<PAGE>
PAINEWEBBER
BALANCED FUND
1285 Avenue of the Americas
New York, New York 10019
. 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
The Fund is a series of PaineWebber Master Series, Inc. ("Corporation"). 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 1, 1995 (as revised
August 14, 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 con-
tacting the Fund, your PaineWebber investment executive or PaineWebber's
correspondent firms or by calling toll-free 1-800-647-1568. Prior to August
1995, the Fund was known as "PaineWebber Asset Allocation Fund."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION NOR HAS ANY SUCH COMMISSION PASSED UPON THE ACCURACY OR ADE-
QUACY 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 SECU-
RITIES DETERMINED TO BE LIQUID BY THE CORPORATION'S BOARD OF DIRECTORS).
INVESTMENT IN RESTRICTED SECURITIES (OTHER THAN SUCH RULE 144A SECURI-
TIES) 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 1, 1995 (as revised August 14, 1995).
A PaineWebber Mutual Fund
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS 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 Balanced Fund ("Fund") is a diversified series
of the Corporation, an open-end, management investment com-
pany.
Investment High total return with low volatility; invests primarily in
Objective and a combination of equity securities, investment grade debt
Policies: securities and money market instruments, based on Mitchell
Hutchins' assessment of the optimal allocation of the
Fund's assets. The Fund seeks to maintain a dollar-weighted
average maturity for its fixed income investments of three
to ten years.
Total Net Assets
at June 26, 1995: $214.1 million.
Investment Mitchell Hutchins Asset Management Inc. ("Mitchell
Adviser: Hutchins"), an asset management subsidiary of PaineWebber
Incorporated ("PaineWebber" or "PW"), manages over $43.6
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
Fund's transfer agent ("Transfer Agent").
Flexible Pricing Investors may select Class A, Class B or Class D shares,
System: 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 pur-
chase). 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 an-
other Class.
2
<PAGE>
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 semi-annually; net capital gain is dis-
tributed 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 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
WHO SHOULD INVEST. The Fund is designed for investors seeking a mutual fund
investing primarily in a combination of equity securities, investment grade
debt securities and money market instruments. The Fund seeks to maintain a dol-
lar-weighted average maturity for its fixed income investments of three to ten
years. Assets are allocated based on Mitchell Hutchins' assessment of consensus
market expectations of key economic variables and the application of fundamen-
tal valuation techniques. While the Fund is not intended to provide a complete
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 in-
vestment 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 debt securities rated lower than investment grade
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or
comparably rated by another nationally recognized statistical rating organiza-
tion ("NRSRO"). Such securities are subject to greater risks of default and
price fluctuation than investment grade securities and are considered predomi-
nantly speculative. The Fund may invest in mortgage- and asset-backed securi-
ties, which involve special risks, such as those relating to the prepayment of
principal on the underlying obligations. The market value of certain mortgage-
backed securities in which the Fund may invest, including interest-only and
principal-only classes of mortgage-backed securities and inverse floating rate
securities, can be extremely volatile, and these securities may become illiq-
uid. The Fund also may invest in U.S. dollar denominated securities of foreign
issuers. Foreign securities involve certain considerations not typically asso-
ciated with investing in securities of U.S. issuers, including risks relating
to political, social and economic developments abroad and to differences be-
tween the regulations to which U.S. and foreign issuers and markets are sub-
ject.
3
<PAGE>
EXPENSES OF INVESTING IN THE FUND. The following tables are intended to as-
sist investors in understanding the expenses associated with investing in the
Fund.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
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
</TABLE>
ANNUAL FUND OPERATING EXPENSES(2)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS 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.......................................... 0.26 0.23 0.26
---- ---- ----
Total operating expenses................................ 1.26% 1.98% 2.01%
==== ==== ====
</TABLE>
-------
(1) Sales charge waivers are available for Class A and Class B shares, re-
duced sales charge purchase plans are available for Class A shares and exchange
fee waivers are available for all three Classes. The maximum 5% contingent de-
ferred 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 February 28,
1995.
(3) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS 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 (includ-
ing distribution fees) than the economic equivalent of the maximum front-end
sales charge permitted by the National Association of Securities Dealers, 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:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class A Shares(1)..................................... $57 $83 $111 $190
Class B Shares:
Assuming a complete redemption at end of peri-
od(2)(3)........................................... $70 $92 $127 $195
Assuming no redemption(3)........................... $20 $62 $107 $195
Class D Shares........................................ $20 $63 $108 $234
</TABLE>
-------
(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 con-
tingent 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 rein-
vested and that the percentage amounts listed under Annual Fund Operating Ex-
penses 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 Securi-
ties and Exchange Commission ("SEC") applicable to all mutual funds; the as-
sumed 5% annual return is not a prediction of, and does not represent, the pro-
jected or actual performance of any Class of the Fund's shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES, 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>
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 each of the pe-
riods 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 re-
port thereon is included in the Annual Report to Shareholders. Further informa-
tion about the Fund's performance is also included in the Annual Report to
Shareholders, which may be obtained without charge. The information provided
below relates to the Fund's operations while it was pursuing different invest-
ment policies and may not necessarily be indicative of current or future opera-
tions.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------- ---------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED JULY 1, FOR THE YEARS ENDED
FEBRUARY 28, 1991+ TO FEBRUARY 28 OR 29,
----------------------------- FEBRUARY 29, ---------------------------
1995 1994 1993 1992 1995 1994 1993
-------- -------- -------- ------------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.04 $ 11.54 $ 11.01 $10.09 $ 12.10 $ 11.56 $ 10.99
-------- -------- -------- ------ ------- ------- --------
Income from investment
operations:
Net investment income.. 0.26 0.22 0.33 0.19 0.44 0.26 0.30
Net realized and
unrealized gains
(losses) from
investment
transactions.......... (1.07) 1.31 0.54 0.96 (1.32) 1.18 0.48
-------- -------- -------- ------ ------- ------- --------
Total income (loss) from
investment operations.. (0.81) 1.53 0.87 1.15 (0.88) 1.44 0.78
-------- -------- -------- ------ ------- ------- --------
Less dividends and
distributions from:
Net investment income.. (0.23) (0.25) (0.34) (0.23) (0.12) (0.12) (0.21)
Net realized gains..... (1.20) (0.78) -- -- (1.20) (0.78) --
-------- -------- -------- ------ ------- ------- --------
Total dividends and (1.43) (1.03) (0.34) (0.23) (1.32) (0.90) (0.21)
distributions.......... -------- -------- -------- ------ ------- ------- --------
Net asset value, end of
period................. $ 9.80 $ 12.04 $ 11.54 $11.01 $ 9.90 $ 12.10 $ 11.56
======== ======== ======== ====== ======= ======= ========
Total return(1)......... (6.02)% 13.57% 8.09% 11.43% (6.68)% 12.62% 7.25%
======== ======== ======== ====== ======= ======= ========
Ratios/Supplemental
Data:
Net assets, end of
period
(000's omitted)........ $174,761 $216,492 $154,594 $ 916 $37,104 $83,178 $160,115
Ratio of expenses to
average net assets..... 1.26% 1.21% 1.18% 1.30%* 1.98% 2.05% 1.98%
Ratio of net investment
income to average net
assets................. 2.41% 1.74% 2.52% 3.43%* 1.60% 1.00% 2.02%
Portfolio turnover...... 106.76% 68.53% 33.17% 83.62% 106.76% 68.53% 33.17%
</TABLE>
-------
* Annualized.
+ Commencement of the offering of shares.
(1) Total 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 gain 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 fig-
ures do not include sales charges; results of Class A and Class B shares
would be lower if sales charges were included. Total returns for periods of
less than one year have not been annualized.
(2) During the period December 12, 1986 (commencement of issuance of Class B
shares) to February 28, 1987, PaineWebber reimbursed the Fund for a portion
of its operating expenses. If such reimbursement 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 2.10% and
2.73%, respectively.
6
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS D
----------------------------------------------------------------- ------------------------------
FOR THE FOR THE
PERIOD FOR THE PERIOD
DECEMBER YEAR ENDED JULY 2,
FOR THE YEARS ENDED FEBRUARY 28 OR 29, 12, 1986+ FEBRUARY 28, 1992+ TO
--------------------------------------------------- TO FEBRUARY ---------------- FEBRUARY 28,
1992 1991 1990 1989 1988 28, 1987 1995 1994 1993
-------- -------- -------- -------- -------- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $ 10.00 $12.03 $ 11.54 $10.86
-------- -------- -------- -------- -------- -------- ------ ------- ------
0.35 0.59 0.65 0.54 0.48 0.04 0.19 0.14 0.13
0.78 0.38 0.10 (0.28) (0.09) 0.36 (1.07) 1.30 0.71
-------- -------- -------- -------- -------- -------- ------ ------- ------
1.13 0.97 0.75 0.26 0.39 0.40 (0.88) 1.44 0.84
-------- -------- -------- -------- -------- -------- ------ ------- ------
(0.35) (0.62) (0.70) (0.52) (0.44) -- (0.13) (0.17) (0.16)
-- -- (0.11) -- (0.17) -- (1.20) (0.78) --
-------- -------- -------- -------- -------- -------- ------ ------- ------
(0.35) (0.62) (0.81) (0.52) (0.61) -- (1.33) (0.95) (0.16)
-------- -------- -------- -------- -------- -------- ------ ------- ------
$ 10.99 $ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $ 9.82 $ 12.03 $11.54
======== ======== ======== ======== ======== ======== ====== ======= ======
11.24% 10.29% 7.53% 2.73% 4.31% 4.00% (6.69)% 12.75% 7.78%
======== ======== ======== ======== ======== ======== ====== ======= ======
$346,290 $403,557 $557,646 $651,003 $715,771 $613,024 $8,525 $12,916 $7,058
2.02% 1.83% 1.84% 1.94% 1.98% 2.03%*(2) 2.01% 1.96% 1.95%*
3.25% 5.46% 6.04% 5.37% 5.01% 2.80%*(2) 1.62% 0.97% 1.91%*
83.62% 169.18% 326.99% 159.32% 129.05% 25.33% 106.76% 68.53% 33.17%
</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>
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 years after issuance
proceeds; 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 de-
scribed 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 ini-
tial sales charge, not all of a Class A shareholder's purchase price is in-
vested 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 eli-
gible 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.
8
<PAGE>
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. An-
nual 12b-1 distribution fees are a form of asset-based sales charge. An in-
vestor 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 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 re-
demption of Class B shares, such an investor would generally pay lower cumula-
tive 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 as-
set 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 an-
nual return of 5%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of compensa-
tion for selling one particular Class of Fund shares rather than another. In-
vestors should understand that distribution fees and initial and contingent de-
ferred sales charges all are intended to compensate Mitchell Hutchins for dis-
tribution services.
See "Purchases," "Redemptions" and "Management" for a more complete descrip-
tion 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 In-
formation" for other differences among the three Classes.
INVESTMENT OBJECTIVE AND
POLICIES
INVESTMENT OBJECTIVE AND PRIMARY INVESTMENTS
The Fund's investment objective is to obtain high total return with low vola-
tility. The Fund seeks to achieve this objective by investing primarily in a
combination of equity securities, investment grade debt securities and money
market instruments based on Mitchell Hutchins' assessment of the optimal allo-
cation of the Fund's assets. The Fund seeks to maintain a dollar-weighted aver-
age maturity for its fixed income investments (comprised of debt securities and
money market instruments) of three to ten years. At least 25% of the Fund's as-
sets will be invested in fixed income investments.
9
<PAGE>
There can be no assurance that the Fund will achieve its investment objec-
tive. 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 in-
vestment 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 di-
rectors without shareholder approval.
Mitchell Hutchins believes that capital market returns reflect the consensus
expectations for key economic variables, such as interest rates, profit growth
and inflation, and that superior performance can be obtained by reallocating
assets from time to time before changes in the consensus outlook have been
fully discounted by the market. To implement this strategy, Mitchell Hutchins
regularly surveys market participants and generates a consensus forecast of
economic variables affecting returns on equity, debt and money market invest-
ments. It then applies fundamental valuation techniques to the consensus data
to determine what Mitchell Hutchins believes is the optimal asset allocation
for the Fund. Portfolio managers specializing in each asset class then select
specific securities for their allocated portions of the portfolio. Mitchell
Hutchins regularly monitors market outlooks and changes asset allocations when
there are significant changes in expected returns.
Equity Securities. In selecting equity securities for the Fund, Mitchell
Hutchins follows a disciplined methodology under which stocks from a universe
of approximately 2,000 medium to large capitalization (generally at least $300
million) companies are ranked utilizing quantitative measures of value, earn-
ings and price momentum in the context of Mitchell Hutchins' economic forecast.
Stocks are selected for the Fund based on fundamental analysis of the highest
ranking stocks.
Debt Securities. The Fund's investments in debt securities are based on anal-
yses of the maturity structure and the risk structure (com-paring yields on
Treasury securities to yields on riskier types of debt securities). The Fund
may invest in a broad range of investment grade bonds, securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, including
mortgage-backed securities, and other fixed income securities. Investment grade
bonds are those bonds that, at the time of purchase, are assigned one of the
four highest grades by S&P or Moody's, are comparably rated by another NRSRO
or, if unrated, are determined by Mitchell Hutchins to be of comparable quality
to such rated securities.
The maturity of a mortgage-backed security is deemed to be its effective life
(i.e., the average time in which it is expected that the principal amount of
the security will be repaid), as estimated by Mitchell Hutchins based upon
scheduled principal amortization and an anticipated rate of principal prepay-
ments, which, in turn, is based upon past prepayment patterns, prevailing in-
terest rates and other factors. The effective life of a mortgage-backed secu-
rity generally is substantially shorter than its stated maturity.
The Fund may also invest in convertible securities rated at least B by S&P or
Moody's, comparably rated by another NRSRO or, if unrated, determined by Mitch-
ell Hutchins to be of comparable quality, provided that the Fund will not do so
if, as a result, more than 10% of its total assets will be invested in convert-
ible securities rated below BBB by S&P, Baa by Moody's, comparably rated by an-
other NRSRO or, if unrated, determined by Mitchell Hutchins to be of comparable
quality. See "Other Investment Policies and Risk Factors--Risk Factors--Risks
of Debt Securities."
10
<PAGE>
Money Market Instruments. The Fund may invest in high-grade money market in-
struments, which are debt securities with maturities of 13 months or less. Such
instruments will be chosen by Mitchell Hutchins based on its judgment of their
utility in furthering the Fund's investment objective. Such instruments include
U.S. Treasury bills and other obligations issued or guaranteed as to interest
and principal by the U.S. government, its agencies and instrumentalities; obli-
gations of U.S. banks (including certificates of deposit and bankers' accept-
ances) having total assets at the time of purchase in excess of $1.5 billion,
and interest-bearing savings deposits in U.S. commercial and savings banks in
principal amounts at each such bank not greater than are fully insured by the
Federal Deposit Insurance Corporation, provided that the aggregate amount of
such deposits does not exceed 5% of the value of the Fund's assets; commercial
paper and other short-term corporate obligations; and variable and floating
rate securities and repurchase agreements. The Fund may also hold cash.
The commercial paper and other short-term corporate obligations purchased by
the Fund will consist only of obligations of U.S. corporations that are rated
at least Prime-2 by Moody's or A-2 by S&P, comparably rated by another NRSRO or
unrated and determined by Mitchell Hutchins to be of comparable quality. These
obligations may include variable amount master demand notes, which are
unsecured obligations redeemable upon notice that permit investment of fluctu-
ating amounts at varying rates of interest pursuant to direct arrange- ments
with the issuer of the instrument. Such obligations usually are not rated by a
rating agency.
The Fund may purchase variable rate securities with remaining maturities of
one year or more issued by U.S. government agencies or instrumentalities or
guaranteed by the U.S. government. The Fund may also acquire certain variable
and floating rate instruments issued by U.S. companies. The yield of these se-
curities varies in relation to changes in specific money market rates such as
the prime rate. These changes are reflected in adjustments to the yields of the
variable rate securities at least semi-annually, and different securities may
have different adjustment rates. The maturities of certain variable rate secu-
rities may be determined based upon their interest rate reset dates.
In addition, the Fund may invest without limitation in participation inter-
ests in the money market securities in which it is permitted to invest. Partic-
ipation interests are pro rata interests in securities held by others.
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 securi-
ties 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 cred-
itworthiness of the issuer, such as securities issued by the Resolution Funding
Corporation and the Tennessee Valley Authority; and securities that are sup-
ported 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- AND ASSET-BACKED SECURITIES. Mortgage-backed securities represent
direct or
11
<PAGE>
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through secu-
rities and collateralized mortgage obligations. Multi-class pass-through secu-
rities and collateralized mortgage obligations are collectively referred to
herein as CMOs. The U.S. government mortgage-backed securities in which the
Fund may invest include mortgage-backed securities issued or guaranteed as to
the payment of principal and interest (but not as to market value) by Ginnie
Mae, Fannie Mae, or Freddie Mac. Other mortgage-backed securities are issued by
private issuers, generally originators of and investors in mortgage loans, in-
cluding savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities (collectively "Private Mortgage Lenders").
Pay-ments of principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be is-
sued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. For more information about
the types of mortgage-backed securities in which the Fund may invest, see Ap-
pendix A to this Prospectus.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle install-
ment sale contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property and receivables from re-
volving credit (credit card) agreements. Such assets are securitized through
the use of trusts or special purpose corporations. Payments or distributions of
principal and interest may be guaranteed up to a certain amount and for a cer-
tain time period by a letter of credit or pool insurance policy issued by a fi-
nancial institution unaffiliated with the issuer, or other credit enhancements
may be present.
ZERO COUPON SECURITIES. The Fund also may invest in certain zero coupon secu-
rities that are U.S. Treasury notes and bonds that have been stripped of their
unmatured interest coupon receipts or interests in such U.S. Treasury securi-
ties or coupons, such as Certificates of Accrual Treasury Securities (CATS) and
Treasury Income Growth Receipts (TIGRs). Such securities generally are likely
to be more sensitive to changes in interest rates than other U.S. government
securities. The SEC staff currently takes the position that "stripped" U.S.
government securities that are not issued through the U.S. Treasury STRIPS pro-
gram are not U.S. government securities.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A con-
vertible 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 spec-
ified 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. Convert-
ible 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 un-
derlying common stock in-
12
<PAGE>
creases. While no securities investment is without some risk, investments in
convertible secu- rities generally entail less risk than the issuer's common
stock, although the extent to which such risk is reduced depends in large meas-
ure upon the degree to which the convertible security sells above its value as
a fixed income security.
RISK FACTORS. The Fund's net asset value will fluctuate based on changes in
the value of its portfolio securities. Neither the issuance by, nor the guaran-
tee of, a U.S. government agency nor even the highest rating by a NRSRO consti-
tutes assurance that the security will not fluctuate in value or that the Fund
will receive the originally anticipated yield on the security. An investment in
the Fund also is subject to the additional risks discussed below.
--INTEREST RATE SENSITIVITY. 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 fixed income investments 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- AND ASSET-BACKED SECURITIES. The yield characteristics
of the mortgage- and asset-backed securities in which the Fund may invest dif-
fer from those of traditional debt securities. Among the major differences are
that interest and principal payments are made more frequently on mortgage- and
asset-backed securities (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 pur-
chases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturi-
ty. (Amounts available for reinvestment by the Fund 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 prepayments on securities purchased by the Fund at a pre-
mium also impose a risk of loss of principal because the premium may not have
been fully amortized at the time the principal is prepaid in full. The market
for privately issued mortgage- and asset-backed securities is smaller and less
liquid than the market for U.S. government mortgage-backed securities. CMO
classes may be specially structured in a manner that provides any of a wide va-
riety of investment characteristics, such as yield, effective maturity and in-
terest rate sensitivity. As market conditions change, however, and particularly
during periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. These
changes can result in volatility in the market value, and in some instances,
reduced liquidity, of the CMO class.
The rate of interest payable on CMO classes may be set at levels that are ei-
ther above or below market rates at the time of issuance, so
13
<PAGE>
that the securities will be sold at a substantial premium to, or at a discount
from, par value. In the most extreme case, one class will be entitled to re-
ceive all or a portion of the interest but none of the principal from the un-
derlying mortgage assets (the interest-only or "IO" class) and one class will
be entitled to receive all or a portion of the principal but none of the inter-
est (the principal-only or "PO" class). IOs and POs may also be created from
mortgage-backed securities that are not CMOs. The yields on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or dis-
count generally are extremely sensitive to the rate of principal payments (in-
cluding prepayments) on the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, an
investor may fail to recoup fully his or her initial investment even if the se-
curity is government issued or guaranteed or is rated AAA or the equivalent.
Some CMO classes are structured to pay interest at rates that are adjusted in
accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive
in certain interest rate environments but not in others. For example, an in-
verse floating rate CMO class pays interest at a rate that increases as a spec-
ified interest rate index decreases but decreases as that index increases. For
other CMO classes, the yield may move in the same direction as market interest
rates-- i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly, more slowly or to a greater or lesser de-
gree. The market value of such securities generally is more volatile than that
of a fixed rate obligation. Such interest rate formulas may be combined with
other CMO characteristics. For example, a CMO class may be an "inverse IO," on
which the holders are entitled to receive no payments of principal and are en-
titled to receive interest at a rate that will vary inversely with a specified
index or a multiple thereof.
During 1994, the value and liquidity of many mortgage-backed securities de-
clined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain mort-
gage-backed securities in which the Fund may invest, including IO and PO clas-
ses of mortgage-backed securities and inverse floating rate securities, can be
extremely volatile and these securities may become illiquid. Mitchell Hutchins
seeks to manage the Fund's investments in mortgage-backed securities so that
the volatility of the Fund's portfolio, taken as a whole, is consistent with
the Fund's investment objective. If Mitchell Hutchins incorrectly forecasts in-
terest rate changes or other factors that may affect the volatility of securi-
ties held by the Fund, the Fund's ability to meet its investment objective may
be reduced.
See Appendix A to this Prospectus for more information concerning the types
of mortgage-backed securities in which the Fund may invest.
--RISKS OF DEBT SECURITIES. The Fund is permitted to purchase investment
grade debt 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 is-
suers, 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 cir-
cumstances 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
14
<PAGE>
securities. The Fund may invest up to 10% of its total assets in non-investment
grade convertible debt securities that are rated at least B by S&P or Moody's
or comparably rated by another NRSRO. Debt securities rated below investment
grade are deemed by those agencies to be predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal and to involve ma-
jor risk exposures to adverse conditions. These securities are commonly re-
ferred to as "junk bonds." The Fund is also permitted to purchase debt securi-
ties 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 de-
termining whether the Fund should continue to hold the security but is not re-
quired to dispose of it. However, in the event that, due to a downgrade of one
or more debt securities, an amount in excess of 35% of the Fund's net assets is
held in securities rated below investment grade and comparable unrated securi-
ties, Mitchell Hutchins will engage in an orderly disposition of these securi-
ties to the extent necessary to ensure that the Fund's holdings of these secu-
rities do not exceed 35% of the Fund's net assets. 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 con-dition 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.
Lower grade debt securities generally offer a higher current yield than that
available from higher grade issues but they involve higher risks, in that they
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in in-
terest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of principal and interest and increase
the possibility of default. In addition, the market for lower grade 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 diffi-culties. As a result, the yields on lower
grade debt securities rose dramatically, but 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 por-
tion of their value as a result of the issuers' financial restructuring or de-
fault. There can be no assurance that such declines will not recur. The market
for lower grade debt securities 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 the 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.
15
<PAGE>
Although Mitchell Hutchins will attempt to minimize the speculative risks as-
sociated with investments in lower grade debt securities through diversifica-
tion, credit analysis and attention to current trends in interest rates and
other factors, investors should carefully review the investment objective and
policies of the Fund and consider their ability to assume the investment risks
involved before making an investment.
--RISKS OF ZERO COUPON SECURITIES. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero coupon se-
curities pay no interest to holders prior to maturity. However, a portion of
the original issue discount on the zero coupon securities must be included in
the Fund's income. Accordingly, to continue to qualify for tax treatment as a
regulated investment company and to avoid certain excise taxes (see "Taxes" in
the Statement of Additional Information), the Fund may be required to distrib-
ute as dividends amounts that are greater than the total amount of cash it ac-
tually receives. These distributions must be made from the Fund's cash assets
or, if necessary, from the proceeds of sales of portfolio securities. The Fund
will not be able to purchase additional income-producing securities with cash
used to make such distributions, and its current income ultimately may be re-
duced as a result. Zero coupon securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of compara-
ble maturities that make current distributions of interest in cash.
FOREIGN SECURITIES. The Fund may invest 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. These risks may include expropria-
tion, confiscatory taxation, withholding taxes on dividends and interest, limi-
tations on the use or transfer of Fund assets and political or social instabil-
ity or diplomatic developments. Moreover, individual foreign economies may dif-
fer 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. Repur-
chase 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 pur-
chased 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase debt secu-
rities, including mortgage-backed securities, on a "when-issued basis" or may
purchase or sell securities for delayed delivery. In such
16
<PAGE>
transactions, delivery of the securities occurs beyond normal settlement peri-
ods, 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 secu-
rity purchased by the Fund on a when-issued or delayed delivery basis may re-
sult in the Fund's incurring a loss or missing an opportunity to make an alter-
native 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 secu-
rities held by the Fund, exceed its net assets.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in il-
liquid securities, including, among other things, securities whose disposition
is restricted under the federal securities laws (other than "Rule 144A" securi-
ties Mitchell Hutchins has determined to be liquid under procedures approved 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 certain restricted securities have developed as a re-
sult of Rule 144A, providing both readily ascertainable values for such re-
stricted securities and the ability to liquidate such an investment to satisfy
share redemption orders. An insufficient number of qualified institutional buy-
ers 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.
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 33 1/3%
of the total value of its portfolio securities to broker-dealers or institu-
tional investors that Mitchell Hutchins deems qualified, but only when the bor-
rower 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 divi-
dends. In determining whether to lend securities to a particular broker-dealer
or institutional investor, Mitchell Hutchins will consider, and during the pe-
riod of the loan will monitor, 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 bor-
rower or placing broker. The Fund will receive interest on the loan or a flat
fee from the borrower and amounts equivalent to any dividends, interest or
other distributions on the se-curities loaned. The Fund will regain record own-
ership 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.
PORTFOLIO TURNOVER. The Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. A higher turnover rate (100% or more) will in-
volve correspondingly greater transaction costs, which will be borne directly
by the Fund, and may increase the potential for short-term capital gains. This
portfolio turnover policy applies both with respect to the
17
<PAGE>
common stock portion of the Fund's portfolio as well as to the remainder of its
portfolio.
OTHER PRACTICES. The Fund may engage in short sales of securities "against
the box" to defer realization of gains or losses for tax or other purposes, and
the Fund may borrow money for temporary purposes, but not in excess of 10% of
its total assets, including reverse repurchase agreements involving up to 5% of
its total assets.
PURCHASES
GENERAL. Class A shares of the Fund are sold to investors subject to an ini-
tial 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 "Conver-
sion 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 Trans-
fer Agent. Investors may contact a local PaineWebber office to open an account.
The minimum initial investment is $1,000, and the minimum for additional pur-
chases is $100. These minimums may be waived or reduced for investments by em-
ployees of PaineWebber or its affiliates, certain pension plans and retirement
accounts and participants in the Fund's automatic investment plan. Purchase or-
ders will be priced at the net asset value per share next determined (see "Val-
uation 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. Invest-
ment executives and correspondent firms are responsible for transmitting pur-
chase 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 third
Business Day after the order is received at PaineWebber's New York City of-
fices. 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 cli-
ents may purchase shares of the Fund through the Trans- fer Agent. Shares of
the Fund may be purchased, and an account with the Fund established, by com-
pleting 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. Subse-
18
<PAGE>
quent 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 be-
low.
Mitchell Hutchins may at times agree to reallow higher discounts 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
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.
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares of the Fund are avail-
able 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 offi-
cers of PaineWebber or its affiliates, directors or trustees and officers of
any PaineWebber or MH/KP mutual 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 bro-
kerage 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 and MH/KP mutual 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 exec-
utives for more information.
Certificate holders of unit investment trusts ("UITs") sponsored by
PaineWebber may
19
<PAGE>
acquire Class A shares of the Fund without regard to minimum investment re-
quirements 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 in-
vestor 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 in-
dividual'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 eli-
gible group of individuals for the benefit of the individual and/or the indi-
vidual'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 Infor-
mation 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, howev-
er, 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 dis-
tributions or (3) shares redeemed more than six years after their purchase.
Otherwise, redemptions of Class B shares will be subject to a contingent de-
ferred 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF NET
ASSET VALUE AT
REDEMPTION DURING REDEMPTION
----------------- -------------------
<S> <C>
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
</TABLE>
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 of a Fund acquired through an exchange with another PaineWebber mutual
fund will be calculated from the date that the Class B shares were
20
<PAGE>
initially acquired in one of the other PaineWebber funds, and Class B shares
being redeemed will be considered to represent, as applicable, capital appreci-
ation 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 de-
ferred 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 con-
nection 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 survi-
vorship. 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 un-
der Section 403(b) of the Internal Revenue Code following attainment of age 59
1/2; any total or partial redemption resulting from a distribution following
retirement in the case of a tax-qualified retirement plan; and a redemption re-
sulting from a tax-free return of an excess contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to confirma-
tion (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 sharehold-
er'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 ex-
change. However, contingent deferred sales charges may apply to redemptions of
Class B shares of PaineWebber mutual funds 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
PaineWebber mutual funds. Thus, contingent deferred sales charges are not ap-
plicable 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 min-
imum investment requirements of the fund into which exchanges are made.
The other PaineWebber ("PW") and MH/KP mutual funds with which Fund shares
may be exchanged include:
Income Funds
. MH/KP ADJUSTABLE RATE GOVERNMENT FUND
. MH/KP GLOBAL FIXED INCOME FUND
21
<PAGE>
. 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 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 BLUE CHIP 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 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 in-
vestment 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 writ-
ing 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 settle-
ment date has passed and payment for such shares has been made.
OTHER EXCHANGE INFORMATION. This exchange privilege may be modified or termi-
nated 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 and MH/KP mutual 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 mutual funds to
be acquired through the exchange.
22
<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 after receipt of a redemption request, as described be-
low. 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 spe-
cifically 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 three Business Days af-
ter receipt of the request, 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 re-
demption 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 re-
quests 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 or-
der," and redemption proceeds will be paid within seven days of the receipt of
the request. "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, partner-
ships and corporations and (4) duly endorsed share certificates, if any. Share-
holders are responsible for ensuring that a request for redemption is received
in "good order."
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder who holds non-certifi-
cated 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 re-
quirements generally, should be referred to the shareholder's PaineWebber in-
vestment executive or correspondent firm, or to the Trans-
23
<PAGE>
fer 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 ac-
counts, the Fund reserves the right to redeem all Fund shares in any share-
holder 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 re-
duction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund ac-
count without a sales charge up to the dollar amount redeemed by purchasing
Class A 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 conver-
sion 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 aver-
aging." 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. Of course, investing
through the automatic investment plan does not assure a profit or protect
against loss in declining markets. Additionally, since the automatic investment
plan involves continuous investing regardless of price levels, an investor
should consider his or her financial ability to continue purchases through pe-
riods of low price levels.
24
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own Class A or Class D shares of
the Fund with a value of $5,000 or more or non-certificated 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 with-
drawal plan. No contingent deferred sales charge will be imposed on such with-
drawals 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 with-
drawal amounts for Class B shares are $200, $400 and $600, respectively. Quar-
terly withdrawals are made in March, June, September and December, and semi-an-
nual 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 ter-
minate automatically if the Initial Account Balance (plus the net asset value
on the date of purchase of Fund shares acquired after the election to partici-
pate in the systematic withdrawal plan), less aggregate redemptions made other
than pursuant to the systematic withdrawal plan, is less than $20,000. Share-
holders who receive dividends or other distributions in cash may not partici-
pate in the systematic withdrawal plan. Purchases of additional shares of the
Fund concurrently with withdrawals are ordinarily disadvantageous to sharehold-
ers 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 es-
tablishing 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 dividends semi-annually from its net investment in-
come; it also may distribute net short-term capital gain, if any, with the
semi-annual dividend. Net investment income includes dividend income, accrued
interest and discount, less amortization of premium and accrued expenses. Sub-
stantially all of the Fund's net capital gain (the excess of net long-term cap-
ital gain over net short-term capital loss), if any, and any undistributed net
short-term capital gain, is distributed at least annually. The Fund may make
additional distributions if necessary to avoid income or excise taxes. While
the Fund will not declare any dividend in excess of the amount of net invest-
ment income and net short-term capital gain available for distribution at the
time of declaration, it is possible that net capital losses sustained after
that time could convert a portion of such a dividend to a non-taxable return of
capital.
Dividends and other distributions paid on all Classes of Fund shares are cal-
culated at the same time and in the same manner. Dividends on Class B and Class
D shares are expected to
25
<PAGE>
be lower than those for the Class A shares because of the higher expenses re-
sulting from the distribution fees borne by Class B and Class D shares. Divi-
dends 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 re-
quested cash payments. Shareholders who wish to receive dividends and/or capi-
tal 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 appro-
priate 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 Fund shares) generally are taxable to shareholders as or-
dinary 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 distribu-
tions 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 also is required from dividends
and capital gain distributions payable to those shareholders who otherwise are
subject to backup withholding.
The Fund is required to include in its gross income each year a portion of
the original issue discount on zero coupon securities it acquires, even though
the Fund receives no interest payment on the securities during the year.
A redemption of Fund shares may result in taxable gain or loss to the redeem-
ing shareholder, depending upon whether the redemption proceeds payable to the
shareholder are more or less than the shareholder's adjusted basis for the re-
deemed 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
mutual fund generally will have similar tax consequences. However, special tax
rules apply when a shareholder (1) disposes of Class A shares through a redemp-
tion or exchange within 90 days of purchase and (2) subsequently acquires Class
A shares of a PaineWebber or MH/KP mutual fund without paying a sales charge
due to the 365-day reinstatement privilege or the exchange privilege. In these
cases, any gain on the disposition of the original Class A shares will be in-
creased, 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 mutual fund shares subsequently acquired. In addition, if
Fund
26
<PAGE>
shares are purchased within 30 days before or after redeeming other 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 conver-
sion of Class B shares into Class A shares.
The foregoing is only a summary of some of the important federal tax consid-
erations 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. Prospec-
tive shareholders are urged to consult their tax advisers.
VALUATION OF SHARES
The net asset value of the Fund's shares fluctuates and is determined sepa-
rately 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. It should be recognized that judgment plays a greater role in valu-
ing lower grade debt securities for the Fund because there is less reliable,
objective data available.
MANAGEMENT
The Corporation's board of directors, as part of its overall management re-
sponsibility, oversees various organizations responsible for the Fund's day-to-
day management. Mitchell Hutchins, the investment adviser and administrator of
the Fund, makes and implements all investment decisions and supervises all as-
pects 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 as-
sets. The investment advisory fees paid by the Fund are higher than those paid
by most investment companies, although such fees are comparable to fees paid by
funds with similar investment objectives and policies. Brokerage transactions
for the Fund may be conducted through PaineWebber in accordance with procedures
adopted by the Corporation's board of directors.
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
ac- count 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, stated as a percentage of average net assets, were as follows: 1.26%,
1.98% and 2.01%, 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 June 30, 1995, Mitchell Hutchins was adviser or
27
<PAGE>
subadviser of 40 investment companies with 74 separate portfolios and aggregate
assets of over 27.9 billion.
T. Kirkham Barneby is responsible for the asset allocation decisions for the
Fund. Mr. Barneby is a Managing Director and Chief Investment Officer--Quanti-
tative Investments of Mitchell Hutchins. Mr. Barneby rejoined Mitchell Hutchins
in 1994, after being with Vantage Global Management for one year. During the
eight years that Mr. Barneby was previously with Mitchell Hutchins, he was Se-
nior Vice President responsible for quantitative management and asset alloca-
tion models. Before joining Mitchell Hutchins, Mr. Barneby served as Director
of Pension Investment Strategy at the Continental Group in Stamford, Connecti-
cut and has held positions in the Economics Department at both Citibank, N.A.
and Merrill Lynch.
Mark A. Tincher is responsible for the day-to-day management of the equity
portion of the Fund. Mr. Tincher is a Managing Director and Chief Investment
Officer of Equity Investments of Mitchell Hutchins responsible for overseeing
the management of domestic equity investments for Mitchell Hutchins. Prior to
joining Mitchell Hutchins in March 1995, Mr. Tincher worked for Chase Manhattan
Private Bank where he was Vice President and directed the U.S. Funds Management
and Equity Research area. At Chase since 1988, Mr. Tincher oversaw the manage-
ment of all Chase equity funds (the Vista Funds and Trust Investment Funds).
Dennis L. McCauley is responsible for the day-to-day management of the debt
securities portion of the Fund. Mr. McCauley is a Managing Director and Chief
Investment Officer-- Fixed Income of Mitchell Hutchins responsible for oversee-
ing all active fixed income investments, including domestic and global taxable
and tax-exempt mutual funds. Prior to joining Mitchell Hutchins in 1994, Mr.
McCauley worked for IBM Corporation where he was Director of Fixed Income In-
vestments responsible for developing and managing investment strategy for all
fixed income and cash management investments of IBM's pension fund and self-in-
sured medical funds. Mr. McCauley has also served as Vice President of IBM
Credit Corporation's mutual funds and as a member of the Retirement Fund In-
vestment Committee.
Nirmal Singh and Craig M. Varrelman will assist Mr. McCauley in managing the
Fund's debt securities. Mr. Singh is a vice president of Mitchell Hutchins, and
Mr. Varrelman is a first vice president of Mitchell Hutchins. Prior to joining
Mitchell Hutchins in 1993, Mr. Singh was with Merrill Lynch Asset Management,
Inc., where he was a member of the portfolio management team responsible for
managing several diversified funds, including mortgage-backed securities funds
with assets totaling approximately $8 billion. From 1990 to 1993, Mr. Singh was
a senior portfolio manager at Nomura Mortgage Fund Management Corporation,
where he was responsible for managing approximately $3 billion in mortgage as-
sets. From 1987 to 1990, Mr. Singh was a vice president of Lehman Brothers. Mr.
Varrelman has been with Mitchell Hutchins as a portfolio manager since 1988 and
manages fixed income portfolios with an emphasis on U.S. government securities.
Susan Messina is responsible for the day-to-day management of the portion of
the Fund's assets invested in money market instruments. Ms. Messina has been
with Mitchell Hutchins since 1982 and is a Senior Vice President of Mitchell
Hutchins.
Each of these managers first assumed responsibilities with respect to the
Fund in August 1995.
28
<PAGE>
Other members of Mitchell Hutchins' domestic equity and domestic fixed income
investments groups provide input on market outlook, interest rate forecasts,
investment research and other considerations pertaining to the Fund's invest-
ments.
Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics that establishes procedures
for personal investing and restricts certain transactions.
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, 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 execu-
tives to compensate them for shareholder servicing that they perform and re-
tains 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, commu-
nications 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 invest-ment 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, adver-
tising and printing and distributing prospectuses and other shareholder materi-
als 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 em-
ployee 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 for its sales commissions and thereafter will pass
a portion of the service and distribution fees on Class D shares on to its in-
vestment 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 con-
tracts per-
29
<PAGE>
taining 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 ex-
penses incurred. Thus, even if Mitchell Hutchins' expenses exceed its service
or distribution fees for the Fund, 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 ac-
crued through the termination date will be Mitchell Hutchins' sole responsibil-
ity and not obligations of the Fund. In their annual consideration of the con-
tinuation 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 com-
pound 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 stan-
dardized 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 nec-
essarily indicate future results. Investment return and principal values will
fluctuate, and proceeds upon redemption may be more or less than a sharehold-
er's cost.
GENERAL INFORMATION
ORGANIZATION. PaineWebber Master Series, Inc., 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 in-
vestment 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 re-
maining shares are classified as shares of the Corporation's other series.
The shares of common stock of the Fund are divided into three Classes, desig-
nated Class A shares, Class B shares and Class D shares. Each Class represents
interests in the same as-
30
<PAGE>
sets 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
on-going distribution fees, are subject to a contingent deferred sales charge
upon certain redemptions and will automatically convert to Class A shares ap-
proximately six years after is-suance; (4) Class D shares are subject to nei-
ther an initial nor a contingent deferred sales charge, bear ongoing distribu-
tion 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 in-
terests 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 nor-
mally be no meetings of shareholders to elect directors unless fewer than a ma-
jority of the directors holding office have been elected by shareholders.
Shareholders 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.
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 is-
sued.
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
Funds' transfer and dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of shares of the Funds. 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.
31
<PAGE>
[This page intentionally left blank]
<PAGE>
APPENDIX A
MORTGAGE-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES
The U.S. government securities in which the Fund may invest include mortgage-
backed securities issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie
Mac. Other mortgage-backed securities in which the Fund may invest will be is-
sued by Private Mortgage Lenders. Such private mortgage-backed securities may
be supported by pools of mortgage loans or other mortgage-backed securities
that are guaranteed, directly or indirectly, by the U.S. government or one of
its agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-govern-
ment credit enhancement. New types of mortgage-backed securities are developed
and marketed from time to time and, consistent with its investment limitations,
the Fund expects to invest in those new types of mortgage-backed securities
that Mitchell Hutchins believes may assist the Fund in achieving its investment
objective. Similarly, the Fund may invest in mortgage-backed securities issued
by new or existing governmental or private issuers other than those identified
herein.
GINNIE MAE CERTIFICATES
Ginnie Mae guarantees certain mortgage pass-through certificates ("Ginnie Mae
certificates") that are issued by 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 the 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. Lend-
ing 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 CERTIFICATES
Fannie Mae facilitates a national secondary market in residential mortgage
loans insured or guaranteed by U.S. government agencies and in privately in-
sured or uninsured residential mortgage loans (sometimes referred to as "con-
ventional mortgage loans" or "conventional loans") through its mortgage pur-
chase and mortgage-backed securities sales activities. Fannie Mae issues guar-
anteed 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 CERTIFICATES
Freddie Mac also facilitates a national secondary market for conventional
residential and U.S. government-insured mortgage loans through its mortgage
purchase and mortgage-backed securities sales activities. Freddie Mac issues
two types of mortgage pass-through securities: mortgage participation certifi-
cates ("PCs") and guaranteed mortgage certificates
A-1
<PAGE>
("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 princi-
pal, 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.
PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES
Mortgage-backed securities issued by Private Mortgage Lenders are structured
similarly to the pass-through certificates and collateralized mortgage obliga-
tions ("CMOs") issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac.
Such mortgage-backed securities may be supported by pools of U.S. government or
agency insured or guaranteed mortgage loans or by other mortgage-backed securi-
ties issued by a government agency or instrumentality, but they generally are
supported by pools of conventional (i.e., non-government guaranteed or insured)
mortgage loans. Since such mortgage-backed securities normally are not guaran-
teed by an entity having the credit standing of Ginnie Mae, Fannie Mae and
Freddie Mac, they normally are structured with one or more types of credit en-
hancement. See "--Types of Credit Enhancement." These credit enhancements do
not protect investors from changes in market value.
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such asso-
ciations, or it acquires such assets in its corporate capacity. These assets
include, among other things, single family and multifamily mortgage loans, as
well as commercial mortgage loans. In order to dispose of such assets in an or-
derly manner, RTC has established a vehicle registered with the SEC through
which it sells mortgage-backed securities. RTC mortgage-backed securities rep-
resent pro rata interests in pools of mortgage loans that RTC holds or has ac-
quired, as described above, and are supported by one or more of the types of
private credit enhancements used by Private Mortgage Lenders.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS
CMOs are debt obligations that are collateralized by mortgage loans or mort-
gage pass-through securities (such collateral collectively being called "Mort-
gage Assets"). CMOs may be issued by Private Mortgage Lenders or by government
entities such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-through
securities are interests in trusts that are comprised of mortgage assets and
that have multiple classes similar to those in CMOs. Unless the context indi-
cates otherwise, references herein to CMOs include multi-class mortgage pass-
through securities. Payments of principal of and interest on the mortgage as-
sets (and in the case of CMOs, any reinvestment income thereon) provide the
funds to pay debt service on the CMOs or to make scheduled distributions on the
multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the mortgage assets may cause CMOs to be retired
substantially earlier
A-2
<PAGE>
than their stated maturities or final distribution dates. Interest is paid or
accrued on all classes of a CMO (other than any PO class) on a monthly, quar-
terly or semi-annual basis. The principal and interest on the mortgage assets
may be allocated among the several classes of a CMO in many ways. In one struc-
ture, payments of principal, including any principal prepayments, on the mort-
gage assets are applied to the classes of a CMO in the order of their respec-
tive stated maturities or final distribution dates so that no payment of prin-
cipal will be made on any class of the CMO until all other classes having an
earlier stated maturity or final distribution date have been paid in full. In
some CMO structures, all or a portion of the interest attributable to one or
more of the CMO classes may be added to the principal amounts attributable to
such classes, rather than passed through to certificateholders on a current ba-
sis, until other classes of the CMO are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES
ARM mortgage-backed securities are mortgage-backed securities that represent
a right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of mortgage loans bearing variable or adjustable
rates of interest (such mortgage loans are referred to as "ARMs"). 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 sup-
ported by pools comprised of fixed-rate mortgage loans. 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 fluctuations than the values of fixed-rate
securities.
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on mortgage assets to make pay-
ments, mortgage-backed securities may contain elements of credit enhancement.
Such credit enhancement falls into two categories: (1) liquidity protection and
(2) protection against losses resulting after default by an obligor on the un-
derlying assets and collection of all amounts recoverable directly from the ob-
ligor and through liquidation of the collateral. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets (usually the bank, savings association or mortgage banker that trans-
ferred the underlying loans to the issuer of the security), to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion. Protec-
tion against losses resulting after default and liquidation ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance policies or let-
ters of credit obtained by the issuer or sponsor, from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Funds will not pay any additional fees for such credit enhance-
ment, although the existence of credit enhancement may increase the price of a
security. Credit enhancements do not provide protection against changes in the
market value of the security.
A-3
<PAGE>
Examples of credit enhancement arising out of the structure of the transac-
tion include "senior-subordinated securities" (multiple class securities with
one or more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held in re-
serve against future losses) and "over-collateralization" (where the scheduled
payments on, or the principal amount of, the underlying assets exceed that re-
quired to make payment of the securities and pay any servicing or other fees).
The degree of credit enhancement provided for each issue generally is based on
historical information regarding the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated could ad-
versely affect the return on an investment in such a security.
A-4
<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).
Return this completed form
ALSO, DO NOT USE THIS FORM TO OPEN to:
A RETIREMENT PLAN ACCOUNT. FOR PFPC Inc.
RETIREMENT PLAN FORMS OR FOR P.O. Box 8950
ASSISTANCE IN COMPLETING THIS FORM Wilmington, DE 19899
CONTACT PFPC INC. AT 1-800-647-1568. ATTN: PaineWebber Mutual
PLEASE PRINT Funds
--------------------------------------------------------------------------------
1 INITIAL INVESTMENT ($1,000 MINIMUM)
ENCLOSED IS A CHECK FOR:
$_______ (payable to PaineWebber Balanced 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 1. Individual / /
without ----------------- --------------- ------------
signature and First Name Last Name MI Soc. Sec. No.
Soc. Sec. or
Tax ID # on 2. Joint Tenancy / /
accompanying -------------- --------------- ------------
Form W-9. First Name Last Name MI Soc. Sec. No.
--As joint ("Joint Tenants with Rights of Survivorship"
tenants, use unless otherwise specified)
Lines 1 and 2.
--As
custodian 3. Gifts to Minors / /
for a minor, ----------------------------- ------------
use Lines 1 Minor's Name Soc. Sec. No.
and 3.
--In the name
of a Under the ______________________ Uniform Gifts / Uniform Trans-
corporation, State of Residence to Minors Act fers to Minors
trust or of Minor Act
other
organization 4. Other Registrations
or any --------------------------- --------------
fiduciary Name Tax Ident. No.
capacity, use
Line 4. 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)
[_] 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, Title Date
Trustee, etc.
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 EX-ECUTIVE 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 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 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 Blue Chip 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 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
LOGO Recycled Paper
PAINEWEBBER
BALANCED FUND
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 2
Financial Highlights....................................................... 6
Flexible Pricing System.................................................... 8
Investment Objective and Policies.......................................... 9
Purchases ................................................................. 18
Exchanges.................................................................. 21
Redemptions................................................................ 23
Conversion of Class B Shares............................................... 24
Other Services and Information............................................. 24
Dividends and Taxes........................................................ 25
Valuation of Shares........................................................ 27
Management................................................................. 27
Performance Information.................................................... 30
General Information........................................................ 30
Appendix A................................................................. A-1
</TABLE>
PROSPECTUS
July 1, 1995
(as revised August 14, 1995)
<PAGE>
PAINEWEBBER BALANCED FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Balanced Fund ("Fund") is a diversified series of PaineWebber
Master Series, Inc. ("Corporation"), a professionally managed mutual fund. The
Fund seeks high total return with low volatility; it invests primarily in a
combination of equity securities, investment grade debt securities and money
market instruments based on Mitchell Hutchins' assessment of the optimal
allocation of the Fund's assets. 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 1, 1995 (as
revised August 14, 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 1,
1995 (as revised August 14, 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 ("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
<PAGE>
within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the
payment of interest and principal on their bonds.
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
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- AND ASSET-BACKED SECURITIES. The yield
characteristics of mortgage- and asset-backed securities differ from those of
traditional debt securities. Among the
2
<PAGE>
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. 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.
Similar factors apply to prepayments on asset-backed securities, but the
receivables underlying asset-backed securities generally are of a shorter
maturity and thus are less likely to experience substantial prepayments. Such
securities, however, often provide that for a specified time period the issuers
will replace receivables in the pool that are repaid with comparable
obligations. If the issuer is unable to do so, repayment of principal on the
asset-backed securities may commence at an earlier date. Mortgage- and asset-
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.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
rate mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments
with respect to ARMs has fluctuated in recent years.
The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities, and this delay reduces the effective yield
to the holder of such securities.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools
of fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of
a pool of mortgage-backed securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a
3
<PAGE>
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Reinvestments of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting the yield of the Fund.
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 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 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. 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 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 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
4
<PAGE>
days in the ordinary course of business at approximately the amount at which
the Fund has valued the securities. Under current guidelines of the staff of
the Securities and Exchange Commission ("SEC"), interest-only ("IO") and
principal-only ("PO") classes of mortgage-backed securities are considered
illiquid. However, IO and PO classes of fixed-rate mortgage-backed securities
issued by the U.S. government or one of its agencies or instrumentalities will
not be considered illiquid if Mitchell Hutchins has determined that they are
liquid pursuant to guidelines established by the Corporation's board of
directors. Illiquid securities also are considered to include, among other
things, repurchase agreements with maturities in excess of seven days and
securities whose disposition is restricted under the federal securities laws
(other than "Rule 144A" securities and certain commercial paper that Mitchell
Hutchins has determined to be liquid under procedures approved by the
Corporation's board of directors). Certain 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 securities, and the Fund might be unable to
dispose of such securities promptly or at favorable prices.
The Corporation's 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 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
5
<PAGE>
(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.
SECTION 4(2) PAPER. Commercial paper issues in which the Fund may invest
include securities issued by major corporations without registration under the
1933 Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof and commercial paper issued in reliance on the so-
called "private placement" exemption from registration afforded by Section 4(2)
of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is restricted as to
disposition under the federal securities laws in that any resale must similarly
be made in an exempt transaction. Section 4(2) paper is normally resold to
other institutional investors through or with the assistance of investment
dealers who make a market in Section 4(2) paper, thus providing liquidity. The
Fund's 10% limitation on investments in illiquid securities includes Section
4(2) paper other than Section 4(2) paper that Mitchell Hutchins has determined
to be liquid pursuant to guidelines established by the Corporation's board of
directors. The board has delegated to Mitchell Hutchins the function of making
day-to-day determinations of liquidity with respect to Section 4(2) paper,
pursuant to guidelines approved by the board that require Mitchell Hutchins to
take into account the same factors described under "Illiquid Securities" above
for other restricted securities and require Mitchell Hutchins to perform the
same monitoring and reporting functions.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. To the extent the Fund
holds securities of foreign issuers, such securities may not be registered with
the 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
6
<PAGE>
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 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.
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.
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
7
<PAGE>
currently does not intend to have obligations under short sales that at any
time during the coming year exceed 5% of the Fund's net assets.
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.
INVESTMENT LIMITATIONS OF THE FUND. The Fund may not (1) issue senior
securities or borrow money, except from banks or through reverse repurchase
agreements for emergency or temporary purposes, and then in an aggregate amount
not in excess of 10% of the value of the Fund's total assets at the time of
such borrowing, provided that the Fund will not purchase securities while
borrowings (including reverse repurchase agreements) in excess of 5% of the
value of the Fund's total assets are outstanding; (2) purchase any securities
other than those its investment objective and policies permit it to purchase;
(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; (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 sell short "against the box;" (7) purchase or sell real estate, including
interests in real estate limited partnerships, 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; (9) invest in oil, gas or mineral-
related programs or leases; (10) make loans, except through loans of portfolio
securities as described in the Prospectus or Statement of Additional
Information and except through repurchase agreements, provided that for
purposes of this restriction the acquisition of publicly distributed 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 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 (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
8
<PAGE>
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) invest more than 10% of its net assets in illiquid
securities, a term that 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; (3) 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; (4)
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. 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; 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.
DIRECTORS AND OFFICERS
The directors and executive officers of the Corporation, their business
addresses and principal occupations during the past five years and ages are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Director and Chairman of Mr. Bewkes is a director of Paine
68** the Board 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 Inter-
state Bakeries Corporation and
NaPro BioTherapeutics, Inc. and a
director or trustee of 26 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Meyer Feldberg; 52 Director Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc., Federated Department
Stores Inc., Inco Homes Corporation
and New World Communications Group
Incorporated and a director or
trustee of 18 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as an invest-
ment adviser.
George W. Gowen; 65 Director Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994 he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is also a
director of Columbia Real Estate
Investments, Inc. and a director or
trustee of 16 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Frederic V. Malek; 58 Director Mr. Malek is chairman of Thayer Cap-
901 15th Street, N.W. ital Partners (investment bank) and
Suite 300 a co-chairman and director of CB
Washington, D.C. 20005 Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 1992, he was campaign manager
of Bush-Quayle '92. From 1990 to
1992, he was vice chairman and,
from 1989 to 1990, he was president
of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.).
Prior to 1989, he was employed by
the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Marriott Hotels and Resorts. Mr.
Malek is also a director of Ameri-
can Management Systems, Inc., Auto-
matic Data Processing, Inc., Avis,
Inc., FPL Group, Inc., ICF Interna-
tional, Manor Care, Inc., National
Education Corporation and Northwest
Airlines Inc. and a director or
trustee of 16 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Frank P. L. Minard; 49** Director Mr. Minard is chairman of the board
of Mitchell Hutchins, chairman of
the board of Mitchell Hutchins In-
stitutional Investors Inc. and a
director of PaineWebber. Prior to
1993, Mr. Minard was managing di-
rector of Oppenheimer Capital in
New York and Director of Oppen-
heimer Capital Ltd. in London. Mr.
Minard is also a director or trustee
of 30 other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Judith Davidson Moyers; Director Mrs. Moyers is president of Public
59 Affairs Television, Inc., an educa-
Public Affairs Televi- tional consultant and a home econo-
sion mist. Mrs. Moyers is also a direc-
356 W. 58th Street tor of Ogden Corporation and a di-
New York, New York 10019 rector or trustee of 16 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
Thomas F. Murray; 84 Director Mr. Murray is a real estate and fi-
400 Park Avenue nancial consultant. Mr. Murray is
New York, New York 10022 also a director and chairman of
American Continental Properties,
Inc., a trustee of Prudential Re-
alty Trust, and a director or
trustee of 16 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Margo N. Alexander; 48 President Ms. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins. Prior to January
1995, Ms. Alexander was an execu-
tive vice president of PaineWebber.
Ms. Alexander is also president of
26 other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president
and manager--advisory administra-
tion of Mitchell Hutchins. Prior to
November 1993, she was compliance
manager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993, Ms.
Boyle was a vice president and man-
ager-- legal administration of
Mitchell Hutchins. Ms. Boyle is
also a vice president of 39 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Joan L. Cohen; 30 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
26 other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Karen L. Finkel; 37 Vice President Mrs. Finkel is a first vice presi-
dent and portfolio manager of
Mitchell Hutchins. Mrs. Finkel is
also a vice president of one other
investment company for which Mitch-
ell Hutchins serves as investment
adviser.
Ellen R. Harris; 49 Vice President Ms. Harris is a managing director of
Mitchell Hutchins. Ms. Harris is
also a vice president of 19 other
investment
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and the senior manager of the Fund
Administration Division of Mitchell
Hutchins. Mr. Maher is also a vice
president and assistant treasurer
of 26 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ann E. Moran; 37 Vice President Ms. Moran is a vice president of
and Assistant Treasurer Mitchell Hutchins. Ms. Moran is
also a vice president and assistant
treasurer of 39 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 42 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
also a vice president and secretary
of 39 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
44 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 Ar-
nold & 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
investment adviser.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Paul H. Schubert; 32 Vice President Mr. Schubert is a vice president of
and Assistant Treasurer Mitchell Hutchins. From August 1992
to August 1994, he was a vice pres-
ident of BlackRock Financial Man-
agement, Inc. Prior to August 1992,
he was an audit manager with Ernst
& Young LLP. Mr. Schubert is also a
vice president and assistant trea-
surer of 39 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Martha J. Slezak; 33 Vice President Ms. Slezak is a vice president of
and 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. LLP. Ms.
Slezak is also a vice president and
assistant treasurer of 39 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
Julian F. Sluyters; 34 Vice President and Mr. Sluyters is a senior vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a
vice president and treasurer of 39
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president
Assistant Secretary 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 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
14
<PAGE>
--------
* 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
the Fund. Because PaineWebber and Mitchell Hutchins perform substantially all
of the services necessary for the operation of the Corporation and the Fund,
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. The table below includes certain
information relating to the compensation of the Corporation's current directors
who held office during the fiscal year ended February 28, 1995.
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.
15
<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:
<TABLE>
<CAPTION>
Annual
AVERAGE DAILY NET ASSETS Rate
------------------------ ------
<S> <C>
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
</TABLE>
During the fiscal years ended February 28, 1995, February 28, 1994 and
February 28, 1993, the Corporation paid (or accrued) to Mitchell Hutchins
investment advisory and administrative fees of $1,934,650, $2,326,697 and
$2,448,359, respectively, 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, PaineWebber earned fees in the
amounts of $100,272, $116,755 and $125,517, respectively, 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)
16
<PAGE>
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 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 $100 million. Certain
expenses, such as brokerage commissions, distribution fees, taxes, interest,
certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. For the fiscal years
ended February 28, 1995, February 28, 1994 and February 28, 1993, no
reimbursements were required pursuant to such limitations for the Fund.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically with respect to the Fund upon assignment and is
terminable at any time without penalty by the Corporation's board of directors
or by vote of the holders of a majority of the Fund's outstanding voting
securities on 60 days' written notice to Mitchell Hutchins, or by Mitchell
Hutchins on 60 days' written notice to the Corporation.
The following table shows the approximate net assets as of May 31, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
INVESTMENT CATEGORY Net Assets ($ mil)
------------------- ------------------
<S> <C>
Domestic (excluding Money Market)...................... $ 5,756.9
Global................................................. 3,355.2
Equity/Balanced........................................ 2,726.5
Fixed Income (excluding Money Market).................. 6,385.6
Taxable Fixed Income................................. 4,577.6
Tax-Free Fixed Income................................ 1,808.0
Money Market Funds..................................... 18,519.0
</TABLE>
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
17
<PAGE>
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 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 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 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:
<TABLE>
<S> <C>
Class A........................................................ $ 472,989
Class B........................................................ 578,407
Class D........................................................ 109,177
</TABLE>
18
<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 Funds during the fiscal year ended February 28,
1995:
CLASS A
<TABLE>
<S> <C>
Marketing and advertising..................................... $ 25,837
Amortization of commissions................................... N/A
Printing of prospectuses and statements of additional
information for other than current shareholders.............. 3,250
Branch network costs allocated and interest expense........... 444,467
Service fees paid to PaineWebber investment executives........ 212,845
CLASS B
Marketing and advertising..................................... $ 72,075
Amortization of commissions................................... 218,282
Printing of prospectuses and statements of additional
information for other than current shareholders.............. 690
Branch network costs allocated and interest expense........... 1,256,788
Service fees paid to PaineWebber investment executives........ 65,071
CLASS D
Marketing and advertising..................................... $ 26,088
Amortization of commissions................................... 23,347
Printing of prospectuses and statements of additional
information for other than current shareholders.............. 158
Branch network costs allocated and interest expense........... 449,190
Service fees paid to PaineWebber investment executives........ 12,282
</TABLE>
"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 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
19
<PAGE>
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 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
20
<PAGE>
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 based upon a
percentage of the average net assets of the Fund, which fees would increase if
the Plan were successful and the Fund attained and maintained significant asset
levels.
Under the Distribution Contract between the Corporation and Mitchell Hutchins
for the Class A shares for the fiscal years set forth below, 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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 28,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Earned............................................... $10,848 $46,856 $33,533
Retained............................................. 2,640 3,188 2,003
</TABLE>
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:
<TABLE>
<S> <C>
1993.......................................... $402,757
1994.......................................... 185,486
1995.......................................... 149,669
</TABLE>
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 $495,853, $540,773, and $318,043,
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
21
<PAGE>
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 years ended February 28, 1994 and February 28,
1993, the Fund paid $67,570 and $4,900, respectively, in brokerage commissions
to PaineWebber. For the fiscal year ended February 28, 1995, the Fund paid
$7,266 in brokerage commissions to PaineWebber, which represented 1.46% of the
total brokerage commissions paid by that Fund and 1.65% of the aggregate dollar
amount of transactions involving the payment of commissions.
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. For the fiscal year
ended February 28, 1995, Mitchell Hutchins directed $74,360,254 in portfolio
transactions to brokers chosen because they provided research services, for
which the Fund paid $144,391 in commissions. For purchases or sales with
broker-dealer firms which act as principal, Mitchell Hutchins seeks best
execution. Although Mitchell Hutchins may receive certain research or execution
services in connection with those transactions, Mitchell Hutchins will not
purchase securities at a higher price or sell securities at a lower price than
would otherwise be paid if no weight was attributed to the services provided by
the executing dealer. Moreover, Mitchell Hutchins will not enter into any
explicit soft dollar arrangements relating to principal transactions and will
not receive in principal transactions the types of services which could be
purchased for hard dollars. Mitchell Hutchins may engage in agency transactions
in OTC equity and debt securities in return for research and execution
services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins receiving multiple quotes from dealers before executing the
transactions on an agency basis.
Research services furnished by the brokers or dealers through which or with
which the Fund effects securities transactions may be used by Mitchell Hutchins
in advising other funds or accounts and, conversely, research services
furnished to Mitchell Hutchins by brokers or dealers in connection with other
funds or accounts that 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.
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
22
<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 were 106.76% and 68.53%, respectively.
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 or MH/KP mutual
fund and thus take advantage of the reduced sales charges for Class A shares
indicated in the table of sales charges 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 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).
23
<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 or MH/KP
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 or MH/KP 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, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting 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 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
24
<PAGE>
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 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.
Reductions in or exemptions from the imposition of a sales charge are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
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
25
<PAGE>
purchase a fixed number of shares. A client can elect to have Plan purchases
executed on the first or fifteenth day of the month. Settlement occurs three
Business Days (as defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to enrolling
in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may take
up to two weeks to become effective.
The terms of the Plan or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
Periodic Investing and Dollar Cost Averaging.
Periodic investing in the PW Funds or other mutual funds, whether through the
Plan or otherwise, helps investors establish and maintain a disciplined
approach to 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
26
<PAGE>
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;
. 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 of
the Fund, 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 the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of
27
<PAGE>
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.
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 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) to the nth power = ERV
a hypothetical initial payment of $1,000 to
purchase shares of a
where: P = 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 made 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
28
<PAGE>
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.
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.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended February 28, 1995:
Standardized Return*............................. (10.27)% (11.68)% (6.69)%
Non-Standardized Return.......................... (6.02)% (6.68)% (6.69)%
Five years ended February 28, 1995:
Standardized Return*............................. NA 6.39 % NA
Non-Standardized Return.......................... NA 6.70 % NA
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Inception** to February 28, 1995:
Standardized Return*............................. 5.74 % 6.57 % 4.83 %
Non-Standardized Return.......................... 7.09 % 6.57 % 4.83 %
</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
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 date for the Class B shares of the Fund was December 12,
1986. The inception dates for Class A shares and Class D shares of the Fund
were July 1, 1991 and July 2, 1992, respectively.
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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") for flexible portfolio 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. Each 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 Funds and comparative mutual fund data and ratings
reported in independent periodicals, including (but not limited to) THE WALL
STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST
and THE KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in
graphic form.
The 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
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) ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans
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<PAGE>
and gains from the sale or other disposition of securities, or other income
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 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 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 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
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<PAGE>
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
likely 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).
The Fund may acquire zero coupon securities or other securities issued with
original issue discount. As a holder of such securities, the Fund must include
in its gross income the portion of the original issue discount that accrues on
the securities during the taxable year, even if the Fund receives no
corresponding payment on them during the year. Because the Fund annually must
distribute substantially all of its investment company taxable income,
including any accrued original issue discount, in order to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, the Fund may
be required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or
losses from those sales, which would increase or decrease its investment
company taxable income and/or net capital gain. In addition, any such gains may
be realized on the disposition of securities held for less than three months.
Because of the Short-Short Limitation, any such gains would reduce the Fund's
ability to sell other securities held for less than three months that it might
wish to sell in the ordinary course of its portfolio management.
OTHER INFORMATION
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.
Prior to August 1995, the Fund was named "PaineWebber Asset Allocation Fund."
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 Fund 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
32
<PAGE>
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.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, N.Y. 10036, serves as the Fund'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.
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<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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; Aa. Bonds which are
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than in Aaa securities; A. Bonds which are
rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future; Baa. Bonds which are rated
Baa are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest 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 high-
est rated issues only in small degree; A. Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories; BBB. Debt rated BBB is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally ex-
hibits 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 for debt in higher rated
categories; BB, B. Debt rated BB or B is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and B a somewhat higher
degree of speculation. While such debt will likely have some quality and pro-
tective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
A-1
<PAGE>
Plus (+) or Minus (-): The ratings from "AA" to "B" 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 SHORT-TERM DEBT RATINGS
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structure 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 rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt 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, may 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-1. This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation; A-
2. Capacity for timely payment on issues with this designation is satisfactory.
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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions...................................... 1
Directors and Officers.................................................... 9
Investment Advisory and Distribution Arrangements......................... 16
Portfolio Transactions.................................................... 21
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 23
Conversion of Class B Shares.............................................. 27
Valuation of Shares....................................................... 28
Performance Information................................................... 28
Taxes..................................................................... 30
Other Information......................................................... 32
Financial Statements...................................................... 33
Appendix A................................................................ A-1
</TABLE>
(C)1995 PAINEWEBBER INCORPORATED
LOGO Recycled Paper
PaineWebber
Balanced Fund
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Statement of Additional Information
July 1, 1995
(as revised August 14, 1995)
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PaineWebber
