all of its net investment income, capital gains and
certain other amounts, if any, each Fund intends not to be subject to any
federal excise tax.
During the fiscal year ended August 31, 1994, Dividend Growth Fund utilized all
prior fiscal year's carryover losses of $11,391,318 to offset a portion of net
realized gains during the year.
Dividends - The Funds record dividends and distributions to their shareholders
on the ex-date.
Change in Accounting for Distributions to Shareholders - During the year ended
August 31, 1994, the Funds adopted Statement of Position 93-2, Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies.
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassifications. Dividends
and distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital. For the year ended August 31, 1994 the effects of such
permanent differences totalled $1,126,972, $10,625 and $304,392 for the Atlas
Global Growth Fund, Dividend Growth Fund and Growth Fund, respectively.
INVESTMENT ADVISER AND ADMINISTRATOR
Each of the Funds has entered into an Investment Advisory and Administration
Contract ("Advisory Contract") with Mitchell Hutchins. In accordance with the
Advisory Contract each Fund pays Mitchell Hutchins an investment advisory and
administration fee, which is accrued daily and paid monthly, in accordance with
the following schedule:
Atlas Global Dividend
Growth Fund Growth Fund Growth Fund
------------ ----------- -----------
As a % of Average Daily Net Assets.. 0.750% 0.700% 0.750%
At August 31, 1994, Atlas Global Growth Fund, Dividend Growth Fund and Growth
Fund owed Mitchell Hutchins $302,957, $331,372 and $186,949, respectively, in
investment advisory and administration fees.
Paine Webber
NOTES TO FINANCIAL STATEMENTS
(continued)
30
<PAGE>
For the year ended August 31, 1994, Atlas Global Growth Fund paid $22,858,
Dividend Growth Fund paid $47,142 and Growth Fund paid $9,326 in brokerage
commissions to PaineWebber for transactions executed on behalf of the Funds.
Under a separate contract Mitchell Hutchins (not the Fund) pays MHII, the
Sub-Adviser, a monthly fee, at an annual rate of 0.25% of the average daily net
assets.
In compliance with applicable state securities laws, Mitchell Hutchins will
reimburse the Funds if and to the extent that the aggregate operating expenses
in any fiscal year, exclusive of taxes, distribution fees, interest, brokerage
fees and extraordinary expenses, exceed limitations imposed by various state
regulations. Currently, the most restrictive limitation applicable to the Funds
is 2.5% of the first $30 million of average daily net assets, 2.0% of the next
$70 million and 1.5% of any excess over $100 million. For the year ended August
31, 1994, no reimbursements were required pursuant to the above limitation for
any of the Funds.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
separate plans of distribution pertaining to the Class A, Class B and Class D
shares ("Class A Plan", "Class B Plan" and "Class D Plan", collectively
"Plans"), each class of shares of each Fund pays Mitchell Hutchins monthly
service fees at the annual rate of up to 0.25% of the average daily net assets
of Class A, Class B and Class D shares and monthly distribution fees at the
annual rate of up to 0.75% of the average daily net assets on Class B and Class
D shares. At August 31, 1994, Atlas Global Growth Fund, Dividend Growth Fund
and Growth Fund owed Mitchell Hutchins $232,142, $317,151 and $131,464,
respectively, in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
upon the purchase of Class A shares and the contingent deferred sales charges
paid upon certain redemptions of Class B shares. Mitchell Hutchins has informed
each Fund that for the year ended August 31, 1994, it earned the following
amounts in sales charges:
Atlas Global Dividend
Growth Fund Growth Fund Growth Fund
------------ ----------- -----------
Initial sales charges-Class A.............. $900,089 $186,333 $367,454
============ =========== ===========
Contingent deferred sales charges-Class B.. $345,680 $2,384,664 $235,285
============ =========== ===========
TRANSFER AGENCY SERVICE FEES
Each Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Fund's transfer
agent. For these services during the year ended August 31, 1994, PaineWebber
earned $169,521, $303,496 and $103,435 from Atlas Global Growth Fund, Dividend
Paine Webber
NOTES TO FINANCIAL STATEMENTS
(continued)
31
<PAGE>
Growth Fund and Growth Fund, respectively. At August 31, 1994, PaineWebber was
owed $16,293, $21,586 and $9,529 by Atlas Global Growth Fund, Dividend Growth
Fund and Growth Fund, respectively, for transfer agency service fees.
TRANSACTION WITH AFFILIATED COMPANY
An affiliated company represents ownership of at least 5% of the voting
securities of the issuer during the period, as defined in the Investment
Company Act of 1940.
At August 31, 1994, Growth Fund owned 330,000 shares of common stock of The
Right Start, Inc. with an original cost of $1,679,943 and a market value of
$1,237,500. Additionally, Growth Fund owned 280,000 shares of common stock of
TDX Corporation with an original cost of $1,429,375 and a market value of
$630,000 at August 31, 1994.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at August 31,
1994, was substantially the same as the cost of securities for financial
statement purposes.
At August 31, 1994, the components of net unrealized appreciation of
investments were as follows:
<TABLE><CAPTION>
Atlas Global Dividend
Growth Fund Growth Fund Growth Fund
------------- ------------- --------------
<S> <C> <C> <C>
Gross appreciation (investments having
an excess of value over cost)......... $61,827,954 $32,579,873 $68,719,273
Gross depreciation (investments having
an excess of cost over value)......... (27,548,770) (6,835,140) (12,488,810)
------------- ------------- --------------
Net unrealized appreciation of
investments........................... $34,279,184 $25,744,733 $56,230,463
============= ============= ==============
</TABLE>
For the year ended August 31, 1994, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE><CAPTION>
Atlas Global Dividend
Growth Fund Growth Fund Growth Fund
------------- ------------- --------------
<S> <C> <C> <C>
Purchases............................. $885,073,201 $615,827,471 $115,515,291
Sales................................. $720,924,925 $884,095,619 $55,057,720
</TABLE>
WRITTEN OPTION ACTIVITY
Written option activity for the year ended August 31, 1994 for the Dividend
Growth Portfolio were as follows:
Number of Amount of
Options Premiums
--------- -----------
Options outstanding at August 31, 1993................. - -
Options written during the year ended August 31, 1994.. 3,419 $(447,072)
Options cancelled in closing purchase transactions..... (794) 38,659
Options expired prior to exercise...................... (52) 30,431
Options exercised...................................... (822) 137,299
--------- -----------
Options outstanding at August 31, 1994................. 1,751 $(240,683)
--------- -----------
Paine Webber
NOTES TO FINANCIAL STATEMENTS
(continued)
32
<PAGE>
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount $.001 par value shares of beneficial interest
authorized. Transactions in shares of beneficial interest were as follows:
<TABLE><CAPTION>
Class A Class B Class C Class D
------------------------- ------------------------- -------------------- -------------------------
For the Years Ended August 31,
--------------------------------------------------------------------------------------------------
1994 1993 1994 1993 1994 1993 1994 1993
------------ ------------ ------------ ------------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Atlas Global Growth Fund
Shares sold...................... 4,374,615 2,062,053 8,462,152 3,368,472 1,277,510 558,621 5,544,502 2,476,773
Shares repurchased............... (2,546,254) (3,252,930) (2,070,066) (354,428) (16,493) (15,300) (2,942,263) (446,313)
Shares converted from
Class B to Class A............... 234,710 73,207 (238,599) (73,969) - - - -
Dividends reinvested resulting in
sale of Fund shares.............. 447,367 - 233,092 - 69,872 - 121,480 -
------------ ------------ ------------ ------------ ---------- --------- ------------ ------------
Net increase (decrease) in shares
outstanding...................... 2,510,438 (1,117,670) 6,386,579 2,940,075 1,330,889 543,321 2,723,719 2,030,460
============ ============ ============ ============ ========== ========= ============ ============
Dividend Growth Fund
Shares sold...................... 484,780 3,649,956 1,075,994 9,598,413 165,180 349,190 355,387 3,363,139
Shares repurchased............... (7,207,269) (5,129,795) (8,992,340) (5,457,981) (274,997) (59,757) (1,515,548) (1,042,586)
Shares converted from
Class B to Class A............... 199,102 969,178 (199,711) (972,092) - - - -
Dividends reinvested resulting in
sale of Fund shares.............. 193,794 216,385 116,857 107,714 13,616 10,374 16,282 12,903
------------ ------------ ------------ ------------ ---------- --------- ------------ ------------
Net increase (decrease) in shares
outstanding...................... (6,329,593) (294,276) (7,999,200) 3,276,054 (96,201) 299,807 (1,143,879) 2,333,456
============ ============ ============ ============ ========== ========= ============ ============
Growth Fund
Shares sold...................... 1,549,566 1,057,760 2,917,179 1,676,649 461,518 339,355 1,795,537 888,972
Shares repurchased............... (1,255,407) (1,274,682) (985,658) (700,517) (8,765) (53,240) (1,207,404) (226,889)
Shares converted from
Class B to Class A............... 106,274 227,587 (108,639) (230,281) - - - -
Dividends reinvested resulting in
sale of Fund shares.............. 322,249 201,137 180,416 75,417 57,056 25,434 55,665 10,332
------------ ------------ ------------ ------------ ---------- --------- ------------ ------------
Net increase in shares
outstanding...................... 722,682 211,802 2,003,298 821,268 509,809 311,549 643,798 672,415
============ ============ ============ ============ ========== ========= ============ ============
</TABLE>
Paine Webber
NOTES TO FINANCIAL STATEMENTS
(concluded)
33
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE><CAPTION>
Class A
--------------------------------------------------
For the Years Ended August 31,
--------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................... $15.57 $12.72 $13.62 $14.88 $16.02
--------- --------- ---------- --------- ---------
Income (loss) from investment operations:
Net investment income (loss)................................. 0.02 0.08 0.09 0.32 0.33
Net realized and unrealized gains (losses) from investment
transactions................................................. 1.47 2.77 (0.79) (0.13) 0.31
--------- --------- ---------- --------- ---------
Total income (loss) from investment operations............... 1.49 2.85 (0.70) 0.19 0.64
--------- --------- ---------- --------- ---------
Less dividends and distributions:
Dividends from net investment income......................... (0.05) - (0.20) (0.45) (0.71)
Distributions from net realized gains on investments and
foreign currency transactions................................ (0.68) - - (1.00) (1.07)
--------- --------- ---------- --------- ---------
Total dividends and distributions............................ (0.73) - (0.20) (1.45) (1.78)
--------- --------- ---------- --------- ---------
Net asset value, end of period............................... $16.33 $15.57 $12.72 $13.62 $14.88
========= ========= ========== ========= =========
Total return(1).............................................. 9.34% 22.41% (5.25)% 1.46% 3.95%
========= ========= ========== ========= =========
Ratios/Supplemental Data:
Net assets, end of period (000's)............................ $213,413 $164,378 $148,453 $208,161 $218,033
Ratio of expenses to average net assets...................... 1.39% 1.48% 1.72% 1.58% 1.49%
Ratio of net investment income (loss) to average net assets.. 0.11% 0.48% 0.44% 2.33% 2.21%
Portfolio turnover........................................... 176.16% 258.05% 80.14% 47.34% 64.78%
</TABLE>
- ----------
* Annualized.
~ Commencement of offering of shares.
~~ A per share breakdown for Class C shares has been omitted for the period
August 26, 1991 (commencement of operations) to August 31, 1991 due to
immaterial amounts.
# Based on average number of shares outstanding at each month end.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and capital gain
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Class A and Class B shares would be
lower if sales charges were included. Total return information for periods
less than one year is not annualized.
Paine Webber
ATLAS GLOBAL GROWTH FUND
34
<PAGE>
<TABLE><CAPTION>
Class B Class C~~ Class D
- ---------------------------------------------- --------------------------- ----------------------------------
For the Years Ended For the Years Ended For the Years Ended
August 31, For the Period August 31, August 31, For the Period
- ------------------------------ July 1, 1991~ --------------------------- ------------------ July 2, 1992~
to to
August 31, 1991 August 31, 1992 1994 1993 1992 1994 1993 1992 1994 1993
- --------------- --------------- ---------- --------- --------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$15.36 $12.64 $13.61 $13.09 $15.64 $12.73 $13.62 $15.44 $12.70 $13.51
- ---------- --------- --------- --------------- -------- -------- --------- --------- -------- ---------------
(0.06) 0.09 0.00# (0.01) 0.04 0.09 0.19 (0.09) 0.01 (0.02)
1.40 2.63 (0.80) 0.53 1.49 2.82 (0.86) 1.44 2.73 (0.79)
- ---------- --------- --------- --------------- -------- -------- --------- --------- -------- ---------------
1.34 2.72 (0.80) 0.52 1.53 2.91 (0.67) 1.35 2.74 (0.81)
- ---------- --------- --------- --------------- -------- -------- --------- --------- -------- ---------------
(0.01) - (0.17) - (0.08) - (0.22) (0.01) - -
(0.68) - - - (0.68) - - (0.68) - -
- ---------- --------- --------- --------------- -------- -------- --------- --------- -------- ---------------
(0.69) - (0.17) - (0.76) - (0.22) (0.69) - -
- ---------- --------- --------- --------------- -------- -------- --------- --------- -------- ---------------
$16.01 $15.36 $12.64 $13.61 $16.41 $15.64 $12.73 $16.10 $15.44 $12.70
========== ========= ========= =============== ======== ======== ========= ========= ======== ===============
8.48% 21.52% (6.00)% (0.51)% 9.59% 22.86% (5.10)% 8.54% 21.57% (6.00)%
========== ========= ========= =============== ======== ======== ========= ========= ======== ===============
$166,039 $61,231 $13,239 $3,164 $38,912 $16,265 $6,327 $77,136 $31,952 $487
2.19% 2.13% 2.47% 2.51%* 1.13% 1.10% 1.45% 2.20% 1.90% 2.62%*
(0.65)% (0.20)% (0.07)% (0.58)%* 0.40% 0.87% 0.93% (0.68)% 0.04% (1.18)%*
176.16% 258.05% 80.14% 47.34% 176.16% 258.05% 80.14% 176.16% 258.05% 80.14%
</TABLE>
Paine Webber
ATLAS GLOBAL GROWTH FUND
35
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
Class A
--------------------------------------------------
For the Years Ended August 31,
--------------------------------------------------
1994 1993 1992 1991 1990
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..................................... $20.86 $20.48 $19.26 $15.87 $16.50
---------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income.................................................... 0.28 0.28 0.24 0.19 0.51
Net realized and unrealized gains (losses) from investment transactions.. (0.41) 0.37 1.25 3.50 (0.61)
---------- --------- --------- --------- ---------
Total income (loss) from investment operations........................... (0.13) 0.65 1.49 3.69 (0.10)
---------- --------- --------- --------- ---------
Less dividends and distributions:
Dividends from net investment income..................................... (0.27) (0.27) (0.27) (0.30) (0.53)
Distributions from net realized gains on investments..................... (0.03) - - - -
---------- --------- --------- --------- ---------
Total dividends and distributions........................................ (0.30) (0.27) (0.27) (0.30) (0.53)
---------- --------- --------- --------- ---------
Net asset value, end of period........................................... $20.43 $20.86 $20.48 $19.26 $15.87
========== ========= ========= ========= =========
Total return(1).......................................................... (0.58)% 3.15% 7.78% 23.62% (0.72)%
========== ========= ========= ========= =========
Ratios/Supplemental Data:
Net assets, end of period (000's)........................................ $222,432 $359,073 $358,643 $232,555 $58,649
Ratio of expenses to average net assets.................................. 1.20% 1.13% 1.22% 1.42% 1.41%
Ratio of net investment income to average net assets..................... 1.29% 1.33% 1.26% 1.79% 3.11%
Portfolio turnover....................................................... 94.32% 36.52% 15.57% 52.00% 32.10%
</TABLE>
- ------
* Annualized.
~ Commencement of offering of shares.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and capital gain
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Class A and Class B shares would be
lower if sales charges were included. Total return information for periods
less than one year is not annualized.
Paine Webber
DIVIDEND GROWTH FUND
36
<PAGE>
<TABLE><CAPTION>
Class B Class C Class D
- ----------------------------------------- ------------------------------- -----------------------------
For the Years Ended For the For the Years Ended For the For the Years Ended For the
August 31, Period August 31, Period August 31, Period
- ------------------------------ July 1, ------------------ February 12, ------------------ July 2,
1991~ to 1992~ to 1992~ to
August 31, August 31, August 31,
1991 1992 1992 1994 1993 1992 1994 1993 1994 1993
- ---------- ------------ ---------- ---------- --------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$20.78 $20.41 $19.23 $18.04 $20.86 $20.48 $20.95 $20.83 $20.47 $20.95
- ---------- --------- ---------
- --------- --------- ---------- -------- ------------ -------- ----------
0.10 0.12 0.13 0.02 0.33 0.33 0.16 0.11 0.11 0.02
(0.37) 0.36 1.20 1.17 (0.40) 0.37 (0.49) (0.38) 0.37 (0.44)
- ---------- --------- ---------
- --------- --------- ---------- -------- ------------ -------- ----------
(0.27) 0.48 1.33 1.19 (0.07) 0.70 (0.33) (0.27) 0.48 (0.42)
- ---------- --------- ---------
- --------- --------- ---------- -------- ------------ -------- ----------
(0.11) (0.11) (0.15) - (0.34) (0.32) (0.14) (0.11) (0.12) (0.06)
(0.03) - - - (0.03) - - (0.03) - -
- ---------- --------- ---------
- --------- --------- ---------- -------- ------------ -------- ----------
(0.14) (0.11) (0.15) - (0.37) (0.32) (0.14) (0.14) (0.12) (0.06)
- ---------- --------- ---------
- --------- --------- ---------- -------- ------------ -------- ----------
$20.37 $20.78 $20.41 $19.23 $20.42 $20.86 $20.48 $20.42 $20.83 $20.47
========== ========= =========
========= ========= ========== ======== ============ ======== ==========
(1.31)% 2.34% 6.99% 6.60% (0.31)% 3.44% (1.15)% (1.29)% 2.35% 2.85%
========== ========= =========
========= ========= ========== ======== ============ ======== ==========
$289,290 $461,389 $386,275 $57,539 $14,690 $17,005 $10,560 $37,287 $61,869 $13,019
1.97% 1.90% 1.97% 2.10%* 0.90% 0.86% 0.93%* 1.94% 1.87% 1.73%*
0.51% 0.57% 4.90% 1.18%* 1.60% 1.62% 1.56%* 0.54% 0.61% 0.94%*
94.32% 36.52% 15.57% 52.00% 94.32% 36.52% 15.57% 94.32% 36.52% 15.57%
</TABLE>
Paine Webber
DIVIDEND GROWTH FUND
37
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE><CAPTION>
Class A
------------------------------------------------
For the Years Ended August 31,
-----------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................... $20.60 $16.78 $17.50 $13.43 $15.57
--------- --------- --------- -------- --------
Income (loss) from investment operations:
Net investment income (loss)................................. - 0.07 - 0.02 0.17
Net realized and unrealized gains (losses) from investment
transactions................................................. 0.51 4.37 (0.11) 4.68 (1.16)
--------- --------- --------- -------- --------
Total income (loss) from investment operations............... 0.51 4.44 (0.11) 4.70 (0.99)
--------- --------- --------- -------- --------
Less dividends and distributions:
Dividends from net investment income......................... - - (0.01) (0.17) -
Distributions from net realized gains on investments......... (1.07) (0.62) (0.60) (0.46) (1.15)
--------- --------- --------- -------- --------
Total dividends and distributions............................ (1.07) (0.62) (0.61) (0.63) (1.15)
--------- --------- --------- -------- --------
Net asset value, end of period............................... $20.04 $20.60 $16.78 $17.50 $13.43
========= ========= ========= ======== ========
Total return(1).............................................. 2.33% 26.97% (0.85)% 37.02% (7.05)%
========= ========= ========= ======== ========
Ratios/Supplemental Data:
Net assets, end of period (000's)............................ $141,342 $130,353 $102,640 $96,796 $72,805
Ratio of expenses to average net assets...................... 1.21% 1.22% 1.43% 1.56% 1.59%
Ratio of net investment income (loss) to average net assets.. 0.06% 0.38% 0.00% 0.10% 2.96%
Portfolio turnover........................................... 24.41% 35.81% 32.49% 28.59% 39.16%
</TABLE>
- ------
* Annualized
~ Commencement of offering of shares.
~~ A per share breakdown for Class C shares has been omitted for the period
August 26, 1991 (commencement of operations) to August 31, 1991 due to
immaterial amounts.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and capital gain
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Class A and Class B shares would be
lower if sales charges were included. Total return information for periods
less than one year is not annualized.
Paine Webber
GROWTH FUND
38
<PAGE>
<TABLE><CAPTION>
Class B Class C~~ Class D
- ----------------------------------------- --------------------------- -------------------------------
For the
For the Years Ended For the For the Years Ended Years Ended For the
August 31, Period August 31, August 31, Period
- ----------------------------- July 1, --------------------------- ------------------- July 2,
1991~ to 1992~ to
August 31, August 31,
1991 1992 1994 1993 1992 1994 1993 1992 1994 1993
- ----------- ----------- --------- --------- --------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$20.25 $16.64 $17.48 $15.63 $20.71 $16.83 $17.50 $20.38 $16.75 $17.04
- --------- --------- --------- ----------- -------- -------- --------- --------- --------- -----------
(0.06) (0.05) (0.06) (0.02) 0.03 0.08 0.05 (0.08) (0.06) (0.01)
0.41 4.28 (0.18) 1.87 0.55 4.42 (0.11) 0.44 4.31 (0.28)
- --------- --------- --------- ----------- -------- -------- --------- --------- --------- -----------
0.35 4.23 (0.24) 1.85 0.58 4.50 (0.06) 0.36 4.25 (0.29)
- --------- --------- --------- ----------- -------- -------- --------- --------- --------- -----------
- - - - - - (0.01) - - -
(1.07) (0.62) (0.60) - (1.07) (0.62) (0.60) (1.07) (0.62) -
- --------- --------- --------- ----------- -------- -------- --------- --------- --------- -----------
(1.07) (0.62) (0.60) - (1.07) (0.62) (0.61) (1.07) (0.62) -
- --------- --------- --------- ----------- -------- -------- --------- --------- --------- -----------
$19.53 $20.25 $16.64 $17.48 $20.22 $20.71 $16.83 $19.67 $20.38 $16.75
========= ========= ========= =========== ======== ======== ========= ========= ========= ===========
1.55% 25.91% (1.58)% 11.84% 2.67% 27.26% (0.52)% 1.59% 25.86% (2.95)%
========= ========= ========= =========== ======== ======== ========= ========= ========= ===========
$97,272 $60,280 $35,867 $3,804 $30,521 $20,706 $11,581 $28,561 $16,474 $2,275
2.00% 2.02% 2.20% 2.24%* 0.94% 0.95% 1.12% 1.98% 2.06% 1.98%*
(0.66)% (0.46)% (0.70)% (0.81)%* 0.40% 0.60% 0.38% (0.65)% (0.69)% (0.65)%*
24.41% 35.81% 32.49% 28.59% 24.41% 35.81% 32.49% 24.41% 35.81% 32.49%
</TABLE>
Paine Webber
GROWTH FUND
39
<PAGE>
The Board of Trustees and Shareholders
PaineWebber Atlas Global Growth Fund
PaineWebber Dividend Growth Fund
PaineWebber Growth Fund
We have audited the accompanying statement of assets and liabilities,
including the portfolios of investments, of the PaineWebber Atlas Global Growth
Fund, PaineWebber Dividend Growth Fund and PaineWebber Growth Fund as of August
31, 1994, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of each Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at August 31, 1994, by correspondence with the custodians and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
PaineWebber Atlas Global Growth Fund, PaineWebber Dividend Growth Fund and
PaineWebber Growth Fund as of August 31, 1994 and the results of their
operations for the year then ended, the changes in their net assets for each of
the two years in the period then ended, and the financial highlights for each
of the indicated periods, in conformity with generally accepted accounting
principles.
New York, New York
October 26, 1994
Paine Webber
REPORT OF INDEPENDENT AUDITORS
40
<PAGE>
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended to advise you within 60 days of each Fund's fiscal year end (August 31,
1994) as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the following
distributions paid during the fiscal year by the Funds were derived from the
following sources:
<TABLE><CAPTION>
Atlas Global Dividend
Growth Growth Growth
Per Share Data: Fund Fund Fund
- ---------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Net investment income
Class A................................................... $0.0455 $0.2740 -
Class B................................................... $0.0051 $0.1057 -
Class C................................................... $0.0808 $0.3386 -
Class D................................................... $0.0119 $0.1100 -
Foreign currency gains*................................... $0.1194 - -
Short-term capital gains*................................. - - $0.0479
Long-term capital gains................................... $0.5560 $0.0310 $1.0255
Percentage of ordinary income dividends qualifying for the
dividends received deduction available to corporate
shareholders.............................................. - 100% 100%
</TABLE>
- ------
* Taxable as ordinary income
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not
be reported as taxable income. Some retirement trusts (e.g., corporate, Keogh
and 403(b)(7) plans) may need this information for their annual information
reporting.
Since each Fund's fiscal year is not the calendar year, another notification
will be sent with respect to calendar year 1994. Such notification, which will
reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1995. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in each of
the Funds.
Special Information for PaineWebber Atlas Global Growth Fund
The Fund intends to make an election under Internal Revenue Code Section 853
to pass through foreign taxes paid by the Fund to its shareholders. The amount
of foreign taxes for the fiscal year ended August 31, 1994 is $0.0195 on a per
share basis. Accordingly, shareholders would report this amount as an
additional income dividend on a federal income tax return and would be entitled
to a foreign tax credit, or an itemized deduction, at their option, for this
amount in computing their U.S. income tax liability. Generally, it is more
advantageous to claim a credit rather than to take a deduction.
The following table identifies the foreign source income earned through
August 31, 1994 by its source on a per share basis. Since the Fund's fiscal
year is not the calendar year, shareholders should refer to their Form 1099 DIV
mailed in January 1995 to determine the amounts to be included on their
respective tax returns for 1994. Shareholders are advised to consult their own
tax advisers with respect to the tax consequences of their investment in the
Fund.
Paine Webber
TAX INFORMATION (UNAUDITED)
41
<PAGE>
PaineWebber Atlas Growth Fund
Gross Foreign Net
Country Amount Tax Amount
- ---------
- -------------------------------
Argentina
0.0088 0.0000 0.0088
- -------------------------------
Australia
0.0002 0.0000 0.0002
- -------------------------------
Brazil
0.0591 0.0087 0.0504
- -------------------------------
Canada
0.0023 0.0004 0.0020
- -------------------------------
China
0.0006 0.0000 0.0006
- -------------------------------
Germany
0.0117 0.0012 0.0105
- -------------------------------
Hong Kong
0.0458 0.0000 0.0458
- -------------------------------
Indonesia
0.0063 0.0008 0.0055
- -------------------------------
Korea
0.0016 0.0003 0.0013
- -------------------------------
Gross Foreign Net
Country Amount Tax Amount
- --------------
- ------------------------------------
Luxembourg
0.0027 0.0000 0.0027
- ------------------------------------
Malaysia
0.0033 0.0010 0.0023
- ------------------------------------
Mexico
0.0018 0.0000 0.0018
- ------------------------------------
Norway
0.0025 0.0004 0.0021
- ------------------------------------
Sweden
0.0175 0.0026 0.0149
- ------------------------------------
Thailand
0.0020 0.0002 0.0018
- ------------------------------------
Turkey
0.0089 0.0000 0.0089
- ------------------------------------
United Kingdom
0.0257 0.0039 0.0218
- ------------------------------------
United States
0.0064 0.0000 0.0064
- ------------------------------------
Paine Webber
TAX INFORMATION (UNAUDITED) (concluded)
42
<PAGE>
RECENT PERFORMANCE RESULTS (unaudited)
Net Asset Value Total Return1
-------------------------- ------------------------
11/02/93*- 6 Months
08/31/94 02/28/94 11/02/93* 08/31/94 Ended 8/31/94
- ------------------------------------------------------------------------
Class A Shares $9.32 $9.63 $10.00 -6.80% -3.22%
- ------------------------------------------------------------------------
Class B Shares 9.27 9.61 10.00 -7.30 -3.54
- ------------------------------------------------------------------------
Class D Shares 9.27 9.61 10.00 -7.30 -3.54
- ------------------------------------------------------------------------
Performance Summary Class A Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- -----------------------------------------------------------------------------
11/02/93 - 12/31/93 $10.00 $9.72 - - -2.80%
- -----------------------------------------------------------------------------
01/01/94 - 08/31/94 9.72 9.32 - - -4.12
- -----------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: -6.80%
- -----------------------------------------------------------------------------
Performance Summary Class B Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- -----------------------------------------------------------------------------
11/02/93 - 12/31/93 $10.00 $9.71 - - -2.90%
- -----------------------------------------------------------------------------
01/01/94 - 08/31/94 9.71 9.27 - - -4.53
- -----------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: -7.30%
- -----------------------------------------------------------------------------
Performance Summary Class D Shares
Net Asset Value Capital Gains Dividends Paid Total
------------------ Distributed Return1
Period Covered Beginning Ending
- -----------------------------------------------------------------------------
11/02/93 - 12/31/93 $10.00 $9.71 - - -2.90%
- -----------------------------------------------------------------------------
01/01/94 - 08/31/94 9.71 9.27 - - -4.53
- -----------------------------------------------------------------------------
Cumulative Total Return as of 08/31/94: -7.30%
- -----------------------------------------------------------------------------
1 Figures assume reinvestment of all dividends and capital gain distributions
at net asset value on the payable date, and do not include sales charges;
results for Class A and B would be lower if sales charges were included.
* Commencement of operations.
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
Paine Webber
1
<PAGE>
PORTFOLIO OF INVESTMENTS
August 31, 1994
Number of
Shares Value
- --------- -----------
Common Stocks - 83.78%
Broadcasting/Cable TV - 6.77%
60,000 Comcast Corporation, Class A Special................ $960,000
5,000 Groupo Televisa, S.A. GDS........................... 293,125
30,000 QVC, Inc.*.......................................... 1,350,000
25,000 Renaissance Communications Corp.*................... 681,250
89,000 Tele-Communications, Inc., Class A*................. 2,008,063
-----------
5,292,438
-----------
Broadcasting/Radio - 3.41%
15,000 Groupo Radio Centro, S.A. de C.V. ADS*.............. 301,875
24,000 Infinity Broadcasting Corporation, Class A*......... 756,000
80,000 Jacor Communications, Inc.*......................... 1,160,000
30,000 Saga Communications, Inc.*.......................... 450,000
-----------
2,667,875
-----------
Cellular & Paging Communications - 7.31%
48,000 AirTouch Communications*............................ 1,356,000
60,000 American Mobile Satellite Corporation*.............. 1,005,000
32,000 Millicom International Cellular S.A.*............... 768,000
55,000 Mobile Telecommunications Technologies Corp.*....... 1,258,125
45,000 Rogers Cantel Mobile Communications Inc., Class B*.. 1,327,500
-----------
5,714,625
-----------
Computer Software - 9.74%
100,000 Excalibur Technologies Corporation*................. 800,000
30,000 FTP Software, Inc.*................................. 577,500
70,000 Informix Corporation*............................... 1,653,750
10,000 Macromedia, Inc. ................................... 130,000
35,000 Oracle Systems Corporation*......................... 1,494,063
50,000 Silicon Graphics, Inc.*............................. 1,312,500
50,000 Spectrum Holobyte, Inc. ............................ 562,500
25,000 Sybase, Inc.*....................................... 1,087,500
-----------
7,617,813
-----------
Electronics & Instrumentation - 1.45%
20,000 C-Cube Microsystems Inc.*........................... 465,000
7,500 Hewlett-Packard Company............................. 674,063
-----------
1,139,063
-----------
Financial Services - 1.01%
18,000 H & R Block, Inc. .................................. 787,500
-----------
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
2
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
August 31, 1994
Number of
Shares Value
- --------- -----------
Common Stocks - (continued)
Leisure & Entertainment - 14.44%
55,000 Acclaim Entertainment Inc.*............. $935,000
235,000 Activision, Inc.*....................... 998,750
48,000 Blockbuster Entertainment Corporation... 1,242,000
25,000 Electronic Arts Inc.*................... 443,750
55,000 Gaylord Entertainment Company, Class A.. 1,251,250
32,000 International Game Technology........... 748,000
125,000 International Post Limited*............. 1,125,000
119,500 IWERKS Entertainment, Inc.*............. 612,438
25,000 King World Productions, Inc.*........... 943,750
90,000 Savoy Pictures Entertainment, Inc.*..... 1,057,500
27,500 Sierra On-Line, Inc.*................... 598,125
35,000 Time Warner Inc......................... 1,334,375
-----------
11,289,938
-----------
Printing & Publishing - 11.61%
65,000 American Publishing Company, Class A*... 893,750
6,000 Dun and Bradstreet Corporation.......... 345,750
50,000 Educational Insights, Inc.*............. 300,000
40,000 E.W. Scripps Company, Class A........... 1,165,000
25,000 Gannett Company Inc..................... 1,250,000
10,000 Knight Ridder Inc....................... 517,500
25,000 McClatchy Newspaper Inc., Class A....... 650,000
27,500 The News Corporation Limited............ 1,491,875
25,000 R.R. Donnelley & Sons Company........... 756,250
14,000 Scholastic Corporation*................. 630,000
20,000 Tribune Company......................... 1,075,000
-----------
9,075,125
-----------
Telecommunications - 2.87%
60,000 Cable and Wireless plc, ADS............. 1,282,500
30,000 Vodafone Group PLC...................... 960,000
-----------
2,242,500
-----------
Telecommunications - Equipment - 9.97%
15,000 Adtran, Inc. ........................... 408,750
50,000 Amphenol Corporation, Class A*.......... 1,025,000
40,000 ANTEC Corporation*...................... 1,510,000
45,000 Belden, Inc............................. 855,000
40,000 General Instruments Corporation*........ 1,220,000
17,500 Glenayre Technologies, Inc.*............ 993,125
33,000 Motorola, Inc. ......................... 1,782,000
-----------
7,793,875
-----------
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
3
<PAGE>
PORTFOLIO OF INVESTMENTS (concluded)
August 31, 1994
Number of
Shares Value
- --------- -----------
Common Stocks - (concluded)
Telecommunications - Services - 6.73%
25,000 AT & T Corp.................................. $ 1,368,750
77,000 Intermedia Communications of Florida, Inc.*.. 1,087,625
50,000 MCI Communications Corporation............... 1,215,625
45,000 MFS Communications Company, Inc.*............ 1,586,250
-----------
5,258,250
-----------
Telephone Companies - 8.47%
20,000 Bell Atlantic Corporation.................... 1,095,000
18,000 Pacific Telesis Group........................ 594,000
64,000 Rochester Telephone Corporation.............. 1,440,000
12,500 Telefonica de Argentina, S.A., ADS........... 910,938
25,000 Telefonos de Mexico, S.A. de C.V., ADS....... 1,568,750
25,000 U S West, Inc................................ 1,009,375
-----------
6,618,063
-----------
Total Common Stocks (cost-$69,333,807)................. 65,497,065
-----------
<TABLE><CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
- --------- -------- --------
<S> <C> <C> <C>
Corporate Bond - 0.35%
Leisure & Entertainment -
$ 3,000 Sierra On-Line, Inc. (cost - $300,000)............................... 04/01/01 6.500% 271,500
------------
U.S. Government Obligations - 15.29%
12,000 U.S. Treasury Bills (cost - $11,950,183)............................. 10/06/94 4.270 11,950,183
------------
Repurchase Agreement - 1.38%
Repurchase Agreement dated 08/31/94 with Morgan Stanley Group,
collateralized by $875,000 U.S. Treasury Bonds, 9.875%, due 11/15/15;
1,077 proceeds: $1,077,141 (cost - $1,077,000)............................. 09/01/94 4.700 1,077,000
------------
Total Investments (cost - $82,660,990) - 100.80%............................... 78,795,748
Liabilities in excess of other assets - (0.80)%................................ (622,942)
------------
Net Assets - 100.00%........................................................... $78,172,806
============
</TABLE>
- ------
ADS-American Depository Shares
GDS-Global Depository Shares
* Non-income producing security
See accompanying notes to financial statements
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
4
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost - $82,660,990)......................................... $78,795,748
Cash............................................................................................. 488
Dividends and interest receivable................................................................ 55,683
Receivable for shares of beneficial interest sold................................................ 241,365
Deferred organizational expenses................................................................. 143,860
Other assets..................................................................................... 29,563
------------
Total assets..................................................................................... 79,266,707
------------
Liabilities
Payable for investments purchased................................................................ 417,000
Payable for shares of beneficial interest repurchased............................................ 398,644
Payable to affiliates............................................................................ 105,564
Accrued expenses and other liabilities........................................................... 172,693
------------
Total liabilities................................................................................ 1,093,901
------------
Net Assets
Beneficial interest shares of $0.001 par value outstanding (unlimited amount authorized)......... 83,330,891
Accumulated net realized losses from investments transactions.................................... (1,292,843)
Net unrealized depreciation of investments....................................................... (3,865,242)
------------
Net assets....................................................................................... $78,172,806
============
Class A:
Net assets....................................................................................... $19,118,766
------------
Shares outstanding............................................................................... 2,050,433
------------
Net asset and redemption value per share......................................................... $9.32
============
Maximum offering price per share (net asset value plus sales charge of 4.50% of offering price).. $9.76
============
Class B:
Net assets....................................................................................... $47,974,591
------------
Shares outstanding............................................................................... 5,176,940
------------
Net asset value and offering price per share..................................................... $9.27
============
Class D:
Net assets....................................................................................... $11,079,449
------------
Shares outstanding............................................................................... 1,195,271
------------
Net asset value, offering price and redemption value per share................................... $9.27
============
</TABLE>
See accompanying notes to financial statements
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
5
<PAGE>
STATEMENT OF OPERATIONS
For the period November 2, 1993
(commencement of operations)
to August 31, 1994
<TABLE>
<S> <C>
Investment Income:
Dividends (net of foreign withholding taxes)....................... $ 336,888
Interest........................................................... 666,323
---------------------
1,003,211
---------------------
Expenses:
Investment advisory and administration fees........................ 473,641
Distribution fees-Class A.......................................... 39,016
Distribution fees-Class B.......................................... 384,326
Distribution fees-Class D.......................................... 91,135
Transfer agency and service fees................................... 100,148
Reports and notices to shareholders................................ 57,475
Custody and accounting fees........................................ 62,089
Legal and audit fees............................................... 53,659
Amortization of organizational expenses............................ 28,640
Federal and state registration fees................................ 11,738
Trustees' fees and expenses........................................ 8,125
Other expenses..................................................... 6,648
---------------------
1,316,640
---------------------
Net investment loss................................................ (313,429)
---------------------
Realized and unrealized losses from investment activities:
Net realized losses from investment transactions................... (1,292,843)
Net change in unrealized appreciation/depreciation of investments.. (3,865,242)
---------------------
Net realized and unrealized losses from investment activities...... (5,158,085)
---------------------
Net decrease in net assets resulting from operations............... $(5,471,514)
=====================
</TABLE>
See accompanying notes to financial statements
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
6
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the period November 2, 1993
(commencement of operations)
to August 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment loss....................................................... $(313,429)
Net realized losses from investment transactions.......................... (1,292,843)
Net change in unrealized appreciation/depreciation of investments......... (3,865,242)
-------------
Net decrease in net assets resulting from operations...................... (5,471,514)
-------------
From beneficial interest transactions:
Net proceeds from the sale of shares...................................... 101,825,996
Cost of shares repurchased................................................ (18,181,706)
-------------
Net increase in net assets derived from beneficial interest transactions.. 83,644,290
-------------
Net increase in net assets ............................................... 78,172,776
Net assets:
Beginning of period....................................................... 30
-------------
End of period............................................................. $78,172,806
=============
</TABLE>
See accompanying notes to financial statements
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
7
<PAGE>
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Communications & Technology Growth Fund ("Fund") is a diversified
series of PaineWebber Olympus Fund ("Trust"), an open-end investment company
organized as a Massachusetts business trust, which offers two series of shares.
The financial statements for PaineWebber Growth Fund ("Growth"), the other
series of the Trust, are not included herein.
Organizational Matters - Prior to commencing its operations, the Fund had no
activities other than organizational matters and activities related to the
initial public offering and the issuance, at net asset value, of 1 Class A
share, 1 Class B share and 1 Class D share of the Fund to Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of
PaineWebber Incorporated ("PaineWebber") and investment adviser and
administrator of the Fund. Costs estimated at approximately $172,500 incurred
by the Fund in connection with its organization and the registration of its
shares, have been deferred and are being amortized, using the straight-line
method over a period not to exceed five years from the commencement of
operations of the Fund.
On November 2, 1993 the Fund commenced operations for Class A, B and D Shares.
Each Class represents interests in the same assets of the Fund and the Classes
are identical except for differences in their sales charge structures, ongoing
distribution charges and certain transfer agency expenses. In addition, Class B
shares and all corresponding dividend reinvested shares automatically convert
to Class A shares approximately six years after issuance. All Classes of shares
have equal voting privileges, except that each Class has exclusive voting
rights with respect to its distribution plan.
Valuation of Investments - Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the
securities. When market quotations are not readily available, securities are
valued based upon appraisals derived from information concerning those
securities or similar securities received from recognized dealers in those
securities. All other assets are valued at fair value as determined in good
faith by or under the direction of the Trust's Board of Trustees. The amortized
cost method of valuation, which approximates market value, is used to value
debt obligations with 60 days or less remaining to maturity, unless the Trust's
Board of Trustees determines that this does not represent fair value.
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic developments, including those
particular to a specific industry, country, or region.
Investment Transactions and Investment Income - Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions
NOTES TO FINANCIAL STATEMENTS
PaineWebber
8
<PAGE>
(continued)
are calculated using the identified cost method. Interest income is recorded on
an accrual basis. Dividend income is accounted for on an ex-dividend basis.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of
dividend-eligible shares, as appropriate) of each class at the beginning of the
day (after adjusting for current capital share activity of the respective
classes). Class-specific expenses are charged directly to the applicable class
of shares.
Repurchase Agreements - The Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to ensure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, the Fund has the right to liquidate
the collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be subject
to legal proceedings. The Fund occasionally participates in joint repurchase
agreement transactions with other funds managed by Mitchell Hutchins.
Federal Tax Status - The Fund intends to distribute all of its taxable income
and to comply with the other requirements of the Internal Revenue Code
applicable to regulated investment companies. Accordingly, no provision for
federal income taxes is required. In addition, by distributing during each
calendar year substantially all of its net investment income, capital gains and
certain other amounts, if any, the Fund intends not to be subject to any
federal excise tax.
In accordance with Treasury Regulations, the Fund has elected to defer realized
losses arising after October 31, 1993. Such losses have been treated for tax
purposes as arising on September 1, 1994. To the extent that such losses are
used to offset future capital gains, it is probable that the gains so offset
will not be distributed to shareholders.
Dividends and Distributions to Shareholders - The Fund records dividends and
distributions to their shareholders on the ex-date. The amount of dividends and
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences
NOTES TO FINANCIAL STATEMENTS
(continued)
PaineWebber
9
<PAGE>
do not require reclassifications. Dividends and distributions which exceed net
investment income and net realized capital gains for financial reporting
purposes but not for tax purposes are reported as dividends in excess of net
investment income or distributions in excess of net realized capital gains. To
the extent they exceed net investment income and net realized capital gains for
tax purposes, they are reported as distributions of paid-in-capital. For the
period ended August 31, 1994 the effects of such permanent differences totaling
$313,429 were reclassified from accumulated net investment loss to capital
surplus.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's Board of Trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, the Fund pays Mitchell Hutchins
an investment advisory and administration fee, which is accrued daily and paid
monthly, at the annual rate of 0.75% of the Fund's average daily net assets. At
August 31, 1994, the Fund owed Mitchell Hutchins $48,821 in investment advisory
and administration fees.
In compliance with applicable state securities laws, Mitchell Hutchins will
reimburse the Fund if and to the extent that the aggregate operating expenses
in any fiscal year, exclusive of taxes, distribution fees, interest, brokerage
fees and extraordinary expenses, exceed limitations imposed by various state
regulations. Currently, the most restrictive limitation applicable to the Fund
is 2.5% of the first $30 million of average daily net assets, 2.0% of the next
$70 million and 1.5% of any excess over $100 million. For the period ended
August 31, 1994 no reimbursements were required pursuant to the above
limitation for the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
separate plans of distribution pertaining to Class A, Class B and Class D
shares, the Fund pays Mitchell Hutchins monthly service fees at an annual rate
of 0.25% of the average daily net assets of each Class of shares and monthly
distribution fees at the annual rate of 0.75% of the average daily net assets
of Class B shares and Class D shares. At August 31, 1994, the Fund owed
Mitchell Hutchins $53,108 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
by the shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class B
NOTES TO FINANCIAL STATEMENTS
(continued)
PaineWebber
10
<PAGE>
shares. Mitchell Hutchins has informed the Fund that for the period ended
August 31, 1994, it earned the following amounts in sales charges:
Initial sales charges-Class A.............. $800,661
Contingent deferred sales charges-Class B.. $133,844
TRANSFER AGENCY SERVICE FEES
The Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Fund's transfer
agent. For these services for the period ended August 31, 1994, PaineWebber
earned $35,189 and was owed $3,635 in transfer agency service fees from the
Fund.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at August 31,
1994 was substantially the same as the cost of securities for financial
statement purposes.
At August 31, 1994, the components of the net unrealized depreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost).. $4,612,950
Gross depreciation (investments having an excess of cost over value).. (8,478,192)
-------------
Net unrealized depreciation of investments............................ $(3,865,242)
=============
</TABLE>
For the period ended August 31, 1994, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
Purchases.. $77,394,973
Sales...... $ 6,467,340
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial interest
authorized. Transactions in shares of beneficial interest for the period
November 2, 1993 (commencement of operations) to August 31, 1994, were as
follows:
Class A Class B Class D
---------- ---------- ----------
Shares sold......................... 2,589,431 6,167,359 1,622,206
Shares repurchased.................. (538,998) (990,419) (426,935)
---------- ---------- ----------
Net increase in shares outstanding.. 2,050,433 5,176,940 1,195,271
========== ========== ==========
NOTES TO FINANCIAL STATEMENTS
(concluded)
PaineWebber
11
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding from November 2,
1993 (commencement of operations) to August 31, 1994 is presented below:
<TABLE><CAPTION>
Class A Class B Class D
--------- ----------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period............................. $10.00 $10.00 $10.00
--------- ----------- -----------
Net income (loss) from investment operations:
Net investment loss.............................................. - (0.05) (0.05)
Net realized and unrealized losses from investment transactions.. (0.68) (0.68) (0.68)
--------- ----------- -----------
Total loss from investment operations............................ (0.68) (0.73) (0.73)
--------- ----------- -----------
Net asset value, end of period................................... $9.32 $9.27 $9.27
========= =========== ===========
Total investment return (1)...................................... (6.80)% (7.30)% (7.30)%
========= =========== ===========
Ratios/Supplemental Data:
Net assets, end of period (000's)................................ $19,119 $47,975 $11,079
Ratio of expenses to average net assets.......................... 1.54%* 2.28%* 2.29%*
Ratio of net investment income (loss) to average net assets...... 0.06%* (0.68)%* (0.68)%*
Portfolio turnover rate.......................................... 11.92% 11.92% 11.92%
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends at net asset value on the payable dates, and a sale at net asset
value on the last day of each period reported. The figures do not include
sales charges; results for Class A and Class B would be lower if sales
charges were included. Total investment returns for less than one year have
not been annualized.
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
PaineWebber Communications & Technology Growth Fund
We have audited the accompanying statement of assets and liabilities of
PaineWebber Communications & Technology Growth Fund, including the portfolio of
investments, as of August 31, 1994, and the related statement of operations,
changes in net assets, and the financial highlights for the period November 2,
1993 (commencement of operations) to August 31, 1994. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
PaineWebber Communications & Technology Growth Fund at August 31, 1994, the
results of its operations, the changes in its net assets, and the financial
highlights for the period November 2, 1993 to August 31, 1994, in conformity
with generally accepted accounting principles.
New York, New York
October 26, 1994
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
13
<PAGE>
TAX INFORMATION (unaudited)
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (August 31,
1994) as to federal tax status of distributions received by shareholders during
such fiscal year. Accordingly, we are advising you that no distributions were
paid during the fiscal year.
Since the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar 1994. The second notification, which will
reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1995. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
PaineWebber
COMMUNICATIONS & TECHNOLOGY GROWTH FUND
14
<PAGE>
Portfolio of Investments
February 28, 1995 (unaudited)
<TABLE><CAPTION>
PaineWebber
PaineWebber Communications PaineWebber
Growth & Technology Blue Chip Pro forma
Fund Growth Fund Growth Fund Combined
Value Value Value Value
Number of Shares ---------- -------------- ----------- ---------
----------------
<S> <C> <C> <C> <C> <C>
Common Stocks - 84.77%
Apparel & Footwear - 0.84%
149,000 Authentic Fitness Corporation* $2,216,375 $2,216,375
55,000 Jones Apparel Group, Inc.* $1,292,500 1,292,500
--------- ---------- ---------- ----------
2,216,375 1,292,500 3,508,875
--------- ---------- ---------- ----------
Banking - 2.59%
60,000 Comerica Incorporated 1,687,500 1,687,500
144,600 KeyCorp 2,446,150 1,747,250 4,193,400
60,000 Marshall and Ilsley Corporation 1,245,000 1,245,000
180,000 Synovus Financial Corp. 3,555,000 3,555,000
--------- ---------- ---------- ----------
7,246,150 3,434,750 10,680,900
--------- ---------- ---------- ----------
Beverages & Bottling - 1.60%
120,000 The Coca-Cola Company 4,125,000 2,475,000 6,600,000
--------- ---------- ---------- ----------
Biotechnology - 0.28%
18,833 Chiron Corporation* 1,144,105 1,144,105
--------- ---------- ---------- ----------
Broadcasting/Cable TV - 6.88%
137,000 British Sky Broadcasting Group, PLC* 1,930,000 $772,000 603,125 3,305,125
5,000 Capital Cities / ABC, Inc. 442,500 442,500
105,000 Comcast Corporation, Class A 1,680,000 1,680,000
257,500 Comcast Corporation, Class A Special 1,771,875 945,000 1,338,750 4,055,625
207,000 International CableTel Incorporated* 5,920,000 704,000 6,624,000
25,000 Renaissance Communications Corp.* 731,250 731,250
225,000 Tele-Communications, Inc., Class A* 2,275,000 1,592,500 1,251,250 5,118,750
124,710 Viacom Inc., Class B* 2,712,521 1,302,001 1,566,250 5,580,772
40,000 Young Broadcasting Inc., Class A 860,000 860,000
---------- ---------- ---------- ----------
16,289,396 6,645,251 5,463,375 28,398,022
---------- ---------- ---------- ----------
Broadcasting / Radio - 0.60%
24,000 Infinity Broadcasting Corporation* 846,000 846,000
80,000 Jacor Communications, Inc.* 1,110,000 1,110,000
30,000 Saga Communications, Inc.* 528,750 528,750
---------- ---------- ---------- ----------
2,484,750 2,484,750
---------- ---------- ---------- ----------
Cellular & Paging
Communications - 2.56%
48,000 AirTouch Communications* 1,308,000 1,308,000
32,000 Millicom International Cellular S.A.* 872,000 872,000
180,000 Mobile Telecommunications Technologies Corp.* 2,765,625 1,216,875 3,982,500
157,500 Rogers Cantel Mobile Communications Inc., Class B* 1,293,750 1,164,375 1,617,188 4,075,313
20,000 United International Holdings Inc., Class A* 315,000 315,000
---------- ---------- ---------- ----------
4,059,375 4,876,250 1,617,188 10,552,813
---------- ---------- ---------- ----------
Computer Software - 3.75%
140,000 EMC Corporation 1,284,375 685,000 428,125 2,397,500
440,000 Excalibur Technologies Corporation* 2,550,000 750,000 3,300,000
50,000 Hummingbird Communications Ltd. 850,000 850,000
20,000 IMRS INC.* 875,000 875,000
45,000 Informix Corporation* 1,698,750 1,698,750
10,000 Macromedia, Inc.* 293,750 293,750
5,000 Microsoft Corporation* 315,000 315,000
52,500 Oracle Systems Corporation* 1,647,188 1,647,188
50,000 Silicon Graphics, Inc.* 1,731,250 1,731,250
50,000 Spectrum Holobyte, Inc.* 675,000 675,000
25,000 Sybase, Inc.* 1,018,750 1,018,750
43,000 Wavefront Technologies Inc. 661,125 661,125
---------- ---------- ---------- ----------
3,834,375 11,200,813 428,125 15,463,313
---------- ---------- ---------- ----------
<PAGE>
PaineWebber
PaineWebber Communications PaineWebber
Growth & Technology Blue Chip Pro forma
Fund Growth Fund Growth Fund Combined
Value Value Value Value
---------- -------------- ----------- ---------
Common Stocks -(continued)
Conglomerates - 0.97%
430,000 Noel Group, Inc.* $2,418,750 $2,418,750
75,000 PEC Israel Economic Corporation* 1,603,125 1,603,125
---------- --------- --------- ----------
4,021,875 4,021,875
---------- --------- --------- ----------
Containers & Packaging - 1.34%
132,000 Sealed Air Corporation* 2,931,250 $2,596,250 5,527,500
---------- --------- --------- ----------
Drugs & Medical Products-6.36%
43,819 Advanced Therapeutic Systems, ADS* 894,771 321,206 1,215,977
45,000 ALZA Corporation, Class A* 1,023,750 1,023,750
132,500 Elan Corporation, PLC ADS* 3,436,875 1,233,750 4,670,625
60,000 Forest Laboratories, Inc.* 3,045,000 3,045,000
40,000 Ivax Corporation 865,000 865,000
100,000 R.P. Scherer Corporation* 4,587,500 4,587,500
172,000 Teva Pharmaceutical Industries Ltd., ADS 2,775,313 1,685,937 4,461,250
222,854 VISX, Incorporated* 3,008,529 3,008,529
130,000 Watson Pharmaceuticals, Inc.* 3,355,625 3,355,625
---------- --------- --------- ----------
21,968,613 4,264,643 26,233,256
---------- --------- --------- ----------
Electronics &
Instrumentation - 1.76%
20,000 C-Cube Microsystems Inc.* $340,000 340,000
45,000 Fisher Scientific International Inc. 1,215,000 1,215,000
7,500 Hewlett-Packard Company 862,500 862,500
150,000 Lattice Semiconductor Corporation* 3,956,250 3,956,250
30,000 Thermo Instrument Systems Inc.* 903,750 903,750
---------- --------- --------- ----------
3,956,250 1,202,500 2,118,750 7,277,500
---------- --------- --------- ----------
Fertilizers - 1.20%
100,000 Potash Corporation of Saskatchewan Inc. 3,575,000 3,575,000
75,000 The Scotts Company, Class A* 1,387,500 1,387,500
---------- --------- --------- ----------
4,962,500 4,962,500
---------- --------- --------- ----------
Financial Services - 5.59%
70,000 Ceridian Corporation* 2,205,000 2,205,000
157,500 Countrywide Credit Industries, Inc. 2,559,375 2,559,375
79,000 Federal Home Loan Mortgage Corporation 2,610,000 1,972,000 4,582,000
67,500 Federal National Mortgage Association 3,085,000 2,120,937 5,205,937
117,000 First Data Corporation 4,031,250 2,257,500 6,288,750
18,000 H & R Block, Inc. 677,250 677,250
37,500 Paychex, Inc. 1,537,500 1,537,500
---------- --------- --------- ----------
12,285,625 677,250 10,092,937 23,055,812
---------- --------- --------- ----------
Foods - 0.10%
168,000 Lincoln Snacks Company* 399,000 399,000
---------- --------- --------- ----------
Forest Products - 0.21%
125,000 Universal Forest Products Inc. 875,000 875,000
---------- --------- --------- ----------
Funeral services - 0.58%
85,500 Service Corporation International 2,404,687 2,404,687
---------- --------- --------- ----------
Health Care - 3.76%
160,000 Humana Inc. 2,375,000 1,425,000 3,800,000
200,000 North American Vaccine Inc.* 1,600,000 1,600,000
20,000 PacifiCare Health Systems, Inc.* 1,405,000 1,405,000
280,000 TDX Corporation*(1) 315,000 315,000
110,000 United HealthCare Corporation* 3,010,000 1,720,000 4,730,000
85,500 U.S. Healthcare, Inc. 2,816,500 860,000 3,676,500
---------- --------- --------- ----------
11,521,500 4,005,000 15,526,500
---------- --------- --------- ----------
Hotel, Motel or Lodging- 1.03%
150,000 Hospitality Franchise Systems, Inc.* 4,256,250 4,256,250
---------- --------- --------- ----------
Household & Consumer
Products - 3.63%
75,436 Belding Hemingway Co. 584,629 584,629
70,000 Duracell International Inc. 2,913,750 2,913,750
165,000 The Forschner Group, Inc.* 1,773,750 1,773,750
80,000 Luxottica Group S.p.A. ADS 3,110,000 3,110,000
220,000 Sunbeam-Oster Company, Inc. 3,656,250 1,706,250 5,362,500
80,000 Syratech Corporation* 1,240,000 1,240,000
---------- --------- --------- ----------
13,278,379 1,706,250 14,984,629
---------- --------- --------- ----------
<PAGE>
PaineWebber
PaineWebber Communications PaineWebber
Growth & Technology Blue Chip Pro forma
Fund Growth Fund Growth Fund Combined
Value Value Value Value
---------- -------------- ----------- ---------
Common Stocks -(continued)
Industrial & Electronic
Products - 1.26%
30,000 Emerson Electric Co. $1,983,750 $1,983,750
40,000 Kaydon Corporation 1,100,000 1,100,000
105,000 Mark IV Industries Inc. 2,100,000 2,100,000
---------- --------- --------- ----------
5,183,750 5,183,750
---------- --------- --------- ----------
Insurance - 0.93%
35,000 Equitable of Iowa Companies 1,163,750 1,163,750
12,000 Frontier Insurance Group, Inc. 259,500 259,500
150,000 PennCorp Financial Group, Inc. $2,400,000 2,400,000
---------- --------- --------- ----------
2,400,000 1,423,250 3,823,250
---------- --------- --------- ----------
Leisure & Entertainment- 5.91%
55,000 Acclaim Entertainment Inc.* $783,750 783,750
235,000 Activision, Inc.* 1,656,016 1,656,016
80,000 Bolle America, Inc.* 680,000 680,000
50,000 Cinar Films Inc.* 287,500 287,500
50,000 Cyrk Incorporated 1,200,000 1,200,000
25,000 Electronic Arts Inc.* 537,500 537,500
100,000 International Post Limited* 725,000 725,000
119,500 IWERKS Entertainment, Inc.* 537,750 537,750
275,000 Marker International* 2,045,312 2,045,312
175,000 Norwood Promotional Products, Inc.* 2,143,750 2,143,750
390,000 Savoy Pictures Entertainment, Inc.* 2,081,250 630,000 2,711,250
27,500 Sierra On-Line, Inc.* 1,065,625 1,065,625
250,000 Sports Club Incorporated 1,812,500 1,812,500
60,000 SweetWater, Inc.* 420,000 420,000
188,000 Time Warner Inc. 4,635,000 1,351,875 1,274,625 7,261,500
10,000 Walt Disney Co. 533,750 533,750
---------- --------- --------- ----------
15,017,812 8,108,766 1,274,625 24,401,203
---------- --------- --------- ----------
Leisure: Gaming - 1.27%
167,500 Mirage Resorts, Incorporated* 2,506,875 1,492,188 3,999,063
100,000 Rio Hotel & Casino, Inc.* 1,237,500 1,237,500
---------- --------- --------- ----------
3,744,375 1,492,188 5,236,563
---------- --------- --------- ----------
Medical Equipment - 0.59%
70,000 Sunrise Medical Inc.* 2,415,000 2,415,000
---------- --------- --------- ----------
Metals & Mining - 0.81%
140,000 Madeco S.A. 3,325,000 3,325,000
---------- --------- --------- ----------
Oil & Gas - 0.55%
193,235 Garnet Resources Corporation* 519,319 519,319
100,000 Louis Dreyfus Natural Gas Corp.* 1,187,500 1,187,500
60,000 NUMAR Corporation* 555,000 555,000
---------- --------- --------- ----------
2,261,819 2,261,819
---------- --------- --------- ----------
Oil Services - 0.31%
70,000 Camco International Inc. 1,295,000 1,295,000
---------- --------- --------- ----------
Printing & Publishing - 2.98%
65,000 American Publishing Company, Class A 747,500 747,500
6,000 Dun and Bradstreet Corporation 310,500 310,500
50,000 Educational Insights, Inc.* 362,500 362,500
40,000 E.W. Scripps Company, Class A 1,165,000 1,165,000
52,500 Gannett Company Inc. 1,375,000 1,512,500 2,887,500
10,000 Knight Ridder Inc. 548,750 548,750
25,000 McClatchy Newspaper Inc., Class A 590,625 590,625
115,000 The News Corporation Limited 1,087,500 996,875 2,084,375
57,500 The News Corporation Limited ADR 483,750 443,438 927,188
25,000 R.R. Donnelley & Sons Company 856,250 856,250
14,000 Scholastic Corporation* 707,000 707,000
20,000 Tribune Company 1,117,500 1,117,500
---------- --------- --------- ----------
1,571,250 9,220,938 1,512,500 12,304,688
---------- --------- --------- ---------
<PAGE>
PaineWebber
PaineWebber Communications PaineWebber
Growth & Technology Blue Chip Pro forma
Fund Growth Fund Growth Fund Combined
Value Value Value Value
---------- -------------- ----------- ---------
Common Stocks -(continued)
Rails - 2.75%
72,500 Burlington Northern Inc. $2,520,000 $1,540,000 $4,060,000
75,000 Conrail Inc. 2,486,250 1,657,500 4,143,750
62,000 Johnstown America Industries, Inc.* 775,000 775,000
101,000 Railtex Inc.* 2,373,500 2,373,500
---------- --------- --------- ----------
8,154,750 3,197,500 11,352,250
---------- --------- --------- ----------
Savings & Loan - 0.37%
40,000 Golden West Financial Corporation 1,530,000 1,530,000
---------- --------- --------- ----------
Services - 0.18%
150,000 Staffing Resources 742,500 742,500
---------- --------- --------- ----------
Specialty Chemicals - 0.86%
35,000 Air Products and Chemicals, Inc. 1,723,750 1,723,750
90,000 Pall Corporation 1,811,250 1,811,250
---------- --------- --------- ----------
3,535,000 3,535,000
---------- --------- --------- ----------
Specialty Retail - 7.99%
250,000 General Nutrition Companies, Inc.* 4,320,000 1,680,000 6,000,000
40,000 Heilig-Meyers Company 945,000 945,000
40,000 Micro Warehouse, Inc.* $1,150,000 1,150,000
96,666 The Home Depot, Inc. 2,243,750 2,094,137 4,337,887
229,500 Rawlings Sporting Goods Company, Inc.* 2,754,000 2,754,000
330,000 The Right Start, Inc.*(1) 928,125 928,125
314,625 Staples, Inc.* 5,810,906 1,818,750 7,629,656
115,000 Toys 'R' Us, Inc.* 1,672,500 1,533,125 3,205,625
200,000 Viking Office Products, Inc.* 6,000,000 6,000,000
---------- --------- --------- ----------
23,729,281 1,150,000 8,071,012 32,950,293
---------- --------- --------- ----------
Steel - 0.67%
220,000 Northwestern Steel and Wire Company* 1,402,500 1,402,500
130,000 Olympic Steel, Inc.* 1,365,000 1,365,000
---------- --------- --------- ----------
2,767,500 2,767,500
---------- --------- --------- ----------
Technology - 0.26%
50,000 Epic Design Technology Inc. 1,062,500 1,062,500
---------- --------- --------- ----------
Telecommunications - 1.51%
30,000 AT&T Corp. 1,552,500 1,552,500
210,000 Cable and Wireless PLC, ADS 2,681,250 1,072,500 3,753,750
30,000 Vodafone Group PLC 915,000 915,000
---------- --------- --------- ----------
2,681,250 1,987,500 1,552,500 6,221,250
---------- --------- --------- ----------
Telecommunications -
Equipment - 5.32%
110,000 Amphenol Corporation, Class A* 1,231,250 1,477,500 2,708,750
170,000 ANTEC Corporation* 1,740,000 870,000 1,087,500 3,697,500
315,000 Belden, Inc. 3,885,000 945,000 1,785,000 6,615,000
40,000 General Instruments Corporation* 1,270,000 1,270,000
26,250 Glenayre Technologies, Inc.* 1,056,562 1,056,562
115,000 Motorola, Inc. 4,025,000 1,437,500 1,150,000 6,612,500
---------- --------- --------- ----------
9,650,000 6,810,312 5,500,000 21,960,312
---------- --------- --------- ----------
Telecommunications -
Services - 3.51%
100,000 AT&T Corp. 3,881,250 1,293,750 5,175,000
25,000 Comcast UK Partners Limited* 398,438 398,438
191,250 IntelCom Group, Inc.* 1,275,000 1,115,625 2,390,625
77,000 Intermedia Communications of Florida, Inc.* 866,250 866,250
82,000 MFS Communications Company, Inc.* 1,529,000 1,320,500 2,849,500
96,000 TeleWest Communications, PLC, ADS* 2,076,750 731,250 2,808,000
---------- --------- --------- ----------
8,762,000 5,725,813 14,487,813
---------- --------- --------- ----------
Telephone Companies - 1.11%
64,000 Frontier Corporation 1,464,000 1,464,000
115,000 Telefonica de Argentina, S.A., ADS 1,676,250 465,625 2,141,875
25,000 U S West, Inc. 968,750 968,750
---------- --------- --------- ----------
1,676,250 2,898,375 4,574,625
---------- --------- --------- ----------
Total Common Stocks (cost - $281,443,978) 209,564,805 64,051,018 76,171,780 349,787,603
----------- ---------- ---------- -----------
</TABLE>
<PAGE>
<TABLE><CAPTION>
PaineWebber
PaineWebber Communications PaineWebber
Growth & Technology Blue Chip Pro forma
Fund Growth Fund Growth Fund Combined
Value Value Value Value
---------- -------------- ----------- ---------
Principal Maturity Interest
Amount Dates Rates
--------- ----------
(000)
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate Bonds - 0.64%
Leisure & Entertainment -0.10%
$300 Sierra On-Line,Inc.* 04/01/01 6.500% $429,750 $429,750
------------ ----------- ----------- ------------
Oil & Gas - 0.18%
1,500 Garnet Resources
Corporation 12/21/98 9.500 $732,900 732,900
------------ ----------- ----------- ------------
Telecommunications -
Services 0.36%
2,160 IntelCom Group, Inc.-
Convertible 09/17/98 8.000 1,471,176 1,471,176
------------ ----------- ----------- ------------
Total Corporate Bonds (cost-$3,960,000) 2,204,076 429,750 2,633,826
------------ ----------- ----------- ------------
U.S. Government
Obligations - 11.37%
47,000 U.S. Treasury Bills
(cost-$46,918,773) 03/02/95 5.020
to 04/06/95 to 5.410 34,925,913 2,997,491 $8,994,456 46,917,860
------------ ----------- ----------- ------------
Repurchase Agreement - 3.31%
10,516 Repurchase Agreement
dated 02/28/95 with
Salomon Brothers, Inc.,
collateralized by
$10,000,000 U.S. Treasury
Notes, 8.75%, due 08/15/00:
proceeds: $10,517,76 03/01/95 6.030 10,516,000 10,516,000
------------ ----------- ----------- ------------
805 Repurchase Agreement dated
02/28/95 with State Street
Bank & Trust Co.,
collateralized by $825,774
U.S. Treasury Notes, 4.125%,
due 05/31/95; proceeds:
$805,123 03/01/95 5.500 805,000 805,000
------------ ----------- ----------- ------------
2,318 Repurchase Agreement dated
02/28/95 with Citicorp
Securities Inc., collateralized
by $1,970,000 U.S.Treasury
Bonds, 10.75% due 02/15/03:
proceeds:$2,318,391 03/01/95 6.080 2,318,000 2,318,000
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------------ ----------- ----------- ------------
Total Repurchase Agreements - (cost - $13,639,000) 10,516,000 805,000 2,318,000 13,639,000
------------ ----------- ----------- ------------
Total Investments (cost-$212,589,628, $70,225,435, $63,146,688, 257,210,794 68,283,259 87,484,236 412,978,289
and $345,961,751,
respectively)- 100.09%
Other assets in excess
of liabilities
(liabilities in excess
of other assets) -0.09% 234,008 230,864 (821,249) (356,377)
------------ ----------- ----------- ------------
Net Assets 100.00% $257,444,802 $68,514,123 $86,662,987 $412,621,912
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
___________________________________
* Non-income producing security
ADR--American Depository Receipt
ADS--American Depository Shares
(1) Investment in affiliated company. An affiliated company
represents ownership of at least 5% of the voting securities
of the issuer during the period, as defined in the Investment
Company Act of 1940.
See accompanying notes to pro forma financial statements.
<PAGE>
<TABLE><CAPTION>
Pro forma Combined
Statement of Assets and Liabilities
February 28 , 1995
(unaudited)
PaineWebber
PaineWebber Communications & PaineWebber
Growth Technology Growth Blue Chip Pro forma
Fund Fund Growth Fund Combined
---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Investments in securities, at value (cost -
$212,589,628, $70,225,435, $257,210,794 $68,283,259 $87,484,236 $412,978,289
$63,146,688, and $345,961,751, respectively)
Other assets 3,532,988 1,185,460 389,811 5,108,259
------------ ----------- ----------- ------------
Total assets 260,743,782 69,468,719 87,874,047 418,086,548
------------ ----------- ----------- ------------
Total liabilities 3,298,980 954,596 1,211,060 5,464,636
------------ ----------- ----------- ------------
Beneficial interest/Capital stock, $0.001
par value (unlimited amount authorized) 213,743,193 74,357,095 60,429,124 348,529,412
Undistributed net investment income (loss) 183,472 (349,874) (59,052) (225,454)
Accumulated net realized gains (losses) from
investments (1,103,029) (3,550,922) 1,955,367 (2,698,584)
Net unrealized appreciation (depreciation)
of investments 44,621,166 (1,942,176) 24,337,548 67,016,538
------------ ----------- ----------- ------------
Net assets $257,444,802 $68,514,123 $86,662,987 $412,621,912
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Class A:
Net assets $120,933,807 $16,557,013 $50,445,093 $187,935,913
------------ ----------- ----------- ------------
Shares outstanding 6,294,685 1,780,835 3,469,743 9,783,068
------------ ----------- ----------- ------------
Net asset value and redemption value per share $19.21 $9.30 $14.54 $19.21
------------ ----------- ----------- ------------
Maximum offering price per share (net asset value
plus sales charges of 4.50%)
$20.12 $9.74 $15.23 $20.12
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Class B:
Net assets $83,636,897 $42,955,786 $32,772,270 $159,364,953
------------ ----------- ----------- ------------
Shares outstanding 4,485,279 4,666,041 2,333,945 8,546,557
------------ ----------- ----------- ------------
Net asset value and offering price per share $18.65 $9.21 $14.04 $18.65
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Class C:
Net assets $29,937,919 $29,937,919
------------ ----------- ----------- ------------
Shares outstanding 1,542,616 1,542,616
------------ ----------- ----------- ------------
Net asset value, offering price and redemption
value per share $19.41 $19.41
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Class D:
Net assets $22,936,179 $9,001,324 $3,445,624 $35,383,127
------------ ----------- ----------- ------------
Shares outstanding 1,221,271 977,690 242,573 1,884,160
------------ ----------- ----------- ------------
Net asset value, offering price and redemption
value per share $18.78 $9.21 $14.20 $18.78
------------ ----------- ----------- ------------
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
<TABLE><CAPTION>
Pro Forma Combined
Statement of Operations For the Twelve Months Ended February 28, 1995
(Unaudited)
PaineWebber
PaineWebber Communications PaineWebber
Growth Technology Growth Blue Chip Pro Forma
Fund Fund Growth Fund Adjustments Combined
---------- ------------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Investment Income
Interest and dividends (net of foreign
withholding taxes) $4,801,736 $1,071,484 $1,540,732 $0 $7,413,952
------------ ---------- -------- -------- -----------
Expenses:
Investment advisory and administration fees 2,101,555 558,927 709,713 0 3,370,195
Distribution fees 1,475,231 609,197 541,878 0 2,626,306
Transfer agency and service fees 294,225 125,924 112,520 (42,615) 490,054
Custody Fees 136,281 98,081 43,749 (138,836) 139,275
Other 267,368 255,824 191,924 (339,018) 376,098
------------ ---------- -------- -------- -----------
4,274,660 1,647,953 1,599,784 (520,469) 7,001,928
------------ ---------- -------- -------- -----------
Net Investment Income (Loss) 527,076 (576,469) (59,052) 520,469 412,024
------------ ---------- -------- -------- -----------
Realized and unrealized gains (losses) from
investment activities:
Net realized gains (losses) from
investment transactions (496,167) (3,573,368) 3,488,338 0 (581,197)
Net change in unrealized
appreciation/depreciation on investments (26,589,574) 402,032 (3,578,885) 0 (29,766,427)
------------ ---------- -------- -------- -----------
Net realized and unrealized losses from investment
activities (27,085,741) (3,171,336) (90,547) 0 (30,347,624)
------------ ---------- -------- -------- -----------
Net decrease in net assets resulting from operations ($26,558,665) ($3,747,805) ($149,599) $520,469 ($29,935,600)
------------ ---------- -------- -------- -----------
------------ ---------- -------- -------- -----------
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
<TABLE><CAPTION>
Pro Forma Capitalization
as of February 28, 1995
(Unaudited)
PaineWebber Communications & PaineWebber PaineWebber
Growth Technology Growth Blue Chip Growth Fund
Fund Fund Growth Fund (As adjusted) (1)
---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Shareholders' Equity:
Beneficial interest/Capital stock shares of
$0.001 par value per share
(unlimited amount authorized)
13,543,851 shares outstanding for Growth
Fund (Actual)
7,424,566 shares outstanding for Communications
& Technology Fund (Actual)
6,046,261 shares outstanding for Blue Chip Growth
Fund (Actual)
21,756,401 shares outstanding for Growth Fund
(As Adjusted) 213,743,193 74,357,095 60,429,124 348,529,412 (2) (3)
Undistributed net investment income (loss) 183,472 (349,874) (59,052) (225,454)
Accumulated net realized gains (losses)
from investments (1,103,029) (3,550,922) 1,955,367 (2,698,584) (4)
Net unrealized appreciation/depreciation
of investments 44,621,166 (1,942,176) 24,337,548 67,016,538
------------ ----------- ----------- ------------
Net Assets $257,444,802 $68,514,123 $86,662,987 $412,621,912
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
(1) The adjusted balances are presented as if the Reorganization involving
all Funds was effective as of February 28, 1995 for information purposes
only. The actual effective time of the Reorganization is expected to be
August, 1995, at which time the results would be reflective of the actual
composition of shareholders' equity at that date.
(2) Assumes the beneficial interest holders of Growth remain unchanged.
Assumes the issuance of 3,645,866 shares in exchange for the net assets
applicable to beneficial interest holders of Communications & Technology.
Assumes the issuance of 4,566,684 shares in exchange for the net assets
applicable to beneficial interest hold of Blue Chip. The exchange is based
on the net asset values for Growth Class A,B, C, and D and the net assets
applicable to beneficial interest holders of Communications & Technology
and capital stock holders of Blue Chip as of February 28, 1995.
(3) Does not include the impact of estimated Reorganization costs of $250,000.
(4) Assumes Communications & Technology's accumulated net realized losses from
investment transactions carry forward into Growth.
<PAGE>
<TABLE><CAPTION>
Pro forma Combined
Statement of Assets and Liabilities
February 28 , 1995
(unaudited)
PaineWebber
PaineWebber Communications &
Growth Technology Growth Pro forma
Fund Fund Combined
---------- ---------------- -----------
<S> <C> <C> <C>
Assets
Investments in securities, at value (cost -
$212,589,628, $70,225,435, $257,210,794 $68,283,259 $325,494,053
and $282,815,063, respectively)
Other assets 3,532,988 1,185,460 4,718,448
------------ ----------- ------------
Total assets 260,743,782 69,468,719 330,212,501
------------ ----------- ------------
Total liabilities 3,298,980 954,596 4,253,576
------------ ----------- ------------
Beneficial interest/Capital stock, $0.001 par value
(unlimited amount authorized) 213,743,193 74,357,095 288,100,288
Undistributed net investment income (loss) 183,472 (349,874) (166,402)
Accumulated net realized losses from investments (1,103,029) (3,550,922) (4,653,951)
Net unrealized appreciation (depreciation) of investments 44,621,166 (1,942,176) 42,678,990
------------ ----------- ------------
Net assets $257,444,802 $68,514,123 $325,958,925
------------ ----------- ------------
------------ ----------- ------------
Class A:
Net assets $120,933,807 $16,557,013 $137,490,820
------------ ----------- ------------
Shares outstanding 6,294,685 1,780,835 7,156,828
------------ ----------- ------------
Net asset value and redemption value per share $19.21 $9.30 $19.21
------------ ----------- ------------
------------ ----------- ------------
Maximum offering price per share (net asset value plus
sales charges of 4.50%) $20.12 $9.74 $20.12
------------ ----------- ------------
------------ ----------- ------------
Class B:
Net assets $83,636,897 $42,955,786 $126,592,683
------------ ----------- ------------
Shares outstanding 4,485,279 4,666,041 6,789,528
------------ ----------- ------------
Net asset value and offering price per share $18.65 $9.21 $18.65
------------ ----------- ------------
------------ ----------- ------------
Class C:
Net assets $29,937,919 $29,937,919
------------ ----------- ------------
Shares outstanding 1,542,616 1,542,616
------------ ----------- ------------
Net asset value, offering price and redemption value
per share $19.41 $19.41
------------ ----------- ------------
------------ ----------- ------------
Class D:
Net assets $22,936,179 $9,001,324 $31,937,503
------------ ----------- ------------
Shares outstanding 1,221,271 977,690 1,700,745
------------ ----------- ------------
Net asset value, offering price and redemption value
per share $18.78 $9.21 $18.78
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
<TABLE><CAPTION>
Pro Forma Combined
Statement of Operations For the Twelve Months Ended February 28, 1995
(Unaudited)
PaineWebber
PaineWebber Communications &
Growth Technology Growth Pro Forma
Fund Fund Adjustments Combined
---------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Investment Income
Interest and dividends (net of foreign withholding taxes) $4,801,736 $1,071,484 $0 $5,873,220
---------- ----------- ----------- ----------
Expenses:
Investment advisory and administration fees 2,101,555 558,927 0 2,660,482
Distribution fees 1,475,231 609,197 0 2,084,428
Transfer agency and service fees 294,225 125,924 (31,702) 388,447
Custody Fees 136,281 98,081 (95,087) 139,275
Other 267,368 255,824 (166,834) 356,358
---------- ----------- ----------- ----------
4,274,660 1,647,953 (293,623) 5,628,990
---------- ----------- ----------- ----------
Net Investment Income (Loss) 527,076 (576,469) 293,623 244,230
---------- ----------- ----------- ----------
Realized and unrealized gains (losses) from
investment activities:
Net realized gains (losses) from
investment transactions (496,167) (3,573,368) 0 (4,069,535)
Net change in unrealized appreciation/depreciation on
investments (26,589,574) 402,032 0 (26,187,542)
---------- ----------- ----------- ----------
Net realized and unrealized losses from investment activities (27,085,741) (3,171,336) 0 (30,257,077)
---------- ----------- ----------- ----------
Net decrease in net assets resulting from operations ($26,558,665) ($3,747,805) $293,623 ($30,012,847)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
<TABLE><CAPTION>
Pro Forma Capitalization
as of February 28, 1995
(Unaudited)
PaineWebber
PaineWebber Communications & PaineWebber
Growth Technology Growth Growth Fund
Fund Fund (As adjusted) (1)
---------- ----------------- --------------------------
<S> <C> <C> <C> <C>
Shareholders' Equity:
Beneficial interest/Capital stock shares of $0.001 par
value per share
(unlimited amount authorized)
13,543,851 shares outstanding for Growth Fund (Actual)
7,424,566 shares outstanding for Communications &
Technology Fund (Actual)
17,189,717 shares outstanding for Growth Fund (As Adjusted) 213,743,193 74,357,095 288,100,288 (2) (3)
Undistributed net investment income (loss) 183,472 (349,874) (166,402)
Accumulated net realized gains (losses) from investments (1,103,029) (3,550,922) (4,653,951) (4)
Net unrealized appreciation/depreciation of investments 44,621,166 (1,942,176) 42,678,990
------------ ----------- ------------
Net Assets $257,444,802 $68,514,123 $325,958,925
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
(1) The adjusted balances are presented as if the Reorganization involving
all Funds was effective as of February 28, 1995 for information purposes
only. The actual effective time of the Reorganization is expected to be
August, 1995, at which time the results would be reflective of the actual
composition of shareholders' equity at that date.
(2) Assumes the beneficial interest holders of Growth remain unchanged.
Assumes the issuance of 3,645,866 shares in exchange for the net assets
applicable to beneficial interest holders of Communications & Technology.
The exchange is based on the net asset values for Growth Class A,B, C, and
D and the net as beneficial interest holders of Communications & Technology
as of February 28, 1995.
(3) Does not include the impact of estimated Reorganization costs of $250,000.
(4) Assumes Communications & Technology's accumulated net realized losses from
investment transactions carry forward into Growth.
<PAGE>
<TABLE><CAPTION>
Pro forma Combined
Statement of Assets and Liabilities
February 28 , 1995
(unaudited)
PaineWebber PaineWebber
Growth Blue Chip Pro forma
Fund Growth Fund Combined
---------- ---------------- -----------
<S> <C> <C> <C>
Assets
Investments in securities, at value (cost -
$212,589,628, $63,146,688, $257,210,794 $87,484,236 $344,695,030
and $275,736,316, respectively)
Other assets 3,532,988 389,811 3,922,799
------------ ----------- ------------
Total assets 260,743,782 87,874,047 348,617,829
Total liabilities 3,298,980 1,211,060 4,510,040
------------ ----------- ------------
Beneficial interest/Capital stock, $0.001 par value
(unlimited amount authorized) 213,743,193 60,429,124 274,172,317
Undistributed net investment income (loss) 183,472 (59,052) 124,420
Accumulated net realized gains (losses) from investments (1,103,029) 1,955,367 852,338
Net unrealized appreciation (depreciation) of investments 44,621,166 24,337,548 68,958,714
------------ ----------- ------------
Net assets $257,444,802 $86,662,987 $344,107,789
------------ ----------- ------------
------------ ----------- ------------
Class A:
Net assets $120,933,807 $50,445,093 $171,378,900
------------ ----------- ------------
Shares outstanding 6,294,685 3,469,743 8,920,925
------------ ----------- ------------
Net asset value and redemption value per share $19.21 $14.54 $19.21
------------ ----------- ------------
Maximum offering price per share (net asset value plus
sales charges of 4.50%) $20.12 $15.23 $20.12
------------ ----------- ------------
------------ ----------- ------------
Class B:
Net assets $83,636,897 $32,772,270 $116,409,167
------------ ----------- ------------
Shares outstanding 4,485,279 2,333,945 6,242,308
------------ ----------- ------------
Net asset value and offering price per share $18.65 $14.04 $18.65
------------ ----------- ------------
Class C:
Net assets $29,937,919 $29,937,919
------------ ----------- ------------
Shares outstanding 1,542,616 1,542,616
------------ ----------- ------------
Net asset value, offering price and redemption value
per share $19.41 $19.41
------------ ----------- ------------
------------ ----------- ------------
Class D:
Net assets $22,936,179 $3,445,624 $26,381,803
------------ ----------- ------------
Shares outstanding 1,221,271 242,573 1,404,686
------------ ----------- ------------
Net asset value, offering price and redemption value
per share $18.78 $14.20 $18.78
------------ ----------- ------------
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
<TABLE><CAPTION>
Pro Forma Combined
Statement of Operations For the Twelve Months Ended February 28, 1995
(Unaudited)
PaineWebber PaineWebber
Growth Blue Chip Pro Forma
Fund Growth Fund Adjustments Combined
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Investment Income
Interest and dividends (net of foreign withholding taxes) $4,801,736 $1,540,732 $0 $6,342,468
------------- ------------ ----------- ------------
Expenses:
Investment advisory and administration fees 2,101,555 709,713 0 2,811,268
Distribution fees 1,475,231 541,878 0 2,017,109
Transfer agency and service fees 294,225 112,520 (20,658) 386,087
Custody Fees 136,281 43,749 (29,850) 150,180
Other 267,368 191,924 (134,128) 325,164
------------- ------------ ----------- ------------
4,274,660 1,599,784 (184,636) 5,689,808
------------- ------------ ----------- ------------
Net Investment Income(Loss) 527,076 (59,052) 184,636 652,660
------------- ------------ ----------- ------------
Realized and unrealized gains (losses) from
investment activities:
Net realized gains (losses) from
investment transactions (496,167) 3,488,338 0 2,992,171
Net change in unrealized appreciation/depreciation on
investments (26,589,574) (3,578,885) 0 (30,168,459)
------------- ------------ ----------- ------------
Net realized and unrealized losses from investment activities (27,085,741) (90,547) 0 (27,176,288)
------------- ------------ ----------- ------------
Net decrease in net assets resulting from operations ($26,558,665) ($149,599) $184,636 ($26,523,628)
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
See Notes to Pro Forma Combined Financial Statements
</TABLE>
<PAGE>
Pro Forma Capitalization
as of February 28, 1995
(Unaudited)
<TABLE><CAPTION>
PaineWebber PaineWebber PaineWebber
Growth Blue Chip Growth Fund
Fund Growth Fund (As adjusted) (1)
---------------- ------------- -----------------
<S> <C> <C> <C>
Shareholders' Equity:
Beneficial interest/Capital stock shares of $0.001 par value per share
(unlimited amount authorized)
13,543,851 shares outstanding for Growth Fund (Actual)
6,046,261 shares outstanding for Blue Chip Growth Fund (Actual)
18,110,535 shares outstanding for Growth Fund (As Adjusted) 213,743,193 60,429,124 274,172,317 (2)(3)
Undistributed net investment income (loss) 183,472 (59,052) 124,420
Accumulated net realized gains (losses) from investments (1,103,029) 1,955,367 852,338
Net unrealized appreciation/depreciation of investments 44,621,166 24,337,548 68,958,714
---------------- ------------- -------------
Net Assets $257,444,802 $86,662,987 $344,107,789
---------------- ------------- -------------
---------------- ------------- -------------
(1) The adjusted balances are presented as if the Reorganization involving all Funds was effective as of February 28, 1995
for information purposes only. The actual effective time of the Reorganization is expected to be August, 1995, at which
time the results would be reflective of the actual composition of shareholders' equity at that date.
(2) Assumes the beneficial interest holders of Growth remain unchanged.
Assumes the issuance of 4,566,684 shares in exchange for the net assets applicable to beneficial interest holders
of Blue Chip. The exchange is based on the net asset values for Growth Class A,B, C, and D and the net assets applicable to
capital stock holders of Blue Chip as of February 28, 1995.
(3) Does not include the impact of estimated Reorganization costs of $250,000.
</TABLE>
<PAGE>
Notes To Pro Forma Combined Financial Statements
(unaudited)
Basis of Presentation:
Subject to approval of the Plan of Reorganization by the shareholders of
PaineWebber Communications & Technology Growth Fund ("Communications &
Technology"), and PaineWebber Blue Chip Growth Fund ("Blue Chip") PaineWebber
Growth Fund ("Growth") would acquire the assets of Communications & Technology
and Blue Chip in exchange solely for the assumption by Growth of Communications
& Technology and Blue Chip's liabilities and the issuance of Class A, Class B,
and Class D shares of Growth that correspond to the outstanding shares of
Communications & Technology and Blue Chip. Shares of Growth will be distributed
to Communications & Technology and Blue Chip's shareholders, at the net asset
value per share of Growth for the value acquired, and Communications &
Technology and Blue Chip will be terminated as soon as practicable thereafter.
Each Communications & Technology and Blue Chip shareholder will receive the
number of full and fractional shares of each Class of shares of Growth equal in
value to such shareholder's holdings in the corresponding Class of shares
Communications & Technology and Blue Chip as of the closing date of the merger.
The pro forma combined financial statements reflect the financial position of
Grow Communications & Technology, and Blue Chip at February 28, 1995 and the
combined results of operations of Growth, Communications & Technology and Blue
Chip for the twelve months ended February 28, 1995. The pro forma combined
financial statements also reflect the combined results of operations of Growth
and Communications & Technology for the twelve months ended February 28, 1995
and the combined results of operations of Growth and Blue Chip for the twelve
months ended February 28, 1995. Certain expenses have been adjusted to reflect
the expected expenses of the combined entity. Pro forma operating expenses
include the actual expenses of the Funds and the combined Fund adjusted for
certain items.
As a result of the Reorganization, the investment advisory and administration
fee will remain the same. Other fixed expenses will be reduced due to
duplication of expenses. In addition, the pro forma combined statement of
assets and liabilities has not been adjusted as a result of the proposed
transaction because such adjustment would not be material It is estimated that
costs of approximately $250,000 associated with the merger will be charged to
each Fund based on net assets at the date of reorganization.
The pro forma combined financial statements are presented for the information
of the reader and may not necessarily be representative of what the actual
combined financial statements would have been had the Reorganization occurred
at February 28, 1995. The pro forma combined financial statements should be
read in conjunction with the historical financial statements of the constituent
Funds included in the statement of additional information.
<PAGE>
PAINEWEBBER OLYMPUS FUND
PART C
OTHER INFORMATION
Item 15. Indemnification
---------------
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the appropriate series of the Registrant will indemnify its
Trustees and officers to the fullest extent permitted by law against claims and
expenses asserted against or incurred by them by virtue of being or having been
a Trustee or officer; provided that no such person shall be indemnified where
there has been an adjudication or other determination, as described in Article
X, that such person is liable to the Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office or did not act in good faith
in the reasonable belief that his or her action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the Trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Trust or a particular series thereof; and that, provided
they have exercised reasonable care and have acted under the reasonable belief
that their actions are in the best interest of the Registrant, the Trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
Trustees shall not be liable for errors of judgment or mistakes of fact or law,
or for any act or omission in accordance with advice of counsel or other
experts, or failing to follow such advice, with respect to the meaning and
operation of the Declaration of Trust.
Article IX of the By-laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a Trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, director, officer or employee of a corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity or arising out of his or her
status as such, whether or not the Registrant would have the power to indemnify
him or her against such liability, provided that the Registrant may not acquire
insurance protecting any Trustee or officer against liability to the Registrant
or its shareholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his or her office.
Section 9 of the Investment Advisory and Administration Contract
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins")
provides that Mitchell Hutchins shall not be liable for any error of judgment or
mistake of law or for any loss suffered by any series of the Registrant in
connection with the matters to which the Contract relates, except for a loss
resulting from the willful misfeasance, bad faith, or gross negligence of
Mitchell Hutchins in the performance of its duties or from its reckless
disregard of its obligations and duties under the Contract. Section 10 of the
Contract provides that the Trustees shall not be liable for any obligations of
the Trust or any series under the Contract and that Mitchell Hutchins shall look
only to the assets and property of the Registrant in settlement of such right or
claim and not to the assets and property of the Trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance
<PAGE>
upon and in conformity with information furnished by Mitchell Hutchins to
the Trust for use in the Registration Statement; and provided that this
indemnity agreement shall not protect any such persons against liabilities
arising by reason of their bad faith, gross negligence or willful misfeasance;
and shall not inure to the benefit of any such persons unless a court of
competent jurisdiction or controlling precedent determines that such result
is not against public policy as expressed in the Securities Act of 1933.
Section 9 of each Distribution Contract also provides that Mitchell Hutchins
agrees to indemnify, defend and hold the Trust, its officers and Trustees
free and harmless of any claims arising out of any alleged untrue statement
or any alleged omission of material fact contained in information furnished
by Mitchell Hutchins for use in the Registration Statement or arising out of
an agreement between Mitchell Hutchins and any retail dealer, or arising out
of supplementary literature or advertising used by Mitchell Hutchins in
connection with the Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of the Distribution Contract, with respect to PaineWebber Incorporated
("PaineWebber").
Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Trust against all liabilities, except those
arising out of bad faith, gross negligence, willful misfeasance or reckless
disregard of its duties under the Contract.
Section 10 of each Distribution Contract and Section 7 of the Service
Contract contain provisions similar to Section 10 of the Investment Advisory and
Administration Contract, with respect to Mitchell Hutchins and PaineWebber, as
appropriate.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended, may be permitted to Trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise, the
Trust has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a Trustee, officer or controlling person of the Trust in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Trust by such
Trustee, officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 16. Exhibits:
---------
(1) (a) Declaration of Trust 1/
-
(b) Amendment effective January 28, 1988 to Declaration of Trust 3/
-
(c) Amendment effective December 21, 1990 to Declaration of Trust7/
-
(d) Amendment effective July 1, 1991 to Declaration of Trust 8/
-
(e) Amendment effective July 1, 1992 to Declaration of Trust 9/
-
(f) Amendment effective August 24, 1993 to Declaration of Trust 10/
--
(g) Amendment effective September 29, 1993 to Declaration of Trust11/
--
(2) (a) By-Laws 1/
-
(b) Amendment dated March 19, 1991 to By-Laws 6/
-
(3) Voting trust agreement -- none
(4) (a) Agreement and Plan of Reorganization and Termination with respect
to PaineWebber Communications & Technology Growth Fund (filed
herewith, see Appendix B)
(b) Agreement and Plan of Reorganization and Termination with respect
to PaineWebber Blue Chip Growth Fund (filed herewith, see
Appendix A)
(5) All instruments defining the rights of holders -- none
(6) (a) Investment Advisory and Administration Contract with respect to
PaineWebber Growth Fund 4/
-
<PAGE>
(b) Investment Advisory Fee Agreement with respect to PaineWebber
Communications & Technology Growth Fund 12/
--
(7) (a) Distribution Contract with respect to Class A shares 11/
--
(b) Distribution Contract with respect to Class B shares 11/
--
(c) Distribution Contract with respect to Class C shares 8/
-
(d) Distribution Contract with respect to Class D shares 11/
--
(e) Exclusive Dealer Agreement with respect to Class A shares 11/
--
(f) Exclusive Dealer Agreement with respect to Class B shares 11/
--
(g) Exclusive Dealer Agreement with respect to Class C shares 8/
-
(h) Exclusive Dealer Agreement with respect to Class D shares 11/
--
(8) Bonus, profit sharing, or pension plans - none
(9) Custodian Agreement 2/
-
(10) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares 8/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares 8/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
D Shares 9/
-
(d) Distribution Fee Addendum with respect to Class D Shares of
PaineWebber Communications & Technology Growth Fund 12/
--
(11) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, regarding the legality of the securities being registered
(filed herewith)
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, regarding certain tax matters with respect to
PaineWebber Communications & Technology Growth Fund (filed
herewith)
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, regarding certain tax matters with respect to
PaineWebber Blue Chip Growth Fund (filed herewith)
(13) (a) Transfer Agency and Service Contract 5/
-
(b) Service Contract 4/
-
(14) (a) Consent of Ernst & Young LLP (filed herewith)
(b) Consent of Price Waterhouse LLP (filed herewith)
(15) Financial statements omitted from Part B - none
(16) Copies of manually signed Powers of Attorney - not applicable
(17) Additional Exhibits
(a) Original Election under Rule 24f-2 (filed herewith)
(b) Election filed pursuant to Rule 24f-2 Notice as filed on
October 28, 1994 (filed herewith)
(c) Proxy Cards (filed herewith)
_____________________
1/ Incorporated by Reference from Post-Effective Amendment No. 8 to the
- -
registration statement, SEC File No. 2-94983, filed February 25, 1987.
2/ Incorporated by Reference from Post-Effective Amendment No. 9 to
- -
registration statement on Form N-1A, SEC File No. 2-94983, filed December
22, 1987.
3/ Incorporated by Reference from Post-Effective Amendment No. 11 to the
- -
registration statement, SEC File No. 2-94983, filed November 3, 1988.
4/ Incorporated by Reference from Post-Effective Amendment No. 14 to the
- -
registration statement, SEC File No. 2-94983, filed December 29, 1989.
5/ Incorporated by Reference from Post-Effective Amendment No. 16 to the
- -
registration statement, SEC File No. 2-94983, filed November 2, 1990.
6/ Incorporated by Reference from Post-Effective Amendment No. 18 to the
- -
registration statement, SEC File No. 2-94983, filed March 26, 1991.
7/ Incorporated by Reference from Post-Effective Amendment No. 19 to the
- -
registration statement, SEC File No. 2-94983, filed May 3, 1991.
<PAGE>
8/ Incorporated by Reference from Post-Effective Amendment No. 20 to the
- -
registration statement, SEC File No. 2-94983, filed December 24, 1991.
9/ Incorporated by Reference from Post-Effective Amendment No. 23 to the
- -
registration statement, SEC File No. 2-94983, filed December 21, 1992.
10/ Incorporated by Reference from Post-Effective Amendment No. 24 to the
- --
registration statement, SEC File No. 2-94983, filed August 27, 1993.
11/ Incorporated by Reference from Post-Effective Amendment No. 25 to the
- --
registration statement, SEC File No. 2-94983, filed December 29, 1993.
12/ Incorporated by Reference from Post-Effective Amendment No. 26 to the
- --
registration statement, SEC File No. 2-94983, filed May 26, 1994.
Item 17. Undertakings
------------
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which
is a part of this Registration Statement by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) of the
Securities Act of 1933, the reoffering prospectus will contain the
information called for by the applicable registration form for
reoffering by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to
the Registration Statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
Registration Statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the
initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the Registrant, in the City of New York
and the State of New York, on this 2nd day of June, 1995
PAINEWEBBER OLYMPUS FUND
By: /s/ Dianne E. O'Donnell
-------------------------------------
Dianne E. O'Donnell
Vice President, Secretary
Each of the undersigned trustees and officers of PaineWebber Olympus Fund
hereby severally constitutes and appoints Victoria E. Schonfeld, Dianne E.
O'Donnell, Gregory K. Todd, Elinor W. Gammon and Robert A. Wittie, and each of
them singly, our true and lawful attorneys, with full power to them to sign for
each of us, and in each of our names and in the capacities indicated below, any
and all amendments to the registration statement of the Trust, and all
instruments necessary or desirable in connection therewith, filed with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by said attorneys to any and all amendments to
said registration.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date:
--------- ----- -----
/s/ Margo N. Alexander President June 2, 1995
--------------------------- (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman June 2, 1995
--------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Meyer Feldberg Trustee June 2, 1995
---------------------------
Meyer Feldberg
/s/ George W. Gowen Trustee June 2, 1995
---------------------------
George W. Gowen
/s/ Frederic V. Malek Trustee June 2, 1995
---------------------------
Frederic V. Malek
/s/ Frank P. L. Minard Trustee June 2, 1995
---------------------------
Frank P. L. Minard
/s/Judith Davidson Moyers Trustee June 2, 1995
---------------------------
Judith Davidson Moyers
/s/ Thomas F. Murray Trustee June 2, 1995
---------------------------
Thomas F. Murray
/s/ Julian F. Sluyters Vice President and June 2, 1995
--------------------------- Treasurer (Principal
Julian F. Sluyters Financial and Accounting
Officer)
<PAGE>
PAINEWEBBER OLYMPUS FUND
EXHIBIT INDEX
------------------------
Exhibit
Number Page
------ ----
(1) (a) Declaration of Trust 1/
-
(b) Amendment effective January 28, 1988 to Declaration of Trust 3/
-
(c) Amendment effective December 21, 1990 to Declaration of Trust7/
-
(d) Amendment effective July 1, 1991 to Declaration of Trust 8/
-
(e) Amendment effective July 1, 1992 to Declaration of Trust 9/
-
(f) Amendment effective August 24, 1993 to Declaration of Trust 10/
--
(g) Amendment effective September 29, 1993 to Declaration of Trust11/
--
(2) (a) By-Laws 1/
-
(b) Amendment dated March 19, 1991 to By-Laws 6/
-
(3) Voting trust agreement -- none
(4) (a) Agreement and Plan of Reorganization and Termination with respect
to PaineWebber Communications & Technology Growth Fund (filed
herewith, see Appendix B) . . . . . . . . . . . . . . . . . . .
(b) Agreement and Plan of Reorganization and Termination with respect
to PaineWebber Blue Chip Growth Fund (filed herewith, see
Appendix A) . . . . . . . . . . . . . . . . . . . . . . . . . .
(5) All instruments defining the rights of holders -- none
(6) (a) Investment Advisory and Administration Contract with respect to
PaineWebber Growth Fund 4/
-
(b) Investment Advisory Fee Agreement with respect to PaineWebber
Communications & Technology Growth Fund 12/
--
(7) (a) Distribution Contract with respect to Class A shares 11/
--
(b) Distribution Contract with respect to Class B shares 11/
--
(c) Distribution Contract with respect to Class C shares 8/
-
(d) Distribution Contract with respect to Class D shares 11/
--
(e) Exclusive Dealer Agreement with respect to Class A shares 11/
--
(f) Exclusive Dealer Agreement with respect to Class B shares 11/
--
(g) Exclusive Dealer Agreement with respect to Class C shares 8/
-
(h) Exclusive Dealer Agreement with respect to Class D shares 11/
--
(8) Bonus, profit sharing, or pension plans - none
(9) Custodian Agreement 2/
-
(10) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares 8/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares 8/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
D Shares 9/
-
(d) Distribution Fee Addendum with respect to Class D Shares of
PaineWebber Communications & Technology Growth Fund 12/
--
(11) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, regarding the legality of the securities being registered
(filed herewith) . . . . . . . . . . . . . . . . . . . . . . . . . .
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, regarding certain tax matters with respect to
PaineWebber Communications & Technology Growth Fund (filed
herewith) . . . . . . . . . . . . . . . . . . . . . . . . . . .
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, regarding certain tax matters with respect to
PaineWebber Blue Chip Growth Fund (filed herewith) . . . . . . .
(13) (a) Transfer Agency and Service Contract 5/
-
(b) Service Contract 4/
-
(14) (a) Consent of Ernst & Young LLP (filed herewith)
(b) Consent of Price Waterhouse LLP (filed herewith)
(15) Financial statements omitted from Part B - none
(16) Copies of manually signed Powers of Attorney - not applicable
<PAGE>
(17) Additional Exhibits
(a) Original Election under Rule 24f-2 (filed herewith) . . . . . .
(b) Election filed pursuant to Rule 24f-2 Notice as filed on
October 28, 1994 (filed herewith) . . . . . . . . . . . . . . .
(c) Proxy Cards (filed herewith) . . . . . . . . . . . . . . . . .
_____________________
1/ Incorporated by Reference from Post-Effective Amendment No. 8 to the
- -
registration statement, SEC File No. 2-94983, filed February 25, 1987.
2/ Incorporated by Reference from Post-Effective Amendment No. 9 to
- -
registration statement on Form N-1A, SEC File No. 2-94983, filed December
22, 1987.
3/ Incorporated by Reference from Post-Effective Amendment No. 11 to the
- -
registration statement, SEC File No. 2-94983, filed November 3, 1988.
4/ Incorporated by Reference from Post-Effective Amendment No. 14 to the
- -
registration statement, SEC File No. 2-94983, filed December 29, 1989.
5/ Incorporated by Reference from Post-Effective Amendment No. 16 to the
- -
registration statement, SEC File No. 2-94983, filed November 2, 1990.
6/ Incorporated by Reference from Post-Effective Amendment No. 18 to the
- -
registration statement, SEC File No. 2-94983, filed March 26, 1991.
7/ Incorporated by Reference from Post-Effective Amendment No. 19 to the
- -
registration statement, SEC File No. 2-94983, filed May 3, 1991.
8/ Incorporated by Reference from Post-Effective Amendment No. 20 to the
- -
registration statement, SEC File No. 2-94983, filed December 24, 1991.
9/ Incorporated by Reference from Post-Effective Amendment No. 23 to the
- -
registration statement, SEC File No. 2-94983, filed December 21, 1992.
10/ Incorporated by Reference from Post-Effective Amendment No. 24 to the
- --
registration statement, SEC File No. 2-94983, filed August 27, 1993.
11/ Incorporated by Reference from Post-Effective Amendment No. 25 to the
- --
registration statement, SEC File No. 2-94983, filed December 29, 1993.
12/ Incorporated by Reference from Post-Effective Amendment No. 26 to the
- --
registration statement, SEC File No. 2-94983, filed May 26, 1994.
Exhibit 4(a)
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
----------------------------------------------------
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of June 1, 1995, between PaineWebber Olympus Fund, a Massachusetts
business trust ("Trust"), on behalf of PaineWebber Growth Fund, a segregated
portfolio of assets ("series") thereof ("Acquiring Fund"), and Trust, on behalf
of its PaineWebber Communications & Technology Growth Fund series ("Target").
(Acquiring Fund and Target are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds.")
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended ("Code"). The reorganization will involve the transfer to
Acquiring Fund of Target's assets solely in exchange for voting shares of
beneficial interest in Acquiring Fund ("Acquiring Fund Shares") and the assump-
tion by Acquiring Fund of Target's liabilities, followed by the constructive
distribution of the Acquiring Fund Shares to the holders of shares of beneficial
interest in Target ("Target Shares") in exchange therefor, all upon the terms
and conditions set forth herein. The foregoing transactions are referred to
herein as the "Reorganization." All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by either Fund
are made and shall be taken or undertaken by Trust on its behalf.
Acquiring Fund's shares are divided into four classes, designated Class A,
Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class B
Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D Acquiring
Fund Shares," respectively). Except as noted in the following sentence, these
classes differ only with respect to the sales charges imposed on the purchase of
shares and the fees ("12b-1 fees") payable by each class pursuant to plans
adopted under Rule 12b-1 promulgated under the Investment Company Act of 1940
("1940 Act"), as follows: (1) Class A Acquiring Fund Shares are offered at net
asset value ("NAV") plus a sales charge, if applicable, and are subject to a
12b-1 service fee at the annual rate of 0.21% of the average daily net assets
attributable to the class ("class assets"); (2) Class B Acquiring Fund Shares
are offered at NAV without imposition of any sales charge and are subject to a
contingent deferred sales charge and 12b-1 service and distribution fees at the
respective annual rates of 0.25% and 0.75% of class assets; (3) Class C
Acquiring Fund Shares are offered, currently only to the trustee of the
PaineWebber Savings Investment Plan on behalf of that plan, at NAV without
imposition of any sales charge and are not subject to any 12b-1 fee; and
(4) Class D Acquiring Fund Shares are offered at NAV
<PAGE>
without imposition of any sales charge and are subject to 12b-1 service and
distribution fees at the respective annual rates of 0.25% and 0.50% of class
assets. These classes also may differ from one another with respect to the
allocation of certain class-specific expenses other than 12b-1 fees. Only
Classes A, B, and D Acquiring Fund Shares are involved in the Reorganization.
Target's shares are divided into three classes, designated Class A, Class
B, and Class D shares ("Class A Target Shares," "Class B Target Shares," and
"Class D Target Shares," respectively). These classes are identical to the
correspondingly lettered classes of Acquiring Fund Shares, except that the Class
A Target Shares are subject to a 12b-1 service fee at the annual rate of 0.25%,
rather than 0.21%, of class assets.
In consideration of the mutual promises herein, the parties covenant and
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
------------------------------------------------
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and fractional
(i) Class A Acquiring Fund Shares determined by dividing the net value of
Target (computed as set forth in paragraph 2.1) ("Target Value")
attributable to the Class A Target Shares by the NAV (computed as set forth
in paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class B Acquiring
Fund Shares determined by dividing the Target Value attributable to the
Class B Target Shares by the NAV (as so computed) of a Class B Acquiring
Fund Share, and (iii) Class D Acquiring Fund Shares determined by dividing
the Target Value attributable to the Class D Target Shares by the NAV (as
so computed) of a Class D Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
2
<PAGE>
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement,
including without limitation Target's share of the expenses described in
paragraph 7.2. Notwithstanding the foregoing, Target agrees to use its best
efforts to discharge all of its known Liabilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without regard
to any deduction for dividends paid) and realized net capital gain, if any, for
the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund Shares
received by it pursuant to paragraph 1.1 to Target's shareholders of record,
determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such dis-
tribution shall be accomplished by the Funds' transfer agent ("Transfer Agent")
opening accounts on Acquiring Fund's share transfer books in the Shareholders'
names and transferring such Acquiring Fund Shares thereto. Each Shareholder's
account shall be credited with the respective pro rata number of full and
fractional (rounded to the third decimal place) Acquiring Fund Shares due that
Shareholder, by class (i.e., the account for a Shareholder of Class A Target
Shares shall be credited with the respective pro rata number of Class A
Acquiring Fund Shares due that Shareholder, the account for a Shareholder of
Class B Target Shares shall be credited with the respective pro rata number of
Class B Acquiring Fund Shares due that Shareholder, and the account for a
Shareholder of Class D Target Shares shall be credited with the respective pro
rata number of Class D Acquiring Fund Shares due that Shareholder). All out-
standing Target Shares, including any represented by certificates, shall
simultaneously be canceled on Target's share transfer records. Acquiring Fund
shall not issue certificates representing the Acquiring Fund Shares in
connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be terminated as a series of
Trust and any further actions shall be taken in connection therewith as required
by applicable law.
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
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1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
---------
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the New York
Stock Exchange, Inc. ("NYSE") on the date of the Closing ("Valuation Time"),
using the valuation procedures set forth in Target's then-current prospectus and
statement of additional information less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A Acquiring Fund
Share, a Class B Acquiring Fund Share, and a Class D Acquiring Fund Share shall
be computed as of the Valuation Time, using the valuation procedures set forth
in Acquiring Fund's then-current prospectus and statement of additional informa-
tion.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
--------------------------
3.1. The Reorganization, together with related acts necessary to consummate
the same ("Closing"), shall occur at the Funds' principal office on August 18,
1995, or at such other place and/or on such other date as the parties may agree.
All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the date thereof or at such other
time as the parties may agree ("Effective Time"). If, immediately before the
Valuation Time, (a) the NYSE is closed to trading or trading thereon is
restricted or (b) trading or the reporting of trading on the NYSE or elsewhere
is disrupted, so that accurate appraisal of the net value of Target and the NAV
per Acquiring Fund Share is impracticable, the Effective Time shall be postponed
until the first business day after the day when such trading shall have been
fully resumed and such reporting shall have been restored.
3.2. Trust shall deliver at the Closing a schedule of the Assets as of the
Effective Time, which shall set forth for all portfolio securities included
therein their adjusted tax basis and holding period by lot. Target's custodian
shall deliver at the Closing a certificate of an authorized officer stating that
(a) the Assets held by the custodian will be transferred to Acquiring Fund at
the Effective Time and (b) all necessary taxes in conjunction
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with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made.
3.3. Trust shall deliver at the Closing a list of the names and addresses
of the Shareholders and the number (by class) of outstanding Target Shares owned
by each Shareholder, all as of the Effective Time, certified by Trust's Secre-
tary or Assistant Secretary. The Transfer Agent shall deliver at the Closing a
certificate as to the opening on Acquiring Fund's share transfer books of
accounts in the Shareholders' names.
3.4. Trust shall deliver at the Closing a certificate executed in its name
by its President or a Vice President dated the Effective Time, to the effect
that the representations and warranties it made in this Agreement are true and
correct at the Effective Time except as they may be affected by the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
4.1. Target represents and warrants as follows:
4.1.1. Trust is an unincorporated voluntary association with trans-
ferable shares organized as a business trust under a written instrument
("Business Trust"); it is duly organized, validly existing, and in good
standing under the laws of the Commonwealth of Massachusetts; and a copy of
its Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts;
4.1.2. Trust is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force and
effect at the Effective Time;
4.1.3. Target is a duly established and designated series of Trust;
4.1.4. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.5. Target's current prospectus and statement of additional
information conform in all material respects to the applicable requirements
of the Securities Act of 1933 ("1933 Act") and the 1940 Act and the rules
and regulations thereunder and do not include any untrue statement of a
material
5
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fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Massachusetts law or any provision of
Trust's Declaration of Trust or By-Laws or of any agreement, instrument,
lease, or other undertaking to which Target is a party or by which it is
bound or result in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, judgment, or decree to which Target is a
party or by which it is bound;
4.1.7. All material contracts and other commitments of or applicable
to Target (other than this Agreement and investment contracts, including
options, futures, and forward contracts) will be terminated, or provision
for discharge of any liabilities of Target thereunder will be made, at or
prior to the Effective Time, without either Fund's incurring any liability
or penalty with respect thereto and without diminishing or releasing any
rights Target may have had with respect to actions taken or omitted to be
taken by any other party thereto prior to the Closing;
4.1.8. No litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Target's knowledge) threatened against Trust with respect to Target or any
of its properties or assets that, if adversely determined, would materially
and adversely affect Target's financial condition or the conduct of its
business; Target knows of no facts that might form the basis for the
institution of any such litigation, proceeding, or investigation and is not
a party to or subject to the provisions of any order, decree, or judgment
of any court or governmental body that materially or adversely affects its
business or its ability to consummate the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to approval by
Target's shareholders and receipt of any necessary exemptive relief or no-
action assurances requested from the Securities and Exchange Commission
("SEC") or its staff with respect to sections 17(a) and 17(d) of the 1940
Act, this Agreement will constitute a valid and legally binding obligation
of Target, enforceable in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, fraudulent transfer,
6
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reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.1.10. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Target's
shareholders;
4.1.11. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934 ("1934 Act"), or the 1940 Act for the execution or performance of this
Agreement by Trust, except for (a) the filing with the SEC of a registra-
tion statement by Trust on Form N-14 relating to the Acquiring Fund Shares
issuable hereunder, and any supplement or amendment thereto ("Registration
Statement"), including therein a prospectus/proxy statement ("Proxy
Statement"), (b) receipt of the exemptive relief referenced in subparagraph
4.1.9, and (c) such consents, approvals, authorizations, and filings as
have been made or received or as may be required subsequent to the
Effective Time;
4.1.12. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Trust with respect to Acquiring Fund for use
therein;
4.1.13. The Liabilities were incurred by Target in the ordinary
course of its business;
4.1.14. Target is a "fund" (within the meaning of section 851(h)(2)
of the Code); it qualified for treatment as a regulated investment company
("RIC") under Subchapter M of the Code for each past taxable year since it
commenced operations and will continue to meet all the requirements for
such qualification for its current taxable year; and it has no earnings and
profits accumulated in any taxable year in which the provisions of Sub-
chapter M did not apply to it. The Assets shall be invested at all times
through the Effective Time in a manner that ensures compliance with the
foregoing;
7
<PAGE>
4.1.15. Target is not under the jurisdiction of a court in a "title
11 or similar case" (within the meaning of section 368(a)(3)(A) of the
Code);
4.1.16. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in
the stock or securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock or securities of five or
fewer issuers; and
4.1.17. Target will be terminated as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Trust is a Business Trust; it is duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Massachusetts; and a copy of its Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts;
4.2.2. Trust is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force and
effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued
and outstanding shares of Acquiring Fund, fully paid and non-assessable,
except to the extent that under Massachusetts law shareholders of a
Business Trust may, under certain circumstances, be held personally liable
for its obligations. Except as contemplated by this Agreement, Acquiring
Fund does not have outstanding any options, warrants, or other rights to
subscribe for or purchase any of its shares, nor is there outstanding any
security convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of addi-
tional information conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
thereunder and do not include
8
<PAGE>
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Massachusetts law or
any provision of Trust's Declaration of Trust or By-Laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, judgment, or decree to which Acquiring Fund is a party or by
which it is bound;
4.2.8. No litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against Trust with respect to
Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; Acquiring Fund knows of
no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to receipt of
any necessary exemptive relief or no-action assurances requested from the
SEC or its staff with respect to sections 17(a) and 17(d) of the 1940 Act,
this Agreement will constitute a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer, reor-
ganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by Trust, except for (a) the
filing with the SEC of the Registration Statement, (b) receipt of the
exemptive relief referenced in subparagraph 4.2.9, and (c) such consents,
approvals, authorizations, and filings as have been
9
<PAGE>
made or received or as may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Trust with respect to Target for use therein;
4.2.12. Acquiring Fund is a "fund" (within the meaning of section
851(h)(2) of the Code); it qualified for treatment as a RIC under
Subchapter M of the Code for each past taxable year since it commenced
operations and will continue to meet all the requirements for such
qualification for its current taxable year; Acquiring Fund intends to
continue to meet all such requirements for the next taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than through redemptions
arising in the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business
in substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to sell
or otherwise dispose of any of the Assets, except for dispositions made in
the ordinary course of that business and dispositions necessary to maintain
its status as a RIC under Subchapter M of the Code, and (c) expects to
retain substantially all the Assets in the same form as it receives them in
the Reorganization, unless and until subsequent investment circumstances
suggest the desirability of change or it becomes necessary to make dispo-
sitions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business
10
<PAGE>
trust or any "fund" thereof (within the meaning of section 851(h)(2) of the
Code) following the Reorganization;
4.2.16. Acquiring Fund is not under the jurisdiction of a court in a
"title 11 or similar case" (within the meaning of section 368(a)(3)(A) of
the Code);
4.2.17. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock or securities
of any one issuer and (b) not more than 50% of the value of such assets
will be invested in the stock or securities of five or fewer issuers; and
4.2.18. Acquiring Fund does not own, directly or indirectly, nor will
it acquire, directly or indirectly, at any time through the Effective Time,
nor has it owned, directly or indirectly, at any time during the past five
years, any shares of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when re-
ceived by the Shareholders, will be approximately equal to the fair market
value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring
Fund Shares to be received by them in the Reorganization and (b) does not
anticipate dispositions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Nor does its
management anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to im-
mediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
11
<PAGE>
4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made to
conform to its policy of distributing all or substantially all of its
income and gains to avoid the obligation to pay federal income tax and/or
the excise tax under section 4982 of the Code and (b) redemptions not made
as part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to, any
of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" of Acquiring Fund within the meaning
of section 304(c) of the Code.
5. COVENANTS
---------
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the Closing;
provided that Target shall not dispose of more than an insignificant portion of
its historic business assets during such period without Acquiring Fund's prior
consent.
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5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Trust covenants to use all reasonable efforts to obtain the approvals
and authorizations required by the 1933 Act, the 1940 Act, and such state
securities laws it may deem appropriate in order to continue its operations
after the Effective Time.
5.5. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
--------------------
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all the obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by Trust's board of trustees and shall have been
approved by Target's shareholders in accordance with applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory authori-
ties (including the SEC and state securities authorities) deemed necessary by
either Fund to permit consummation, in all material respects, of
13
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the transactions contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material adverse effect on
the assets or properties of either Fund, provided that either Fund may for
itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Trust (on behalf of Target) shall have received an opinion of Kirk-
patrick & Lockhart LLP, its counsel, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such counsel,
to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Trust on behalf
of Target, is a valid and legally binding obligation of Trust with respect
to Acquiring Fund, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting cre-
ditors' rights and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable, except to the extent
that under Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiring Fund has any preemptive right to subscribe for
or purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel) to which Trust (with respect to Acquiring
Fund) is a party or by which it is bound or, to the knowledge of such
counsel, result in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, judgment,
14
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or decree to which Trust (with respect to Acquiring Fund) is a party or by
which it is bound, except as set forth in such opinion;
6.4.5. To the knowledge of such counsel, no consent, approval,
authorization, or order of any court or governmental authority is required
for the consummation by Trust on behalf of Acquiring Fund of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act and such as may be required
under state securities laws;
6.4.6. Trust is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel, (a) no litigation,
administrative proceeding, or investigation of or before any court or
governmental body is pending or threatened as to Trust (with respect to
Acquiring Fund) or any of its properties or assets attributable or
allocable to Acquiring Fund and (b) Trust (with respect to Acquiring Fund)
is not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially and adversely
affects Acquiring Fund's business, except as set forth in such opinion.
In rendering such opinion, such counsel may rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel.
6.5. Trust (on behalf of Acquiring Fund) shall have received an opinion of
Kirkpatrick & Lockhart LLP, its counsel, substantially to the effect that:
6.5.1. Target is a duly established series of Trust, a Business Trust
duly organized and validly existing under the laws of the Commonwealth of
Massachusetts with power under its Declaration of Trust to own all of its
properties and assets and, to the knowledge of such counsel, to carry on
its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Trust on behalf of Target and (b) assuming due authorization,
execution, and delivery of this Agreement by Trust on behalf of Acquiring
Fund, is a valid and legally binding obligation of Trust with respect to
Target, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or
15
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affecting creditors' rights and by general principles of equity;
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel) to which Trust (with respect to Target)
is a party or by which it is bound or, to the knowledge of such counsel,
result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which Trust (with
respect to Target) is a party or by which it is bound, except as set forth
in such opinion;
6.5.4. To the knowledge of such counsel, no consent, approval,
authorization, or order of any court or governmental authority is required
for the consummation by Trust on behalf of Target of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
6.5.5. Trust is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.5.6. To the knowledge of such counsel, (a) no litigation,
administrative proceeding, or investigation of or before any court or
governmental body is pending or threatened as to Trust (with respect to
Target) or any of its properties or assets attributable or allocable to
Target and (b) Trust (with respect to Target) is not a party to or subject
to the provisions of any order, decree, or judgment of any court or gov-
ernmental body that materially and adversely affects its business, except
as set forth in such opinion.
In rendering such opinion, such counsel may rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel.
6.6. Trust shall have received an opinion of Kirkpatrick & Lockhart LLP,
its counsel, as to the federal income tax consequences mentioned below ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the represen-
tations made in this Agreement (and/or in separate letters addressed to such
counsel) and the certificate delivered pursuant to paragraph 3.4. The Tax
Opinion shall be substantially to the effect that, based on the facts and
assumptions stated therein, for federal income tax purposes:
16
<PAGE>
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the Liabili-
ties, followed by Target's distribution of those shares to the Shareholders
constructively in exchange for the Shareholders' Target Shares, will con-
stitute a reorganization within the meaning of section 368(a)(1)(C) of the
Code, and each Fund will be "a party to a reorganization" within the
meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer
to Acquiring Fund of the Assets in exchange solely for Acquiring Fund
Shares and Acquiring Fund's assumption of the Liabilities or on the
subsequent distribution of those shares to the Shareholders in constructive
exchange for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
Notwithstanding paragraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder (regarding the recognition of gain or loss and/or the determination
of the basis or holding period) with respect to any asset (including certain
options, futures, and forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal income tax pur-
poses at the end of a taxable year (or on the termination or transfer thereof)
under a mark-to-market system of accounting.
At any time before the Closing, either Fund may waive any of the foregoing
conditions if, in the judgment of Trust's board of
17
<PAGE>
trustees, such waiver will not have a material adverse effect on its
shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
---------------------------
7.1. There are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
7.2. Except as otherwise provided herein, all expenses incurred in
connection with the transactions contemplated by this Agreement (whether or not
they are consummated) will be borne by the Funds proportionately, as follows:
each such expense will be borne by the Funds in proportion to their respective
net assets as of the close of business on the last business day of the month in
which such expense was incurred. Such expenses include: (a) expenses incurred
in connection with entering into and carrying out the provisions of this
Agreement; (b) expenses associated with the preparation and filing of the
Registration Statement; (c) registration or qualification fees and expenses of
preparing and filing such forms as are necessary under applicable state
securities laws to qualify the Acquiring Fund Shares to be issued in connection
herewith in each state in which Target's shareholders are resident as of the
date of the mailing of the Proxy Statement to such shareholders; (d) printing
and postage expenses; (e) legal and accounting fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
--------------------------
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall survive
the Closing.
9. TERMINATION OF AGREEMENT
------------------------
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed at
or prior to the Effective Time, (b) if a condition to its obligations has not
been met and it reasonably appears that such condition will not or cannot be
met, or (c) if the Closing has not occurred on or before December 31, 1995; or
18
<PAGE>
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or Trust's trustees or
officers, to the other Fund.
10. AMENDMENT
---------
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the Share-
holders' interests.
11. MISCELLANEOUS
-------------
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. The parties acknowledge that Trust is a Business Trust. Notice is
hereby given that this instrument is executed on behalf of Trust's trustees
solely in their capacity as trustees, and not individually, and that Trust's
obligations under this instrument are not binding on or enforceable against any
of its trustees, officers, or shareholders, but are only binding on and
enforceable against each Fund's assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to the
other Fund's assets and property in settlement of such rights or claims and not
to such trustees or shareholders.
19
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
ATTEST: PAINEWEBBER OLYMPUS FUND,
on behalf of its series,
PAINEWEBBER GROWTH FUND
By: /s/ Gregory K. Todd /s/ Dianne E. O'Donnell
----------------------- ------------------------------
Assistant Secretary Vice President
ATTEST: PAINEWEBBER OLYMPUS FUND,
on behalf of its series,
PAINEWEBBER COMMUNICATIONS & TECHNOLOGY
GROWTH FUND
By: /s/ Gregory K. Todd /s/ Joan L. Cohen
----------------------- ------------------------------
Assistant Secretary Vice President
20
Exhibit 4(b)
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
----------------------------------------------------
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
("Agreement") is made as of June 1, 1995, between PaineWebber
Olympus Fund, a Massachusetts business trust ("Trust"), on behalf
of PaineWebber Growth Fund, a segregated portfolio of assets
("series") thereof ("Acquiring Fund"), and PaineWebber Master
Series, Inc., a Maryland corporation ("Corporation"), on behalf
of its PaineWebber Blue Chip Growth Fund series ("Target").
(Acquiring Fund and Target are sometimes referred to herein indi-
vidually as a "Fund" and collectively as the "Funds," and Trust
and Corporation are sometimes referred to herein collectively as
the "Investment Companies.")
This Agreement is intended to be, and is adopted as, a plan
of a reorganization described in section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended ("Code"). The reorgan-
ization will involve the transfer to Acquiring Fund of Target's
assets solely in exchange for voting shares of beneficial
interest in Acquiring Fund ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of Target's liabilities, followed by
the constructive distribution of the Acquiring Fund Shares to the
holders of shares of common stock in Target ("Target Shares") in
exchange therefor, all upon the terms and conditions set forth
herein. The foregoing transactions are referred to herein as the
"Reorganization." All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by
either Fund are made and shall be taken or undertaken by Trust on
behalf of Acquiring Fund and by Corporation on behalf of Target.
Acquiring Fund's shares are divided into four classes,
designated Class A, Class B, Class C, and Class D shares ("Class
A Acquiring Fund Shares," "Class B Acquiring Fund Shares," "Class
C Acquiring Fund Shares," and "Class D Acquiring Fund Shares,"
respectively). Except as noted in the following sentence, these
classes differ only with respect to the sales charges imposed on
the purchase of shares and the fees ("12b-1 fees") payable by
each class pursuant to plans adopted under Rule 12b-1 promulgated
under the Investment Company Act of 1940 ("1940 Act"), as
follows: (1) Class A Acquiring Fund Shares are offered at net
asset value ("NAV") plus a sales charge, if applicable, and are
subject to a 12b-1 service fee at the annual rate of 0.21% of the
average daily net assets attributable to the class ("class as-
sets"); (2) Class B Acquiring Fund Shares are offered at NAV
without imposition of any sales charge and are subject to a con-
tingent deferred sales charge and 12b-1 service and distribution
fees at the respective annual rates of 0.25% and 0.75% of class
assets; (3) Class C Acquiring
<PAGE>
Fund Shares are offered, currently only to the trustee of the
PaineWebber Savings Investment Plan on behalf of that plan, at
NAV without imposition of any sales charge and are not subject to
any 12b-1 fee; and (4) Class D Acquiring Fund Shares are offered
at NAV without imposition of any sales charge and are subject to
12b-1 service and distribution fees at the respective annual
rates of 0.25% and 0.50% of class assets. These classes also may
differ from one another with respect to the allocation of certain
class-specific expenses other than 12b-1 fees. Only Classes A,
B, and D Acquiring Fund Shares are involved in the Reorganiza-
tion.
Target's shares are divided into three classes, designated
Class A, Class B, and Class D shares ("Class A Target Shares,"
"Class B Target Shares," and "Class D Target Shares," respec-
tively). These classes are identical to the correspondingly let-
tered classes of Acquiring Fund Shares, except that the Class A
Target Shares are subject to a 12b-1 service fee at the annual
rate of 0.25%, rather than 0.21%, of class assets.
In consideration of the mutual promises herein, the parties
covenant and agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
------------------------------------------------
1.1. Target agrees to assign, sell, convey, transfer, and
deliver all of its assets described in paragraph 1.2 ("Assets")
to Acquiring Fund. Acquiring Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full
and fractional (i) Class A Acquiring Fund Shares determined
by dividing the net value of Target (computed as set forth
in paragraph 2.1) ("Target Value") attributable to the Class
A Target Shares by the NAV (computed as set forth in
paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class
B Acquiring Fund Shares determined by dividing the Target
Value attributable to the Class B Target Shares by the NAV
(as so computed) of a Class B Acquiring Fund Share, and
(iii) Class D Acquiring Fund Shares determined by dividing
the Target Value attributable to the Class D Target Shares
by the NAV (as so computed) of a Class D Acquiring Fund
Share; and
(b) to assume all of Target's liabilities described in
paragraph 1.3 ("Liabilities").
Such transactions shall take place at the Closing (as defined in
paragraph 3.1).
1.2. The Assets shall include, without limitation, all
cash, cash equivalents, securities, receivables (including
interest and dividends receivable), claims and rights of action,
rights to register shares under applicable securities laws, books
and rec-
2
<PAGE>
ords, deferred and prepaid expenses shown as assets on Target's
books, and other property owned by Target at the Effective Time
(as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise
provided herein) all of Target's liabilities, debts, obligations,
and duties of whatever kind or nature, whether absolute, accrued,
contingent, or otherwise, whether or not arising in the ordinary
course of business, whether or not determinable at the Effective
Time, and whether or not specifically referred to in this Agree-
ment, including without limitation Target's share of the expenses
described in paragraph 7.2. Notwithstanding the foregoing,
Target agrees to use its best efforts to discharge all of its
known Liabilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target
shall declare and pay to its shareholders a dividend and/or other
distribution in an amount large enough so that it will have
distributed substantially all (and in any event not less than
90%) of its investment company taxable income (computed without
regard to any deduction for dividends paid) and realized net
capital gain, if any, for the current taxable year through the
Effective Time.
1.5. At the Effective Time (or as soon thereafter as is
reasonably practicable), Target shall constructively distribute
the Acquiring Fund Shares received by it pursuant to paragraph
1.1 to Target's shareholders of record, determined as of the
Effective Time (collectively "Shareholders" and individually a
"Shareholder"), in exchange for their Target Shares. Such dis-
tribution shall be accomplished by the Funds' transfer agent
("Transfer Agent") opening accounts on Acquiring Fund's share
transfer books in the Shareholders' names and transferring such
Acquiring Fund Shares thereto. Each Shareholder's account shall
be credited with the respective pro rata number of full and
fractional (rounded to the third decimal place) Acquiring Fund
Shares due that Shareholder, by class (i.e., the account for a
Shareholder of Class A Target Shares shall be credited with the
respective pro rata number of Class A Acquiring Fund Shares due
that Shareholder, the account for a Shareholder of Class B Target
Shares shall be credited with the respective pro rata number of
Class B Acquiring Fund Shares due that Shareholder, and the ac-
count for a Shareholder of Class D Target Shares shall be
credited with the respective pro rata number of Class D Acquiring
Fund Shares due that Shareholder). All outstanding Target
Shares, including any represented by certificates, shall
simultaneously be canceled on Target's share transfer records.
Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution
of the Acquiring Fund Shares pursuant to paragraph 1.5, Target
shall be terminated as a series of Corporation and any further
actions
3
<PAGE>
shall be taken in connection therewith as required by applicable
law.
1.7. Any reporting responsibility of Target to a public
authority is and shall remain its responsibility up to and
including the date on which it is terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring
Fund Shares in a name other than that of the registered holder on
Target's books of the Target Shares constructively exchanged
therefor shall be paid by the person to whom such Acquiring Fund
Shares are to be issued, as a condition of such transfer.
2. VALUATION
---------
2.1. For purposes of paragraph 1.1(a), Target's net value
shall be (a) the value of the Assets computed as of the close of
regular trading on the New York Stock Exchange, Inc. ("NYSE") on
the date of the Closing ("Valuation Time"), using the valuation
procedures set forth in Target's then-current prospectus and
statement of additional information less (b) the amount of the
Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A
Acquiring Fund Share, a Class B Acquiring Fund Share, and a Class
D Acquiring Fund Share shall be computed as of the Valuation
Time, using the valuation procedures set forth in Acquiring
Fund's then-current prospectus and statement of additional
information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2
shall be made by or under the direction of Mitchell Hutchins
Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
--------------------------
3.1. The Reorganization, together with related acts
necessary to consummate the same ("Closing"), shall occur at the
Funds' principal office on August 18, 1995, or at such other
place and/or on such other date as the parties may agree. All
acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the date thereof or
at such other time as the parties may agree ("Effective Time").
If, immediately before the Valuation Time, (a) the NYSE is closed
to trading or trading thereon is restricted or (b) trading or the
reporting of trading on the NYSE or elsewhere is disrupted, so
that accurate appraisal of the net value of Target and the NAV
per Acquiring Fund Share is impracticable, the Effective Time
shall be postponed until the first business day after the day
when such trading shall have been fully resumed and such
reporting shall have been restored.
4
<PAGE>
3.2. Corporation shall deliver to Trust at the Closing a
schedule of the Assets as of the Effective Time, which shall set
forth for all portfolio securities included therein their
adjusted tax basis and holding period by lot. Target's custodian
shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all
necessary taxes in conjunction with the delivery of the Assets,
including all applicable federal and state stock transfer stamps,
if any, have been paid or provision for payment has been made.
3.3. Corporation shall deliver to Trust at the Closing a
list of the names and addresses of the Shareholders and the
number (by class) of outstanding Target Shares owned by each
Shareholder, all as of the Effective Time, certified by
Corporation's Secretary or Assistant Secretary. The Transfer
Agent shall deliver at the Closing a certificate as to the
opening on Acquiring Fund's share transfer books of accounts in
the Shareholders' names. Trust shall issue and deliver a
confirmation to Corporation evidencing the Acquiring Fund Shares
(by class) to be credited to Target at the Effective Time or
provide evidence satisfactory to Corporation that such Acquiring
Fund Shares have been credited to Target's account on Acquiring
Fund's books. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, stock certifi-
cates, receipts, or other documents as the other party or its
counsel may reasonably request.
3.4. Each Investment Company shall deliver to the other at
the Closing a certificate executed in its name by its President
or a Vice President in form and substance satisfactory to the
recipient and dated the Effective Time, to the effect that the
representations and warranties it made in this Agreement are true
and correct at the Effective Time except as they may be affected
by the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
4.1. Target represents and warrants as follows:
4.1.1. Corporation is a corporation duly organized,
validly existing, and in good standing under the laws of the
State of Maryland, and a copy of its Articles of
Incorporation is on file with the Department of Assessments
and Collections of Maryland;
4.1.2. Corporation is duly registered as an open-end
management investment company under the 1940 Act, and such
registration will be in full force and effect at the
Effective Time;
5
<PAGE>
4.1.3. Target is a duly established and designated
series of Corporation;
4.1.4. At the Closing, Target will have good and
marketable title to the Assets and full right, power, and
authority to sell, assign, transfer, and deliver the Assets
free of any liens or other encumbrances; and upon delivery
and payment for the Assets, Acquiring Fund will acquire good
and marketable title thereto;
4.1.5. Target's current prospectus and statement of
additional information conform in all material respects to
the applicable requirements of the Securities Act of 1933
("1933 Act") and the 1940 Act and the rules and regulations
thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading;
4.1.6. Target is not in violation of, and the
execution and delivery of this Agreement and consummation of
the transactions contemplated hereby will not conflict with
or violate, Maryland law or any provision of Corporation's
Articles of Incorporation or By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a
party or by which it is bound or result in the acceleration
of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Target is a
party or by which it is bound, except as previously
disclosed in writing to and accepted by Trust;
4.1.7. Except as disclosed in writing to and accepted
by Trust, all material contracts and other commitments of or
applicable to Target (other than this Agreement and invest-
ment contracts, including options, futures, and forward con-
tracts) will be terminated, or provision for discharge of
any liabilities of Target thereunder will be made, at or
prior to the Effective Time, without either Fund's incurring
any liability or penalty with respect thereto and without
diminishing or releasing any rights Target may have had with
respect to actions taken or omitted to be taken by any other
party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and
accepted by Trust, no litigation, administrative proceeding,
or investigation of or before any court or governmental body
is presently pending or (to Target's knowledge) threatened
against Corporation with respect to Target or any of its
properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition
or the conduct of its business; Target knows of no facts
that
6
<PAGE>
might form the basis for the institution of any such litiga-
tion, proceeding, or investigation and is not a party to or
subject to the provisions of any order, decree, or judgment
of any court or governmental body that materially or
adversely affects its business or its ability to consummate
the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of
this Agreement has been duly authorized as of the date
hereof by all necessary action on the part of Corporation's
board of directors, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject
to approval by Target's shareholders and receipt of any
necessary exemptive relief or no-action assurances requested
from the Securities and Exchange Commission ("SEC") or its
staff with respect to sections 17(a) and 17(d) of the 1940
Act, this Agreement will constitute a valid and legally
binding obligation of Target, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights
and by general principles of equity;
4.1.10. At the Effective Time, the performance of this
Agreement shall have been duly authorized by all necessary
action by Target's shareholders;
4.1.11. No governmental consents, approvals,
authorizations, or filings are required under the 1933 Act,
the Securities Exchange Act of 1934 ("1934 Act"), or the
1940 Act for the execution or performance of this Agreement
by Corporation, except for (a) the filing with the SEC of a
registration statement by Trust on Form N-14 relating to the
Acquiring Fund Shares issuable hereunder, and any supplement
or amendment thereto ("Registration Statement"), including
therein a prospectus/proxy statement ("Proxy Statement"),
(b) receipt of the exemptive relief referenced in
subparagraph 4.1.9, and (c) such consents, approvals,
authorizations, and filings as have been made or received or
as may be required subsequent to the Effective Time;
4.1.12. On the effective date of the Registration
Statement, at the time of the shareholders' meeting referred
to in paragraph 5.2, and at the Effective Time, the Proxy
Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the
1940 Act and the regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in
or omissions from the
7
<PAGE>
Proxy Statement made in reliance on and in conformity with
information furnished by Trust for use therein;
4.1.13. The Liabilities were incurred by Target in the
ordinary course of its business;
4.1.14. Target is a "fund" (within the meaning of sec-
tion 851(h)(2) of the Code); it qualified for treatment as a
regulated investment company ("RIC") under Subchapter M of
the Code for each past taxable year since it commenced
operations and will continue to meet all the requirements
for such qualification for its current taxable year; and it
has no earnings and profits accumulated in any taxable year
in which the provisions of Subchapter M did not apply to it.
The Assets shall be invested at all times through the
Effective Time in a manner that ensures compliance with the
foregoing;
4.1.15. Target is not under the jurisdiction of a
court in a "title 11 or similar case" (within the meaning of
section 368(a)(3)(A) of the Code);
4.1.16. Not more than 25% of the value of Target's
total assets (excluding cash, cash items, and U.S.
government securities) is invested in the stock or
securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock or securities
of five or fewer issuers; and
4.1.17. Target will be terminated as soon as reason-
ably practicable after the Reorganization, but in all events
within six months after the Effective Time.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Trust is an unincorporated voluntary associ-
ation with transferable shares organized as a business trust
under a written instrument ("Business Trust"); it is duly
organized, validly existing, and in good standing under the
laws of the Commonwealth of Massachusetts; and a copy of its
Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
4.2.2. Trust is duly registered as an open-end manage-
ment investment company under the 1940 Act, and such reg-
istration will be in full force and effect at the Effective
Time;
4.2.3. Acquiring Fund is a duly established and desig-
nated series of Trust;
8
<PAGE>
4.2.4. No consideration other than Acquiring Fund
Shares (and Acquiring Fund's assumption of the Liabilities)
will be issued in exchange for the Assets in the Reorganiza-
tion;
4.2.5. The Acquiring Fund Shares to be issued and
delivered to Target hereunder will, at the Effective Time,
have been duly authorized and, when issued and delivered as
provided herein, will be duly and validly issued and
outstanding shares of Acquiring Fund, fully paid and non-
assessable, except to the extent that under Massachusetts
law shareholders of a Business Trust may, under certain
circumstances, be held personally liable for its obliga-
tions. Except as contemplated by this Agreement, Acquiring
Fund does not have outstanding any options, warrants, or
other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible into any
of its shares;
4.2.6. Acquiring Fund's current prospectus and
statement of additional information conform in all material
respects to the applicable requirements of the 1933 Act and
the 1940 Act and the rules and regulations thereunder and do
not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the
execution and delivery of this Agreement and consummation of
the transactions contemplated hereby will not conflict with
or violate, Massachusetts law or any provision of Trust's
Declaration of Trust or By-Laws or of any provision of any
agreement, instrument, lease, or other undertaking to which
Acquiring Fund is a party or by which it is bound or result
in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, judgment, or decree to
which Acquiring Fund is a party or by which it is bound,
except as previously disclosed in writing to and accepted by
Corporation;
4.2.8. Except as otherwise disclosed in writing to and
accepted by Corporation, no litigation, administrative pro-
ceeding, or investigation of or before any court or govern-
mental body is presently pending or (to Acquiring Fund's
knowledge) threatened against Trust with respect to Acquir-
ing Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect
Acquiring Fund's financial condition or the conduct of its
business; Acquiring Fund knows of no facts that might form
the basis for the institution of any such litigation, pro-
ceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any
court or governmental
9
<PAGE>
body that materially or adversely affects its business or
its ability to consummate the transactions contemplated
hereby;
4.2.9. The execution, delivery, and performance of
this Agreement has been duly authorized as of the date
hereof by all necessary action on the part of Trust's board
of trustees, which has made the determinations required by
Rule 17a-8(a) under the 1940 Act; and, subject to receipt of
any necessary exemptive relief or no-action assurances
requested from the SEC or its staff with respect to sections
17(a) and 17(d) of the 1940 Act, this Agreement will
constitute a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by
general principles of equity;
4.2.10. No governmental consents, approvals,
authorizations, or filings are required under the 1933 Act,
the 1934 Act, or the 1940 Act for the execution or
performance of this Agreement by Trust, except for (a) the
filing with the SEC of the Registration Statement,
(b) receipt of the exemptive relief referenced in
subparagraph 4.2.9, and (c) such consents, approvals,
authorizations, and filings as have been made or received or
as may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration
Statement, at the time of the shareholders' meeting referred
to in paragraph 5.2, and at the Effective Time, the Proxy
Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the
1940 Act and the regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in
or omissions from the Proxy Statement made in reliance on
and in conformity with information furnished by Corporation
for use therein;
4.2.12. Acquiring Fund is a "fund" (within the meaning
of section 851(h)(2) of the Code); it qualified for
treatment as a RIC under Subchapter M of the Code for each
past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification
for its current taxable year; Acquiring Fund intends to
continue to meet all such requirements for the next taxable
year; and it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M did not
apply to it;
10
<PAGE>
4.2.13. Acquiring Fund has no plan or intention to
issue additional Acquiring Fund Shares following the
Reorganization except for shares issued in the ordinary
course of its business as a series of an open-end investment
company; nor does Acquiring Fund have any plan or intention
to redeem or otherwise reacquire any Acquiring Fund Shares
issued to the Shareholders pursuant to the Reorganization,
other than through redemptions arising in the ordinary
course of that business;
4.2.14. Acquiring Fund (a) will actively continue Tar-
get's business in substantially the same manner that Target
conducted that business immediately before the
Reorganization, (b) has no plan or intention to sell or
otherwise dispose of any of the Assets, except for
dispositions made in the ordinary course of that business
and dispositions necessary to maintain its status as a RIC
under Subchapter M of the Code, and (c) expects to retain
substantially all the Assets in the same form as it receives
them in the Reorganization, unless and until subsequent
investment circumstances suggest the desirability of change
or it becomes necessary to make dispositions thereof to
maintain such status;
4.2.15. There is no plan or intention for Acquiring
Fund to be dissolved or merged into another corporation or
business trust or any "fund" thereof (within the meaning of
section 851(h)(2) of the Code) following the Reorganization;
4.2.16. Acquiring Fund is not under the jurisdiction
of a court in a "title 11 or similar case" (within the
meaning of section 368(a)(3)(A) of the Code);
4.2.17. Immediately after the Reorganization, (a) not
more than 25% of the value of Acquiring Fund's total assets
(excluding cash, cash items, and U.S. government securities)
will be invested in the stock or securities of any one
issuer and (b) not more than 50% of the value of such assets
will be invested in the stock or securities of five or fewer
issuers; and
4.2.18. Acquiring Fund does not own, directly or indi-
rectly, nor will it acquire, directly or indirectly, at any
time through the Effective Time, nor has it owned, directly
or indirectly, at any time during the past five years, any
shares of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund
Shares, when received by the Shareholders, will be approxi-
mately equal to the fair market value of their Target Shares
constructively surrendered in exchange therefor;
11
<PAGE>
4.3.2. Its management (a) is unaware of any plan or
intention of Shareholders to redeem or otherwise dispose of
any portion of the Acquiring Fund Shares to be received by
them in the Reorganization and (b) does not anticipate dis-
positions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and
frequency of dispositions of shares of Target as a series of
an open-end investment company. Consequently, its
management expects that the percentage of Shareholder inter-
ests, if any, that will be disposed of as a result of or at
the time of the Reorganization will be de minimis. Nor does
its management anticipate that there will be extraordinary
redemptions of Acquiring Fund Shares immediately following
the Reorganization;
4.3.3. The Shareholders will pay their own expenses,
if any, incurred in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reor-
ganization, Acquiring Fund will hold substantially the same
assets and be subject to substantially the same liabilities
that Target held or was subject to immediately prior
thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis
of the Assets will equal or exceed the Liabilities to be
assumed by Acquiring Fund and those to which the Assets are
subject;
4.3.6. There is no intercompany indebtedness between
the Funds that was issued or acquired, or will be settled,
at a discount;
4.3.7. Pursuant to the Reorganization, Target will
transfer to Acquiring Fund, and Acquiring Fund will acquire,
at least 90% of the fair market value of the net assets, and
at least 70% of the fair market value of the gross assets,
held by Target immediately before the Reorganization. For
the purposes of this representation, any amounts used by
Target to pay its Reorganization expenses and redemptions
and distributions made by it immediately before the
Reorganization (except for (a) distributions made to conform
to its policy of distributing all or substantially all of
its income and gains to avoid the obligation to pay federal
income tax and/or the excise tax under section 4982 of the
Code and (b) redemptions not made as part of the Reorganiza-
tion) will be included as assets thereof held immediately
before the Reorganization;
4.3.8. None of the compensation received by any Share-
holder who is an employee of Target will be separate
consideration for, or allocable to, any of the Target Shares
held by such Shareholder-employee; none of the Acquiring
Fund Shares
12
<PAGE>
received by any such Shareholder-employee will be separate
consideration for, or allocable to, any employment
agreement; and the consideration paid to any such
Shareholder-employee will be for services actually rendered
and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the
Shareholders will not own shares constituting "control" of
Acquiring Fund within the meaning of section 304(c) of the
Code.
5. COVENANTS
---------
5.1. Each Fund covenants to operate its respective business
in the ordinary course between the date hereof and the Closing,
it being understood that (a) such ordinary course will include
declaring and paying customary dividends and other distributions
and such changes in operations as are contemplated by each Fund's
normal business activities and (b) each Fund will retain
exclusive control of the composition of its portfolio until the
Closing; provided that Target shall not dispose of more than an
insignificant portion of its historic business assets during such
period without Acquiring Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to
consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated
hereby.
5.3. Target covenants that the Acquiring Fund Shares to be
delivered hereunder are not being acquired for the purpose of
making any distribution thereof, other than in accordance with
the terms hereof.
5.4. Target covenants that it will assist Trust in obtain-
ing such information as Trust reasonably requests concerning the
beneficial ownership of Target Shares.
5.5. Target covenants that Target's books and records (in-
cluding all books and records required to be maintained under the
1940 Act and the rules and regulations thereunder) will be turned
over to Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the
Proxy Statement in compliance with applicable federal securities
laws.
5.7. Each Fund covenants that it will, from time to time,
as and when requested by the other Fund, execute and deliver or
cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further
action, as the other Fund may deem necessary or desirable in
order to vest in,
13
<PAGE>
and confirm to, (a) Acquiring Fund, title to and possession of
all the Assets, and (b) Target, title to and possession of the
Acquiring Fund Shares to be delivered hereunder, and otherwise to
carry out the intent and purpose hereof.
5.8. Trust covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act,
the 1940 Act, and such state securities laws it may deem
appropriate in order to continue its operations after the
Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take
or cause to be taken all actions, and to do or cause to be done
all things, reasonably necessary, proper, or advisable to
consummate and effectuate the transactions contemplated hereby.
6. CONDITIONS PRECEDENT
--------------------
Each Fund's obligations hereunder shall be subject to
(a) performance by the other Fund of all the obligations to be
performed hereunder at or before the Effective Time, (b) all
representations and warranties of the other Fund contained herein
being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same
force and effect as if made at and as of the Effective Time, and
(c) the following further conditions that, at or before the
Effective Time:
6.1. This Agreement and the transactions contemplated
hereby shall have been duly adopted and approved by Corporation's
board of directors and shall have been approved by Target's
shareholders in accordance with applicable law.
6.2. All necessary filings shall have been made with the
SEC and state securities authorities, and no order or directive
shall have been received that any other or further action is
required to permit the parties to carry out the transactions
contemplated hereby. The Registration Statement shall have
become effective under the 1933 Act, no stop orders suspending
the effectiveness thereof shall have been issued, and the SEC
shall not have issued an unfavorable report with respect to the
Reorganization under section 25(b) of the 1940 Act nor instituted
any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940
Act. All consents, orders, and permits of federal, state, and
local regulatory authorities (including the SEC and state securi-
ties authorities) deemed necessary by either Fund to permit
consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund,
provided that either Fund may for itself waive any of such condi-
tions.
14
<PAGE>
6.3. At the Effective Time, no action, suit, or other pro-
ceeding shall be pending before any court or governmental agency
in which it is sought to restrain or prohibit, or to obtain
damages or other relief in connection with, the transactions
contemplated hereby.
6.4. Corporation shall have received an opinion of Kirkpat-
rick & Lockhart LLP, counsel to Trust, substantially to the
effect that:
6.4.1. Acquiring Fund is a duly established series of
Trust, a Business Trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with
power under its Declaration of Trust to own all of its prop-
erties and assets and, to the knowledge of such counsel, to
carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized,
executed, and delivered by Trust on behalf of Acquiring Fund
and (b) assuming due authorization, execution, and delivery
of this Agreement by Corporation on behalf of Target, is a
valid and legally binding obligation of Trust with respect
to Acquiring Fund, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by
general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and dis-
tributed to the Shareholders under this Agreement, assuming
their due delivery as contemplated by this Agreement, will
be duly authorized and validly issued and outstanding and
fully paid and non-assessable, except to the extent that
under Massachusetts law shareholders of a Business Trust
may, under certain circumstances, be held personally liable
for its obligations, and no shareholder of Acquiring Fund
has any preemptive right to subscribe for or purchase such
shares;
6.4.4. The execution and delivery of this Agreement
did not, and the consummation of the transactions
contemplated hereby will not, materially violate Trust's
Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel) to which Trust (with
respect to Acquiring Fund) is a party or by which it is
bound or, to the knowledge of such counsel, result in the
acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which
Trust (with respect to Acquiring Fund) is a party or by
which it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by
Corporation;
15
<PAGE>
6.4.5. To the knowledge of such counsel, no consent,
approval, authorization, or order of any court or
governmental authority is required for the consummation by
Trust on behalf of Acquiring Fund of the transactions
contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act and such as may
be required under state securities laws;
6.4.6. Trust is registered with the SEC as an invest-
ment company, and to the knowledge of such counsel no order
has been issued or proceeding instituted to suspend such
registration; and
6.4.7. To the knowledge of such counsel, (a) no liti-
gation, administrative proceeding, or investigation of or
before any court or governmental body is pending or
threatened as to Trust (with respect to Acquiring Fund) or
any of its properties or assets attributable or allocable to
Acquiring Fund and (b) Trust (with respect to Acquiring
Fund) is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body
that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as other-
wise disclosed in writing to and accepted by Corporation.
In rendering such opinion, such counsel may rely, as to matters
governed by the laws of the Commonwealth of Massachusetts, on an
opinion of competent Massachusetts counsel.
6.5. Trust shall have received an opinion of Kirkpatrick &
Lockhart LLP, counsel to Corporation, substantially to the effect
that:
6.5.1. Target is a duly established series of Corpora-
tion, a corporation duly organized and validly existing
under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and
assets and, to the knowledge of such counsel, to carry on
its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized,
executed, and delivered by Corporation on behalf of Target
and (b) assuming due authorization, execution, and delivery
of this Agreement by Trust on behalf of Acquiring Fund, is a
valid and legally binding obligation of Corporation with
respect to Target, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by
general principles of equity;
16
<PAGE>
6.5.3. The execution and delivery of this Agreement
did not, and the consummation of the transactions
contemplated hereby will not, materially violate
Corporation's Articles of Incorporation or By-Laws or any
provision of any agreement (known to such counsel) to which
Corporation (with respect to Target) is a party or by which
it is bound or, to the knowledge of such counsel, result in
the acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which
Corporation (with respect to Target) is a party or by which
it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by Trust;
6.5.4. To the knowledge of such counsel, no consent,
approval, authorization, or order of any court or
governmental authority is required for the consummation by
Corporation on behalf of Target of the transactions
contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act and such as may
be required under state securities laws;
6.5.5. Corporation is registered with the SEC as an
investment company, and to the knowledge of such counsel no
order has been issued or proceeding instituted to suspend
such registration; and
6.5.6. To the knowledge of such counsel, (a) no liti-
gation, administrative proceeding, or investigation of or
before any court or governmental body is pending or
threatened as to Corporation (with respect to Target) or any
of its properties or assets attributable or allocable to
Target and (b) Corporation (with respect to Target) is not a
party to or subject to the provisions of any order, decree,
or judgment of any court or governmental body that
materially and adversely affects its business, except as set
forth in such opinion or as otherwise disclosed in writing
to and accepted by Trust.
In rendering such opinion, such counsel may rely, as to matters
governed by the laws of the State of Maryland, on an opinion of
competent Maryland counsel.
6.6. Each Investment Company shall have received an opinion
of Kirkpatrick & Lockhart LLP, its counsel, addressed to and in
form and substance satisfactory to it, as to the federal income
tax consequences mentioned below ("Tax Opinion"). In rendering
the Tax Opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the repre-
sentations made in this Agreement (and/or in separate letters
addressed to such counsel) and the certificates delivered
pursuant to paragraph 3.4. The Tax Opinion shall be subs-
tantially to the effect that, based on the facts and assumptions
stated therein, for federal income tax purposes:
17
<PAGE>
6.6.1. Acquiring Fund's acquisition of the Assets in
exchange solely for Acquiring Fund Shares and Acquiring
Fund's assumption of the Liabilities, followed by Target's
distribution of those shares to the Shareholders con-
structively in exchange for the Shareholders' Target Shares,
will constitute a reorganization within the meaning of
section 368(a)(1)(C) of the Code, and each Fund will be "a
party to a reorganization" within the meaning of section
368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on
the transfer to Acquiring Fund of the Assets in exchange
solely for Acquiring Fund Shares and Acquiring Fund's
assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in
constructive exchange for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring
Fund on its receipt of the Assets in exchange solely for
Acquiring Fund Shares and its assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be
the same as the basis thereof in Target's hands immediately
before the Reorganization, and Acquiring Fund's holding
period for the Assets will include Target's holding period
therefor;
6.6.5. A Shareholder will recognize no gain or loss on
the constructive exchange of all its Target Shares solely
for Acquiring Fund Shares pursuant to the Reorganization;
and
6.6.6. A Shareholder's basis for the Acquiring Fund
Shares to be received by it in the Reorganization will be
the same as the basis for its Target Shares to be
constructively surrendered in exchange for those Acquiring
Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target
Shares, provided they are held as capital assets by the
Shareholder at the Effective Time.
Notwithstanding paragraphs 6.6.2 and 6.6.4, the Tax Opinion may
state that no opinion is expressed as to the effect of the Reor-
ganization on the Funds or any Shareholder (regarding the
recognition of gain or loss and/or the determination of the basis
or holding period) with respect to any asset (including certain
options, futures, and forward contracts included in the Assets)
as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a
mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive
any of the foregoing conditions if, in the judgment of Trust's
board of trustees, such waiver will not have a material adverse
18
<PAGE>
effect on its shareholders' interests, and (b) Target may waive
any of the foregoing conditions if, in the judgment of
Corporation's board of directors, such waiver will not have a
material adverse effect on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
---------------------------
7.1. Each Investment Company represents and warrants to the
other that there are no brokers or finders entitled to receive
any payments in connection with the transactions provided for
herein.
7.2. Except as otherwise provided herein, all expenses
incurred in connection with the transactions contemplated by this
Agreement (whether or not they are consummated) will be borne by
the Funds proportionately, as follows: each such expense will be
borne by the Funds in proportion to their respective net assets
as of the close of business on the last business day of the month
in which such expense was incurred. Such expenses include:
(a) expenses incurred in connection with entering into and
carrying out the provisions of this Agreement; (b) expenses
associated with the preparation and filing of the Registration
Statement; (c) registration or qualification fees and expenses of
preparing and filing such forms as are necessary under applicable
state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which Target's
shareholders are resident as of the date of the mailing of the
Proxy Statement to such shareholders; (d) printing and postage
expenses; (e) legal and accounting fees; and (f) solicitation
costs.
8. ENTIRE AGREEMENT; SURVIVAL
--------------------------
Neither party has made any representation, warranty, or
covenant not set forth herein, and this Agreement constitutes the
entire agreement between the parties. The representations, war-
ranties, and covenants contained herein or in any document
delivered pursuant hereto or in connection herewith shall survive
the Closing.
9. TERMINATION OF AGREEMENT
------------------------
This Agreement may be terminated at any time at or prior to
the Effective Time, whether before or after approval by Target's
shareholders:
9.1. By either Fund (a) in the event of the other Fund's
material breach of any representation, warranty, or covenant con-
tained herein to be performed at or prior to the Effective Time,
(b) if a condition to its obligations has not been met and it
reasonably appears that such condition will not or cannot be met,
19
<PAGE>
or (c) if the Closing has not occurred on or before December 31,
1995; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2,
there shall be no liability for damages on the part of either
Fund, or the trustees/directors or officers of either Investment
Company, to the other Fund.
10. AMENDMENT
---------
This Agreement may be amended, modified, or supplemented at
any time, notwithstanding approval thereof by Target's sharehold-
ers, in such manner as may be mutually agreed upon in writing by
the parties; provided that following such approval no such amend-
ment shall have a material adverse effect on the Shareholders'
interests.
11. MISCELLANEOUS
-------------
11.1. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massa-
chusetts; provided that, in the case of any conflict between such
laws and the federal securities laws, the latter shall govern.
11.2. Nothing expressed or implied herein is intended or
shall be construed to confer upon or give any person, firm,
trust, or corporation other than the parties and their respective
successors and assigns any rights or remedies under or by reason
of this Agreement.
11.3. The parties acknowledge that Trust is a Business
Trust. Notice is hereby given that this instrument is executed
on behalf of Trust's trustees solely in their capacity as trus-
tees, and not individually, and that Trust's obligations under
this instrument are not binding on or enforceable against any of
its trustees, officers, or shareholders, but are only binding on
and enforceable against Acquiring Fund's assets and property.
Target agrees that, in asserting any rights or claims under this
Agreement, it shall look only to Acquiring Fund's assets and
property in settlement of such rights or claims and not to such
trustees or shareholders.
20
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to
be executed by its duly authorized officer.
ATTEST: PAINEWEBBER OLYMPUS FUND,
on behalf of its series,
PAINEWEBBER GROWTH FUND
By: /s/ Gregory K. Todd /s/ Diane E. O'Donnell
----------------------- ------------------------------
Assistant Secretary Vice President
ATTEST: PAINEWEBBER MASTER SERIES, INC.
on behalf of its series,
PAINEWEBBER BLUE CHIP GROWTH
FUND
By: /s/ Gregory K. Todd /s/ Joan L. Cohen
----------------------- ------------------------------
Assistant Secretary Vice President
21
Exhibit 11
June 5, 1995
PaineWebber Olympus Fund
1285 Avenue of the Americas
New York, New York 10019
Dear Sir or Madam:
You have requested our opinion as to certain matters
regarding the issuance by PaineWebber Olympus Fund ("Trust") of
Class A, Class B and Class D shares of beneficial interest (the
"Shares") of PaineWebber Growth Fund ("Growth Fund"), a series of
the Trust, pursuant to an Agreement and Plan of Reorganization
and Termination ("Plan") among the Trust, on behalf of Growth
Fund, PaineWebber Communications & Technology Growth Fund
("ComTech Growth Fund"), also a series of the Trust, and
PaineWebber Blue Chip Growth Fund ("Blue Chip Growth Fund"), a
series of PaineWebber Master Series, Inc. ("Corporation"). Under
the Plan, Growth Fund would acquire the assets of each of ComTech
Growth Fund and Blue Chip Growth Fund in exchange for the Shares
and the assumption by Growth Fund of ComTech Growth Fund's and
Blue Chip Growth Fund's liabilities. In connection with the
Plan, the Trust is about to file a Registration Statement on Form
N-14 (the "N-14") for the purpose of registering the Shares under
the Securities Act of 1933, as amended ("1933 Act") to be issued
pursuant to the Plan.
We have examined originals or copies believed by us to be
genuine of the Trust's Declaration of Trust and By-Laws, the
Corporation's Articles of Incorporation and By-Laws, minutes of
meetings of the Trust's board of trustees, and the Corporation's
board of directors, the Plan, and such other documents relating
to the authorization and issuance of the Shares as we have deemed
relevant. Based upon that examination, we are of the opinion
that the Shares being registered by the N-14 may be issued in
accordance with the Plan and the Trust's Declaration of Trust and
By-Laws, subject to compliance with the 1933 Act, the Investment
Company Act of 1940, as amended, and applicable state laws
<PAGE>
PaineWebber Olympus Fund
June 5, 1995
Page 2
regulating the distribution of securities, and when so issued,
those Shares will be legally issued, fully paid and
non-assessable.
The Trust is an entity of the type commonly knows as a
"Massachusetts business trust." Under Massachusetts law,
shareholders could, under certain circumstances, be held
personally liable for the obligations of the Trust or a series of
the Trust ("Series"). The Declaration of Trust states that the
creditors of, contractors with, and claimants against, the Trust
or a Series shall look only to the assets of the Trust or such
Series for payment. It also requires that notice of such
disclaimer be given in each note, bond, contract, certificate,
undertaking or instrument made or issued by the officers or the
trustees of the Trust on behalf of the Trust or a Series. The
Declaration of Trust further provides: (i) for indemnification
from Trust or Series assets, as appropriate, for all losses and
expenses of any shareholder held personally liable for the
obligations of the Trust or Series by virtue of ownership of
Shares of a Series; and (ii) for a Series to assume the defense
of any claim against the shareholder for any act or obligation of
the Series. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to
circumstances in which the Trust or a Series would be unable to
meet its obligations.
We hereby consent to this opinion accompanying the Form N-14
that the Trust plans to file with the Securities and Exchange
Commission and to the reference to our firm under the caption
"Miscellaneous -- Legal Matters" in the Prospectus/Proxy
Statement filed as part of the From N-14.
Sincerely yours,
KIRKPATRICK & LOCKHART LLP
/s/Susan M. Casey
-------------------------------
Susan M. Casey
Exhibit 12(a)
June 2, 1995
PaineWebber Olympus Fund
1285 Avenue of the Americas
New York, NY 10019
Ladies and Gentlemen:
PaineWebber Olympus Fund ("Trust"), on behalf of PaineWebber Growth
Fund ("Acquiring Fund") and PaineWebber Communications & Technology Growth
Fund ("Target"), each a segregated portfolio of assets ("series")
thereof,1/ has requested our opinion as to certain federal income tax
-
consequences of the proposed acquisition of Target by Acquiring Fund,
pursuant to an Agreement and Plan of Reorganization and Termination between
them dated as of June 1, 1995 ("Plan"), attached as an exhibit to the pro-
spectus/proxy statement to be furnished in connection with the solicitation
of proxies by Trust's board of trustees ("Board") for use at a special
meeting of Target shareholders ("Special Meeting") to be held on August 11,
1995 ("Proxy"), included in the registration statement on Form N-14 to be
filed with the Securities and Exchange Commission ("SEC") on or about June 5,
1995 ("Registration Statement"). Specifically, Trust has requested
our opinion:
(1) that the acquisition by Acquiring Fund of Target's
assets in exchange solely for voting shares of beneficial
interest in Acquiring Fund and the assumption by Acquiring Fund
of Target's liabilities, followed by the distribution of those
shares by Target pro rata to its shareholders of record as of the
close of regular trading on the New York Stock Exchange, Inc. on
the date
- --------------------
1/ Acquiring Fund and Target are referred to herein individually either
- -
by such names or as a "Fund" and collectively as the "Funds."
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 2
of the Closing (as hereinafter defined) ("Shareholders") construc-
tively in exchange for their shares of beneficial interest in Target
("Target Shares") (such transaction sometimes being referred to herein
as the "Reorganization"), will constitute a "reorganization" within
the meaning of section 368(a)(1)(C)2/ and that each Fund will be a
-
"party to a reorganization" within the meaning of section 368(b),
(2) that Target, the Shareholders, and Acquiring Fund will
recognize no gain or loss upon the Reorganization, and
(3) regarding the basis and holding period after the Reor-
ganization of the transferred assets and the shares of Acquiring
Fund issued pursuant thereto.
In rendering this opinion, we have examined (1) each Fund's currently
effective prospectus and statement of additional information, all January
1, 1995, (2) the Proxy, (3) the Plan, and (4) such other documents as we
have deemed necessary or appropriate for the purposes hereof. As to
various matters of fact material to this opinion, we have relied, exclu-
sively and without independent verification, on statements of responsible
Trust officers and on representations made in letters to us from Trust and
in the Plan (as contemplated in paragraph 6.6 thereof) (collectively
"Representations").
- --------------------
2/ All section references are to the Internal Revenue Code of
- -
1986, as amended ("Code"), and all "Treas. Reg. Sec." references are
to the regulations under the Code ("Regulations").
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 3
FACTS
-----
Trust is an unincorporated voluntary association with transferable
shares formed as a business trust under the laws of the Commonwealth of
Massachusetts (commonly referred to as a "Massachusetts business trust")
pursuant to a Declaration of Trust dated October 31, 1986, and is the
successor to PaineWebber Olympus Fund, Inc., a Maryland corporation.
Acquiring Fund commenced operations as its only series on March 18, 1985,
and Target commenced operations as a series thereof on November 2, 1993.
Trust is registered with the SEC as an open-end management investment com-
pany under the Investment Company Act of 1940 ("1940 Act"). Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsi-
diary of PaineWebber Incorporated, serves as investment adviser and admini-
strator to each Fund and is the distributor of each Fund's shares.
Target currently offers for sale three classes of shares, designated
Class A, Class B, and Class D shares ("Class A Target Shares," "Class B
Target Shares," and "Class D Target Shares," respectively). These classes
differ only with respect to the sales charges imposed on the purchase of
shares and the fees payable by each class pursuant to plans adopted under
Rule 12b-1 promulgated under the 1940 Act ("12b-1 fees") and possible dif-
ferences with respect to the allocation of class-specific expenses other
than 12b-1 fees.
Acquiring Fund's shares are divided into four classes, designated
Class A, Class B, Class C, and Class D shares ("Class A Acquiring Fund
Shares," "Class B Acquiring Fund Shares," "Class C Acquiring Fund Shares,"
and "Class D Acquiring Fund Shares," respectively). The Reorganization
only involves Classes A, C, and D Acquiring Fund Shares, which are
identical to the correspondingly lettered classes of Target Shares, except
that the Class A Target Shares are subject to a slightly higher 12b-1
service fee than the Class A Acquiring Fund Shares (imposed at the annual
rate of 0.25%, as compared to 0.21%, of the average daily net assets
attributable to the class).
At or immediately before the close of business on the date on which
the Reorganization, together with all related acts necessary
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 4
to consummate the same ("Closing") occurs, scheduled for August 18, 1995
(or on such other date or at such other time as the parties may agree)
("Effective Time"), Target shall declare and pay to its shareholders a
dividend and/or other distribution in an amount large enough so that it
will have distributed substantially all (and in any event not less than
90%) of its investment company taxable income (computed without regard to
any deduction for dividends paid) and realized net capital gain, if any,
for the current taxable year through the Effective Time.
The Funds' investment objectives, which are identical, and
their respective investment policies are described in the Proxy. Although
there are differences in such policies, it is not expected that Acquiring
Fund will revise its investment policies following the Reorganization to
reflect Target's. Mitchell Hutchins believes that most, if not all, of the
assets held by Target will be consistent with Acquiring Fund's investment
policies and thus can be transferred to and held by Acquiring Fund
pursuant to the Reorganization. If the Reorganization is approved, Target
will sell any assets that are inconsistent with Acquiring Fund's investment
policies prior to the Effective Time, and the proceeds thereof will be held
in temporary investments or reinvested in assets that qualify to be held by
Acquiring Fund.
The Reorganization was recommended by Mitchell Hutchins to, and
approved by, the Board at a meeting thereof held on April 28, 1995. In
considering the Reorganization, the Board made an extensive inquiry into a
number of factors (which are described in the Proxy, together with Mitchell
Hutchins's advice and recommendations to the Board and the purposes of the
Reorganization). Pursuant thereto, the Board approved the Plan, subject to
approval of Target's shareholders. In doing so, the Board, including a
majority of its members who are not "interested persons" (as that term is
defined in the 1940 Act) of Trust, concluded that the Reorganization is in
each Fund's best interests, that the terms of the Reorganization are fair
and reasonable, and that each Fund's shareholders' interests will not be
diluted as a result of the Reorganization.
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 5
The Plan, which specifies that it is intended to be, and is adopted
as, a plan of a reorganization described in section 368(a)(1)(C), provides
in relevant part for the following:
(1) The acquisition by Acquiring Fund of all cash, cash
equivalents, securities, receivables (including interest and
dividends receivable), claims and rights of action, rights to
register shares under applicable securities laws, books and rec-
ords, deferred and prepaid expenses shown as assets on Target's
books, and other property owned by Target at the Effective Time
(collectively "Assets") in exchange solely for
(a) the number of full and fractional (i) Class A
Acquiring Fund Shares determined by dividing the net
value of Target ("Target Value") attributable to the
Class A Target Shares by the net asset value ("NAV") of
a Class A Acquiring Fund Share, (ii) Class B Acquiring
Fund Shares determined by dividing the Target Value
attributable to the Class B Target Shares by the NAV of
a Class B Acquiring Fund Share, and (iii) Class D
Acquiring Fund Shares determined by dividing the Target
Value attributable to the Class D Target Shares by the
NAV of a Class D Acquiring Fund Share, and
(b) Acquiring Fund's assumption of all of Target's
liabilities, debts, obligations, and duties of whatever
kind or nature, whether absolute, accrued, contingent,
or otherwise, whether or not arising in the ordinary
course of business, whether or not determinable at the
Effective Time, and whether or not specifically
referred to in the Plan, including without limitation
Target's share of the expenses incurred in connection
with the Reorganization (collectively "Liabilities")
(Target having agreed to use its best efforts to
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 6
discharge all its known liabilities prior to the Effective Time),
(2) The constructive distribution of such Acquiring Fund
Shares to the Shareholders, and
(3) The subsequent termination of Target.
The distribution described in (2) will be accomplished by transferring the
Acquiring Fund Shares then credited to Target's account on Acquiring Fund's
share transfer records to open accounts on those records established in the
Shareholders' names, with each Shareholder's account being credited with
the respective pro rata number of full and fractional (rounded to three
decimal places) Acquiring Fund Shares due such Shareholder, by class. All
outstanding Target Shares, including any represented by certificates,
simultaneously will be canceled on Target's share transfer records.
OPINION
-------
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of Closing and (2) the Reor-
ganization being consummated in accordance with the Plan, our opinion (as
explained more fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets solely in exchange
for the Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares pro
rata to the Shareholders constructively in exchange for their Target
Shares, will constitute a reorganization within the meaning of section
368(a)(1)(C), and each Fund will be "a party to a reorganization"
within the meaning of section 368(b);
2. No gain or loss will be recognized to Target on the transfer
of the Assets to Acquiring Fund solely in exchange for the Acquiring
Fund Shares and Acquiring Fund's assumption of the Liabilities or upon
the subsequent distribution of
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 7
those shares to the Shareholders in constructive exchange for their
Target Shares (section 361);
3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets solely in exchange for the Acquiring Fund Shares
and its assumption of the Liabilities (section 1032(a));
4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization
(section 362(b)), and Acquiring Fund's holding period for the Assets
will include Target's holding period therefor (section 1223(2));
5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring
Fund Shares pursuant to the Reorganization (section 354(a)); and
6. A Shareholder's basis for the Acquiring Fund Shares to be re-
ceived by it in the Reorganization will be the same as the basis for
its Target Shares to be constructively surrendered in exchange for
those Acquiring Fund Shares (section 358(a)), and its holding period
for those Acquiring Fund Shares will include its holding period for
those Target Shares, provided they are held as capital assets by the
Shareholder on the Closing Date (section 1223(1)).
The foregoing opinion (1) is based on, and is conditioned on the
continued applicability of, the provisions of the Code and the Regulations,
judicial decisions, and rulings and other pronouncements of the Internal
Revenue Service ("Service") in existence on the date hereof and (2) is
applicable only to the extent each Fund is solvent. We express no opinion
about the tax treatment of the transactions described herein if either Fund
is insolvent.
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 8
ANALYSIS
--------
I. The Reorganization Will Be a Reorganization under Section
368(a)(1)(C), and Each Fund Will Be a Party to a Reorganization.
----------------------------------------------------------------
A. Each Fund Is a Separate Corporation.
-----------------------------------
A reorganization under section 368(a)(1)(C) (a "C reorganization")
involves the acquisition by one corporation, in exchange solely for all or
a part of its voting stock, of substantially all of the properties of
another corporation. For the transaction to qualify under that section,
therefore, both entities involved therein must be corporations (or associ-
ations taxable as corporations). Trust, however, is a Massachusetts busi-
ness trust, not a corporation, and each Fund is a separate series thereof.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees
for the benefit of beneficiaries) will not be classified as trusts for
purposes of the Code because they are not simply arrangements to protect or
conserve the property for the beneficiaries. These "business or commercial
trusts" are created simply as devices to carry on profit-making businesses
that normally would have been carried on through corporations or partner-
ships. Treasury Regulation section 301.7701-4(c) further provides that an
"`investment' trust will not be classified as a trust if there is a power
under the trust agreement to vary the investment of the certificate
holders." See Commissioner v. North American Bond Trust, 122 F.2d 545 (2d
--- -----------------------------------------
Cir. 1941), cert. denied, 314 U.S. 701 (1942).
------------
Based on these criteria, Trust does not qualify as a trust for federal
income tax purposes. While Trust is an "investment trust," it does not
have a fixed pool of assets -- each Fund has been a managed portfolio of
securities, and its investment adviser has had the authority to buy and
sell securities for it. Trust is not simply an arrangement to protect or
conserve property for the beneficiaries, but is designed to carry on a
profit-making business. In addition, the word "association" has long been
held to include "Massachusetts business trusts," such as Trust. See Hecht v.
--- ----- --
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 9
Malley, 265 U.S. 144 (1924). Accordingly, we believe that Trust will be
- ------
treated as a corporation for federal income tax purposes.
Trust as such, however, is not participating in the Reorganization,
but rather two series thereof are the participants. Ordinarily, a
transaction involving segregated pools of assets (such as the Funds) could
not qualify as a reorganization, because the pools would not be corpora-
tions. Under section 851(h), however, each Fund is treated as a separate
corporation for all purposes of the Code save the definitional requirement
of section 851(a) (which is satisfied by Trust). Thus, we believe that
each Fund will be a separate corporation, and each Fund's shares will be
treated as shares of corporate stock, for purposes of section 368(a)(1)(C).
B. Satisfaction of Section 368(a)(2)(F).
------------------------------------
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (other than subparagraph (E) thereof) are
"investment companies," the transaction will not be considered a reorgan-
ization with respect to any such investment company or its shareholders
unless, among other things, the investment company is a RIC or --
(1) not more than 25% of the value of its total assets is
invested in the stock or securities of any one issuer
and
(2) not more than 50% of the value of its total assets is
invested in the stock or securities of five or fewer
issuers.
Each Fund will meet the requirements for qualification and treatment as a
RIC for its respective current taxable year, and the foregoing percentage
tests will be satisfied by each Fund. Accordingly, we believe that section
368(a)(2)(F) will not cause the Reorganization to fail to qualify as a C
reorganization with respect to either Fund.
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 10
C. Transfer of "Substantially All" of the Properties.
-------------------------------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the
transferor corporation solely in exchange for all or part of the acquiring
corporation's stock. For purposes of issuing private letter rulings, the
Service considers the transfer of at least 70% of the transferor's gross
assets, and at least 90% of its net assets, held immediately before the
reorganization to satisfy the "substantially all" requirement. Rev. Proc.
77-37, 1977-2 C.B. 568. The Reorganization will involve such a transfer.
Accordingly, we believe that the Reorganization will involve the transfer
to Acquiring Fund of substantially all of Target's properties.
D. Qualifying Consideration.
------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the
transferor's property solely in exchange for voting stock. Section
368(a)(2)(B)(iii). The assumption of liabilities by the acquiring
corporation or its acquisition of property subject to liabilities normally
are disregarded (section 368(a)(1)(C)), but the amount of any such
liabilities will be treated as money paid for the transferor's property if
the acquiring corporation exchanges any money or property (other than its
voting stock) therefor. Section 368(a)(2)(B). Because Acquiring Fund will
exchange only the Acquiring Fund Shares, and no money or other property,
for the Assets, we believe that the Reorganization will satisfy the solely-
for-voting-stock requirement to qualify as a C reorganization.
E. Requirements of Continuity.
--------------------------
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to
a valid reorganization: (1) a continuity of the business enterprise under
the modified corporate form ("continuity of business") and (2) a continuity
of interest therein on the part of those persons who, directly or
indirectly, were the owners of the enterprise prior to the reorganization
("continuity of interest").
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 11
1. Continuity of Business.
----------------------
The continuity of business enterprise test as set forth in Treas. Reg.
Sec. 1.368-1(d)(2) requires that the acquiring corporation must either
(i) continue the acquired corporation's historic business ("business
continuity") or (ii) use a significant portion of the acquired
corporation's historic business assets in a business ("asset continuity").
While there is no authority that deals directly with the requirement
of continuity of business in the context of a transaction such as the Reor-
ganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in
municipal securities. P acquired the assets of T in exchange for P common
stock in a transaction that was intended to qualify as a C reorganization.
Prior to the exchange, T sold its entire portfolio of corporate securities
and purchased a portfolio of municipal bonds. The Service held that this
transaction did not qualify as a reorganization for the following reasons:
(1) because T had sold its historic assets prior to the exchange, there was
no asset continuity; and (2) the failure of P to engage in the business of
investing in corporate securities after the exchange caused the transaction
to lack business continuity as well.
The Funds' investment objectives are identical, and their investment
policies are similar. Furthermore, Acquiring Fund will actively continue
Target's business in the same manner that Target conducted it immediately
before the Reorganization. Accordingly, there will be business continuity.
Acquiring Fund not only will continue Target's historic business, but
Acquiring Fund also (1) has no plan or intention to sell or otherwise dis-
pose of any of the Assets, except for dispositions made in the ordinary
course of its business and dispositions necessary to maintain its status as
a RIC, and (2) expects to retain substantially all the Assets in the same
form as it receives them in the Reorganization, unless and until subsequent
investment circumstances suggest the desirability of change or it becomes
necessary to make dispositions thereof to maintain such status. Accord-
ingly, there will be asset continuity as well.
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 12
For all the foregoing reasons, we believe that the Reorganization will
meet the continuity of business requirement.
2. Continuity of Interest.
----------------------
For purposes of issuing private letter rulings, the Service considers
the continuity of interest requirement of Treas. Reg. Sec. 1.368-1(b)
satisfied if ownership in an acquiring corporation on the part of a
transferor corporation's former shareholders is equal in value to at least
50% of the value of all the formerly outstanding shares of the transferor
corporation. Rev. Proc. 77-37, supra; but see Rev. Rul. 56-345, 1956-2
----- --- ---
C.B. 206 (continuity of interest was held to exist in a reorganization of
two RICs where immediately after the reorganization 26% of the shares were
redeemed in order to allow investment in a third RIC); also see Reef Corp.
---- --- ----------
v. Commissioner, 368 F.2d 125 (5th Cir. 1966), cert. denied, 386 U.S. 1018
- --------------- ------------
(1967) (a redemption of 48% of a transferor corporation's stock was not a
sufficient shift in proprietary interest to disqualify a transaction as a
reorganization under section 368(a)(2)(F) ("F Reorganization"), even though
only 52% of the transferor's shareholders would hold all the transferee's
stock); Aetna Casualty and Surety Co. v. U.S., 568 F.2d 811, 822-23 (2d
-------------------------------------
Cir. 1976) (redemption of a 38.39% minority interest did not prevent a
transaction from qualifying as an F Reorganization); Rev. Rul. 61-156,
1961-2 C.B. 62 (a transaction qualified as an F Reorganization even though
the transferor's shareholders acquired only 45% of the transferee's stock,
while the remaining 55% of that stock was issued to new shareholders in a
public underwriting immediately after the transfer).
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev.
Rul. 66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of
ownership for a period of time sufficient to warrant the conclusion that
such ownership is definite and substantial" will suffice and that
"ordinarily, the Service will treat five years of unrestricted . . .
ownership as a sufficient period" for continuity of interest purposes.
A preconceived plan or arrangement by or among an acquired cor-
poration's shareholders to dispose of more than 50% of an ac-
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 13
quiring corporation's shares could be problematic. Shareholders with no
such preconceived plan or arrangement, however, are basically free to sell
any part of the shares received by them in the reorganization without fear
of breaking continuity of interest, because the subsequent sale will be
treated as an independent transaction from the reorganization.
Neither Fund (1) is aware of any plan or intention of Shareholders to
dispose of any portion of the Acquiring Fund Shares to be received by them
in the Reorganization or (2) anticipates dispositions thereof at the time
of or soon after the Reorganization to exceed the usual rate and frequency
of dispositions of shares of Target as a series of an open-end investment
company. Consequently, each Fund expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Accordingly, we be-
lieve that the Reorganization will meet the continuity of interest
requirement of Treas. Reg. Sec. 1.368-1(b).
F. Distribution by Target.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify
as a C reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of
the plan of reorganization. Under the Plan -- which we believe constitutes
a "plan of reorganization" within the meaning of Treas. Reg. Sec. 1.368-2(g) -
- - Target will distribute all the Acquiring Fund Shares to its shareholders
in constructive exchange for their Target Shares; as soon as is reasonably
practicable thereafter, Target will be terminated. Accordingly, we believe
that the requirements of section 368(a)(2)(G)(i) will be satisfied.
G. Business Purpose.
----------------
All reorganizations must meet the judicially imposed requirements of
the "business purpose doctrine," which was established in Gregory v.
----------
Helvering, 293 U.S. 465 (1935), and is now set forth in Treas. Reg. Sec.Sec.
- ---------
1.368-1(b), -1(c), and -2(g) (the last of which provides that, to qualify
as a reorganization, a transaction must be "undertaken for reasons germane
to the continuance of the business
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 14
of a corporation a party to the reorganization"). Under that doctrine, a
transaction must have a bona fide business purpose (and not a purpose to
avoid federal income tax) to constitute a valid reorganization. The
substantial business purposes of the Reorganization are described in the
Proxy. Accordingly, we believe that the Reorganization is being undertaken
for bona fide business purposes (and not a purpose to avoid federal income
tax) and therefore meets the requirements of the business purpose doctrine.
For all the foregoing reasons, we believe that the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1)(C).
H. Both Funds are Parties to the Reorganization.
--------------------------------------------
Section 368(b)(2) and Treas. Reg. Sec. 1.368-1(f) provide that if one
corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization.
Target is transferring substantially all of its properties to Acquiring
Fund in exchange for Acquiring Fund Shares. Accordingly, we believe that
each Fund will be "a party to a reorganization."
II. No Gain or Loss Will Be Recognized to Target.
--------------------------------------------
Under sections 361(a) and (c), no gain or loss will be recognized to a
corporation that is a party to a reorganization (1) on the exchange of
property, pursuant to the plan of reorganization, solely for stock or
securities in another corporate party to the reorganization or (2) on the
distribution to its shareholders, pursuant to that plan, of stock in such
other corporation that was received by the distributing corporation in the
exchange. (Such a distribution is required by section 368(a)(2)(G)(i) for
a reorganization to qualify as a C reorganization.) Section 361(c)(4) pro-
vides that specified provisions requiring recognition of gain on certain
distributions shall not apply to a distribution described in (2) above.
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 15
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to
be received under section 361 without recognition of gain if it were the
sole consideration and, as part of the consideration, another party to the
exchange assumes a liability of the taxpayer or acquires from the taxpayer
property subject to a liability, then that assumption or acquisition shall
not be treated as money or other property and shall not prevent the
exchange from being within section 361. Section 357(b) applies where the
principal purpose of the assumption or acquisition was a tax avoidance
purpose or not a bona fide business purpose.
As noted above, the Reorganization will constitute a C reorganization,
each Fund will be a party to a reorganization, and the Plan constitutes a
plan of reorganization. Target will exchange the Assets solely for the
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities
and then will terminate pursuant to the Plan, distributing those shares to
its shareholders in constructive exchange for their Target Shares. As also
noted above, we believe that the Reorganization is being undertaken for
bona fide business purposes (and not a purpose to avoid federal income
tax); we also do not believe that the principal purpose of Acquiring Fund's
assumption of the Liabilities is avoidance of federal income tax on the
proposed transaction. Accordingly, we believe that no gain or loss will be
recognized to Target on the Reorganization.3/
-
- --------------------
3/ Notwithstanding anything herein to the contrary, no opinion
- -
is expressed as to the effect of the Reorganization on the Funds
or any Shareholder (regarding the recognition of gain or loss
and/or the determination of the basis or holding period) with
respect to any asset (including certain options, futures, and
forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the
termination or transfer thereof) under a mark-to-market system of
accounting.
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 16
III. No Gain or Loss Will Be Recognized to Acquiring Fund.
----------------------------------------------------
Section 1032(a) provides that no gain or loss will be recognized to a
corporation on the receipt by it of money or other property in exchange for
its shares. Acquiring Fund will issue the Acquiring Fund Shares to Target
in exchange for the Assets, which consist of money and securities.
Accordingly, we believe that no gain or loss will be recognized to
Acquiring Fund on the Reorganization.
IV. Acquiring Fund's Basis for the Assets Will Be a Carryover Basis, and
Its Holding Period Will Include Target's Holding Period.
--------------------------------------------------------------------
Section 362(b) provides that property acquired by a corporation in
connection with a reorganization will have the same basis in that
corporation's hands as the basis of the property in the transferor
corporation's hands immediately before the exchange, increased by any gain
recognized to the transferor on the transfer. As noted above, the Reorgan-
ization will constitute a C reorganization and Target will recognize no
gain on the Reorganization under section 361(a). Accordingly, we believe
that Acquiring Fund's basis for the Assets will be the same as the basis
thereof in Target's hands immediately before the Reorganization.
Section 1223(2) provides that where property acquired in an exchange
has a carryover basis, the property will have a holding period in the hands
of the acquiror that includes the holding period of the property in the
transferor's hands. As stated above, Acquiring Fund's basis for the Assets
will be a carryover basis. Accordingly, we believe that Acquiring Fund's
holding period for the Assets will include Target's holding period
therefor.
V. No Gain or Loss Will Be Recognized to a Shareholder.
----------------------------------------------------
Under section 354(a), no gain or loss is recognized to a shareholder
who exchanges shares for other shares pursuant to a plan of reorganization,
where the shares exchanged, as well as the shares received, are those
of a corporation that is a party to the
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 17
reorganization. As stated above, the Reorganization will constitute a C
reorganization, the Plan constitutes a plan of reorganization, and each
Fund will be a party to a reorganization. Accordingly, we believe that
under section 354 a Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization.
VI. A Shareholder's Basis for Acquiring Fund Shares Will Be a Substituted
Basis, and its Holding Period therefor Will Include its Holding Period
--------------------------
for its Target Shares.
----------------------------------
Section 358(a)(1) provides, in part, that in the case of an exchange
to which section 354 applies, the basis of any shares received in the
transaction without the recognition of gain is the same as the basis of the
property transferred in exchange therefor, decreased by, among other
things, the fair market value of any other property and the amount of any
money received in the transaction and increased by the amount of any gain
recognized on the exchange by the shareholder.
As noted above, the Reorganization will constitute a C reorganization
and under section 354 no gain or loss will be recognized to a Shareholder
on the constructive exchange of its Target Shares for Acquiring Fund Shares
in the Reorganization. No property will be distributed to the Shareholders
other than the Acquiring Fund Shares, and no money will be distributed to
them pursuant to the Reorganization. Accordingly, we believe that a Sha-
reholder's basis for the Acquiring Fund Shares to be received by it in the
Reorganization will be the same as the basis for its Target Shares to be
constructively surrendered in exchange for those Acquiring Fund Shares.
Under section 1223(1), the holding period of property received in an
exchange includes the holding period of the property exchanged therefor if
the acquired property has, for the purpose of determining gain or loss, the
same basis in the holder's hands as the property exchanged therefor
("substituted basis") and such property was a capital asset. As noted
above, a Shareholder will have a substituted basis for the Acquiring Fund
Shares it receives
<PAGE>
PaineWebber Olympus Fund
June 2, 1995
Page 18
in the Reorganization; accordingly, provided that the Shareholder held its
Target Shares as capital assets on the Closing Date, we believe its holding
period for those Acquiring Fund Shares will include its holding period for
those Target Shares.
We hereby consent to this opinion accompanying the Registration
Statement and to the references to our firm under the captions "Approval of
the Reorganizations -- Synopsis -- Federal Income Tax Consequences of the
Reorganizations" and "The Proposed Transactions -- Federal Income Tax
Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
---------------------
Theodore L. Press
Exhibit 12(b)
June 2, 1995
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
1285 Avenue of the Americas
New York, NY 10019
Ladies and Gentlemen:
PaineWebber Olympus Fund ("Trust"), on behalf of PaineWebber Growth
Fund, a segregated portfolio of assets ("series") thereof ("Acquiring
Fund"), and PaineWebber Master Series, Inc. ("Corporation"), on behalf of
PaineWebber Blue Chip Growth Fund, a series thereof ("Target"),1/ have
-
requested our opinion as to certain federal income tax consequences of the
proposed acquisition of Target by Acquiring Fund, pursuant to an Agreement
and Plan of Reorganization and Termination between them dated as of June 1,
1995 ("Plan"), attached as an exhibit to the prospectus/proxy statement to
be furnished in connection with the solicitation of proxies by
Corporation's board of directors for use at a special meeting of Target
shareholders ("Special Meeting") to be held on August 11, 1995 ("Proxy"),
included in the registration statement on Form N-14 to be filed with the
Securities and Exchange Commission ("SEC") on or about June 5, 1995
("Registration Statement"). Specifically, each Investment Company has re-
quested our opinion:
(1) that the acquisition by Acquiring Fund of Target's
assets in exchange solely for voting shares of beneficial
interest in Acquiring Fund and the assumption
--------------------
1/ Acquiring Fund and Target are referred to herein individually either
- -
by such names or as a "Fund" and collectively as the "Funds," and Trust and
Corporation are referred to herein individually either by such names or as
an "Investment Company" and collectively as the "Investment Companies."
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 2
by Acquiring Fund of Target's liabilities, followed by the distri-
bution of those shares by Target pro rata to its shareholders of
record as of the close of regular trading on the New York Stock
Exchange, Inc. on the date of the Closing (as hereinafter defined)
("Shareholders") constructively in exchange for their shares of common
stock in Target ("Target Shares") (such transaction sometimes being
referred to herein as the "Reorganization"), will constitute a "reor-
ganization" within the meaning of section 368(a)(1)(C)2/ and that
-
each Fund will be a "party to a reorganization" within the meaning of
section 368(b),
(2) that Target, the Shareholders, and Acquiring Fund will
recognize no gain or loss upon the Reorganization, and
(3) regarding the basis and holding period after the Reor-
ganization of the transferred assets and the shares of Acquiring
Fund issued pursuant thereto.
In rendering this opinion, we have examined (1) Target's currently
effective prospectus and statement of additional information, both dated
July 1, 1994, and the currently effective prospectus and statement of
additional information of Acquiring Fund, both dated January 1, 1995,
(2) the Proxy, (3) the Plan, and (4) such other documents as we have deemed
necessary or appropriate for the purposes hereof. As to various matters of
fact material to this opinion, we have relied, exclusively and without
independent verification, on statements of responsible officers of each
Investment Company and on representations made in letters to us from each
Investment Company and in the Plan (as contemplated in paragraph 6.6
thereof) (collectively "Representations").
- --------------------
2/ All section references are to the Internal Revenue Code of
- -
1986, as amended ("Code"), and all "Treas. Reg. Sec." references are
to the regulations under the Code ("Regulations").
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 3
FACTS
-----
Trust is an unincorporated voluntary association with transferable
shares formed as a business trust under the laws of the Commonwealth of
Massachusetts (commonly referred to as a "Massachusetts business trust")
pursuant to a Declaration of Trust dated October 31, 1986, and is the
successor to PaineWebber Olympus Fund, Inc., a Maryland corporation;
Acquiring Fund commenced operations as its only series on March 18, 1985.
Corporation was formed as a Maryland corporation pursuant to Articles of
Incorporation dated October 29, 1985; Target commenced operations as a
series thereof on July 18, 1986. Each Investment Company is registered
with the SEC as an open-end management investment company under the Invest-
ment Company Act of 1940 ("1940 Act"). Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber
Incorporated, serves as investment adviser and administrator to each Fund
and is the distributor of each Fund's shares.
Target currently offers for sale three classes of shares, designated
Class A, Class B, and Class D shares ("Class A Target Shares," "Class B
Target Shares," and "Class D Target Shares," respectively). These classes
differ only with respect to the sales charges imposed on the purchase of
shares and the fees payable by each class pursuant to plans adopted under
Rule 12b-1 promulgated under the 1940 Act ("12b-1 fees") and possible dif-
ferences with respect to the allocation of class-specific expenses other
than 12b-1 fees.
Acquiring Fund's shares are divided into four classes, designated
Class A, Class B, Class C, and Class D shares ("Class A Acquiring Fund
Shares," "Class B Acquiring Fund Shares," "Class C Acquiring Fund Shares,"
and "Class D Acquiring Fund Shares," respectively). The Reorganization
only involves Classes A, C, and D Acquiring Fund Shares, which are
identical to the correspondingly lettered classes of Target Shares, except
that the Class A Target Shares are subject to a slightly higher 12b-1
service fee than the Class A Acquiring Fund Shares (imposed at the annual
rate of 0.25%, as compared to 0.21%, of the average daily net assets
attributable to the class).
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 4
At or immediately before the close of business on the date on which
the Reorganization, together with all related acts necessary to consummate
the same ("Closing") occurs, scheduled for August 18, 1995 (or on such
other date or at such other time as the parties may agree) ("Effective
Time"), Target shall declare and pay to its shareholders a dividend and/or
other distribution in an amount large enough so that it will have distri-
buted substantially all (and in any event not less than 90%) of its invest-
ment company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current tax-
able year through the Effective Time.
The Funds' investment objectives, which are identical, and
their respective investment policies are described in the Proxy. Although
there are differences in such policies, it is not expected that Acquiring
Fund will revise its investment policies following the Reorganization to
reflect Target's. Mitchell Hutchins believes that most, if not all, of the
assets held by Target will be consistent with Acquiring Fund's investment
policies and thus can be transferred to and held by Acquiring Fund
pursuant to the Reorganization. If the Reorganization is approved, Target
will sell any assets that are inconsistent with Acquiring Fund's investment
policies prior to the Effective Time, and the proceeds thereof will be held
in temporary investments or reinvested in assets that qualify to be held by
Acquiring Fund.
The Reorganization was recommended by Mitchell Hutchins to, and
approved by, each Investment Company's board of directors/trustees (each a
"board") at a combined meeting thereof held on April 28, 1995. In
considering the Reorganization, each board made an extensive inquiry into a
number of factors (which are described in the Proxy, together with Mitchell
Hutchins's advice and recommendations to the boards and the purposes of the
Reorganization). Pursuant thereto, each board approved the Plan, subject
to approval of Target's shareholders. In doing so, each board, including a
majority of its members who are not "interested persons" (as that term is
defined in the 1940 Act) of Corporation or Trust, as applicable, concluded
that the Reorganization is in its Fund's best interests, that the terms of
the Reorganization are fair and reasonable, and
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 5
that its Fund's shareholders' interests will not be diluted as a result of
the Reorganization.
The Plan, which specifies that it is intended to be, and is adopted
as, a plan of a reorganization described in section 368(a)(1)(C), provides
in relevant part for the following:
(1) The acquisition by Acquiring Fund of all cash, cash
equivalents, securities, receivables (including interest and
dividends receivable), claims and rights of action, rights to
register shares under applicable securities laws, books and rec-
ords, deferred and prepaid expenses shown as assets on Target's
books, and other property owned by Target at the Effective Time
(collectively "Assets") in exchange solely for
(a) the number of full and fractional (i) Class A
Acquiring Fund Shares determined by dividing the net
value of Target ("Target Value") attributable to the
Class A Target Shares by the net asset value ("NAV") of
a Class A Acquiring Fund Share, (ii) Class B Acquiring
Fund Shares determined by dividing the Target Value
attributable to the Class B Target Shares by the NAV of
a Class B Acquiring Fund Share, and (iii) Class D
Acquiring Fund Shares determined by dividing the Target
Value attributable to the Class D Target Shares by the
NAV of a Class D Acquiring Fund Share, and
(b) Acquiring Fund's assumption of all of Target's
liabilities, debts, obligations, and duties of whatever
kind or nature, whether absolute, accrued, contingent,
or otherwise, whether or not arising in the ordinary
course of business, whether or not determinable at the
Effective Time, and whether or not specifically
referred to in the Plan, including without limitation
Target's share of the ex-
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 6
penses incurred in connection with the Reorganization
(collectively "Liabilities") (Target having agreed to use its
best efforts to discharge all its known liabilities prior to the
Effective Time),
(2) The constructive distribution of such Acquiring Fund
Shares to the Shareholders, and
(3) The subsequent termination of Target.
The distribution described in (2) will be accomplished by transferring the
Acquiring Fund Shares then credited to Target's account on Acquiring Fund's
share transfer records to open accounts on those records established in the
Shareholders' names, with each Shareholder's account being credited with
the respective pro rata number of full and fractional (rounded to three
decimal places) Acquiring Fund Shares due such Shareholder, by class. All
outstanding Target Shares, including any represented by certificates,
simultaneously will be canceled on Target's share transfer records.
OPINION
-------
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of Closing and (2) the Reor-
ganization being consummated in accordance with the Plan, our opinion (as
explained more fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets solely in exchange
for the Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares pro
rata to the Shareholders constructively in exchange for their Target
Shares, will constitute a reorganization within the meaning of section
368(a)(1)(C), and each Fund will be "a party to a reorganization"
within the meaning of section 368(b);
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 7
2. No gain or loss will be recognized to Target on the transfer
of the Assets to Acquiring Fund solely in exchange for the Acquiring
Fund Shares and Acquiring Fund's assumption of the Liabilities or upon
the subsequent distribution of those shares to the Shareholders in
constructive exchange for their Target Shares (section 361);
3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets solely in exchange for the Acquiring Fund Shares
and its assumption of the Liabilities (section 1032(a));
4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization
(section 362(b)), and Acquiring Fund's holding period for the Assets
will include Target's holding period therefor (section 1223(2));
5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring
Fund Shares pursuant to the Reorganization (section 354(a)); and
6. A Shareholder's basis for the Acquiring Fund Shares to be re-
ceived by it in the Reorganization will be the same as the basis for
its Target Shares to be constructively surrendered in exchange for
those Acquiring Fund Shares (section 358(a)), and its holding period
for those Acquiring Fund Shares will include its holding period for
those Target Shares, provided they are held as capital assets by the
Shareholder on the Closing Date (section 1223(1)).
The foregoing opinion (1) is based on, and is conditioned on the
continued applicability of, the provisions of the Code and the Regulations,
judicial decisions, and rulings and other pronouncements of the Internal
Revenue Service ("Service") in existence on the date hereof and (2) is
applicable only to the extent each Fund is solvent. We express no opinion
about the tax treatment of the transactions described herein if either Fund
is insolvent.
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 8
ANALYSIS
--------
I. The Reorganization Will Be a Reorganization under Section
368(a)(1)(C), and Each Fund Will Be a Party to a Reorganization.
----------------------------------------------------------------
A. Each Fund Is a Separate Corporation.
-----------------------------------
A reorganization under section 368(a)(1)(C) (a "C reorganization")
involves the acquisition by one corporation, in exchange solely for all or
a part of its voting stock, of substantially all of the properties of
another corporation. For the transaction to qualify under that section,
therefore, both entities involved therein must be corporations (or associ-
ations taxable as corporations). Trust, however, is a Massachusetts busi-
ness trust, not a corporation, and each Fund is a separate series of an
Investment Company.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees
for the benefit of beneficiaries) will not be classified as trusts for
purposes of the Code because they are not simply arrangements to protect or
conserve the property for the beneficiaries. These "business or commercial
trusts" are created simply as devices to carry on profit-making businesses
that normally would have been carried on through corporations or partner-
ships. Treasury Regulation section 301.7701-4(c) further provides that an
"`investment' trust will not be classified as a trust if there is a power
under the trust agreement to vary the investment of the certificate
holders." See Commissioner v. North American Bond Trust, 122 F.2d 545 (2d
--- -----------------------------------------
Cir. 1941), cert. denied, 314 U.S. 701 (1942).
------------
Based on these criteria, Trust does not qualify as a trust for federal
income tax purposes. While Trust is an "investment trust," it does not
have a fixed pool of assets -- Acquiring Fund has been a managed portfolio
of securities, and its investment adviser has had the authority to buy and
sell securities for it. Trust is not simply an arrangement to protect or
conserve property for the beneficiaries, but is designed to carry on a
profit-making business. In addition, the word "association" has long been
held to include
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 9
"Massachusetts business trusts," such as Trust. See Hecht v. Malley, 265
--- ---------------
U.S. 144 (1924). Accordingly, we believe that Trust will be treated as a
corporation for federal income tax purposes.
Neither Investment Company as such, however, is participating in the
Reorganization, but rather series of each of them are the participants.
Ordinarily, a transaction involving segregated pools of assets (such as the
Funds) could not qualify as a reorganization, because the pools would not
be corporations. Under section 851(h), however, each Fund is treated as a
separate corporation for all purposes of the Code save the definitional re-
quirement of section 851(a) (which is satisfied by each Investment
Company). Thus, we believe that each Fund will be a separate corporation,
and each Fund's shares will be treated as shares of corporate stock, for
purposes of section 368(a)(1)(C).
B. Satisfaction of Section 368(a)(2)(F).
------------------------------------
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (other than subparagraph (E) thereof) are
"investment companies," the transaction will not be considered a reorgan-
ization with respect to any such investment company or its shareholders
unless, among other things, the investment company is a RIC or --
(1) not more than 25% of the value of its total assets is
invested in the stock or securities of any one issuer
and
(2) not more than 50% of the value of its total assets is
invested in the stock or securities of five or fewer
issuers.
Each Fund will meet the requirements for qualification and treatment as a
RIC for its respective current taxable year, and the foregoing percentage
tests will be satisfied by each Fund. Accordingly, we believe that section
368(a)(2)(F) will not cause the Reorganization to fail to qualify as a C
reorganization with respect to either Fund.
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 10
C. Transfer of "Substantially All" of the Properties.
-------------------------------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the
transferor corporation solely in exchange for all or part of the acquiring
corporation's stock. For purposes of issuing private letter rulings, the
Service considers the transfer of at least 70% of the transferor's gross
assets, and at least 90% of its net assets, held immediately before the
reorganization to satisfy the "substantially all" requirement. Rev. Proc.
77-37, 1977-2 C.B. 568. The Reorganization will involve such a transfer.
Accordingly, we believe that the Reorganization will involve the transfer
to Acquiring Fund of substantially all of Target's properties.
D. Qualifying Consideration.
------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the
transferor's property solely in exchange for voting stock. Section
368(a)(2)(B)(iii). The assumption of liabilities by the acquiring
corporation or its acquisition of property subject to liabilities normally
are disregarded (section 368(a)(1)(C)), but the amount of any such
liabilities will be treated as money paid for the transferor's property if
the acquiring corporation exchanges any money or property (other than its
voting stock) therefor. Section 368(a)(2)(B). Because Acquiring Fund will
exchange only the Acquiring Fund Shares, and no money or other property,
for the Assets, we believe that the Reorganization will satisfy the solely-
for-voting-stock requirement to qualify as a C reorganization.
E. Requirements of Continuity.
--------------------------
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to
a valid reorganization: (1) a continuity of the business enterprise under
the modified corporate form ("continuity of business") and (2) a continuity
of interest therein on the part of those persons who, directly or
indirectly, were the owners of the enterprise prior to the reorganization
("continuity of interest").
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 11
1. Continuity of Business.
----------------------
The continuity of business enterprise test as set forth in Treas. Reg.
Sec. 1.368-1(d)(2) requires that the acquiring corporation must either
(i) continue the acquired corporation's historic business ("business
continuity") or (ii) use a significant portion of the acquired
corporation's historic business assets in a business ("asset continuity").
While there is no authority that deals directly with the requirement
of continuity of business in the context of a transaction such as the Reor-
ganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in
municipal securities. P acquired the assets of T in exchange for P common
stock in a transaction that was intended to qualify as a C reorganization.
Prior to the exchange, T sold its entire portfolio of corporate securities
and purchased a portfolio of municipal bonds. The Service held that this
transaction did not qualify as a reorganization for the following reasons:
(1) because T had sold its historic assets prior to the exchange, there was
no asset continuity; and (2) the failure of P to engage in the business of
investing in corporate securities after the exchange caused the transaction
to lack business continuity as well.
The Funds' investment objectives are virtually identical, and their
investment policies are similar. Furthermore, Acquiring Fund will actively
continue Target's business in the same manner that Target conducted it
immediately before the Reorganization. Accordingly, there will be business
continuity.
Acquiring Fund not only will continue Target's historic business, but
Acquiring Fund also (1) has no plan or intention to sell or otherwise dis-
pose of any of the Assets, except for dispositions made in the ordinary
course of its business and dispositions necessary to maintain its status as
a RIC, and (2) expects to retain substantially all the Assets in the same
form as it receives them in the Reorganization, unless and until subsequent
investment circumstances suggest the desirability of change or it becomes
necessary to make dispositions thereof to maintain such status. Accord-
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 12
ingly, there will be asset continuity as well.
For all the foregoing reasons, we believe that the Reorganization will
meet the continuity of business requirement.
2. Continuity of Interest.
----------------------
For purposes of issuing private letter rulings, the Service considers
the continuity of interest requirement of Treas. Reg. Sec. 1.368-1(b)
satisfied if ownership in an acquiring corporation on the part of a
transferor corporation's former shareholders is equal in value to at least
50% of the value of all the formerly outstanding shares of the transferor
corporation. Rev. Proc. 77-37, supra; but see Rev. Rul. 56-345, 1956-2
----- --- ---
C.B. 206 (continuity of interest was held to exist in a reorganization of
two RICs where immediately after the reorganization 26% of the shares were
redeemed in order to allow investment in a third RIC); also see Reef Corp.
---- --- ----------
v. Commissioner, 368 F.2d 125 (5th Cir. 1966), cert. denied, 386 U.S. 1018
- --------------- ------------
(1967) (a redemption of 48% of a transferor corporation's stock was not a
sufficient shift in proprietary interest to disqualify a transaction as a
reorganization under section 368(a)(2)(F) ("F Reorganization"), even though
only 52% of the transferor's shareholders would hold all the transferee's
stock); Aetna Casualty and Surety Co. v. U.S., 568 F.2d 811, 822-23 (2d
-------------------------------------
Cir. 1976) (redemption of a 38.39% minority interest did not prevent a
transaction from qualifying as an F Reorganization); Rev. Rul. 61-156,
1961-2 C.B. 62 (a transaction qualified as an F Reorganization even though
the transferor's shareholders acquired only 45% of the transferee's stock,
while the remaining 55% of that stock was issued to new shareholders in a
public underwriting immediately after the transfer).
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev.
Rul. 66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of
ownership for a period of time sufficient to warrant the conclusion that
such ownership is definite and substantial" will suffice and that
"ordinarily, the Service will treat five years of unrestricted . . .
ownership as a sufficient period" for continuity of interest purposes.
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 13
A preconceived plan or arrangement by or among an acquired cor-
poration's shareholders to dispose of more than 50% of an acquiring
corporation's shares could be problematic. Shareholders with no such
preconceived plan or arrangement, however, are basically free to sell any
part of the shares received by them in the reorganization without fear of
breaking continuity of interest, because the subsequent sale will be
treated as an independent transaction from the reorganization.
Neither Fund (1) is aware of any plan or intention of Shareholders to
dispose of any portion of the Acquiring Fund Shares to be received by them
in the Reorganization or (2) anticipates dispositions thereof at the time
of or soon after the Reorganization to exceed the usual rate and frequency
of dispositions of shares of Target as a series of an open-end investment
company. Consequently, each Fund expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Accordingly, we be-
lieve that the Reorganization will meet the continuity of interest
requirement of Treas. Reg. Sec. 1.368-1(b).
F. Distribution by Target.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify
as a C reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of
the plan of reorganization. Under the Plan -- which we believe constitutes
a "plan of reorganization" within the meaning of Treas. Reg. Sec. 1.368-2(g) -
- - Target will distribute all the Acquiring Fund Shares to its shareholders
in constructive exchange for their Target Shares; as soon as is reasonably
practicable thereafter, Target will be terminated. Accordingly, we believe
that the requirements of section 368(a)(2)(G)(i) will be satisfied.
G. Business Purpose.
----------------
All reorganizations must meet the judicially imposed requirements of
the "business purpose doctrine," which was established in Gregory v.
----------
Helvering, 293 U.S. 465 (1935), and is now set forth in
- ---------
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 14
Treas. Reg. Sec.Sec. 1.368-1(b), -1(c), and -2(g) (the last of which provides
that, to qualify as a reorganization, a transaction must be "undertaken for
reasons germane to the continuance of the business of a corporation a party
to the reorganization"). Under that doctrine, a transaction must have a
bona fide business purpose (and not a purpose to avoid federal income tax)
to constitute a valid reorganization. The substantial business purposes of
the Reorganization are described in the Proxy. Accordingly, we believe
that the Reorganization is being undertaken for bona fide business purposes
(and not a purpose to avoid federal income tax) and therefore meets the re-
quirements of the business purpose doctrine.
For all the foregoing reasons, we believe that the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1)(C).
H. Both Funds are Parties to the Reorganization.
--------------------------------------------
Section 368(b)(2) and Treas. Reg. Sec. 1.368-1(f) provide that if one
corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization.
Target is transferring substantially all of its properties to Acquiring
Fund in exchange for Acquiring Fund Shares. Accordingly, we believe that
each Fund will be "a party to a reorganization."
II. No Gain or Loss Will Be Recognized to Target.
--------------------------------------------
Under sections 361(a) and (c), no gain or loss will be recognized to a
corporation that is a party to a reorganization (1) on the exchange of
property, pursuant to the plan of reorganization, solely for stock or
securities in another corporate party to the reorganization or (2) on the
distribution to its shareholders, pursuant to that plan, of stock in such
other corporation that was received by the distributing corporation in the
exchange. (Such a distribution is required by section 368(a)(2)(G)(i) for
a reorganization to qualify as a C reorganization.) Section 361(c)(4) pro-
vides that specified provisions requiring recognition of gain on
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 15
certain distributions shall not apply to a distribution described in (2)
above.
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to
be received under section 361 without recognition of gain if it were the
sole consideration and, as part of the consideration, another party to the
exchange assumes a liability of the taxpayer or acquires from the taxpayer
property subject to a liability, then that assumption or acquisition shall
not be treated as money or other property and shall not prevent the
exchange from being within section 361. Section 357(b) applies where the
principal purpose of the assumption or acquisition was a tax avoidance
purpose or not a bona fide business purpose.
As noted above, the Reorganization will constitute a C reorganization,
each Fund will be a party to a reorganization, and the Plan constitutes a
plan of reorganization. Target will exchange the Assets solely for the
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities
and then will terminate pursuant to the Plan, distributing those shares to
its shareholders in constructive exchange for their Target Shares. As also
noted above, we believe that the Reorganization is being undertaken for
bona fide business purposes (and not a purpose to avoid federal income
tax); we also do not believe that the principal purpose of Acquiring Fund's
assumption of the Liabilities is avoidance of federal income tax on the
proposed transaction. Accordingly, we believe that no gain or loss will be
recognized to Target on the Reorganization.3/
-
- --------------------
3/ Notwithstanding anything herein to the contrary, no opinion
- -
is expressed as to the effect of the Reorganization on the Funds
or any Shareholder (regarding the recognition of gain or loss
and/or the determination of the basis or holding period) with
respect to any asset (including certain options, futures, and
forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the
termination or transfer thereof)
(continued)
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 16
III. No Gain or Loss Will Be Recognized to Acquiring Fund.
----------------------------------------------------
Section 1032(a) provides that no gain or loss will be recognized to a
corporation on the receipt by it of money or other property in exchange for
its shares. Acquiring Fund will issue the Acquiring Fund Shares to Target
in exchange for the Assets, which consist of money and securities.
Accordingly, we believe that no gain or loss will be recognized to
Acquiring Fund on the Reorganization.
IV. Acquiring Fund's Basis for the Assets Will Be a Carryover Basis, and
Its Holding Period Will Include Target's Holding Period.
--------------------------------------------------------------------
Section 362(b) provides that property acquired by a corporation in
connection with a reorganization will have the same basis in that
corporation's hands as the basis of the property in the transferor
corporation's hands immediately before the exchange, increased by any gain
recognized to the transferor on the transfer. As noted above, the Reorgan-
ization will constitute a C reorganization and Target will recognize no
gain on the Reorganization under section 361(a). Accordingly, we believe
that Acquiring Fund's basis for the Assets will be the same as the basis
thereof in Target's hands immediately before the Reorganization.
Section 1223(2) provides that where property acquired in an exchange
has a carryover basis, the property will have a holding period in the hands
of the acquiror that includes the holding period of the property in the
transferor's hands. As stated above, Acquiring Fund's basis for the Assets
will be a carryover basis. Accordingly, we believe that Acquiring Fund's
holding period for the Assets will include Target's holding period
therefor.
- ---------------------
3/ (...continued)
- -
thereof) under a mark-to-market system of accounting.
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 17
V. No Gain or Loss Will Be Recognized to a Shareholder.
----------------------------------------------------
Under section 354(a), no gain or loss is recognized to a shareholder
who exchanges shares for other shares pursuant to a plan of reorganization,
where the shares exchanged, as well as the shares received, are those
of a corporation that is a party to the reorganization. As stated above,
the Reorganization will constitute a C reorganization, the Plan constitutes
a plan of reorganization, and each Fund will be a party to a reorgan-
ization. Accordingly, we believe that under section 354 a Shareholder will
recognize no gain or loss on the constructive exchange of all its Target
Shares solely for Acquiring Fund Shares pursuant to the Reorganization.
VI. A Shareholder's Basis for Acquiring Fund Shares Will Be a Substituted
Basis, and its Holding Period therefor Will Include its Holding Period
--------------------------
for its Target Shares.
----------------------------------
Section 358(a)(1) provides, in part, that in the case of an exchange
to which section 354 applies, the basis of any shares received in the
transaction without the recognition of gain is the same as the basis of the
property transferred in exchange therefor, decreased by, among other
things, the fair market value of any other property and the amount of any
money received in the transaction and increased by the amount of any gain
recognized on the exchange by the shareholder.
As noted above, the Reorganization will constitute a C reorganization
and under section 354 no gain or loss will be recognized to a Shareholder
on the constructive exchange of its Target Shares for Acquiring Fund Shares
in the Reorganization. No property will be distributed to the Shareholders
other than the Acquiring Fund Shares, and no money will be distributed to
them pursuant to the Reorganization. Accordingly, we believe that a Sha-
reholder's basis for the Acquiring Fund Shares to be received by it in the
Reorganization will be the same as the basis for its Target Shares to be
constructively surrendered in exchange for those Acquiring Fund Shares.
<PAGE>
PaineWebber Olympus Fund
PaineWebber Master Series, Inc.
June 2, 1995
Page 18
Under section 1223(1), the holding period of property received in an
exchange includes the holding period of the property exchanged therefor if
the acquired property has, for the purpose of determining gain or loss, the
same basis in the holder's hands as the property exchanged therefor
("substituted basis") and such property was a capital asset. As noted
above, a Shareholder will have a substituted basis for the Acquiring Fund
Shares it receives in the Reorganization; accordingly, provided that the
Shareholder held its Target Shares as capital assets on the Closing Date,
we believe its holding period for those Acquiring Fund Shares will include
its holding period for those Target Shares.
We hereby consent to this opinion accompanying the Registration
Statement and to the references to our firm under the captions "Approval of
the Reorganizations -- Synopsis -- Federal Income Tax Consequences of the
Reorganizations" and "The Proposed Transactions -- Federal Income Tax
Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
---------------------
Theodore L. Press
Exhibit 14(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Highlights"
and "Experts" and to the incorporation by reference of our report dated
October 26, 1994 on PaineWebber Growth Fund (a series of PaineWebber Olympus
Fund), in the Registration Statement (Form N-14) of PaineWebber Growth Fund.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
May 30, 1995
Exhibit 14(b)
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement constituting part of this registration statement on Form N-14
(the "N-14 Registration Statement") of our report dated April 17, 1995, relating
to the financial statements and financial highlights of PaineWebber Blue Chip
Growth Fund appearing in the February 28, 1995 Annual Report to Shareholders,
which is incorporated by reference in the Statement of Additional Information
constituting part of the N-14 Registration Statement. We also consent to
the reference to us under the heading "Miscellaneous - Experts" in such
Prospectus/Proxy Statement of the N-14 Registration Statement.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 30, 1995
Exhibit 17.(a)
As filed with the Securities and Exchange Commission on December 19, 1984
Registration 2-
---------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
---- ----
Post-Effective Amendment No. [ ]
---- -----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
-----
Amendment No. [ ]
----- ------
(Check appropriate box or boxes.)
PAINEWEBBER GROWTH FUND, INC.
(Exact name of registrant as specified in charter)
140 Broadway
New York, New York 10005
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 437-6796
SAM SCOTT MILLER, Esq.
LAURA A. CORSELL, Esq.
PaineWebber Incorporated
140 Broadway
New York, New York 10005
(Name and address of agent for service)
Copies to:
ARTHUR J. BROWN, Esq.
Kirkpatrick & Lockhart
1900 M Street, N.W.
Washington, D.C. 20036
Telephone: (202) 452-7000
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
<PAGE>
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act
of 1940, an indefinite number of shares of capital stock is being registered by
this Registration Statement.
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Exhibit 17(b)
Rule 24f-2 NOTICE FOR
PAINEWEBBER OLYMPUS FUND
Growth Fund
Communications & Technology Growth Fund
(1933 Act File No. 2-94983)
1. The fiscal year for which the notice is filed:
September 1, 1993 to August 31, 1994
2. The number or amount of securities of the same class or series, if any,
which have been registered under the Securities Act of 1933 other than
pursuant to this section but which remain unsold at the beginning of such
fiscal period:
1,649,851 share of the Growth Fund
3. The number or amount of securities, if any, registered during such fiscal
period other than pursuant to this section:
None
4. The number or amount of securities sold during such fiscal year:
$240,506,184 representing 17,102,796 shares
5. The number or amount of securities sold during such fiscal period in
reliance upon registration pursuant to this section:
$215,659,428 representing 15,452,945 shares
6. The calculation of filing fee:
(a) The total amount of registered shares of
capital stock ($0.001 par value) sold
including sales load: $215,659,428
(b) Less the total amount of registered shares
of capital stock ($0.001 par value)
redeemed or repurchased: (86,891,473)
--------------
(e) Net change $128,767,955
==============
(f) Filing fee pursuant to section 6(b) of
1933 Act (Line (e) Amount x .00034483): $44,403
==============
/s/ Ann E. Moran
------------------------------
Date: 27-Oct-94 Ann E. Moran
Vice President and Assistant Treasurer
PaineWebber Olympus Fund
Exhibit 17(C)
PROXY
-----
PaineWebber Olympus Fund - PaineWebber Communications & Technology Growth Fund
Special Meeting of Shareholders - August 11, 1995
The undersigned hereby appoints as proxies Dianne E. O'Donnell and Jennifer A.
Farrell and each of them (with power of substitution) to vote for the
undersigned all shares of beneficial interest of the undersigned at the
aforesaid meeting and any adjournment thereof with all the power the
undersigned would have if personally present. The shares represented by this
proxy will be voted as instructed. Unless indicated to the contrary, this
proxy shall be deemed to grant authority to vote "FOR" all proposals. This
proxy is solicited on behalf of the Board of Trustees of PaineWebber Olympus
Fund.
YOUR VOTE IS IMPORTANT
Please date and sign this proxy on the reverse side and return it in the
enclosed envelope to Alamo Direct Mail Services, Inc., 10 Lucon Drive,
Deer Park, NY 11729.
Please indicate your vote by an "X" in the appropriate box below. The Board
of Trustees recommends a vote "FOR"
FOR AGAINST ABSTAIN
1. Approval of an Agreement and Plan of
Reorganization and Termination between
PaineWebber Communications & Technology
Growth Fund and PaineWebber Growth Fund. [ ] [ ] [ ]
Continued and to be signed on reverse side
<PAGE>
This proxy will not be voted unless it is dated and signed exactly as
instructed below
Is shares are held jointly, each Shareholder named should sign. If only one
signs, his or her signature will be binding. If the Shareholder is a
corporation, the President or a Vice President should sign in his or her own
name, indicating title. If the Shareholder is a partnership, a partner should
sign in his or her own name, indicating that he or she is a "Partner."
Sign exactly as name appears hereon.
______________________________(L.S.)
______________________________(L.S.)
Date _________________________, 1995
<PAGE>
PROXY
-----
PaineWebber Master Series, Inc. - PaineWebber Blue Chip Growth Fund
Special Meeting of Shareholders - August 11, 1995
The undersigned hereby appoints as proxies Dianne E. O'Donnell and Jennifer A.
Farrell and each of them (with power of substitution) to vote for the
undersigned all shares of beneficial interest of the undersigned at the
aforesaid meeting and any adjournment thereof with all the power the
undersigned would have if personally present. The shares represented by this
proxy will be voted as instructed. Unless indicated to the contrary, this
proxy shall be deemed to grant authority to vote "FOR" all proposals. This
proxy is solicited on behalf of the Board of Directors of PaineWebber Olympus
Fund.
YOUR VOTE IS IMPORTANT
Please date and sign this proxy on the reverse side and return it in the
enclosed envelope to Alamo Direct Mail Services, Inc., 10 Lucon Drive,
Deer Park, NY 11729.
Please indicate your vote by an "X" in the appropriate box below. The Board
of Directors recommends a vote "FOR"
FOR AGAINST ABSTAIN
1. Approval of an Agreement and Plan of
Reorganization and Termination between
PaineWebber Blue Chip Growth Fund and
PaineWebber Growth Fund. [ ] [ ] [ ]
Continued and to be signed on reverse side
<PAGE>
This proxy will not be voted unless it is dated and signed exactly as
instructed below
Is shares are held jointly, each Shareholder named should sign. If only one
signs, his or her signature will be binding. If the Shareholder is a
corporation, the President or a Vice President should sign in his or her own
name, indicating title. If the Shareholder is a partnership, a partner should
sign in his or her own name, indicating that he or she is a "Partner."
Sign exactly as name appears hereon.
______________________________(L.S.)
______________________________(L.S.)
Date _________________________, 1995
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