<PAGE>
As filed with the Securities and Exchange Commission on July 1, 1996.
1933 Act: Registration No. 33-2524
1940 Act: Registration No. 811-4448
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
-----
Pre-Effective Amendment No._____ [_____]
Post-Effective Amendment No. 28 [ X ]
----- -----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
-----
Amendment No. 22
-----
(Check appropriate box or boxes.)
PAINEWEBBER MASTER SERIES, INC.
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
RICHARD C. MILLER, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.; Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[_____] Immediately upon filing pursuant to Rule 485(b)
[ X ] On July 1, 1996 pursuant to Rule 485(b)
----- -----------------
[_____] 60 days after filing pursuant to Rule 485 (a)(i)
[_____] On _________________ pursuant to Rule 485 (a)(i)
[_____] 75 days after filing pursuant to Rule 485(a)(ii)
[_____] On _________________ pursuant to Rule 485(a)(ii)
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for its most
recent fiscal year on April 24, 1996.
<PAGE>
PAINEWEBBER MASTER SERIES, INC.
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
PaineWebber Balanced Fund - Class A, B and C Shares
- -------------------------
Part A - Prospectus
Part B - Statement of Additional Information
PaineWebber Balanced Fund - Class Y Shares
- -------------------------
Part A - Prospectus
Part B - Statement of Additional Information
PaineWebber Money Market Fund - Class A, B and C Shares
- -----------------------------
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PAINEWEBBER MASTER SERIES, INC.
Class A, B, and C Shares of:
PaineWebber Balanced Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
<S> <C> <C>
1. Cover Page................. Cover Page
The Funds at a Glance;
2. Synopsis................... Expense Table
3. Condensed Financial
Information................ Financial Highlights
4. General Description of The Funds at a Glance;
Registrant................. Investment Objective and
Policies; Investment
Philosophy and Process;
General Information
Management; General
5. Management of the Fund..... Information
6. Capital Stock and Cover Page; Flexible
Pricing; Dividends and
Other Securities........... Taxes; General Information
7. Purchase of Securities Flexible Pricing; How to
Being Offered.............. Buy Shares; How to Exchange
Shares; Other Services;
Determining the Shares' Net
Asset Value
8. Redemption or How to Sell Shares; Other
Repurchase................. Services
9. Pending Legal
Proceedings................ Not Applicable
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- -----------------------
10. Cover Page................. Cover Page
11. Table of Contents.......... Table of Contents
12. General Information
and History................ Other Information
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Investment Policies and
13. Investment Objective and Restrictions; Portfolio
Policies................... Transactions
14. Management of the Fund..... Directors, Trustees and
Officers; Compensation
Table
15. Control Persons and
Principal Holders of Directors, Trustees and
Securities................. Officers
16. Investment Advisory and Investment Advisory and
Other Services............. Distribution Arrangements
17. Brokerage Allocation....... Portfolio Transactions
18. Capital Stock and Other Conversion of Class B
Securities................. Shares; Other Information
19. Purchase, Redemption Reduced Sales Charges,
and Pricing of Securi- Additional Exchange and
ties Being Offered......... Redemption Information and
Other Services; Valuation
of Shares
20. Tax Status................. Taxes
21. Underwriters............... Investment Advisory and
Distribution Arrangements
22. Calculation of
Performance Data........... Performance Information
23. Financial Statements....... Financial Statements
</TABLE>
<PAGE>
PAINEWEBBER MASTER SERIES, INC.
Class Y Shares of:
PaineWebber Balanced Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
<S> <C> <C>
1. Cover Page................. Cover Page
The Funds at a Glance;
2. Synopsis................... Expense Table
3. Condensed Financial
Information................ Financial Highlights
4. General Description of The Funds at a Glance;
Registrant................. Investment Objective and
Policies; Investment
Philosophy and Process;
General Information
Management; General
5. Management of the Fund..... Information
6. Capital Stock and Cover Page; Dividends and
Other Securities........... Taxes; General Information
7. Purchase of Securities How to Buy Shares;
Being Offered.............. Determining the Shares' Net
Asset Value
8. Redemption or How to Sell Shares; Other
Repurchase................. Services
9. Pending Legal
Proceedings................ Not Applicable
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- -----------------------
10. Cover Page................. Cover Page
11. Table of Contents.......... Table of Contents
12. General Information
and History................ Other Information
Investment Policies and
13. Investment Objective and Restrictions; Portfolio
Policies................... Transactions
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
14. Management of the Fund..... Directors, Trustees and
Officers; Compensation
Table
15. Control Persons and
Principal Holders of Directors, Trustees and
Securities................. Officers
16. Investment Advisory and Investment Advisory and
Other Services............. Distribution Arrangements
17. Brokerage Allocation....... Portfolio Transactions
18. Capital Stock and Other
Securities................. Other Information
19. Purchase, Redemption
and Pricing of Securities
Being Offered......... Valuation of Shares
20. Tax Status................. Taxes
21. Underwriters............... Investment Advisory and
Distribution Arrangements
22. Calculation of
Performance Data........... Performance Information
23. Financial Statements....... Financial Statements
</TABLE>
<PAGE>
PAINEWEBBER MASTER SERIES, INC.
Class A, B and C Shares of:
PaineWebber Money Market Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
--------------------------- ------------------
<S> <C> <C>
1. Cover Page.................. Cover Page
2. Synopsis.................... Prospectus Summary
3. Condensed Financial Financial Highlights;
Information................. Performance Information
4. General Description of Prospectus Summary; Investment
Registrant.................. Objectives and Policies;
General Information
5. Management of the Fund...... Management; General
Information
6. Capital Stock and Other Cover Page; Conversion of
Securities.................. Class B Shares; Dividends and
Taxes; General Information
7. Purchases of Securities Investing in the Fund
Being Offered...............
8. Redemption or Repurchase.... Investing in the Fund
9. Pending Legal Proceedings... Not Applicable
Part B Item No. and Caption Statement of Additional
--------------------------- -----------------------
Information Caption
-------------------
10. Cover page............ Cover Page
11. Table of Contents..... Table of Contents
12. General Information and Other Information
History...............
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
13. Investment Objective and Investment Policies and
Policies................... Restrictions; Hedging
Atrategies; Portfolio
Transactions
14. Management of the Fund..... Directors and Officers;
15. Control Persons and
Principal Holders of
Securities................. Directors and Officers
16. Investment Advisory and Investment Advisory and
Other Services............. Distribution Arrangements;
Other Information
17. Brokerage Allocation....... Portfolio Transactions
18. Capital Stock and Other Conversion of Class B
Securities................. Shares; Other Information
19. Purchase, Redemption
and Pricing of Securities Additional Exchange and
Being Offered......... Redemption Information;
Reduced Sales Charges;
Valuation of Shares
20. Tax Status................. Taxes
21. Underwriters............... Investment Advisory and
Distribution Arrangements
22. Calculation of
Performance Data........... Performance Information
23. Financial Statements....... Financial Statements
</TABLE>
<PAGE>
------------------
---------
Prospectus Page 1
----------------------------------------------------------------------------
PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
1285 Avenue of the Americas, New York, New York 10019
Prospectus -- July 1, 1996
- --------------------------------------------------------------------------------
PaineWebber Asset Allocation Funds are designed for investors generally seeking
high total return. PaineWebber Balanced Fund invests primarily in a combination
of equity securities, investment grade bonds, and money market instruments.
PaineWebber Tactical Allocation Fund follows an investment strategy that ac-
tively allocates its assets among equity securities, U.S. Treasury notes and
U.S. Treasury bills.
This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and re-
tain a copy of this Prospectus for future reference.
A Statement of Additional Information dated July 1, 1996 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your invest-
ment executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad categories, which
are presented here. Generally, investors seeking to maximize return must assume
greater risk. Balanced Fund and Tactical Allocation Fund are both in the ASSET
ALLOCATION category.
. Money Market Fund for . Asset Allocation Funds for long-term growth and
income and stability by income by investing in stocks and bonds.
investing in high-
quality, short-term
investments.
. Bond Funds for income . Stock Funds for long-term growth by investing
by investing mainly in mainly in stocks.
bonds.
. Tax-Free Bond Funds for . Global Funds for long-term growth by investing
income exempt from mainly in foreign stocks or high current income
federal income taxes by investing mainly in global debt instruments.
and, in some cases,
state and local income
taxes, by investing in
municipal bonds.
A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
- --------------------------------------------------------------------------------
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. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR THEIR DISTRIBU-
TOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 5
Financial Highlights....................................................... 8
Investment Objectives & Policies........................................... 11
Investment Philosophy & Process............................................ 12
Performance................................................................ 14
The Funds' Investments..................................................... 16
Flexible PricingSM......................................................... 21
How to Buy Shares.......................................................... 23
How to Sell Shares......................................................... 25
Other Services............................................................. 25
Management................................................................. 26
Determining the Shares' Net Asset Value.................................... 28
Dividends & Taxes.......................................................... 28
General Information........................................................ 30
</TABLE>
----------
- --------------------------------------------------------------------------------
Prospectus Page 2
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
The Funds at a Glance
- -------------------------------------------------------------------------------
The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or both of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or
diversify a portfolio. When selling shares, investors should be aware that
they may get more or less for their shares than they originally paid for them.
As with any mutual fund, there is no assurance that the Funds will achieve
their goals.
BALANCED FUND
GOAL: To increase the value of your investment by investing in a combination
of equity securities, investment grade bonds and money market instruments.
INVESTMENT OBJECTIVE: High total return with low volatility.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests in equity securities, its price will rise and fall.
Certain investment grade securities in which the Fund may invest have
speculative characteristics. The Fund may invest in mortgage- and asset-backed
securities, which involve additional risks, such as those relating to the
prepayment of principal on the underlying obligations. The Fund may invest in
U.S. dollar-denominated securities of foreign companies, which involve more
risk than investing in the securities of U.S. companies. The Fund may use
derivatives, such as options and futures, in its investment activities, which
may involve additional risks. Investors may lose money by investing in the
Fund; your investment is not guaranteed.
SIZE: On May 31, 1996, the Fund had over $199.7 million in assets.
TACTICAL ALLOCATION FUND
GOAL: To increase the value of your investment by following a systematic
investment strategy that actively allocates the Fund's assets among equity
securities, U.S. Treasury notes and U.S. Treasury bills.
INVESTMENT OBJECTIVE: Total return, consisting of long-term capital
appreciation and current income.
RISKS: Although the Fund seeks total return, the Fund may not achieve as high
a level of either capital appreciation or current income as a fund that has
only one of those objectives as its primary objective. The Fund invests in
equity securities included in the Standard and Poor's 500 Composite Stock
Price Index (the "S&P 500 Index"). Equity securities historically have shown
greater growth potential than other types of securities; but they have also
shown greater volatility. As a result of the Fund's investment in equity
securities, its price will rise and fall. Some of the securities in which the
Fund invests are issued by foreign companies and involve more risk than the
securities of U.S. companies. The Fund may use derivatives, such as options
and futures, in its investment activities, which may involve additional risks.
Investors may lose money by investing in the Fund; your investment is not
guaranteed.
SIZE: On May 31, 1996, the Fund had over $103.3 million in assets.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of Balanced Fund and Tactical Allocation
Fund (each a "Fund" and, collectively, the "Funds").
MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors
need only $100.
----------
- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
The Funds at a Glance
(Continued)
- -------------------------------------------------------------------------------
WHO SHOULD INVEST
BALANCED FUND is for investors who want high total return with low volatility
through investments in equity securities, investment grade bonds and money
market instruments. The Fund is designed for investors who want an investment
that maintains a fixed income allocation at all times, yet has the flexibility
to change its investment mix in response to changing market conditions. Over
time, the 25% minimum in fixed income investments should result in a lower
risk profile for the Fund than if it could invest 100% of its assets in
stocks.
TACTICAL ALLOCATION FUND is for investors who want total return, consisting of
long-term capital appreciation and current income, through a systematic
investment strategy that actively allocates assets among equity securities,
U.S. Treasury notes and U.S. Treasury bills. The Fund is designed for
investors who want to participate in the broad stock market, yet want the
flexibility to take a more defensive posture when a secular decline in stock
prices is projected. This disciplined approach to investing in stocks attempts
to shift the asset mix in anticipation of, not in response to, changing market
trends.
HOW TO PURCHASE SHARES OF THE FUNDS
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge (the maximum is
4.5% of the public offering price). Although investors pay an initial sales
charge when they buy Class A shares, the ongoing expenses for this class are
lower than the ongoing expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is
immediately invested. However, Class B shares have higher ongoing expenses
than Class A shares. Depending upon how long they own the shares, investors
may have to pay a sales charge when they sell Class B shares. This sales
charge is called a "contingent deferred sales charge" and applies when
investors sell their Class B shares within six years. After six years, Class B
shares convert to Class A shares, which have lower ongoing expenses and no
contingent deferred sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is
immediately invested. However, Class C shares have higher ongoing expenses
than Class A shares. A contingent deferred sales charge of 1% is charged on
shares sold within one year of the purchase date. Class C shares never convert
to any other class of shares.
----------
- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Expense Table
- -------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in Class A, B and C shares of the Funds.
Expenses shown below represent those incurred for the most recent fiscal year,
except for Class B shares of Tactical Allocation Fund, for which "Other
Expenses"are estimated based on expenses incurred by Class A and Class C
shares during the most recent fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C
- -------------------------------- ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a %
of offering price).................................. 4.5% None None
Sales Charge on Reinvested Dividends (as a % of of-
fering price)....................................... None None None
Maximum Contingent Deferred Sales Charge (as a % of
net asset value at the time of purchase or sale,
whichever is less).................................. None 5% 1%
Exchange Fee for Balanced Fund....................... $5.00 $5.00 $5.00
Exchange Fee for Tactical Allocation Fund............ None None None
ANNUAL FUND OPERATING EXPENSES (as a % of average net
assets)
BALANCED FUND
Management Fees...................................... 0.75% 0.75% 0.75%
12b-1 Fees........................................... 0.25 1.00 1.00
Other Expenses....................................... 0.29 0.30 0.33
----- ----- -----
Total Operating Expenses............................. 1.29% 2.05% 2.08%
===== ===== =====
TACTICAL ALLOCATION FUND
Management Fees...................................... 0.50% 0.50% 0.50%
12b-1 Fees........................................... 0.25 1.00 1.00
Other Expenses....................................... 0.71 0.72 0.72
----- ----- -----
Total Operating Expenses............................. 1.46% 2.22% 2.22%
===== ===== =====
</TABLE>
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase
plan are available. Purchases of $1 million or more are not subject to a
sales charge. However, if such shares are sold within one year after
purchase, a contingent
deferred sales charge of 1% is imposed on the net asset value of the shares at
the time of purchase or sale, whichever is less.
CLASS B SHARES: Sales charge waivers are available. The maximum 5%
contingent deferred sales charge applies to sales of shares during the first
year after purchase. The charge generally declines by 1% annually, reaching
zero after six years.
CLASS C SHARES: If shares are sold within one year after purchase, a
contingent deferred sales charge of 1% of the net asset value of the shares
at the time of purchase or sale, whichever is less, is imposed.
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<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>
For more information, see "Management" and "Flexible Pricing SM."
----------
- --------------------------------------------------------------------------------
Prospectus Page 5
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Expense Table
(Continued)
- -------------------------------------------------------------------------------
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
Exchange Commission ("SEC") applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in each Fund, assuming a 5% annual return:
BALANCED FUND
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $58 $84 $113 $194
Class B (Assuming sale of all shares at end of
period)....................................... $71 $94 $130 $201
Class B (Assuming no sale of shares)........... $21 $64 $110 $201
Class C (Assuming sale of all shares at end of
period)....................................... $31 $65 $112 $241
Class C (Assuming no sale of shares)........... $21 $65 $112 $241
</TABLE>
TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $59 $89 $121 $212
Class B (Assuming sale of all shares at end of
period)....................................... $73 $99 $139 $219
Class B (Assuming no sale of shares)........... $23 $69 $119 $219
Class C (Assuming sale of all shares at end of
period)....................................... $33 $69 $119 $255
Class C (Assuming no sale of shares)........... $23 $69 $119 $255
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
. ALL CLASSES: Reinvestment of all dividends and distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain
the same for years shown.
. CLASS A SHARES: Deduction of the maximum 4.5% initial sales charge at
the time of purchase.
. CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of sale, which declines over a period of six
years. Ten-year figures assume that Class B shares convert to Class A
shares at the end of the sixth year.
. CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for
sales of shares within one year of purchase.
----------
- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Financial Highlights
- -------------------------------------------------------------------------------
BALANCED FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
the Fund's Annual Report to Shareholders for the fiscal year ended February
29, 1996 and the report of Price Waterhouse LLP, independent accountants,
appearing in the Fund's Annual Report to Shareholders. Both are incorporated
by reference into the Statement of Additional Information. The financial
statements and notes, as well as the information for the period July 1, 1991
to February 29, 1992 and for each of the four years in the period ended
February 29, 1996, appearing in the following tables, have been audited by
Price Waterhouse LLP. Further information about the Fund's performance is also
included in the Annual Report to Shareholders, which may be obtained without
charge by calling 1-800-647-1568. Prior to August 14, 1995, the Fund pursued
certain different investment policies; thus, the information shown below for
periods prior to that date may not necessarily be indicative of current or
future operations.
<TABLE>
<CAPTION>
BALANCED FUND
--------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------------------- -----------------------------------------
FOR THE FOR THE YEARS ENDED FOR THE PERIOD FOR THE FOR THE YEARS ENDED
YEAR ENDED FEBRUARY 28, JULY 1, 1991+ TO YEAR ENDED FEBRUARY 28,
FEBRUARY 29, ------------------------------ FEBRUARY 29, FEBRUARY 29, ----------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993
------------ -------- -------- -------- ---------------- ------------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.80 $ 12.04 $ 11.54 $ 11.01 $10.09 $ 9.90 $ 12.10 $ 11.56 $ 10.99
-------- -------- -------- -------- ------ ------- ------- ------- --------
Net investment income... 0.27++ 0.26 0.22 0.33 0.19 0.19++ 0.44 0.26 0.30
Net realized and
unrealized gains
(losses) from
investment
transactions........... 1.84 (1.07) 1.31 0.54 0.96 1.86 (1.32) 1.18 0.48
-------- -------- -------- -------- ------ ------- ------- ------- --------
Net increase (decrease)
from investment
operations............. 2.11 (0.81) 1.53 0.87 1.15 2.05 (0.88) 1.44 0.78
-------- -------- -------- -------- ------ ------- ------- ------- --------
Dividends from net
investment income...... (0.31) (0.23) (0.25) (0.34) (0.23) (0.20) (0.12) (0.12) (0.21)
Distributions from net
realized gains from
investment
transactions........... (0.75) (1.20) (0.78) -- -- (0.75) (1.20) (0.78) --
-------- -------- -------- -------- ------ ------- ------- ------- --------
Total dividends and
distributions.......... (1.06) (1.43) (1.03) (0.34) (0.23) (0.95) (1.32) (0.90) (0.21)
-------- -------- -------- -------- ------ ------- ------- ------- --------
Net asset value, end of
period................. $ 10.85 $ 9.80 $ 12.04 $ 11.54 $11.01 $ 11.00 $ 9.90 $ 12.10 $ 11.56
======== ======== ======== ======== ====== ======= ======= ======= ========
Total investment return
(1).................... 22.08 % (6.02)% 13.57 % 8.09 % 11.43 % 21.20 % (6.68)% 12.62 % 7.25 %
======== ======== ======== ======== ====== ======= ======= ======= ========
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $171,609 $174,761 $216,492 $154,594 $ 916 $26,627 $37,104 $83,178 $160,115
Expenses to average net
assets................. 1.29 % 1.26 % 1.21 % 1.18 % 1.30 %* 2.05 % 1.98 % 2.05 % 1.98 %
Net investment income to
average net assets..... 2.55 % 2.41 % 1.74 % 2.52 % 3.43 %* 1.81 % 1.60 % 1.00 % 2.02 %
Portfolio turnover...... 188 % 107 % 69 % 33 % 84 % 188 % 107 % 69 % 33 %
</TABLE>
- -------
* Annualized.
** Formerly Class D shares.
+ Commencement of offering of shares.
++ Calculated using the monthly average shares outstanding for the year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period, reinvestment of all dividends and other
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment 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.
----------
- --------------------------------------------------------------------------------
Prospectus Page 8
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Financial Highlights
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND
- --------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C**
- ------------------------------------------------------------------------- ------------------------------------------------
FOR THE
FOR THE PERIOD FOR THE YEARS ENDED FOR THE PERIOD
FOR THE YEAR ENDED FEBRUARY 28 OR 29 DECEMBER 12, 1986+ YEAR ENDED FEBRUARY 28, JULY 2, 1992+ TO
- ---------------------------------------------------- TO FEBRUARY FEBRUARY 29, ---------------- FEBRUARY 28,
1992 1991 1990 1989 1988 28, 1987 1996 1995 1994 1993
- -------- -------- -------- -------- -------- ------------------ ------------ ------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $ 10.00 $ 9.82 $12.03 $ 11.54 $10.86
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
0.35 0.59 0.65 0.54 0.48 0.04 0.19++ 0.19 0.14 0.13
0.78 0.38 0.10 (0.28) (0.09) 0.36 1.84 (1.07) 1.30 0.71
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
1.13 0.97 0.75 0.26 0.39 0.40 2.03 (0.88) 1.44 0.84
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
(0.35) (0.62) (0.70) (0.52) (0.44) -- (0.22) (0.13) (0.17) (0.16)
-- -- (0.11) -- (0.17) -- (0.75) (1.20) (0.78) --
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
(0.35) (0.62) (0.81) (0.52) (0.61) -- (0.97) (1.33) (0.95) (0.16)
- -------- -------- -------- -------- -------- -------- ------ ------ ------- ------
$ 10.99 $ 10.21 $ 9.86 $ 9.92 $ 10.18 $ 10.40 $10.88 $ 9.82 $ 12.03 $11.54
======== ======== ======== ======== ======== ======== ====== ====== ======= ======
11.24 % 10.29 % 7.53 % 2.73 % 4.31 % 4.00 % 21.12 % (6.69)% 12.75 % 7.78 %
======== ======== ======== ======== ======== ======== ====== ====== ======= ======
$346,290 $403,557 $557,646 $651,003 $715,771 $613,024 $7,469 $8,525 $12,916 $7,058
2.02 % 1.83 % 1.84 % 1.94 % 1.98 % 2.03%*(2) 2.08 % 2.01 % 1.96 % 1.95 %*
3.25 % 5.46 % 6.04 % 5.37 % 5.01 % 2.80%*(2) 1.77 % 1.62 % 0.97 % 1.91 %*
84 % 169.18 % 326.99 % 159.32 % 129.05 % 25.33% 188 % 107 % 69 % 33 %
</TABLE>
----------
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
TACTICAL ALLOCATION FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
the Fund's Annual Report to Shareholders for the fiscal year ended August 31,
1995 and the report of Ernst & Young LLP, independent auditors, appearing in
the Fund's Annual Report to Shareholders. Both are incorporated by reference
into the Statement of Additional Information. The financial statements and
notes, as well as the financial information in the tables below relating to
the fiscal year ended August 31, 1995,
have been audited by Ernst & Young LLP. The financial information for the year
ended August 31, 1994 and the prior periods was audited by other auditors,
whose report on this data was unqualified. Further information about the
Fund's performance is also included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568. The financial
statements and notes and the financial information in the tables below, as
they relate to the six months ended February 29, 1996, have been taken from
the records of the Fund without examination by the independent auditors, who
have not expressed an opinion on the information.
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
--------------------------------------------------------------------------
CLASS A CLASS B
------------------------------ -------------- ---------------
FOR THE FOR THE PERIOD FOR THE
SIX MONTHS FOR THE YEAR FOR THE PERIOD JANUARY 30, SIX MONTHS IOD
ENDED ENDED MAY 10, 1996+ TO ENDED
FEBRUARY 29, AUGUST 31, 1993+ FEBRUARY 29, FEBRUARY 29,
1996 -------------- TO AUGUST 31, 1996 1996 1,
(UNAUDITED) 1995** 1994 1993 (UNAUDITED) (UNAUDITED)
------------ ------ ------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period.......... $ 14.86 $13.78 $13.50 $12.90 $15.54 $ 14.87
------- ------ ------ ------ ------ -------
Net investment
income.......... 0.11 0.22 0.24 0.08 0.01 0.03
Net realized and
unrealized gains
from investment
transactions.... 2.00 2.05 0.32 0.59 0.25 2.02
------- ------ ------ ------ ------ -------
Net increase
from investment
operations...... 2.11 2.27 0.56 0.67 0.26 2.05
------- ------ ------ ------ ------ -------
Dividends from
net investment
income.......... (0.14) (0.22) (0.24) (0.07) -- (0.07)
Distributions
from net
realized gains
from investment
transactions.... (1.06) (0.97) (0.04) -- -- (1.06)
------- ------ ------ ------ ------ -------
Total dividends
and
distributions to
shareholders.... (1.20) (1.19) (0.28) (0.07) -- (1.13)
------- ------ ------ ------ ------ -------
Net asset value,
end of period... $ 15.77 $14.86 $13.78 $13.50 $15.80 $ 15.79
======= ====== ====== ====== ====== =======
Total investment
return(1)....... 14.59% 18.43% 4.21% 5.17% 1.67% 14.13%
======= ====== ====== ====== ====== =======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)......... $ 3,989 $1,944 $1,801 $3,007 $ 910 $54,473
Expenses to
average net
assets.......... 1.35%* 1.46% 1.13% 1.06%* 2.06%* 2.02%* *
Net investment
income to
average net
assets.......... 1.05%* 1.60% 1.64% 1.71%* 1.59%* 0.35%* *
Portfolio
turnover........ 5% 53% 4% 0% 5% 5%
Average
commission rate
paid per share
on common stock
investments
purchased/sold(2). $ 0.0250 -- -- -- $ 0.0250 $ 0.0250
<CAPTION>
-------------------------------------------
CLASS C***
-------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED JULY 22,
AUGUST 31, 1992+
--------------------------- TO AUGUST 31,
1995** 1994 1993 1992
------- ------- -------- --------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period.......... $ 13.78 $ 13.49 $ 12.12 $ 12.00
------- ------- -------- -------
Net investment
income.......... 0.12 0.13 0.18 0.03
Net realized and
unrealized gains
from investment
transactions.... 2.06 0.33 1.34 0.09
------- ------- -------- -------
Net increase
from investment
operations...... 2.18 0.46 1.52 0.12
------- ------- -------- -------
Dividends from
net investment
income.......... (0.12) (0.13) (0.15) --
Distributions
from net
realized gains
from investment
transactions.... (0.97) (0.04) -- --
------- ------- -------- -------
Total dividends
and
distributions to
shareholders.... (1.09) (0.17) (0.15) --
------- ------- -------- -------
Net asset value,
end of period... $ 14.87 $ 13.78 $ 13.49 $ 12.12
======= ======= ======== =======
Total investment
return(1)....... 17.57% 3.46% 12.61% 0.98%
======= ======= ======== =======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)......... $48,105 $62,970 $107,761 $50,222
Expenses to
average net
assets.......... 2.22% 1.88% 1.73% 1.75%*
Net investment
income to
average net
assets.......... 0.86% 0.89% 1.04% 2.42%*
Portfolio
turnover........ 53% 4% 0% 0%
Average
commission rate
paid per share
on common stock
investments
purchased/sold(2). $ -- -- -- --
</TABLE>
- -------
+ Commencement of offering of shares.
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
*** Formerly Class B shares.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable dates and a
sale at net asset value on the last day of each period reported. The
figures do not include sales charges; results for each class would be
lower if sales charges were included. Total investment returns for periods
of less than one year have not been annualized.
(2) Disclosure effective for fiscal years beginning on or after September 1,
1995.
----------
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
- --------------------------------------------------------------------------------
------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Investment Objectives & Policies
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards.
BALANCED FUND
Balanced Fund's investment objective is to obtain high total return with low
volatility. The Fund pursues this objective by investing primarily in a
combination of three asset classes: stocks (equity securities), bonds
(investment grade bonds) and cash (money market securities). The portion
invested in each of these asset classes is based on Mitchell Hutchins' judgment
of the best allocation of the Fund's assets. However, the Fund maintains a
fixed income allocation (including bonds and cash) of at least 25%. The Fund
attempts to maintain a dollar-weighted average maturity for its fixed income
investments--the average remaining time to maturity of a portfolio's bonds--of
three to ten years.
The Fund may invest in a broad range of:
. Equity securities issued by companies believed by Mitchell Hutchins to have
the potential for rapid earnings growth;
. Investment grade bonds, that is, bonds that, at the time of purchase, are
assigned one of the four highest grades by Standard & Poor's, a division of
the McGraw Hill Companies, Inc. ("S&P"), or Moody's Investors Service, Inc.
("Moody's"), are comparably rated by another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, are determined by
Mitchell Hutchins to be of comparable quality, and U.S. government
securities;
. Convertible securities rated at least B by S&P or Moody's, comparably rated
by another NRSRO or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Securities rated BB or B by S&P (or Ba or B by Moody's)
are regarded as having predominantly speculative characteristics with respect
to the ability to pay interest and repay principal. While such securities may
have some quality and protective characteristics, these are outweighed by
large uncertainties or major exposures to adverse conditions. However, the
Fund will not invest more than 10% of its total assets in convertible
securities rated below investment grade (BBB by S&P, Baa by Moody's,
comparably rated by another NRSRO or, if unrated, determined by Mitchell
Hutchins to be of comparable quality); and
.High quality money market securities.
TACTICAL ALLOCATION FUND
Tactical Allocation Fund's investment objective is total return, consisting of
long-term capital appreciation and current income. The Fund seeks to achieve
its objective by using a systematic investment strategy that actively allocates
the Fund's assets among common stocks, U.S. Treasury notes and U.S. Treasury
bills.
In seeking total return, the Fund shifts its asset mix among (i) an equity
portion designed to track the performance of the S&P 500 Index (the Fund
generally holds 450 of the 500 stocks in the S&P 500 Index), a bond portion,
consisting of five-year U.S. Treasury notes, and a cash portion, consisting of
30-day U.S. Treasury bills. The allocation among these three segments is based
on the asset mix recommendation of the Mitchell Hutchins Tactical Allocation
Model ("Model").
The performance of the Fund's equity portion is intended to replicate that of
the S&P 500 Index before deducting operating expenses. The Fund may invest in
derivative instruments related to the stocks in the S&P 500 Index and five-year
U.S. Treasury notes, such as options on common stock indexes, futures on stock
indexes, interest rate futures and options on futures.
The Model is a systematic, cost-effective approach to allocating assets among
the three asset classes. The Fund seeks to achieve total return during all
economic and financial market cycles, with a degree of volatility lower than
that of the S&P 500 Index, by investing in common stocks held in the S&P 500
Index, but can take a more defensive posture when the Model signals a potential
secular decline in stock prices.
****
As with any mutual fund, there is no assurance that either Fund will achieve
its investment objective. Each Fund's net asset value fluctuates based upon
changes in the value of its portfolio securities.
----------
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
- -------------------------------------------------------------------------------
Investment Philosophy & Process
- -------------------------------------------------------------------------------
BALANCED FUND
Mitchell Hutchins believes 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. Mitchell Hutchins also believes that
capital market returns (returns on stocks and bonds) reflect the consensus
expectations for key economic variables, such as interest rates, profit growth
and inflation. To implement this strategy for the Fund, Mitchell Hutchins:
. Regularly surveys market participants and generates a consensus forecast of
economic variables affecting returns on equity securities, bonds and money
market instruments; and
. Applies fundamental valuation techniques to the consensus data to determine
the asset allocation it believes to be optimal.
Once the Fund's asset allocation is determined, the portfolio managers
specializing in each asset class select individual securities for each portion
of the portfolio. Mitchell Hutchins regularly monitors market outlooks and
shifts the asset allocation mix when there are significant changes in expected
returns.
The Fund uses the following investment process to determine the individual
securities for each portion of the Fund:
. EQUITY SECURITIES. Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks providing a combination of value and price
momentum. The Model screens a universe of small- to large-capitalization
companies in ten different business sectors to identify undervalued
companies with strong earnings momentum that rank well in three measures:
--VALUE: projected dividends, cash flow, earnings and book value;
--MOMENTUM: earnings and price to identify companies that could surprise on
the upside; and
--ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.
The equity securities ranking in the top 20% of the Model's universe are
screened twice a month. Then the portfolio managers take a closer look at
those equity securities that rank higher based on value and momentum. Mitchell
Hutchins applies traditional analysis and may speak to the management of these
companies, as well as those of their competitors.
. DEBT SECURITIES. Mitchell Hutchins selects these securities based on its
analysis of the maturity structure and risk structure (comparing yields on
Treasury securities to yields on riskier types of debt securities).
. MONEY MARKET INSTRUMENTS. Mitchell Hutchins' decision to use these
securities is based on its judgment of how they can further the Fund's
investment objective.
TACTICAL ALLOCATION FUND
Mitchell Hutchins allocates Tactical Allocation Fund's assets among stocks and
bonds or cash, based on the Model's quantitative assessment of the projected
rates of return of each asset class. The Model embraces the concept that
incremental return can be achieved through the tactical allocation of
portfolio assets across three main asset classes--stocks, bonds and cash. The
emphasis of the Model is to avoid or reduce exposure to the stock market
during down economic cycles and to perform close to the S&P 500 Index in
periods of strongly positive market performance.
The basic premise of the Model is that investors accept the risk of owning
stocks, measured as volatility of return, because they expect a return
advantage. The expected return advantage of stocks fluctuates as investor
psychology pushes the market to valuation extremes. The Model incorporates the
following factors to determine the allocations:
----------
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
.Expected future dividends and current price of stocks;
.Economic statistics;
. Five-year, "bottom-up" company earnings projections; and
.Yield-to-maturity of the one-year Treasury bill.
The Fund's asset allocation mix is dictated by the Model, except as described
below. The Fund does not maintain a portion of its investments in each asset
class at all times. The weightings can range from 100% to 0% in stocks, bonds
or cash. Possible asset mixes are 100% stocks; 75% stocks/25% bonds or cash;
100% bonds or cash. For example, as of August 31, 1995, the Fund's assets were
allocated as follows: 100% to stocks, 0% to bonds and 0% to cash. As of
February 29, 1996, the allocation looked like this: 100% to stocks, 0% to
bonds and 0% to cash. The Fund does not hold bonds and cash at the same time,
except for limited amounts always held in cash generally to pay expenses. This
disciplined approach to investing in stocks attempts to shift the asset mix in
anticipation of, not in response to, changing market trends.
Asset reallocations are made on the first business day of each month. If no
reallocation of assets is dictated by the Model, any material amounts
resulting from appreciation or receipt of dividends, distributions, interest
payments and proceeds from securities maturing in each of the asset classes
are reallocated (or "rebalanced") to the extent practicable to re-establish
the Model's recommended asset allocation mix.
In contrast to a typical S&P 500 Index fund that maintains a 100% allocation
to the Index, the Fund is designed to take a more defensive posture when the
Model signals a potential secular decline in stock prices. The Fund deviates
from the recommendations of the Model only to the extent necessary to:
. Maintain an amount in cash, not expected to exceed 2% of its total assets,
to pay Fund operating expenses, dividends and distributions on its shares
and to meet anticipated sales of shares; and
. Qualify as a regulated investment company for Federal income tax purposes.
See "Dividends and Taxes."
----------
- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Performance
- -------------------------------------------------------------------------------
These charts show the total returns for the Fund. Sales charges have not been
deducted from the total returns. Returns would be lower if sales charges were
deducted. Past results are not a guarantee of future results.
Total returns both before and after deducting the maximum sales charges are
shown below in the tables that follow the performance charts.
BALANCED FUND
The inception date of the Class A shares was July 1, 1991; thus, the 1991
return represents the period from July 1, 1991 through December 31, 1991. The
Class B shares commenced operations on December 12, 1986; thus, the 1986
return for Class B shares represents the period from December 12, 1986 through
December 31, 1986. The inception date of Class C shares was July 2, 1992;
thus, the 1992 return for Class C shares represents the period from July 2,
1992 through December 31, 1992.
BALANCED FUND (Graph on page 14 of the ABC prospectus)
X=12/12/86-12/31/86, Y=-2.40% - Class B
X=1987, Y=1.21% - Class B
X=1988, Y=11.34% - Class B
X=1989, Y=10.84% - Class B
X=1990, Y=1.94% - Class B
X=1991, Y=11.53% - Class A
X=1991, Y=18.52% - Class B
X=1992, Y=5.18% - Class A
X=1992, Y=4.46% - Class B
X=1992, Y=5.08% - Class C
X=1993, Y=15.63% - Class A
X=1993, Y=14.66% - Class B
X=1993, Y=14.79% - Class C
X=1994, Y=9.88% - Class A
X=1994, Y=10.51% - Class B
X=1994, Y=10.48% - Class C
X=1995, Y=23.16% - Class A
X=1995, Y=22.27% - Class B
X=1995, Y=22.18% - Class C
AVERAGE ANNUAL RETURNS
As of February 29, 1996
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date.................... 7/1/91 12/12/86 7/2/92
ONE YEAR..........................
Before deducting maximum sales
charges......................... 22.08% 21.20% 21.12%
After deducting maximum sales
charges......................... 16.60% 16.20% 20.12%
FIVE YEARS........................
Before deducting maximum sales
charges......................... N/A 8.73% N/A
After deducting maximum sales
charges......................... N/A 8.44% N/A
LIFE..............................
Before deducting maximum sales
charges......................... 10.13% 7.90% 9.04%
After deducting maximum sales
charges......................... 9.04% 7.90% 9.04%
</TABLE>
----------
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
TACTICAL ALLOCATION FUND
The inception date of Class A shares was May 10, 1993; thus the 1993 return
represents the period from May 10, 1993 through December 31, 1993. As Class B
shares commenced operations on January 30, 1996, they are not included in this
chart or in the table below. The Class C shares commenced operations on July
22, 1992; thus, the 1992 return for Class C shares represents the period from
July 22, 1992 through December 31, 1992.
TACTICAL ALLOCATION FUND (Graph on page 15 of the ABC prospectus)
X=7/22/92-12/31/92, Y=6.67% - Class C
X=1993, Y=6.48% - Class A
X=1993, Y=7.64% - Class C
X=1994, Y=-0.59% - Class A
X=1994, Y=-1.28% - Class C
X=1995, Y=35.13% - Class A
X=1995, Y=34.09% - Class C
AVERAGE ANNUAL RETURNS
As of August 31, 1995
<TABLE>
<CAPTION>
CLASS A SHARES CLASS C SHARES
-------------- --------------
<S> <C> <C>
Inception Date.................................... 5/10/93 7/22/92
ONE YEAR..........................................
Before deducting maximum sales charges........... 18.43% 17.57%
After deducting maximum sales charges............ 13.10% 16.57%
LIFE..............................................
Before deducting maximum sales charges........... 11.98% 11.00%
After deducting maximum sales charges............ 9.76% 11.00%
</TABLE>
PERFORMANCE INFORMATION
The Funds perform 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 Funds as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for Class A
shares of the Funds reflects deduction of the Funds' maximum initial sales
charge of 4.5% at the time of purchase, and standardized return for Class B
and Class C shares of the Funds reflects the deduction of the applicable
contingent deferred sales charge imposed on a sale of shares held for the
period. One-, five- and ten-year periods will be shown, unless the Fund or
class has been in existence for a shorter period. Total return calculations
assume reinvestment of dividends and other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average
annual rates, actual year-by-year rates or any combination thereof. Non-
standardized return does not reflect initial or contingent deferred sales
charges and would be lower if such charges were deducted.
Total return information reflects past performance and does not necessarily
indicate future results. The investment return and principal value of shares
of the Funds will fluctuate. The amount investors receive when selling shares
may be more or less than what they paid. Further information about the Funds'
performance is contained in the Funds' Annual Reports, which may be obtained
without charge by contacting each Fund, your PaineWebber investment executive
or PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568.
----------
- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
The Funds' Investments
- -------------------------------------------------------------------------------
BALANCED FUND
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and
common stock purchase warrants and rights. Common stocks, the most familiar
type, represent an equity (ownership) interest in a corporation. While past
performance does not guarantee future results, common stocks historically have
provided the greatest long-term growth potential in a company. However, their
prices generally fluctuate more than other securities, and reflect changes in
a company's financial condition and in overall market and economic conditions.
Preferred stock has certain fixed income features, like a bond, but is
actually equity in a company, like common stock. Convertible securities may
include debentures, notes and preferred equity securities, which are
convertible into common stock.
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.
BONDS (including notes and debentures) are used by corporations and
governments to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest and must repay the amount borrowed at
maturity. Bonds have varying degrees of investment risk and varying levels of
sensitivity to changes in interest rates.
ASSET-BACKED SECURITIES are debt obligations backed by specific assets. The
most common type of asset-backed securities is mortgage-backed bonds, which
represent a direct or indirect interest (participation) in--or are secured by
and payable from--a pool of mortgage loans secured by real property. They are
sold by government agencies, such as the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association, and private
corporations. Investors typically receive payments out of the interest and
principal on the underlying mortgages. The growth of mortgage-backed
securities and the secondary mortgage market in which they are traded has
helped keep mortgage money available for home financing.
Mortgage-backed securities include:
. Single- and multi-class pass-through securities, representing pooled debt
obligations repackaged as shares, that pass income from debtors through the
intermediary to investors;
. Collateralized mortgage obligations ("CMOs"), which are more complex
versions of mortgage-backed bonds. Evaluating the risks and rewards of CMOs
requires special knowledge.
When interest rates go down and homeowners refinance their mortgages,
mortgage-backed bonds are paid off more quickly than investors may expect.
Other asset-backed securities are structured similar to mortgage-backed
securities, except that the underlying assets are not first lien mortgage
loans or interests in them. Instead, these securities include assets such as
motor vehicle installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements.
ZERO COUPON SECURITIES are securities that make no periodic interest payments
but instead are sold at a deep discount from their face value. The buyer of
such a bond receives the rate of return by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. There
are many kinds of zero coupon securities. The most commonly known is the zero
coupon bond, which either may be issued at a deep discount by a corporation or
may be created by a brokerage firm when it strips (separates) the coupons
(unmatured interest payments) off a bond and sells the principal and the
coupons separately. This technique is used frequently with U.S. Treasury
bonds; these issues include CATS (Certificates of Accrual Treasury Securities)
and TIGRs (Treasury Income Growth Receipts).
----------
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
- -------------------------------------------------------------------------------
-------------------
Paine Webber Balanced Fund Tactical Allocation Fund
Because zero coupon securities bear no interest and holders do not receive
interest payments, they are generally more sensitive to changes in interest
rates than other U.S. government securities. For example, when interest rates
fall, the value of zero coupon securities rises more rapidly than bonds paying
out interest on a current basis, because the bonds have locked in a particular
rate of reinvestment that becomes more attractive the further rates fall.
However, when interest rates rise, their value falls more dramatically.
MONEY MARKET INSTRUMENTS in which the Fund may invest include:
. U.S. Treasury bills and other obligations issued or guaranteed as to
interest and principal by the U.S. government, its agencies and
instrumentalities;
. Obligations of U.S. banks (including certificates of deposit and bankers'
acceptances) with total assets in excess of $1.5 billion at the time of
purchase;
. Interest-bearing savings deposits in U.S. commercial and savings banks with
principal amounts not greater than are fully insured by the Federal Deposit
Insurance Corporation (the aggregate amount of these deposits may 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.
In addition, the Fund may hold cash and may invest in participation interests
of the money market securities mentioned above without limitation. These
participation interests are the interests of securities held by others on a
pro-rata basis.
TACTICAL ALLOCATION FUND
STOCK PORTION. In its stock portion, the Fund attempts to duplicate, before
the deduction of operating expenses, the investment results of the S&P 500
Index by investing in 450 of the 500 common stocks included in that Index. The
S&P 500 Index, which is chosen by S&P on a statistical basis and may change
from time to time, emphasizes large capitalization stocks and is based on such
factors as the market capitalization and trading activity of each stock and
its adequacy as a representative of stocks in a particular industry sector.
The Fund attempts to achieve a correlation between the performance of the
stock portion and that of the S&P 500 Index of at least 0.95, before the
deduction of operating expenses (a correlation of 1.00 would be perfect, which
would mean that the net asset value of the stock portion increased or
decreased in exactly the same proportion as changes in the Index).
BOND PORTION. In its bond portion, the Fund invests in U.S. Treasury notes
having five years remaining to maturity at the beginning of the then-current
calendar year or, if those instruments are unavailable at favorable prices, in
U.S. Treasury notes with remaining maturities as close as possible to five
years. The Fund does not invest in bonds and cash simultaneously, except as
noted below.
CASH PORTION. In its cash portion, the Fund invests in U.S. Treasury bills
with remaining maturities of 30 days or, if those instruments are unavailable
at favorable prices, in U.S. Treasury bills with remaining maturities as close
as possible to 30 days. Limited amounts of the Fund's assets are always
invested in the cash portion, generally to pay expenses.
RISKS
Under normal circumstances, Balanced Fund invests primarily in equity
securities, bonds, U.S. government securities, mortgage- and asset-backed
securities and money market instruments, and Tactical Allocation Fund invests
primarily in equity securities and U.S. government securities. Following is a
discussion of risks that are common to each Fund:
EQUITY SECURITIES. Equity securities historically have shown greater growth
potential than other types of securities. As with all investments, higher
returns are typically accompanied by higher risks; thus, common stocks
represent the riskiest investment in a company. It is possible that investors
may lose their entire investment.
INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and the prices of bonds and U.S. government securities will
fall,
----------
- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
lowering the value of the Funds' investments. Long-term bonds, including U.S.
government securities, are generally more sensitive to interest rate changes
than short-term bonds, including U.S. government securities. Adverse changes
in economic conditions can affect an issuer's ability to pay principal and
interest.
FOREIGN SECURITIES. Balanced 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. Since the S&P 500 Index includes
common stocks of foreign issuers, Tactical Allocation Fund is also subject to
certain risks associated with investments in foreign securities.
Investing in securities of foreign companies involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in foreign economic or monetary policies, exchange control
regulations and regulations involving prohibitions on the repatriation of
foreign currencies.
In general, less information may be available about foreign companies than
about U.S. companies, and they are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of foreign investing frequently
are higher than those in the United States. These costs include relatively
higher brokerage commissions and foreign custody expenses.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements. In a
typical repurchase agreement, a Fund buys a security and simultaneously agrees
to sell it back at an agreed-upon price and time, usually no more than seven
days after purchase. The time and price reflect a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities. Risks
associated with repurchase agreements include a possible decline in the value
of the underlying securities and delays and costs to the Fund if the other
party to the repurchase agreement becomes insolvent.
In addition to these general risks, investments in each Fund are subject to
other risk considerations:
BALANCED FUND
BOND RATINGS. The Fund invests in a broad range of bonds rated investment
grade. Investment grade quality means that the securities are rated within the
four highest categories by S&P and Moody's. Bonds rated in the fourth highest
category (BBB by S&P or Baa by Moody's) include securities which
have speculative features in the opinions of the rating agencies.
The Fund may invest up to 10% of its total assets in convertible bonds rated
lower than investment grade, that is, below BBB by S&P or Baa by Moody's.
These bonds, which are commonly referred to as "junk bonds," are considered to
be predominantly speculative with respect to the issuer's ability to pay
interest and repay principal and may be more sensitive to adverse conditions.
The Fund's policy of investing a portion of its assets in lower rated
securities thus entails greater risks than those associated with investment in
higher rated securities. The Fund also may invest in securities that are
comparably rated by another NRSRO and unrated securities deemed by Mitchell
Hutchins to be of comparable quality.
RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of
the mortgage- and asset-backed securities in which the Fund may invest differ
from those of traditional debt securities. Among the major differences are
that interest and principal payments 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. Generally, prepayments on fixed-rate mortgage loans
will increase during a period of falling interest rates and decrease during a
period of rising interest rates. Mortgage- and asset-backed securities may
also 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. 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 Fund's yield. 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
variety of
----------
- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
investment characteristics, such as yield, effective maturity and interest
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
either above or below market rates at the time of issuance, so 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 receive all
or a portion of the interest but none of the principal from the underlying
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 interest
(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
discount generally are extremely sensitive to the rate of principal payments
(including 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 security is government issued or guaranteed or is rated
AAA or the equivalent.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which the Fund may invest, including IO and PO
classes of mortgage-backed 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 interest rate changes or
other factors that may affect the volatility of securities held by the Fund,
the Fund's ability to meet its investment objective may be reduced.
See Appendix A to the Statement of Additional Information for more information
concerning the types of mortgage-backed securities in which the Fund may
invest.
RISKS OF ZERO COUPON SECURITIES. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. government securities. Zero coupon
securities 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
distribute as dividends amounts that are greater than the total amount of cash
it actually 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 reduced 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 comparable maturities that make current distributions of
interest in cash.
TACTICAL ALLOCATION FUND
LIMITS OF ASSET ALLOCATION STRATEGY. Although it seeks total return,
consisting of both capital appreciation and current income, in following its
asset allocation strategy, the Fund may not achieve as high a level of either
capital appreciation or current income as a fund that has only one of those
objectives as its primary objective. In addition, the need to qualify as a
regulated investment company for federal income tax purposes may limit the
Fund's ability to adhere rigidly to the recommendations of the Model. See
"Dividends & Taxes."
INDEX INVESTING AND OPEN-END INVESTMENT COMPANIES. While the Fund's stock
portion attempts to duplicate, before deduction of operating expenses, the
investment results of the S&P 500 Index, the investment results of the stock
portion generally are not identical to those of the Index. Deviations from the
performance of the S&P 500 Index may result from shareholder purchases and
sales of shares that occur daily, as well as from expenses borne by the Fund.
----------
- --------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND RELATED STRATEGIES. In an attempt to reduce the overall risk of
its investments, known as hedging, to enhance income or return or to increase
or decrease its exposure to an asset class prior to purchasing or selling
securities, each Fund may use certain strategies, known as "hedging"
strategies. These hedging strategies involve derivative contracts, including
options (on securities, futures and indexes) and futures contracts (on stock
indexes and interest rates). In addition, new financial products and risk
management techniques continue to be developed and may be used if consistent
with the Funds' investment objectives and policies. The Funds' ability to use
the strategies may be limited by market conditions, regulatory limits and tax
considerations. The Statement of Additional Information for the Funds contains
further information on these strategies.
Each Fund may enter into options and futures contracts under which the full
value of its portfolio is at risk. Under normal circumstances, however, the
Fund's use of these strategies will place at risk a much smaller portion of
its assets.
The Funds might not use any hedging strategies, and there can be no assurance
that any strategy used will succeed. If Mitchell Hutchins is incorrect in its
judgment on interest rates, market values or other economic factors in using a
particular hedging strategy, a Fund might have lower net income and a net loss
on the investment. Each of these strategies involves certain risks, which
include:
. the fact that the skills needed to use hedging instruments are different
from those needed to select securities for the Funds,
. the possibility of imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the
securities being hedged,
. possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to "cover"
or to segregate securities, and
. the possibility that the Fund is unable to close out or liquidate its
position.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as "derivatives," because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used in hedging strategies.
There is only limited consensus as to what constitutes a "derivative"
security. However, in Mitchell Hutchins' view, derivative securities also
include "stripped" securities and specially structured types of mortgage- and
asset-backed securities such as IOs, POs and inverse floaters. The market
value of derivative instruments and securities sometimes is more volatile than
that of other investments, and each type of derivative instrument may pose its
own special risks. Mitchell Hutchins takes these risks into account in its
management of the Funds.
OTHER INFORMATION. Each Fund may purchase securities on a when-issued basis or
may purchase or sell securities for delayed delivery. A Fund generally would
not pay for such securities or start earning interest on them until they are
delivered, but it would immediately assume the risks of ownership, including
the risk of price fluctuation. Each Fund may borrow money for temporary or
emergency purposes, but not in excess of 10% (Balanced Fund) or 20% (Tactical
Allocation Fund) of its total assets, including (in the case of Balanced Fund)
reverse repurchase agreements involving up to 5% of its total assets.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities, including repurchase agreements maturing in more than
seven days, certain cover for over-the-counter ("OTC") options and securities
whose disposition is restricted under the federal securities laws. The Funds
do not consider securities that are eligible for resale under SEC Rule 144A to
be illiquid if Mitchell Hutchins has determined them to be liquid, based upon
the trading markets for the securities under procedures approved by the Funds'
boards.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
U.S. and foreign brokers, dealers and banks in an amount up to 33% of the
Fund's total assets taken at market value. The Funds' loans of securities will
be collateralized in an amount at least equal to the current market value of
the loaned securities. Lending securities enables the Funds to earn additional
income, but could result in a loss or delay in recovering these securities.
----------
- --------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
- -------------------------------------------------------------------------------
Flexible Pricing/SM/
- -------------------------------------------------------------------------------
Each Fund offers three classes of shares that differ in terms of sales charges
and expenses. An investor can select the class that is best suited to his or
her investment needs, based upon the holding period and the amount of
investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum is 4.5% of the public offering price) next
calculated after PaineWebber's New York City headquarters or PFPC Inc., the
Funds' Transfer Agent ("Transfer Agent") receives the purchase order. Although
investors pay an initial sales charge when they buy Class A shares, the
ongoing expenses for this class are lower than the ongoing expenses of Class B
and Class C shares. Class A shares sales charges are calculated as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED
---------------------------------- DEALERS AS PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- -------------------- -------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than $50,000....... 4.50% 4.71% 4.25%
$50,000 to $99,999...... 4.00 4.17 3.75
$100,000 to $249,999.... 3.50 3.63 3.25
$250,000 to $499,999.... 2.50 2.56 2.25
$500,000 to $999,999.... 1.75 1.78 1.50
$1,000,000 and over (1). None None 1.00 (2)
</TABLE>
- -------
(1) A contingent deferred sales charge of 1% of the shares' net asset value at
the time of purchase or sale, whichever is less, is charged on sales of
shares made within one year of the purchase date. Class A shares
representing reinvestment of any dividends or other distributions are not
subject to the 1% charge. Withdrawals under the Systematic Withdrawal Plan
are not subject to this charge. However, investors may not withdraw more
than 12% of the value of the Fund account under the Plan in the first year
after purchase. This charge does not apply to Class A shares bought before
November 10, 1995.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors purchasing Class A shares in more than one PaineWebber mutual fund
may combine those purchases to get a reduced sales charge. Investors who
already own Class A shares in one or more PaineWebber mutual funds may combine
the amount they are currently purchasing with the value of such previously
owned shares to qualify for a reduced sales charge. To determine the sales
charge reduction in either case, please refer to the chart above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
. their spouses, parents or children under age 21;
. their Individual Retirement Accounts (IRAs);
. certain employee benefit plans, including 401(k) plans;
. any company controlled by the investor;
. trusts created by the investor;
. Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of individuals for the benefit of the investors'
children; or
. accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
. is an employee, director, trustee or officer of PaineWebber, its affiliates
or any PaineWebber mutual fund;
. is the spouse, parent or child of any of the above, or advisory clients of
Mitchell Hutchins;
----------
- --------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
. buys these shares through a PaineWebber investment executive who was
formerly employed as a broker with a competing brokerage firm that was
registered as a broker-dealer with the SEC; and
. the investor was the investment executive's client at the competing
brokerage firm;
. within 90 days of buying Class A shares in this Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor
either paid a sales charge to buy those shares, paid a contingent
deferred sales charge when selling them or held those shares until the
contingent deferred sales charge was waived; and
. the amount that the investor purchases does not exceed the total amount
of money the investor received from the sale of the other mutual fund;
. is a certificate holder of unit investment trusts sponsored by PaineWebber
and has elected to have dividends and other distributions from that
investment automatically invested in Class A shares;
. is an employer establishing an employee benefit plan qualified under section
401 or 403(b), or a salary reduction plans qualified under section 401(k),
of the Internal Revenue Code ("Code"). (This waiver is subject to minimum
requirements, with respect to the number of employees and investment amount,
established by Mitchell Hutchins.) Currently, the plan must have 100 or more
eligible employees or the amount invested or to be invested in the Fund or
any other PaineWebber mutual fund must total at least $1 million during the
subsequent 13-month period; or
. acquires Class A shares in connection with a reorganization pursuant to
which the Fund acquires substantially all of the assets and liabilities of
another investment company in exchange solely for shares of the Fund.
For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated
after PaineWebber's New York City headquarters or the Transfer Agent receives
the purchase order. The ongoing expenses investors pay for Class B shares are
higher than those of Class A shares. Because investors do not pay an initial
sales charge when they buy Class B shares, 100% of their purchase is
immediately invested.
Depending on how long they own their Fund investment, investors may have to
pay a sales charge when they sell their Fund shares. This sales charge is
called a "contingent deferred sales charge." The amount of the charge depends
on how long the investor owned the shares. The sales charge is calculated by
multiplying the net asset value of the shares at the time of sale or purchase,
whichever is less, by the percentage shown on the following table. Investors
who own shares for more than six years do not have to pay a sales charge when
selling those shares.
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET ASSET
IF THE INVESTOR SELLS SHARES WITHIN: VALUE IS MULTIPLIED:
- ------------------------------------ ---------------------
<S> <C>
1st year of purchase..................................... 5%
2nd year of purchase..................................... 4
3rd year of purchase..................................... 3
4th year of purchase..................................... 2
5th year of purchase..................................... 2
6th year of purchase..................................... 1
7th year of purchase..................................... None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A
shares of equal dollar value after the investor has owned them for six years.
Dividends and other distributions paid to the investor by the Fund in the form
of additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the
initial investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years,
the Fund automatically will minimize the sales charge by assuming they are
selling:
. First, Class B shares owned through reinvested dividends and capital gain
distributions; and
. Second, Class B shares held in the portfolio the longest.
----------
- --------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
. sales of shares under the Fund's "Systematic Withdrawal Plan" (investors may
not withdraw annually more than 12% of the value of the Fund account under
the Plan);
. a distribution from an IRA, a self-employed individual retirement plan
("Keogh Plan") or a custodial account under Section 403(b) of the Internal
Revenue Code (after the investor reaches age 59 1/2);
. a tax-free return of an excess IRA contribution;
. a tax-qualified retirement plan distribution following retirement; or
. Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
Investors must provide satisfactory information to PaineWebber or the Fund if
they seek any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value
next calculated after PaineWebber's New York City headquarters or the Transfer
Agent receives the purchase order. Investors do not pay an initial sales
charge when they buy Class C shares, but the ongoing expenses of Class C
shares are higher than those of Class A shares. Class C shares never convert
to any other class of shares.
A contingent deferred sales charge of 1% of the net asset value of the shares
at the time of purchase or sale, whichever is less, is charged on sales of
shares made within one year of the purchase date. Other PaineWebber mutual
funds may impose a different contingent deferred sales charge on Class C
shares sold within one year of the purchase date. A sale of Class C shares
acquired through an exchange and held less than one year will be subject to
the same contingent deferred sales charge that would have been imposed on the
Class C shares of the PaineWebber mutual fund originally purchased and then
exchanged into Class C shares of the acquired fund. Class C shares
representing reinvestment of any dividends or capital gains are not subject to
the 1% charge. Withdrawals under the Systematic Withdrawal Plan also are not
subject to this charge. However, investors may not withdraw annually more than
12% of the value of the Fund account under the Plan in the first year after
purchase. This charge does not apply to Class C shares bought before November
10, 1995.
- -------------------------------------------------------------------------------
How to Buy Shares
- -------------------------------------------------------------------------------
Prices are calculated for the Fund's Class A, Class B and Class C shares once
each Business Day, at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time). A "Business Day" is any day,
Monday through Friday, on which the New York Stock Exchange is open for
business. Shares are purchased at the next share price calculated after the
purchase order is received. The Funds 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 an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's
New York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its
correspondent firms. Payment is due on the third Business Day after
PaineWebber's New York City headquarters office receives the purchase order.
----------
- --------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up
an account through the Transfer Agent by completing an account application,
which can be obtained by calling 1-800-647-1568. The application and check
must be mailed to PFPC Inc., the Funds' Transfer Agent, Attn: PaineWebber
Mutual Funds, P.O. Box 8950, Wilmington, DE 19899.
Investors who already have money invested in a PaineWebber mutual fund, and
want to invest in another PaineWebber mutual fund, can:
. mail an application with a check; or
. open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional
investments in the Fund.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account....................................................... $1,000
To add to an account..................................................... $ 100
</TABLE>
A Fund may waive or reduce these minimums for:
. employees of PaineWebber or its affiliates; or
. participants in certain pension plans, retirement accounts or the Fund's
automatic investment plan.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Fund shares for
the same class of other PaineWebber mutual fund shares. In classes of shares
where no initial sales charge is imposed, a contingent deferred sales charge
may apply if the investor sells the shares acquired through the exchange.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made. A $5 fee is imposed on each exchange into or out of
Balanced Fund. Exchanges into or out of Tactical Allocation Fund are not
charged this fee.
. Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or
wire.
. Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of
instruction must include:
. the investor's name and address;
. the Fund's name;
. the Fund account number;
. the dollar amount or number of shares to be sold; and
. a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock exchange
member.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when shares are exchanged for
the corresponding class of shares of other PaineWebber mutual funds. A Fund
will use the purchase date of the initial investment to determine any
contingent deferred sales charge due when the shares are sold. Fund shares may
be exchanged only after the settlement date has passed and payment for the
shares has been made. The exchange privilege is available only in those
jurisdictions where the sale of the fund shares to be acquired are authorized.
This exchange privilege may be modified or terminated at any time and, when
required by SEC rules, upon 60 days' notice. See the back cover of this
prospectus for a listing of other PaineWebber mutual funds.
----------
- --------------------------------------------------------------------------------
Prospectus Page 24
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
How to Sell Shares
- -------------------------------------------------------------------------------
Investors can arrange to sell (redeem) shares at any time. Shares will be sold
at the share price for that class as next calculated after the order is
received and accepted (less any applicable contingent deferred sales charge).
Share prices are normally calculated at the close of regular trading on the
New York Stock Exchange (currently 4:00 p.m., Eastern time).
Investors who own more than one class of shares should specify which class
they are selling. If they do not, the Fund will assume they are first selling
their Class A shares, then Class C, and last, Class B.
If a shareholder wants to sell shares which were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have
bought their shares through PFPC Inc., the Fund's Transfer Agent, may sell
shares by writing a "letter of instruction," as detailed in "How to Exchange
Shares."
Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to purchase back all Fund shares in any
shareholder account with a net asset value of less than $500. If the Fund
elects to do so, it will notify the shareholder of the opportunity to increase
the amount invested to $500 or more within 60 days of the notice. The Fund
will not purchase back accounts that fall below $500 solely due to a reduction
in net asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive
at PaineWebber or one of its correspondent firms at the time of purchase.
- -------------------------------------------------------------------------------
Other Services
- -------------------------------------------------------------------------------
Investors should consult their investment executive at PaineWebber or one of
its correspondent firms to learn more about the following services:
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan Service with a minimum initial
investment of $1,000 through which the Fund will deduct $50 or more each month
from the investor's bank account to invest directly in the Fund. In addition
to providing a convenient and disciplined manner of investing, participation
in the Automatic Investment Plan enables the investor to use the technique of
"dollar cost averaging."
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December) or semiannual (June and December)
withdrawals from their PaineWebber Mutual Fund accounts. Minimum balances and
withdrawals vary according to the class of shares:
. CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.
. CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly and semiannual withdrawals of $200, $400 and $600, respectively.
Withdrawals under the Systematic Withdrawal Plan are not subject to a
contingent deferred sales charge. Investors may not withdraw annually more
than 12% of the value of the Fund account when the investor signed up for the
Plan (for Class B shares annually; for Class A and Class C shares, during the
first year under
----------
- --------------------------------------------------------------------------------
Prospectus Page 25
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
the Plan). Shareholders who elect to receive dividends or other distributions
in cash may not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-Directed IRAs are available through PaineWebber in which purchases of
PaineWebber funds and other investments may be made. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be
moved 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.
- -------------------------------------------------------------------------------
Management
- -------------------------------------------------------------------------------
Balanced Fund is a series of PaineWebber Master Series, Inc. ("Corporation")
and Tactical Allocation Fund is a series of PaineWebber Investment Trust
("Trust"). The board of directors for the Corporation and the board of
trustees of the Trust oversee the Funds' operations and, as part of this
overall management responsibility, oversee various organizations responsible
for the day-to-day management of each Fund. Each board has appointed Mitchell
Hutchins as investment adviser and administrator responsible for the Fund's
operations (subject to the authority of the board).
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which
is wholly owned by Paine Webber Group Inc., a publicly owned financial
services holding company. On May 31, 1996, Mitchell Hutchins was adviser or
sub-adviser of 31 investment companies with 65 separate portfolios and
aggregate assets of approximately $30.4 billion.
Each board has determined that brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.
ABOUT THE INVESTMENT ADVISER
As investment adviser and administrator for Balanced Fund and Tactical
Allocation Fund, Mitchell Hutchins makes and implements all investment
decisions and supervises all aspects of each Fund's operations.
T. Kirkham Barneby is responsible for the asset allocation decisions for both
Balanced Fund and Tactical Allocation Fund. He has been responsible for the
day-to-day management of Tactical Allocation Fund since February 1995. Mr.
Barneby is a managing director and chief investment officer of quantitative
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 a
senior vice president responsible for quantitative management and asset
allocation models.
Mark A. Tincher is responsible for the day-to-day management of the equity
portion of Balanced Fund. Mr. Tincher is a managing director and chief
investment officer of equities of Mitchell Hutchins, responsible for
overseeing the management of equity investments. From March 1988 to March
1995, Mr. Tincher worked for Chase Manhattan Private Bank where he was a vice
president. Mr. Tincher directed the U.S. funds management and equity research
area at Chase and oversaw the management of all Chase U.S. equity funds (the
Vista Funds and Trust Investment Funds).
Dennis L. McCauley is responsible for the day-to-day management of the debt
securities portion of Balanced Fund. Mr. McCauley is a managing director and
chief investment officer of fixed income investments of Mitchell Hutchins,
responsible for overseeing 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 investments responsible for developing and
managing investment strategy for all fixed income
----------
- --------------------------------------------------------------------------------
Prospectus Page 26
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
and cash management investments of IBM's pension fund and self-insured 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 investment
committee.
Nirmal Singh and Craig M. Varrelman, CFA, assist Mr. McCauley in managing
Balanced Fund's debt securities. Mr. Singh and Mr. Varrelman are both first
vice presidents of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
September 1993, Mr. Singh was with Merrill Lynch Asset Management, Inc., where
he was a member of the portfolio management team. From 1990 to 1993, Mr. Singh
was a senior portfolio manager at Nomura Mortgage Fund Management Corporation.
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
Balanced 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
Balanced Fund in August 1995.
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 each Fund's
investments.
Mitchell Hutchins 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.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. For the most
recent fiscal year, Mitchell Hutchins received a monthly fee from Balanced Fund
for these services at the effective annual rate of 0.75% of the Fund's average
daily net assets and from Tactical Allocation Fund at the effective annual rate
of 0.50% of the Fund's average daily net assets. The management fee payable to
Mitchell Hutchins by Balanced Fund is greater than those paid by most funds.
Balanced Fund also pays PaineWebber an annual fee of $4.00 per active
shareholder account held at PaineWebber for certain services not provided by
the Transfer Agent. Tactical Allocation Fund does not pay this fee.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
distribution plans for Class A, Class B and Class C shares ("Class A Plan,"
"Class B Plan" and "Class C Plan," collectively, "Plans"), each 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.
. Monthly distribution fees at the annual rate of 0.75% of the average daily
net assets of Class B shares and Class C Shares.
Under the Plans, Mitchell Hutchins primarily uses the service fees to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund by PaineWebber
clients. PaineWebber then compensates its investment executives for shareholder
servicing that they perform and offsets its own expenses in servicing and
maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:
. Offset the commissions it pays to PaineWebber for selling each Fund's Class B
and Class C shares, respectively.
. Offset each Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are sold, as well as on an ongoing basis. Mitchell Hutchins receives no special
compensation from either Fund or investors at the time of sale of Class B or C
shares.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid upon
sales
----------
- --------------------------------------------------------------------------------
Prospectus Page 27
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related distribution contracts for each class of shares
("Distribution Contracts") specify that each Fund must pay service and
distribution fees to Mitchell Hutchins for its activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
Funds will not be obligated to pay more than those fees. On the other hand, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. Expenses in excess of service and distribution fees
received or accrued through the termination date of any Plan will be Mitchell
Hutchins' sole responsibility and not that of the Funds. Annually, the board
of trustees of each Fund reviews the Plans and Mitchell Hutchins'
corresponding expenses for each class separately from the Plans and expenses
of the other classes.
- -------------------------------------------------------------------------------
Determining the Shares' Net Asset Value
- -------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
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.
Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available,
assets are valued at fair value as determined in good faith by or under the
direction of its board. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining to maturity,
unless its board determines that this does not represent fair value.
Investments denominated in foreign currencies are valued daily in U.S. dollars
based on the then-prevailing exchange rates.
- -------------------------------------------------------------------------------
Dividends & Taxes
- -------------------------------------------------------------------------------
DIVIDENDS
Tactical Allocation Fund pays dividends quarterly from its net investment
income and Balanced Fund pays dividends semi-annually from its net investment
income. Each Fund also may distribute net short-term capital gain, if any,
with the periodic dividend. Net investment income includes dividend income,
accrued interest and discount, less amortization of premium and accrued
expenses. Substantially all of each Fund's net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, and any
undistributed net short-term capital gain, is distributed at least annually.
The Funds may make additional distributions if necessary to avoid income or
excise taxes. While the Funds will not declare any dividend in excess of the
amount of net investment 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 each class of shares of each Fund
are calculated at the same time and in the same manner. Dividends on Class B
and Class C shares of the Funds are expected to be lower than those for their
Class A shares because Class B and Class C shares have higher expenses
resulting from their distribution fees. Dividends on each class might be
affected differently by the allocation of other class-specific expenses. See
"General Information."
The Funds' dividends and capital gain distributions are paid in additional
Fund shares of the same class at net asset value, unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends
----------
- --------------------------------------------------------------------------------
Prospectus Page 28
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
and/or capital gain distributions in cash, either mailed to the shareholder by
check or credited to the shareholder's PaineWebber account, should contact
their investment executive at PaineWebber or one of its correspondent firms or
complete the appropriate section of the account application.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will not have to
pay Federal income tax on the part of its investment company taxable income
(generally consisting of net investment income and net short-term capital gain)
and net capital gain that it distributes to its shareholders. These
requirements may limit the ability of Tactical Allocation Fund to reallocate
its assets under certain circumstances.
Dividends from each Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) generally are taxable to shareholders as
ordinary income. Distributions of each 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 generally will not be required
to pay tax on amounts distributed to them.
Balanced 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.
YEAR-END TAX REPORTING
Each 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 special
treatment.
WITHHOLDING REQUIREMENTS
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate is also required from dividends
and capital gain distributions payable to those shareholders who otherwise are
subject to backup withholding.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
When shareholders sell (redeem) shares, it may result in a taxable gain or
loss. This depends upon whether the shareholders receive more or less than
their adjusted basis for the shares (which normally takes into account any
initial sales charge paid on Class A shares). An exchange of a Fund's shares
for shares of another PaineWebber mutual fund generally will have similar tax
consequences. In addition, if a Fund's shares are bought within 30 days before
or after selling other shares of the Fund (regardless of class) at a loss, all
or a portion of that loss will not be deductible and will increase the basis of
the newly purchased shares.
SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase, and subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased or, in
the case of a loss, decreased by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
* * * *
Because the foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders, a further discussion
is contained in the Statement of Additional Information. Prospective
shareholders are urged to consult their tax advisors.
----------
- --------------------------------------------------------------------------------
Prospectus Page 29
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
General Information
- -------------------------------------------------------------------------------
ORGANIZATION
BALANCED FUND
Balanced Fund is a diversified series of the Corporation, an open-end
management investment company that was incorporated in Maryland on October 29,
1985. The Corporation commenced operations as an investment company on March
27, 1986. The Corporation has authority to issue 10 billion shares of common
stock of separate series, par value $.001 per share; three billion of these
shares are classified as shares of Balanced Fund, and the remaining shares are
classified as shares of the Corporation's other series. Prior to August 1995,
Balanced Fund was known as "PaineWebber Asset Allocation Fund."
TACTICAL ALLOCATION FUND
Tactical Allocation Fund is a series of the Trust, which was formed as a
business trust under the laws of The Commonwealth of Massachusetts on March
28, 1991. The Fund commenced operations on July 22, 1992. The Declaration
authorizes the Trust's board of trustees to create separate series, and within
each series separate Classes, of an unlimited number of shares of beneficial
interest, par value $.001 per share. As of the date of this Prospectus, the
trustees have established two such series, representing interests in Tactical
Allocation Fund described in this Prospectus and in one other series.
SHARES
The shares of each Fund are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. Each class represents an identical
interest in the respective Fund's investment portfolio and has the same
rights, privileges and preferences. However, each class may differ with
respect to sales charges, if any, distribution and/or service fees, if any,
other expenses allocable exclusively to each class, voting rights on matters
exclusively affecting that class, and its exchange privilege. The different
sales charges and other expenses applicable to the different classes of shares
of the Funds will affect the performance of those classes.
Each share of each Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due
to the differing expenses of the classes, dividends on Class B and Class C
shares are likely to be lower than for Class A shares and are likely to be
lower on Class Y shares than for any other class of shares.
Class Y shares, which are offered only to limited groups of investors, are
subject to neither an initial or contingent deferred sales charge nor ongoing
service or distribution fees. More information concerning Class Y shares may
be obtained from an investment executive at PaineWebber or one of its
correspondent firms or by calling toll-free 1-800-647-1568.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for misstatements in the Prospectus about another Fund.
The boards have considered this factor in approving the use of a single,
combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of all the shares of
the Corporation or the Trust may elect all of the board members of the
respective Fund. The shares of the Funds will be voted separately except when
an aggregate vote of all series in the Corporation or the Trust is required by
law and except that only the shareholders of a particular class of a Fund may
vote on matters affecting only that class, such as the terms of a Plan as it
relates to a class.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Corporation or the Trust may remove a board member through a declaration
in writing or by vote cast in person or by proxy at a meeting called for that
purpose. A meeting will be
----------
- --------------------------------------------------------------------------------
Prospectus Page 30
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
called to vote on the removal of a board member at the written request of
holders of 10% of the Corporation's or Trust's outstanding shares.
REPORTS TO SHAREHOLDERS
Each Fund sends Fund shareholders audited annual and unaudited semi-annual
reports, each of which includes a list of the investment securities held by
the Fund as of the end of the period covered by the report. The Statement of
Additional Information is available to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Funds' custodian and recordkeeping
agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds'
transfer and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
----------
- --------------------------------------------------------------------------------
Prospectus Page 31
<PAGE>
------------------
---------
- --------------------------------------------------------------------------------
----------------------------------------------------------------------------
PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
Prospectus -- July 1, 1996
- --------------------------------------------------------------------------------
. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Growth Fund
Government Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Value Fund
U.S. Government Income Fund Utility Income Fund
. PAINEWEBBER TAX-FREE . PAINEWEBBER GLOBAL FUNDS
BOND FUNDS
Emerging Markets Equity Fund
California Tax-Free Income Fund Global Equity Fund
Municipal High Income Fund Global Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund . PAINEWEBBER MONEY MARKET FUND
. PAINEWEBBER ASSET
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation 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. Please read it carefully before
investing. It is important you have all the information you need to make a
sound investment decision.
<PAGE>
PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The two funds named above (each a "Fund" and, collectively, "Funds") are
series of open-end management investment companies. PaineWebber Balanced Fund
("Balanced Fund") is a diversified series of PaineWebber Master Series, Inc.
("Corporation"), a professionally managed mutual fund. Balanced 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.
PaineWebber Tactical Allocation Fund ("Tactical Allocation Fund") is a
diversified series of PaineWebber Investment Trust ("Trust"), a professionally
managed mutual fund. Tactical Allocation Fund seeks total return, consisting
of long-term capital appreciation and current income, by utilizing a
systematic investment strategy that actively allocates the Fund's assets among
common stocks, U.S. Treasury notes and U.S. Treasury bills.
The investment adviser, administrator and distributor for each Fund 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 Funds' current Prospectus, dated July 1,
1996. 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, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELD FACTORS AND RATINGS. Standard & Poor's, a division of The McGraw Hill
Companies, Inc. ("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. Balanced 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 Balanced Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the
<PAGE>
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 Balanced Fund invests
are dependent on a variety of factors, including general money market
conditions, general conditions in the bond market, the financial condition of
the issuer, the size of the offering, the maturity of the obligation and its
rating. There is a wide variation in the quality of bonds, both within a
particular classification and between classifications. An issuer's obligations
under its bonds are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of bond holders or other
creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the
payment of interest and principal on their bonds.
MORTGAGE- AND ASSET-BACKED SECURITIES. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable from,
mortgage loans secured by real property and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Multi-class
pass-through securities and collateralized mortgage obligations are
collectively referred to herein as CMOs. The U.S. Government mortgage-backed
securities in which Balanced 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, including savings
associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively "Private Mortgage Lenders"). Payments
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
issued 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 Balanced Fund may
invest, see Appendix B to this Statement of Additional Information.
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
installment sale contracts, other installment sale contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving 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 certain time period by a letter of credit or pool insurance
policy issued by a financial institution unaffiliated with the issuer, or
other credit enhancements may be present.
ADJUSTABLE RATE AND FLOATING RATE MORTGAGE-BACKED SECURITIES. Balanced 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
2
<PAGE>
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 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
3
<PAGE>
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
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.
HEDGING AND RELATED INCOME STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins may use a variety of financial instruments ("Strategic
Instruments"), including certain options, futures contracts (sometimes
referred to as "futures") and options on futures contracts to attempt to hedge
Funds' portfolios to enhance income and return, and to increase or decrease a
Fund's exposure to an asset class in anticipation of purchasing or selling
securities. Appendix C to the Statement of Additional Information describes
the Strategic Instruments that the Funds may use.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Strategic Instrument
intended partially or fully to offset potential declines in the value of one
or more investments held in a Fund's portfolio. Thus, in a short hedge a Fund
takes a position in a Strategic Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged. For
example, a Fund might purchase a put option on a security to hedge against a
potential decline in the value of that security. If the price of the security
declined below the exercise price of the put, the Fund could exercise that put
and thus limit its loss below the exercise price to the premium paid plus
transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, the
Fund might be able to close out the put option and realize a gain to offset
the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Strategic Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a
long hedge a Fund takes a position in a Strategic Instrument whose price is
expected to move in
4
<PAGE>
the same direction as the price of the prospective investment being hedged.
For example, a Fund might purchase a call option on a security it intends to
purchase in order to hedge against an increase in the cost of the security. If
the price of the security increased above the exercise price of the call, the
Fund could exercise the call and thus limit its acquisition cost to the
exercise price plus the premium paid and transaction costs. Alternatively, the
Fund might be able to offset the price increase by closing out an appreciated
call option and realizing a gain.
Each Fund may purchase and write (sell) covered straddles on securities or
indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where
the exercise price of the put is less than or equal to the exercise price of
the call. The Fund might enter into a long straddle when Mitchell Hutchins
believes it likely that interest rates will be more volatile during the term
of the option than the option pricing implies. A short straddle is a
combination of a call and a put written on the same security where the
exercise price of the put is less than or equal to the exercise price of the
call. A Fund might enter into a short straddle when Mitchell Hutchins believes
it unlikely that interest rates will be as volatile during the term of the
option as the option pricing implies.
Strategic Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund
owns or intends to acquire. Strategic Instruments on debt securities may be
used to hedge either individual securities or broad fixed income market
sectors.
The use of Strategic Instruments is subject to applicable regulations of the
Securities and Exchange Commission ("SEC"), the several options and futures
exchanges upon which they are traded, the Commodity Futures Trading Commission
("CFTC") and various state regulatory authorities. In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expect to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develop new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent
that they are consistent with the Fund's investment objectives and permitted
by the Funds' investment limitations and applicable regulatory authorities.
The Funds' Prospectus or Statement of Additional Information will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
Special Risks of Hedging Strategies. The use of Strategic Instruments
involves special considerations and risks, as described below. Risks
pertaining to particular Strategic Instruments are described in the sections
that follow:
(1) Successful use of most Strategic Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Strategic Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Strategic Instrument and price movements of the
investments being hedged. For example, if the value of a Strategic Instrument
used in a short hedge increased by less than the decline in value of the
hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors
5
<PAGE>
unrelated to the value of the investments being hedged, such as speculative or
other pressures on the markets in which Strategic Instruments are traded. The
effectiveness of hedges using Strategic Instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Strategic Instrument. Moreover, if the price of
the Strategic Instrument declined by more than the increase in the price of
the security, the Fund could suffer a loss. In either such case, the Fund
would have been in a better position had it not hedged at all.
(4) As described below, the Funds might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Strategic Instruments involving obligations to third parties
(i.e., Strategic Instruments other than purchased options). If the Fund were
unable to close out its positions in such Strategic Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a
Fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. A Fund's ability to close out a
position in a Strategic Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of a contra party to enter into a
transaction closing out the position. Therefore, there is no assurance that
any hedging position can be closed out at a time and price that is favorable
to a Fund.
Cover for Hedging Strategies. Transactions using Strategic Instruments,
other than purchased options, expose the Funds to an obligation to another
party. A Fund will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities or other options on
futures contracts or (2) cash, receivables and short-term liquid debt
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. The Funds will
comply with SEC guidelines regarding cover for hedging transactions and will,
if the guidelines so require, set aside cash, U.S. government securities or
other liquid, high-grade debt securities in a segregated account with its
custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Strategic Instrument is open, unless they
are replaced with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Options. The Funds may purchase put and call options, and write (sell)
covered put and call options, on equity and debt securities. The purchase of
call options serves as a long hedge, and the purchase of put options serves as
a short hedge. Writing covered put or call options can enable a Fund to
enhance income by reason of the premiums paid by the purchasers of such
options. In addition, writing covered put options serves as a limited long
hedge, because increases in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options serves as a
limited short hedge, because declines in the value of the hedged investment
would be offset to the extent of the premium received for
6
<PAGE>
writing the option. However, if the security appreciates to a price higher
than the exercise price of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to sell the security at less
than its market value. The securities or other assets used as cover for OTC
options written by the Funds would be considered illiquid to the extent
described below under "Investment Policies and Restrictions--Illiquid
Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Generally, over-the-counter ("OTC") options on
debt securities are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option. Options that expire unexercised have no value.
The Funds may effectively terminate their rights or obligations under an
option by entering into a closing transaction. For example, a Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or
call option it had purchased by writing an identical put or call option; this
is known as a closing sale transaction. Closing transactions permit the Funds
to realize profits or limit losses on an option position prior to its exercise
or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. in contrast, OTC
options are contracts between a Fund and its contra party (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the contra party
to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction. The Funds will enter into OTC option transactions only with
contra parties that have a net worth of at least $20 million.
The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected
to be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
7
<PAGE>
The Funds may purchase and write put and call options on common stock
indices and indices of debt securities in much the same manner as the more
traditional options discussed above, except the index options may serve as a
hedge against overall fluctuations in the equity or debt securities market (or
market sectors) rather than anticipated increases or decreases in the value of
a particular security.
Guidelines for Options. The Funds' use of options is governed by the
following guidelines, which can be changed by each Fund's board without
shareholder vote:
1. Each Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums
on all other options purchased by the Fund, does not exceed 5% of the Fund's
total assets.
2. The aggregate value of securities underlying put options written by each
Fund, determined as of the date the put options are written, will not exceed
50% of the Fund's net assets.
3. The aggregate premiums paid on all options (including options on
securities, stock indices and indices of debt securities and options on
futures contracts) purchased by each Fund that are held at any time will not
exceed 20% of the Fund's net assets.
Futures. The Funds may purchase and sell interest rate futures contracts,
stock index futures contracts and debt securities index futures contracts. The
Funds also may purchase put and call options, and write covered put and call
options, on the futures contracts they are allowed to purchase and sell. The
purchase of futures or call options thereon can serve as a long hedge, and the
sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a
limited short hedge, and writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar to that used for
writing covered call options on securities or indices.
Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of a Fund, the Fund may sell an interest rate futures contract or a call
option thereon, or purchase a put option on that futures contract. If Mitchell
Hutchins wishes to lengthen the average duration of a Fund, the Fund may buy
an interest rate futures contract or a call option thereon or sell a put
option thereon.
The Funds may also write put options on interest rate futures contracts
while at the same time purchasing call options on the same futures contracts
in order synthetically to create a long futures contract position. Such
options would have the same strike prices and expiration dates. The Fund will
engage in this strategy only when it is more advantageous to the Fund than is
purchasing the futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is returned to the Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally
in the future by regulatory action.
8
<PAGE>
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a put or call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures
may be closed only on an exchange or board of trade that provides a secondary
market. Each Fund intends to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid, secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or options position due to the
absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to
market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might
be increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
Guidelines for Futures and Related Options. The Funds' use of futures and
related options is governed by the following guidelines, which can be changed
by each Fund's board without shareholder vote:
1. To the extent each Fund enters into futures contracts and options on
futures positions traded on a commodities exchange that are not for bona fide
hedging purposes (as defined by the CFTC), the aggregate
9
<PAGE>
initial margin and premiums on those positions (excluding the amount by which
options are "in-the-money") may not exceed 5% of the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities, stock indices and indices of debt securities and options on
futures contracts) purchased by each Fund that are held at any time will not
exceed 20% of the Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by each Fund will not exceed 5% of the Fund's total
assets.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
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. Each 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 a 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. Each 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 each Fund's board. Mitchell Hutchins will review
and monitor the creditworthiness of those institutions under the board's
general supervision.
REVERSE REPURCHASE AGREEMENTS. Balanced 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 a Fund's net asset value.
When a 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."
Each 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.
10
<PAGE>
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities. Under current guidelines of the staff of the 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
Balanced Fund's board. 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 each Fund's board). 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, a Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, 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 a 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.
Each Fund's board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of
factors in reaching liquidity decisions, including (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins will monitor the liquidity of restricted securities in the Fund's
portfolio and report periodically on such decisions to the board of directors.
11
<PAGE>
SECTION 4(2) PAPER. Commercial paper issues in which Balanced 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 Fund's board. 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 each
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 a 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.
Balanced 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 Funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign
taxes to which the Fund would be subject.
CONVERTIBLE SECURITIES. Balanced Fund is permitted to invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security
entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are
usually subordinated to comparable non-convertible securities. While no
securities investment is without some risk, investments in convertible
securities generally
12
<PAGE>
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 each 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." Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to 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. Each Fund 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
13
<PAGE>
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.
LENDING PORTFOLIO SECURITIES. As indicated in the Prospectus, each Fund is
authorized to lend up to 33 1/3% of its portfolio securities to broker-dealers
or institutional investors that Mitchell Hutchins deems qualified, but only
when the borrower maintains acceptable collateral with the Fund's custodian,
marked to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral
is limited to cash, U.S. government securities and irrevocable letters of
credit that meet certain guidelines established by Mitchell Hutchins. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each will retain authority to terminate any
loan at any time. A Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. A Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. A Fund will retain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the Fund's
interest.
INVESTMENT LIMITATIONS OF THE FUNDS
Each Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that issuer
or the Fund would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Fund's total assets
may be invested without regard to this limitation, and except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued by
other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more
of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities.
(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ("1940 Act") and then not in excess of
33 1/3% of the Fund's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the Fund
may borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations,
14
<PAGE>
commercial paper, certificates of deposit, bankers' acceptances or similar
instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Fund may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to hold
real estate acquired by reason of such enforcement until that real estate
can be liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or
enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
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 a Fund or (2) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at
the time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.
The following investment restrictions may be changed by the vote of the
Fund's board without shareholder approval. Each 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 (in
the case of Balanced Fund) or the Trust (in the case of Tactical Allocation
Fund) 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.
(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.
15
<PAGE>
(6) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make
margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(7) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b) maintain
short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(8) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition.
(9) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not
apply to securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation, or merger.
(10) purchase securities while borrowing in excess of 5% of its total
assets are outstanding.
(11) invest in real estate limited partnerships.
16
<PAGE>
DIRECTORS, TRUSTEES AND OFFICERS
The directors, trustees and executive officers of the Corporation and/or the
Trust, their ages, business addresses and principal occupations during the
past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 49 Director/Trustee and Mrs. Alexander is president, chief
President executive officer and a director of
Mitchell Hutchins (since January
1995) and also is an execu-
tive vice president and a director
of PaineWebber. Mrs. Alexander is
president and a director or trustee
of 30 investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment advis-
er.
Richard Q. Armstrong; 60 Director/Trustee Mr. Armstrong is chairman and prin-
78 West Brother Drive cipal of RQA Enterprises (manage-
Greenwich, CT 06830 ment consulting firm) (since April
1991 and princi-
pal occupation since March 1995).
Mr.
Armstrong is also a director of
HiLo
Automotive, Inc. He was chairman of
the board, chief executive officer
and co-owner of Adirondack Bever-
ages (producer and distributor of
soft drinks and sparkling/still wa-
ters) (October 1993-March 1995).
Mr. Armstrong was a partner of The
New England Consulting Group (man-
agement consulting firm) (December
1992-September 1993). He was manag-
ing director of LVMH U.S. Corpora-
tion (U.S. subsidiary of the French
luxury goods conglomerate, Luis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its
wine and spirits subsidiary,
Schieffelin &
Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee
of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as in vestment adviser.
E. Garrett Bewkes, Director/Trustee and Mr. Bewkes is a director of Paine
Jr.**; 69 Chairman of the Board of Webber Group Inc. ("PW Group")
Directors/Trustees (holding company of PaineWebber and
Mitchell Hutchins). Prior to Decem-
ber 1995, he was a consultant to PW
Group. Prior to
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
1988, he was chairman of the board,
president and chief executive
officer of American Bakeries Compa-
ny. Mr. Bewkes is a director of In-
terstate Bakeries Corporation and
NaPro BioTherapeutics, Inc. Mr.
Bewkes is a director or trustee of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Richard R. Burt; 49 Director/Trustee Mr. Burt is chairman of Interna-
1101 Connecticut Ave- tional Equity Partners (interna-
nue, N.W. tional investments and consulting
Washington, D.C. firm) (since March 1994) and a
20036 partner of McKinsey & Company (man-
agement consulting firm) (since
1991). He is also a director of
American Publishing Company. He was
the chief negotiator in the Strate-
gic Arms Reduction Talks with the
former Soviet Union (1989-1991) and
the U.S. Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 46 Director/Trustee Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982.
She is a member of the Financial
Women's Association and Women's
Economic Roundtable, and is em-
ployed as a regular panelist on
Wall Street Week with Louis
Rukeyser. She also serves on the
Board of Overseers of New York
University's Stern School of Busi-
ness. Ms. Farrell is a director or
trustee of 29 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Meyer Feldberg; 54 Director/Trustee 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 versity. Prior to 1989, he was
10027 president of the Illinois In-
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
stitute of Technology. Mr. Feldberg
is also a director of AMSCO Inter-
national Inc., Federated Department
Stores, Inc. and New World Communi-
cations Group Incorporated. Mr.
Feldberg is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment advis-
er.
George W. Gowen; 66 Director/Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York Miller. Prior to May 1994, he was a
10017 partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a direc-
tor of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a director
or trustee of 29 investment compa-
nies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Frederic V. Malek; 59 Director/Trustee 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. Commercial Group Inc. (real es-
20005 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 Marriott
Hotels and
Resorts. Mr. Malek is also a direc-
tor of American Management Systems,
Inc. (management consulting and
computer related services), Auto-
matic Data processing, Inc., Avis,
Inc. (passenger car rental), FPL
Group, Inc., (electric services)
National Education Corporation and
Northwest Airlines Inc. Mr. Malek
is a director or trustee of 29 in-
vestment
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
companies for which Mitchell
Hutchins or PaineWebber serves as
investment
adviser.
Carl W. Schafer; 60 Director/Trustee Mr. Schafer is president of the At-
P.O. Box 1164 lantic Foundation (charitable foun-
Princeton, New Jersey dation supporting mainly oceano-
08542 graphic exploration and research).
He also is a director of Roadway
Express, Inc. (trucking), The
Guardian Group of Mutual Funds,
Evans Systems, Inc. (a motor fuels,
convenience store and diversified
company), Hidden Lake Gold Mines
Ltd. (gold mining), Electronic
Clearing House, Inc. (financial
transactions processing), Wainoco
Oil Corporation and Nutraceutix
Inc. (biotechnology). Prior to Jan-
uary 1993, Mr. Schafer was chairman
of the Investment Advisory Commit-
tee of the Howard Hughes Medical
Institute. Mr. Schafer is a direc-
tor or trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
John R. Torell III; 56 Director/Trustee Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial advi-
Suite 4605 sory firm), chairman of Telesphere
New York, NY 10153 Corporation (electronic provider of
financial information), and a part-
ner of Zilkha & Company (merchant
banking and private
investment company). He is the for-
mer chairman and chief executive
officer of Fortune Bancorp (1990-
1991 and 1990-1994, respectively),
the former chairman, president and
chief executive officer of CalFed,
Inc. (savings association) (1988 to
1989) and former president of Manu-
facturers Hanover Corp. (bank)
(prior to 1988). Mr. Torell is also
a director of American Home Prod-
ucts Corp., Volt
Information Sciences Inc., and New
Colt Inc. (armament manufacturer).
Mr. Torell is a director or trustee
of 29 investment companies for
which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
T. Kirkham Barneby; 49 Vice President Mr. Barneby is a managing director
and chief investment officer--quan-
titative investments of Mitchell
Hutchins. Prior to September 1994,
he was a senior vice president at
Vantage Global Management. Prior to
June 1993, he was a senior vice
president at Mitchell Hutchins. Mr.
Barneby is a vice president of four
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 37 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
manager--legal administration of
Mitchell Hutchins. Ms. Boyle is a
vice president of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. Mr. Maher is a vice pres-
ident and assistant treasurer
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director
(Master Series, Inc.) and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income investments of IBM
Corporation. Mr. McCauley is a vice
president of 19 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Susan P. Messina; 35 Vice President Ms. Messina is a senior vice presi-
(Master Series, Inc.) dent and portfolio manager of
Mitchell Hutchins. Ms. Messina has
been with Mitchell Hutchins since
1982. Ms. Messina is
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
a vice president of five investment
companies for which Mitchell
Hutchins
or PaineWebber serves as investment
adviser.
Ann E. Moran; 38 Vice President Ms. Moran is a vice president of
and Assistant Treasurer Mitchell Hutchins. Ms. Moran is a
vice president and assistant trea-
surer of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment
adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
45 and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld
is a vice president of 30 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice presi-
and Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 1994, he was a vice pres-
ident of BlackRock Financial Man-
agement L.P. Prior to August 1992,
he was an audit manager with Ernst
& Young LLP. Mr. Schubert is a vice
president and assistant treasurer
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president
(Master Series, Inc.) and a portfolio manager of Mitchell
Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
is a vice president of five invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment
adviser.
Julian F. Sluyters; 35 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
a vice president and treasurer of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director
(Master Series, Inc.) and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and eq-
uity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
a vice president of 14 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment
adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice presi-
(Master Series, Inc.) dent and a portfolio manager of
Mitchell Hutchins. Mr. Varrelman is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to May
1995, he was an attorney in private
practice. Mr. Weller is a vice
president and assistant secretary
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Corporation and the Trust as defined in the 1940 Act by virtue of their
positions with PW Group, PaineWebber and/or Mitchell Hutchins.
23
<PAGE>
Each Fund pays directors/trustees who are not interested persons of the
Corporation/Trust ("disinterested directors/trustees") $1,000 annually per
Fund. Each Fund also pay its disinterested directors/trustees $150 per meeting
of the board or any committee thereof. Directors/trustees are reimbursed for
any expenses incurred in attending meetings of the board or any committee
thereof. Directors, trustees and officers of the Corporation/Trust 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, the Trust and the Funds, the Corporation and the
Trust require no employees. No officer, director or employee of PaineWebber or
Mitchell Hutchins presently receives any compensation from the Corporation or
the Trust for acting as director, trustee or officer. The table below includes
certain information relating to the compensation of the Corporation's and the
Trust's current directors/trustees who held office during the fiscal year
ended February 29, 1996 and August 31, 1995, respectively.
24
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
AGGREGATE CORPORATION,
COMPENSATION AGGREGATE THE TRUST
FROM THE COMPENSATION AND THE
NAME OF PERSON, POSITION CORPORATION* FROM THE TRUST* COMPLEX+
- ------------------------ ------------ --------------- ------------
<S> <C> <C> <C>
Richard Q. Armstrong, $ 9,000
Director/Trustee...................
Richard R. Burt, Director/Trustee... 7,750
Meyer Feldberg, Director/Trustee.... $3,250 106,375
George W. Gowen, Director/Trustee... 3,250 99,750
Frederic V. Malek, 3,250 99,750
Director/Trustee...................
Carl W. Schafer, Director/Trustee... $20,625 118,175
John R. Torell, III, 28,125
Director/Trustee...................
</TABLE>
- --------
Only independent members of the board are compensated by the Corporation or
the Trust and identified above; directors/trustees who are "interested
persons," as defined by the 1940 Act, do not receive compensation.
* Represents fees paid to each director/trustee during the fiscal years ended
February 29, 1996 and August 31, 1995; neither the Corporation nor the Trust
has a pension or retirement plan.
+ Represents total compensation paid to each director during the calendar year
ended December 31, 1995.
BENEFICIAL OWNERSHIP OF GREATER THAN 5% OF FUND SHARES
The following shareholder is shown in the Trust's records as owning more
than 5% of Tactical Allocation Fund's shares.
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES BENEFICIALLY
NAME AND ADDRESS* OWNED AS OF JUNE 5, 1996
- ----------------- ------------------------
<S> <C> <C>
E. Boch.............................................. 434,842.736 (6.8%)
</TABLE>
- --------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to a contract with the
Corporation dated August 4, 1988 and a contract with the Trust dated April 13,
1995, (each an "Advisory Contract"). Under the Advisory Contracts, each Fund
pays Mitchell Hutchins an annual fee, computed daily and paid monthly,
according to the schedule set forth below:
BALANCED FUND
<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>
25
<PAGE>
TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
------------------------ ------
<S> <C>
Up to $250 million................................................. 0.500%
Over $250 million.................................................. 0.450
</TABLE>
During the fiscal years ended February 29, 1996, February 28, 1995 and
February 28, 1994, the Corporation paid (or accrued) to Mitchell Hutchins
investment advisory and administrative fees of $1,584,083, $1,934,650 and
$2,326,697, respectively, with respect to Balanced Fund.
For the fiscal years ended August 31, 1995, August 31, 1994 and August 31,
1993, the Trust paid (or accrued) management fees with respect to the Fund of
$279,950, $505,878 and $419,426, respectively, to Tactical Allocation Fund's
investment adviser and administrator during those periods.
Under a service agreement with the Corporation that is reviewed by the
Corporation's board of directors annually, PaineWebber provides certain
services to Balanced Fund not otherwise provided by the Fund's transfer agent.
Pursuant to the service agreement, during the fiscal years ended February 29,
1996, February 28, 1995 and February 28, 1994, PaineWebber earned fees in the
amounts of $77,050, $100,272 and $116,755, respectively, with respect to the
Fund.
Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Corporation or the Trust not readily
identifiable as belonging to the Funds or to the Corporation's or Trust's
other series are allocated among series by or under the direction of the board
in such manner as the board deems to be fair and equitable. Expenses borne by
each 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/Trust
under federal and state securities laws and maintenance of such registrations
and qualifications; (5) fees and salaries payable to board members who are not
interested persons of the Corporation/Trust or Mitchell Hutchins; (6) all
expenses incurred in connection with the board members' 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/Trust or the Fund for violation of any law; (10)
legal, accounting and auditing expenses, including legal fees of special
counsel for the independent board members; (11) charges of custodians,
transfer agents and other agents; (12) costs of preparing share certificates;
(13) expenses of setting in type and printing prospectuses and supplements
thereto, statements of additional information and supplements thereto, reports
and proxy materials for existing shareholders, and costs of mailing such
materials to existing shareholders; (14) any extraordinary expenses (including
fees and disbursements of counsel) incurred by the Corporation/Trust 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 board members and officers; and
(18) costs of mailing, stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse each Fund
if and to the extent that the aggregate operating expenses of that Fund exceed
applicable limits in any fiscal year. Currently the most
26
<PAGE>
restrictive such limit applicable to each Fund is 2.5% of the first $30
million of a 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 $100 million. Certain expenses, such as brokerage commissions,
distribution fees, taxes, interest, certain expenses attributable to investing
outside the United States and extraordinary items, are excluded from this
limitation. For the fiscal years ended February 29, 1996, February 28, 1995
and February 28, 1994 (for Balanced Fund) and for the fiscal years ended
August 31, 1995, August 31, 1994 and August 31, 1993 (for Tactical Allocation
Fund) no reimbursements were required pursuant to such limitations for either
Fund.
Under the Advisory Contracts, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by either Fund in
connection with the performance of the Advisory Contracts, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Each Advisory Contract
terminates automatically with respect to a Fund upon assignment and is
terminable at any time without penalty by the Corporation's board of directors
or the Trust's board of trustees or by vote of the holders of a majority of a
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the
Corporation or the Trust.
The following table shows the approximate net assets as of May 31, 1996,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market).............................. $ 5,608.2
Global......................................................... 2,833.3
Equity/Balanced................................................ 3,127.4
Fixed Income (excluding Money Market).......................... 5,314.1
Taxable Fixed Income......................................... 3,683.0
Tax-Free Fixed Income........................................ 1,631.1
Money Market Funds............................................. 21,968.9
</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 funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other
Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class C shares of each Fund under separate distribution
contracts with the Corporation and the Trust (collectively, "Distribution
Contracts") that require Mitchell Hutchins to use its best efforts, consistent
with its other businesses, to sell shares of each Fund. Shares of the Funds
are offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to the Class A, Class B and Class C
shares of the Funds (collectively, "Exclusive Dealer Agreements"), PaineWebber
and its correspondent firms sell each Fund's shares.
27
<PAGE>
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of each Fund adopted by the Corporation and the Trust in the
manner prescribed under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class
B Plan" and "Class C Plan," collectively, "Plans"), each Fund pays Mitchell
Hutchins a service fee, accrued daily and payable monthly, at the annual rate
of 0.25% of the average daily net assets of each Class of shares. Under the
Class B Plan, each 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 C Plan, each 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 C
shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the Corporation's/Trust's board of directors/trustees at least
quarterly, and the directors/trustees will review, reports regarding all
amounts expended under the Plan and the purposes for which such expenditures
were made, (2) the Plan will continue in effect only so long as it is approved
at least annually, and any material amendment thereto is approved, by the
Corporation's/Trust's board of directors/trustees, including those
directors/trustees who are not "interested persons" of the Corporation/Trust
and who have no direct or indirect financial interest in the operation of the
Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by a Fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the relevant Class and (4) while the Plan remains
in effect, the selection and nomination of directors/trustees who are not
"interested persons" of the Corporation/Trust shall be committed to the
discretion of the directors who are not interested persons of the
Corporation/Trust.
In reporting amounts expended under the Plans to the directors/trustees,
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 years ended February 29, 1996 and August 31, 1995,
respectively, Balanced Fund and Tactical Allocation Fund paid (or accrued) the
following fees to Mitchell Hutchins under the Class A, Class B and Class C
Plans:
<TABLE>
<CAPTION>
TACTICAL
BALANCED FUND ALLOCATION FUND
------------- ---------------
<S> <C> <C>
Class A..................................... $432,449 $4,345
Class B..................................... 307,874 --
Class C..................................... 74,438 512,944
</TABLE>
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 years ended February 29,
1996 (Balanced Fund) and August 31, 1995 (Tactical Allocation Fund):
CLASS A
<TABLE>
<CAPTION>
TACTICAL
BALANCED FUND ALLOCATION FUND
------------- ---------------
<S> <C> <C>
Marketing and advertising........................ $40,675 $300
Amortization of commissions...................... -- --
Printing of prospectuses and statements of
additional information for other than current
shareholders.................................... 322 300
Branch network costs allocated and interest ex-
pense........................................... 312,428 1,685
Service fees paid to PaineWebber investment exec-
utives.......................................... 195,005 2,068
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
TACTICAL
BALANCED FUND ALLOCATION FUND
------------- ---------------
CLASS B
<S> <C> <C>
Marketing and advertising........................ $ 55,135 NA
Amortization of commissions...................... 149,316 NA
Printing of prospectuses and statements of
additional information for other than current
shareholders.................................... 436 NA
Branch network costs allocated and interest ex-
pense........................................... 435,308 NA
Service fees paid to PaineWebber investment exec-
utives.......................................... 34,711 NA
CLASS C
Marketing and advertising........................ $ 20,190 $122,300
Amortization of commissions...................... 34,441 --
Printing of prospectuses and statements of
additional information for other than current
shareholders.................................... 160 122,300
Branch network costs allocated and interest ex-
pense........................................... 155,178 112,730
Service fees paid to PaineWebber investment exec-
utives.......................................... 8,391 155,646
</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 each Fund's overall Flexible PricingSM system of distribution,
the Corporation's/Trust's board of directors/trustees considered several
factors, including that implementation of Flexible Pricing would (1) enable
investors to choose the purchasing option best suited to their individual
situation, thereby encouraging current shareholders to make additional
investments in the Fund and attracting new investors and assets to the Fund to
the benefit of the Fund and its shareholders; (2) facilitate distribution of
the Fund's shares; and (3) maintain the competitive position of the Fund in
relation to other funds that have implemented or are seeking to implement
similar distribution arrangements.
In approving the Class A Plan for each Fund, the directors/trustees
considered all the features of the distribution system, including (1) the
conditions under which initial sales charges would be imposed and the amount
of such charges, (2) Mitchell Hutchins' belief that the initial sales charge
combined with a service fee would be attractive to PaineWebber investment
executives and correspondent firms, resulting in 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 each Fund, the directors/trustees
considered all the features of the distribution system, including (1) the
conditions under which contingent deferred sales charges would be imposed and
the amount of such charges, (2) the advantage to investors in having no
initial sales charges deducted from the Fund'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
29
<PAGE>
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/trustees also recognized that Mitchell Hutchins'
willingness to compensate PaineWebber and its investment executives, without
the concomitant receipt by Mitchell Hutchins of initial sales charges, was
conditioned upon its expectation of being compensated under the Class B Plan.
In approving the Class C Plan for each Fund, the directors/trustees
considered all the features of the distribution system, including (1) the
advantage to investors in having no initial sales charges deducted from the
Fund's purchase payments and instead having the entire amount of their
purchase payments immediately invested in Fund shares, (2) the advantage to
investors in being free from contingent deferred sales charges upon redemption
and paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales compensation for their sales of Class C shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class C shares and 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/trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges or contingent deferred
sales charges upon redemption, was conditioned upon its expectation of being
compensated under the Class C Plan.
With respect to each Plan, the directors/trustees considered all
compensation that Mitchell Hutchins would receive under the Plan and the
Distribution Contract, including service fees and, as applicable, initial
sales charges, distribution fees and contingent deferred sales charges. The
directors/trustees also considered the benefits that would accrue to Mitchell
Hutchins under each Plan in that Mitchell Hutchins would receive service,
distribution and advisory fees that are calculated based upon a percentage of
the average net assets of a Fund, which fees would increase if the Plan were
successful and the Fund attained and maintained significant asset levels.
Under the Distribution Contracts between the Corporation and the Trust 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:
BALANCED FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
FEBRUARY 28, FEBRUARY 29,
--------------- ------------
1994 1995 1996
------- ------- ------------
<S> <C> <C> <C>
Earned............................................. $46,856 $33,533 $82,272
Retained........................................... 3,188 2,003 3,365
</TABLE>
30
<PAGE>
TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
AUGUST 31,
-------------------
1993 1994 1995
------ ------ -----
<S> <C> <C> <C>
Earned.................................................. $ 0 $ 0 $
Retained................................................ 0 0
</TABLE>
For the fiscal years ended February 28, 1994, February 28, 1995 and February
29, 1996, Mitchell Hutchins earned and retained the following contingent
deferred sales charges paid upon certain redemptions of Class B shares of
Balanced Fund:
<TABLE>
<S> <C>
1994.......................................... $185,486
1995.......................................... 149,669
1996.......................................... 101,522
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of directors/trustees, Mitchell
Hutchins is responsible for the execution of each Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins seeks to obtain the best net results
for the Funds, taking into account such factors as 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 Balanced Fund, for the fiscal
years ended February 29, 1996, February 28, 1995, and February 28, 1994, the
Fund paid $335,166, $495,853, and $540,773, respectively, in aggregate
brokerage commissions. For Tactical Allocation Fund, for the fiscal years
ended August 31, 1995, August 31, 1994 and August 31, 1993, the Fund paid
$82,091, $56,965 and $58,975 respectively, in aggregate brokerage commissions.
Neither Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. Each Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board of each Fund 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 each Advisory Contract authorize Mitchell
Hutchins and any of its affiliates that are members of a national securities
exchange to effect portfolio transactions for each Fund on such exchange and
to retain compensation in connection with such transactions. Any such
transactions will be effected and related compensation paid only in accordance
with applicable SEC regulations. For Balanced Fund, for the fiscal years ended
February 28, 1995 and February 28, 1994, the Fund paid $7,266 and $67,570,
respectively, in brokerage commissions to PaineWebber. For the fiscal year
ended February 29, 1996, the Fund paid $1,350 in brokerage commissions to
PaineWebber, which represented .04% of the total brokerage commissions paid by
that Fund and .05% of the aggregate dollar amount of transactions involving
the payment of commissions. For Tactical Allocation Fund, for the fiscal year
ended August 31, 1995, the Fund paid no brokerage commissions to PaineWebber.
31
<PAGE>
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Funds' transactions in
futures contracts, including procedures permitting the use of Mitchell
Hutchins and its affiliates, are similar to those in effect with respect to
brokerage transactions in securities.
Consistent with the interest of each Fund and subject to the review of the
board of directors/trustees, Mitchell Hutchins may cause each 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
Balanced Fund's 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 Balanced 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 a 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 Contracts.
Investment decisions for each 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 a Fund and one or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between a 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 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 Funds 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 each Fund's board 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
32
<PAGE>
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 for each Fund 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 Balanced Fund, for the
fiscal years ended February 29, 1996 and February 28, 1995, the portfolio
turnover rates were 188% and 107%, respectively. For Tactical Allocation Fund,
for the fiscal years ended August 31, 1995 and August 31, 1994, the portfolio
turnover rates were 53% and 4%, respectively. The higher turnover for the most
recent fiscal year was due to reallocations of Tactical Allocation Fund's
portfolio in accordance with its systematic asset allocation strategy.
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 each Fund
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges for Class A shares
indicated in the table of sales charges in the Prospectus. The sales charge
payable on the purchase of Class A shares of each Fund and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or 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); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
33
<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 Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber mutual
fund. The purchaser must provide sufficient information to permit confirmation
of his or her holdings, and the acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at
any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares of the Funds 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 each Fund may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification
of the exchange offer, except no notice need be given of an amendment whose
only material effect is to reduce the exchange fee and no notice need be given
if, under extraordinary circumstances, either redemptions are suspended under
the circumstances described below or a Fund temporarily delays or ceases the
sales of its shares because it is unable to invest amounts effectively in
accordance with the Fund's investment objective, policies and restrictions.
If conditions exist which make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting those securities into cash. The Corporation
and the Trust have each elected, however, to be governed by Rule 18f-1 under
the 1940 Act, under which a Fund is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of 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. Each Fund may suspend redemption privileges or
postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets, or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a 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 a Fund of sufficient
Fund shares to provide the withdrawal payment specified by participants in the
Fund's
34
<PAGE>
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 a 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 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
35
<PAGE>
current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions
under the Plan may be changed at any time, but may take up to two weeks to
become effective.
The terms of the Plan or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
Periodic Investing and Dollar Cost Averaging.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an
investor to take advantage of "dollar cost averaging." By investing a fixed
amount in mutual fund shares at established intervals, an investor purchases
more shares when the price is lower and fewer shares when the price is higher,
thereby increasing his or her earning potential. Of course, dollar cost
averaging does not guarantee a profit or protect against a loss in a declining
market, and an investor should consider his or her financial ability to
continue investing through periods of 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 seven RMA money market funds--RMA Money Market Portfolio, RMA
U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA Connecticut Municipal Money Fund, RMA New Jersey Municipal
Money Fund and RMA New York Municipal Money Fund. Each money market fund
attempts to maintain a stable price per share of $1.00, although there can
be no assurance that it will be able to do so. Investments in the money
market funds are not insured or guaranteed by the U.S. government;
. check writing, with no per-check usage charge, no minimum amount on checks
and no maximum number of checks that can be written. RMA accountholders can
code their checks to classify expenditures. All canceled checks are
returned each month;
. Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
36
<PAGE>
. 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 each Fund will automatically convert to Class A shares of
that 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 each Fund would not be
converted and would continue to be subject to the higher ongoing expenses of
the Class B shares beyond six years from the date of purchase. Mitchell
Hutchins has no reason to believe that these conditions for the availability
of the conversion feature will not continue to be met.
VALUATION OF SHARES
Each 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.
37
<PAGE>
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 or the
Trust's board of trustees. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining to maturity,
unless the Corporation's board of directors determines that this does not
represent fair value.
PERFORMANCE INFORMATION
Each 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 each Fund's Performance Advertisements are calculated according to the
following formula:
<TABLE>
<S> <C> <C> <C>
P(1 + T)n = 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.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over
the period. In calculating the ending redeemable value for Class A shares,
each Fund's maximum 4.5% initial sales charge is deducted from the initial
$1,000 payment and, for Class B and Class C shares, the applicable contingent
deferred sales charge imposed on a redemption of Class B and Class C shares
held for the period is deducted. All dividends and other distributions are
assumed to have been reinvested at net asset value.
Each 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"). Each 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.
38
<PAGE>
The following table shows performance information for the Class A, Class B
and Class C shares of the Funds for the periods indicated. All returns for
periods of more than one year are expressed as an average return.
BALANCED FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended February 29, 1996:
Standardized Return*.................................. 16.60% 16.20% 20.12%
Non-Standardized Return............................... 22.08% 21.20% 21.12%
Five years ended February 29, 1996:
Standardized Return*.................................. NA 8.44% NA
Non-Standardized Return............................... NA 8.73% NA
Inception** to February 29, 1996:
Standardized Return*.................................. 9.04% 7.90% 9.04%
Non-Standardized Return............................... 10.13% 7.90% 9.04%
TACTICAL ALLOCATION FUND
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended August 31, 1995:
Standardized Return*.................................. 13.10% NA 16.57%
Non-Standardized Return............................... 18.43% NA 17.57%
Five years ended August 31, 1995:
Standardized Return*.................................. NA NA NA
Non-Standardized Return............................... NA NA NA
Inception*** to August 31, 1995:
Standardized Return*.................................. 9.76% NA 11.00%
Non-Standardized Return............................... 11.98% NA 11.00%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
** The inception date for the Class B shares of Balanced Fund was December
12, 1986. The inception dates for Class A shares and Class C shares of
Balanced Fund were July 1, 1991 and July 2, 1992, respectively.
*** The inception date for Class C shares of Tactical Allocation Fund was July
22, 1992. The inception dates for Class A and Class B shares of Tactical
Allocation Fund were May 10, 1993 and January 30, 1996, respectively.
OTHER INFORMATION. In Performance Advertisements, each 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.
39
<PAGE>
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.
Each 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.
Each 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 a 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 each Fund generally have
longer maturities than most CDs and may reflect interest rate fluctuations for
longer term securities. An investment in either 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, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-
term capital gain) ("Distribution Requirement") and must meet several
additional requirements. With respect to each Fund, these requirements include
the following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities, or other
income (including gains from options and futures) derived with respect to its
business of investing in securities ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options or futures 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.
40
<PAGE>
Dividends and other distributions declared by each Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will
be taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or 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.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Balanced 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" ("QIF")
then in lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the QEF 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 by the QEF. 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 Balanced Fund,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was
in effect).
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains
and losses each Fund realizes in connection therewith. Gains from options and
futures will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures will be subject to
the Short-Short limitation if they are held for less than three months.
41
<PAGE>
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent the Fund does not
qualify for this treatment, it may be forced to defer the closing out of
certain options and futures beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.
Balanced 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
Prior to August 1995, Balanced Fund was named "PaineWebber Asset Allocation
Fund."
CLASS-SPECIFIC EXPENSES. Each 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 a Fund bear higher transfer agency fees per shareholder account than
those borne by Class A or Class C shares. The higher fee is imposed due to the
higher costs incurred by the Transfer Agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Ave., N.W., Washington, D.C., 20036-1800, counsel to the Corporation and the
Trust, 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 AUDITORS. Price Waterhouse LLP, 1177 Avenue of the Americas, New
York, New York 10036, serves as Balanced Fund's independent accountants. Ernst
& Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as Tactical
Allocation Fund's independent auditors.
42
<PAGE>
FINANCIAL STATEMENTS
Balanced Fund's Annual Report to Shareholders for the fiscal year ended
February 29, 1996, and Tactical Allocation Fund's Annual Report to
Shareholders for the fiscal year ended August 31, 1995, and its Semi-Annual
Report to Shareholders for the six months ended February 29, 1996, each is a
separate document supplied with this Statement of Additional Information, and
the financial statements, accompanying notes and (with respect to the Annual
Report to Shareholders) report of independent accountants appearing therein
are incorporated by reference in this Statement of Additional Information.
43
<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 hav-
ing an adequate capacity to pay interest and repay principal. Whereas it nor-
mally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in higher
rated categories; BB, B. Debt rated BB or B is regarded as having predomi-
nantly 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 protective characteristics, these are outweighed by large uncer-
tainties 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>
APPENDIX B
MORTGAGE-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES
The U.S. government securities in which Balanced 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 issued 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-government 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 Balanced Fund. Mortgage pools
consist of whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. Lending institutions that originate mortgages
for the pools are subject to certain standards, including credit and other
underwriting criteria for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES
Fannie Mae facilitates a national secondary market in residential mortgage
loans insured or guaranteed by U.S. government agencies and in privately
insured or uninsured residential mortgage loans (sometimes referred to as
"conventional mortgage loans" or "conventional loans") through its mortgage
purchase and mortgage-backed securities sales activities. Fannie Mae issues
guaranteed mortgage pass-through certificates ("Fannie Mae certificates"),
which represent pro rata shares of all interests 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
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC
represents a pro rata share of all interest and principal payments made and
owed on the underlying pool. Freddie Mac generally guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal, but it also
has a PC program under which it guarantees timely payment of both principal
and interest. GMCs also represent a pro rata interest in a pool of mortgages.
These instruments, however, pay interest semi-annually and return
B-1
<PAGE>
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
obligations ("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 securities 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 guaranteed 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 enhancement. 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
associations, 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 orderly manner, RTC has established a vehicle registered with the
SEC through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and holds or has acquired, 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
mortgage pass-through securities (such collateral collectively being called
"Mortgage 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 indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal of and interest on the
mortgage assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make schedule
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 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, quarterly 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 structure, payments of principal, including any
principal prepayments, on the mortgage assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal 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 basis, until other classes
of the CMO are paid in full.
B-2
<PAGE>
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
supported 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
payments, 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 underlying assets and collection of all amounts recoverable
directly from the obligor 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 transferred 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. Protection 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 letters 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 enhancement, 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.
Examples of credit enhancement arising out of the structure of the
transaction 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 reserve against future losses) and "over-
collateralization" (where the scheduled payments on, or the principal amount
of, the underlying assets exceed that required 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 adversely
affect the return on an investment in such a security.
B-3
<PAGE>
APPENDIX C
DESCRIPTION OF STRATEGIC INSTRUMENTS
Certain Portfolios may use the following instruments in connection with
hedging and related income and return strategies:
OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a
premium, has the right to buy the security or currency underlying the
option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation,
upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A
put option is a similar contract that gives its purchaser, in return for a
premium, the right to sell the underlying security or currency at a
specified price during the option term. The writer of the put option, who
receives the premium, has the obligation, upon exercise of the option
during the option term, to buy the underlying security or currency at the
exercise price.
OPTIONS ON INDEXES--An index assigns relative values to the securities
included in the index and fluctuates with changes in the market values of
these securities. Index options operate in the same way as more traditional
options, except that the exercise of an index option is effected with cash
payment and does not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price and the closing
price of the index.
INDEX FUTURES CONTRACT--An index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value at the close of trading
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the securities comprising the index is
made. Generally, contracts are closed out prior to the expiration date of
the contract.
INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the
other party agrees to accept, delivery of a specified type of debt security
at a specified future time and at a specified price. Although such futures
contracts by their terms call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase
or sell a security or currency, at a specified price at any time during the
option term. Upon exercise of the option, the delivery of the futures
position to the holder of the option will be accompanied by delivery of the
accumulated balance that represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the future. The
writer of an option, upon exercise, will assume a short position in the
case of a call and a long position in the case of a put.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions..................................... 1
Directors, Trustees and Officers......................................... 17
Compensation Table....................................................... 25
Investment Advisory and Distribution Arrangements........................ 25
Portfolio Transactions................................................... 31
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services.......................................................... 33
Conversion of Class B Shares............................................. 37
Valuation of Shares...................................................... 37
Performance Information.................................................. 38
Taxes.................................................................... 40
Other Information........................................................ 42
Financial Statements..................................................... 43
Appendix A...............................................................
Appendix B...............................................................
Appendix C...............................................................
</TABLE>
(C)1996 PaineWebber Incorporated
[LOGO RECYCLED PAPER APPEARS HERE]
PAINEWEBBER BALANCED FUND
PAINEWEBBER
TACTICAL ALLOCATION FUND
- --------------------------------------------------------------------------------
Statement of Additional Information
July 1, 1996
- --------------------------------------------------------------------------------
PAINEWEBBER
<PAGE>
- --------------------------------------------------------------------------------
------------------
PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
Class Y Shares
1285 Avenue of the Americas, New York, NY 10019
Prospectus -- July 1, 1996
- --------------------------------------------------------------------------------
PaineWebber Asset Allocation Funds are designed for investors generally seeking
high total return. PaineWebber Balanced Fund invests primarily in a combination
of equity securities, investment grade bonds, and money market instruments.
PaineWebber Tactical Allocation Fund follows an investment strategy that ac-
tively allocates its assets among equity securities, U.S. Treasury notes and
U.S. Treasury bills.
This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and re-
tain a copy of this Prospectus for future reference.
A Statement of Additional Information dated July 1, 1996 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your invest-
ment executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad categories, which
are presented here. Generally, investors seeking to maximize return must assume
greater risk. Balanced Fund and Tactical Allocation Fund are both in the ASSET
ALLOCATION category.
. Money Market Fund for . Asset Allocation Funds for long-term growth and
income and stability by income by investing in stocks and bonds.
investing in high-
quality, short-term
investments.
. Bond Funds for income . Stock Funds for long-term growth by investing
by investing mainly in mainly in stocks.
bonds.
. Tax-Free Bond Funds for . Global Funds for long-term growth by investing
income exempt from mainly in foreign stocks or high current income
federal income taxes by investing mainly in global debt instruments.
and, in some cases,
state and local income
taxes, by investing in
municipal bonds.
A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
- --------------------------------------------------------------------------------
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. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR THEIR DISTRIBU-
TOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
The Class Y shares described in this Prospectus are currently offered for sale
primarily to participants in the INSIGHT Investment Advisory Program ("IN-
SIGHT"), when purchased through that program. See "How to Buy Shares."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------
----------------------------------------------------------------------------
Prospectus Page 1
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 5
Financial Highlights....................................................... 6
Investment Objectives & Policies........................................... 7
Investment Philosophy & Process............................................ 8
Performance................................................................ 10
The Funds' Investments..................................................... 11
How to Buy Shares.......................................................... 15
How to Sell Shares......................................................... 16
Management................................................................. 17
Determining the Shares' Net Asset Value.................................... 18
Dividends & Taxes.......................................................... 18
General Information........................................................ 20
</TABLE>
----------
- --------------------------------------------------------------------------------
Prospectus Page 2
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
The Funds at a Glance
- -------------------------------------------------------------------------------
The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or both of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or
diversify a portfolio. When selling shares, investors should be aware that
they may get more or less for their shares than they originally paid for them.
As with any mutual fund, there is no assurance that the Funds will achieve
their goals.
BALANCED FUND
GOAL: To increase the value of your investment by investing in a combination
of equity securities,
investment grade bonds and money market instruments.
INVESTMENT OBJECTIVE: High total return with low volatility.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests in equity securities, its price will rise and fall.
Certain investment grade securities in which the Fund may invest have
speculative characteristics. The Fund may invest in mortgage- and asset-backed
securities, which involve additional risks, such as those relating to the
prepayment of principal on the underlying obligations. The Fund may invest in
U.S. dollar denominated securities of foreign companies, which involve more
risk than investing in the securities of U.S. companies. The Fund may use
derivatives, such as options and futures, in its investment activities, which
may involve additional risks. Investors may lose money by investing in the
Fund; your investment is not guaranteed.
SIZE: On May 31, 1996, the Fund had over $199.7 million in assets.
TACTICAL ALLOCATION FUND
GOAL: To increase the value of your investment by following a systematic
investment strategy that actively allocates the Fund's assets among equity
securities, U.S. Treasury notes and U.S. Treasury bills.
INVESTMENT OBJECTIVE: Total return, consisting of long-term capital
appreciation and current income.
RISKS: Although the Fund seeks total return, the Fund may not achieve as high
a level of either capital appreciation or current income as a fund that has
only one of those objectives as its primary objective. The Fund invests in
equity securities included in the Standard and Poor's 500 Composite Stock
Price Index (the "S&P 500 Index"). Equity securities historically have shown
greater growth potential than other types of securities; but they have also
shown greater volatility. As a result of the Fund's investment in equity
securities, its price will rise and fall. Some of the securities in which the
Fund invests are issued by foreign companies and involve more risk than the
securities of U.S. companies. The Fund may use derivatives, such as options
and futures, in its investment activities, which may involve additional risks.
Investors may lose money by investing in the Fund; your investment is not
guaranteed.
SIZE: On May 31, 1996, the Fund had over $103.3 million in assets.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of Balanced Fund and Tactical Allocation
Fund (each a "Fund" and, collectively, the "Funds").
WHO SHOULD INVEST
BALANCED FUND is for investors who want high total return with low volatility
through investments in equity securities, investment grade bonds and money
market instruments. The Fund is designed for investors who want an investment
that maintains a fixed income allocation at all times, yet has the flexibility
to change its investment mix in response to changing market conditions. Over
time, the 25% minimum in fixed income investments should result in a lower
risk profile for the Fund than if it could invest 100% in stocks.
----------
- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
The Funds at a Glance
(Continued)
- -------------------------------------------------------------------------------
TACTICAL ALLOCATION FUND is for investors who want total return, consisting of
long-term capital appreciation and current income, through a systematic
investment strategy that actively allocates assets among equity securities,
U.S. Treasury notes and U.S. Treasury bills. The Fund is designed for
investors who want to participate in the broad stock market, yet want the
flexibility to take a more defensive posture when a secular decline in stock
prices is projected. This disciplined approach to investing in stocks attempts
to shift the asset mix in anticipation of, not in response to, changing market
trends.
HOW TO PURCHASE CLASS Y SHARES
Eligible investors may purchase Class Y shares of the Funds as follows:
The price is the net asset value next calculated after PaineWebber's New York
City headquarters or the Transfer Agent receives the purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares.
100% of their purchase is immediately invested. Investors also do not pay a
redemption fee or contingent deferred sales charge when they sell Class Y
shares.
----------
- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Expense Table
- -------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Funds. Expenses
shown below represent those incurred for the most recent fiscal year.
<TABLE>
<CAPTION>
CLASS Y
SHAREHOLDER TRANSACTION EXPENSES -------
<S> <C>
Maximum Sales Charge on Purchases of Shares............................ None
Sales Charge on Reinvested Dividends................................... None
Maximum Contingent Deferred Sales Charge............................... None
Maximum Annual Investment Advisory Fee Payable by Shareholders through
INSIGHT (as a % of average daily value of shares held) (1)............ 1.50%
ANNUAL FUND OPERATING EXPENSES (as a % of average net assets) (2)
BALANCED FUND
Management Fees........................................................ 0.75%
12b-1 Fees............................................................. 0.00
Other Expenses (estimated)............................................. 0.29
----
Total Operating Expenses (estimated)................................... 1.04%
====
TACTICAL ALLOCATION FUND
Management Fees........................................................ 0.50%
12b-1 Fees............................................................. 0.00
Other Expenses......................................................... 0.73
----
Total Operating Expenses............................................... 1.23%
====
</TABLE>
- -------
(1)Participation in INSIGHT is subject to payment of an advisory fee at the
maximum annual rate of 1.50% of assets held through INSIGHT (generally
charged quarterly in advance, which may be changed to the INSIGHT
participant's PaineWebber amount).
(2)See "Management" for additional information. The fees and expenses for
Tactical Allocation Fund are those actually incurred for the fiscal year
ended August 31, 1995. The fees and expenses for Balanced Fund are
estimated based on the expenses incurred by the Class A shares of that Fund
for the fiscal year ended February 29, 1996. The INSIGHT fee is not
included.
EXAMPLE OF EFFECT OF FUND EXPENSES
The following example should assist investors in understanding various costs
and expenses incurred as shareholders of a Fund. The assumed 5% annual return
shown in the example is required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all mutual funds. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES OF A
FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in each Fund, assuming a 5% annual return.
BALANCED FUND
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class Y......................................... $11 $33 $57 $127
TACTICAL ALLOCATION FUND
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class Y......................................... $28 $85 $144 $306
</TABLE>
----------
- --------------------------------------------------------------------------------
Prospectus Page 5
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Financial Highlights
- -------------------------------------------------------------------------------
TACTICAL ALLOCATION FUND
The following table provides investors with data and ratios for one Class Y
share for each of the periods shown. This information is supplemented by the
financial statements and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended August 31, 1995 and the
report of Ernst & Young LLP, independent auditors, appearing in the Fund's
Annual Report to Shareholders. Both are incorporated by reference into the
Statement of Additional Information. The financial statements and notes, as
well as the financial information in the table below relating to the fiscal
year ended August 31, 1995, have been audited by Ernst & Young LLP. The
financial information for the year ended August 31, 1994 and the prior periods
was audited by other auditors, whose report on this data was unqualified.
Further information about the Fund's performance is also included in the
Annual Report to Shareholders, which may be obtained without charge by calling
1-800-647-1568. The financial statements and notes and the financial
information in the table below, as they relate to the six months ended
February 29, 1996, have been taken from the records of the Fund without
examination by the independent auditors, who have not expressed an opinion on
the information.
As of February 29, 1996, Class Y shares for Balanced Fund had not yet
commenced operations and no financial information was therefore available.
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
--------------------------------------------------
CLASS Y***
--------------------------------------------------
FOR THE SIX FOR THE PERIOD
MONTHS ENDED FOR THE YEAR MAY 10, 1993+
FEBRUARY 29, 1996 ENDED TO AUGUST 31,
(UNAUDITED) AUGUST 31, 1993
----------------- ---------------- --------------
1995** 1994
------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period.................. $ 14.88 $ 13.79 $ 13.52 $ 12.90
------- ------- ------- -------
Net investment income....... 0.19 0.23 0.25 0.09
Net realized and unrealized
gains from investment
transactions............... 1.95 2.09 0.33 0.60
------- ------- ------- -------
Net increase from investment
operations................. 2.14 2.32 0.58 0.69
------- ------- ------- -------
Dividends from net invest-
ment income................ (0.16) (0.26) (0.27) (0.07)
Distributions from net real-
ized gains from investment
transactions............... (1.06) (0.97) (0.04) --
------- ------- ------- -------
Total dividends and distri-
butions to shareholders.... (1.22) (1.23) (0.31) (0.07)
------- ------- ------- -------
Net asset value, end of pe-
riod....................... $ 15.80 $ 14.88 $ 13.79 $ 13.52
======= ======= ======= =======
Total investment return (1). 14.80% 18.79% 4.41% 5.30%
======= ======= ======= =======
Ratios/ supplemental data:
Net assets, end of period
(000's)................... $12,686 $ 2,506 $ 3,880 $ 3,379
Expenses to average net as-
sets...................... 1.09%* 1.23% 0.88% 0.81%*
Net investment income to
average net assets........ 1.53%* 1.86% 1.90% 1.96%*
Portfolio turnover......... 5% 53% 4% 0%
Average commission rate
paid per share on common
stock investments
purchased/sold (2)........ $0.0250 -- -- --
</TABLE>
- -------
+ Commencement of offering of shares.
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder,
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
*** Formerly Class C shares.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable dates, and a
sale at net asset value on the last day of each period reported. Total
investment returns for periods of less than one year have not been
annualized.
(2) Disclosure effective for fiscal years beginning on or after September 1,
1995.
----------
- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Investment Objectives & Policies
- -------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards.
BALANCED FUND
Balanced Fund's investment objective is to obtain high total return with low
volatility. The Fund pursues this objective by investing primarily in a
combination of three asset classes: stocks (equity securities), bonds
(investment grade bonds) and cash (money market securities). The portion
invested in each of these asset classes is based on Mitchell Hutchins'
judgment of the best allocation of the Fund's assets. However, the Fund
maintains a fixed income allocation (including bonds and cash) of at least
25%. The Fund attempts to maintain a dollar-weighted average maturity for its
fixed income investments--the average remaining time to maturity of a
portfolio's bonds--of three to ten years.
The Fund may invest in a broad range of:
. Equity securities issued by companies believed by Mitchell Hutchins to have
the potential for rapid earnings growth;
. Investment grade bonds, that is, bonds that, at the time of purchase, are
assigned one of the four highest grades by Standard & Poor's, a division of
the McGraw Hill Companies, Inc. ("S&P"), or Moody's Investors Service, Inc.
("Moody's"), are comparably rated by another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, are determined by
Mitchell Hutchins to be of comparable quality, and U.S. government
securities;
. Convertible securities rated at least B by S&P or Moody's, comparably rated
by another NRSRO or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Securities rated BB or B by S&P (or Ba or B by Moody's)
are regarded as having predominantly speculative characteristics with
respect to the ability to pay interest and repay principal. While such
securities may have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
However, the Fund will not invest more than 10% of its total assets in
convertible securities rated below investment grade (BBB by S&P, Baa by
Moody's, comparably rated by another NRSRO or, if unrated, determined by
Mitchell Hutchins to be of comparable quality); and
.High quality money market securities.
TACTICAL ALLOCATION FUND
Tactical Allocation Fund's investment objective is total return, consisting of
long-term capital appreciation and current income. The Fund seeks to achieve
its objective by using a systematic investment strategy that actively
allocates the Fund's assets among common stocks, U.S. Treasury notes and U.S.
Treasury bills.
In seeking total return, the Fund shifts its asset mix among an equity portion
designed to track the performance of the S&P 500 Index (the Fund generally
holds 450 of the 500 stocks in the S&P 500 Index), a bond portion, consisting
of five-year U.S. Treasury notes, and a cash portion, consisting of 30-day
U.S. Treasury bills. The allocation among these three segments is based on the
asset mix recommendation of the Mitchell Hutchins Tactical Allocation Model
("Model").
The performance of the Fund's equity portion is intended to replicate that of
the S&P 500 Index before deducting operating expenses. The Fund may invest in
derivative instruments related to the stocks in the S&P 500 Index and five-
year U.S. Treasury notes, such as options on common stock Indexes, futures on
stock indexes, interest rate futures and options on futures.
The Model is a systematic, cost-effective approach to allocating assets among
the three asset classes. The Fund seeks to achieve total return during all
economic and financial market cycles, with a degree of volatility lower than
that of the S&P 500 Index, by investing in common stocks held in the S&P
----------
- --------------------------------------------------------------------------------
Prospectus Page 7
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
500 Index, but can take a more defensive posture when the Model signals a
potential secular decline in stock prices.
****
As with any mutual fund, there is no assurance that either Fund will achieve
its investment objective. Each Fund's net asset value fluctuates based upon
changes in the value of its portfolio securities.
- -------------------------------------------------------------------------------
Investment Philosophy & Process
- -------------------------------------------------------------------------------
BALANCED FUND
Mitchell Hutchins believes 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. Mitchell Hutchins also believes that
capital market returns (returns on stocks and bonds) reflect the consensus
expectations for key economic variables, such as interest rates, profit growth
and inflation. To implement this strategy for the Fund, Mitchell Hutchins:
. Regularly surveys market participants and generates a consensus forecast of
economic variables affecting returns on equity securities, bonds and money
market instruments; and
. Applies fundamental valuation techniques to the consensus data to determine
the asset allocation it believes to be optimal.
Once the Fund's asset allocation is determined, the portfolio managers
specializing in each asset class select individual securities for each portion
of the portfolio. Mitchell Hutchins regularly monitors market outlooks and
shifts the asset allocation mix when there are significant changes in expected
returns.
The Fund uses the following investment process to determine the individual
securities for each portion of the Fund:
. EQUITY SECURITIES. Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks providing a combination of value and price
momentum. The Model screens a universe of small- to large-capitalization
companies in ten different business sectors to identify undervalued
companies with strong earnings momentum that rank well in three measures:
--VALUE: projected dividends, cash flow, earnings and book value;
--MOMENTUM: earnings and price to identify companies that could surprise on
the upside; and
--ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.
The equity securities ranking in the top 20% of the Model's universe are
screened twice a month. Then the portfolio managers take a closer look at
those equity securities that rank higher based on value and momentum. Mitchell
Hutchins applies traditional analysis and may speak to the management of these
companies, as well as those of their competitors.
. DEBT SECURITIES. Mitchell Hutchins selects these securities based on its
analysis of the maturity structure and risk structure (comparing yields on
Treasury securities to yields on riskier types of debt securities).
. MONEY MARKET INSTRUMENTS. Mitchell Hutchins' decision to use these
securities is based on its judgment of how they can further the Fund's
investment objective.
TACTICAL ALLOCATION FUND
Mitchell Hutchins allocates Tactical Allocation Fund's assets among stocks and
bonds or cash, based on the Model's quantitative assessment of the projected
rates of return of each asset class. The Model embraces the concept that
incremental return can be achieved through the tactical allocation of
portfolio assets across three main asset classes--stocks, bonds and cash. The
emphasis of the Model is to avoid or reduce exposure to the stock market
during down economic cycles and to perform close to the S&P 500 Index in
periods of strongly positive market performance.
----------
- --------------------------------------------------------------------------------
Prospectus Page 8
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
The basic premise of the Model is that investors accept the risk of owning
stocks, measured as volatility of return, because they expect a return
advantage. The expected return advantage of stocks fluctuates as investor
psychology pushes the market to valuation extremes. The Model incorporates the
following factors to determine the allocations:
.Expected future dividends and current price of stocks;
.Economic statistics;
. Five-year, "bottom-up" company earnings projections; and
.Yield-to-maturity of the one-year Treasury bill.
The Fund's asset allocation mix is dictated by the Model, except as described
below. The Fund does not maintain a portion of its investments in each asset
class at all times. The weightings can range from 100% to 0% in stocks, bonds
or cash. Possible asset mixes are 100% stocks; 75% stocks/25% bonds or cash;
100% bonds or cash. For example, as of August 31, 1995, the Fund's assets were
allocated as follows: 100% to stocks, 0% to bonds and 0% to cash. As of
February 29, 1996, the allocation looked like this: 100% to stocks, 0% to
bonds and 0% to cash. The Fund does not hold bonds and cash at the same time,
except for limited amounts always held in cash generally to pay expenses. This
disciplined approach to investing in stocks attempts to shift the asset mix in
anticipation of, not in response to, changing market trends.
Asset reallocations are made on the first business day of each month. If no
reallocation of assets is dictated by the Model, any material amounts
resulting from appreciation or receipt of dividends, distributions, interest
payments and proceeds from securities maturing in each of the asset classes
are reallocated (or "rebalanced") to the extent practicable to re-establish
the Model's recommended asset allocation mix.
In contrast to a typical S&P 500 Index fund that maintains a 100% allocation
to the Index, the Fund is designed to take a more defensive posture when the
Model signals a potential secular decline in stock prices. The Fund deviates
from the recommendations of the Model only to the extent necessary to:
. Maintain an amount in cash, not expected to exceed 2% of its total assets to
pay Fund operating expenses, dividends and distributions on its shares and
to meet anticipated sales of shares; and
. Qualify as a regulated investment company for Federal income tax purposes.
See "Dividends and Taxes."
----------
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Performance
- --------------------------------------------------------------------------------
These charts show the total returns for Class Y shares of Tactical Allocation
Fund. Past results are not a guarantee of future results.
TACTICAL ALLOCATION FUND
As Class Y shares commenced operations
on May 10, 1993, the 1993 return
represents the period from May 10, 1993
to December 31, 1993.
(CHART)
AVERAGE ANNUAL RETURNS
As of August 31, 1995
<TABLE>
<CAPTION>
CLASS Y SHARES
--------------
<S> <C>
Inception Date................................................... 5/10/93
One Year......................................................... 18.79%
Life............................................................. 12.28%
</TABLE>
PERFORMANCE INFORMATION
The Funds perform 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 Funds as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. One-, five- and ten-year periods
will be shown, unless the Fund or Class has been in existence for a shorter
period. If so, returns will be shown for the period since inception. Total
return calculations assume reinvestment of dividends and other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.
Total return information reflects past performance and does not necessarily
indicate future results. The investment return and principal value of shares of
the Funds will fluctuate. The amount investors receive when selling shares may
be more or less than what they paid. Further information about each Fund's
performance is contained in its Annual Report, which may be obtained without
charge by contacting the Fund, your PaineWebber investment executive or
PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568.
----------
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
The Funds' Investments
- -------------------------------------------------------------------------------
BALANCED FUND
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and
common stock purchase warrants and rights. Common stocks, the most familiar
type, represent an equity (ownership) interest in a corporation. While past
performance does not guarantee future results, common stocks historically have
provided the greatest long-term growth potential in a company. However, their
prices generally fluctuate more than other securities, and reflect changes in
a company's financial condition and in overall market and economic conditions.
Preferred stock has certain fixed income features, like a bond, but is
actually equity in a company, like common stock. Convertible securities may
include debentures, notes and preferred equity securities, which are
convertible into common stock.
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.
BONDS (including notes and debentures) are used by corporations and
governments to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest and must repay the amount borrowed at
maturity. Bonds have varying degrees of investment risk and varying levels of
sensitivity to changes in interest rates.
ASSET-BACKED SECURITIES are debt obligations backed by specific assets. The
most common type of asset-backed securities is mortgage-backed bonds, which
represent a direct or indirect interest (participation) in--or are secured by
and payable from--a pool of mortgage loans secured by real property. They are
sold by government agencies, such as the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association, and private
corporations. Investors typically receive payments out of the interest and
principal on the underlying mortgages. The growth of mortgage-backed
securities and the secondary mortgage market in which they are traded has
helped keep mortgage money available for home financing.
Mortgage-backed securities include:
. Single- and multi-class pass-through securities, representing pooled debt
obligations repackaged as shares, that pass income from debtors through the
intermediary to investors;
. Collateralized mortgage obligations ("CMOs"), which are more complex
versions of mortgage-backed bonds. Evaluating the risks and rewards of CMOs
requires special knowledge.
When interest rates go down and homeowners refinance their mortgages,
mortgage-backed bonds are paid off more quickly than investors may expect.
Other asset-backed securities are structured similar to mortgage-backed
securities, except that the underlying assets are not first lien mortgage
loans or interests in them. Instead, these securities include assets such as
motor vehicle installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements.
ZERO COUPON SECURITIES are securities that make no periodic interest payments
but instead are sold at a deep discount from their face value. The buyer of
such a bond receives the rate of return by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. There
are many kinds of zero coupon securities. The most commonly known is the zero
coupon bond, which either may be issued at a deep discount by a corporation or
may be created by a brokerage firm when it strips (separates) the coupons
(unmatured interest payments) off a bond and sells the principal and the
coupons separately. This technique is used frequently with U.S. Treasury
bonds; these issues include CATS (Certificates of Accrual Treasury Securities)
and TIGRs (Treasury Income Growth Receipts).
Because zero coupon securities bear no interest and holders do not receive
interest payments, they are generally more sensitive to changes in interest
rates than other U.S. government securities. For example, when interest rates
fall, the value of zero coupon
----------
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
securities rises more rapidly than bonds paying out interest on a current
basis because the bonds have locked in a particular rate of reinvestment that
becomes more attractive the further rates fall. However, when interest rates
rise, their value falls more dramatically.
MONEY MARKET INSTRUMENTS in which the Fund may invest include:
. U.S. Treasury bills and other obligations issued or guaranteed as to
interest and principal by the U.S. government, its agencies and
instrumentalities;
. Obligations of U.S. banks (including certificates of deposit and bankers'
acceptances) with total assets in excess of $1.5 billion at the time of
purchase;
. Interest-bearing savings deposits in U.S. commercial and savings banks with
principal amounts not greater than are fully insured by the Federal Deposit
Insurance Corporation (the aggregate amount of these deposits may 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.
In addition, the Fund may hold cash and may invest in participation interests
of the money market securities mentioned above without limitation. These
participation interests are the interests of securities held by others on a
pro-rata basis.
TACTICAL ALLOCATION FUND
STOCK PORTION. In its stock portion, the Fund attempts to duplicate, before
the deduction of operating expenses, the investment results of the S&P 500
Index by investing in 450 of the 500 common stocks included in that index. The
S&P 500 Index, which is chosen by S&P on a statistical basis and may change
from time to time, emphasizes large capitalization stocks and is based on such
factors as the market capitalization and trading activity of each stock and
its adequacy as a representative of stocks in a particular industry sector.
The Fund attempts to achieve a correlation between the performance of the
stock portion and that of the S&P 500 Index of at least 0.95, before the
deduction of operating expenses (a correlation of 1.00 would be perfect, which
would mean that the net asset value of the stock portion increased or
decreased in exactly the same proportion as changes in the Index).
BOND PORTION. In its bond portion, the Fund invests in U.S. Treasury notes
having five years remaining to maturity at the beginning of the then-current
calendar year or, if those instruments are unavailable at favorable prices, in
U.S. Treasury notes with remaining maturities as close as possible to five
years. The Fund does not invest in bonds and cash simultaneously, except as
noted below.
CASH PORTION. In its cash portion, the Fund invests in U.S. Treasury bills
with remaining maturities of 30 days or, if those instruments are unavailable
at favorable prices, in U.S. Treasury bills with remaining maturities as close
as possible to 30 days. Limited amounts of the Fund's assets are always
invested in the cash portion, generally to pay expenses.
RISKS
Under normal circumstances, Balanced Fund invests primarily in equity
securities, bonds, U.S. government securities, mortgage- and asset-backed
securities and money market instruments, and Tactical Allocation Fund invests
primarily in equity securities and U.S. government securities. Following is a
discussion of risks that are common to each Fund:
EQUITY SECURITIES. Equity securities historically have shown greater growth
potential than other types of securities. As with all investments, higher
returns are typically accompanied by higher risks; thus, common stocks
represent the riskiest investment in a company. It is possible that investors
may lose their entire investment.
INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and the prices of bonds and U.S. government securities will
fall, lowering the value of the Funds' investments. Long-term bonds, including
U.S. government securities, are generally more sensitive to interest rate
changes than short-term bonds, including U.S. government securities. Adverse
changes in economic conditions can affect an issuer's ability to pay principal
and interest.
FOREIGN SECURITIES. Balanced 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. Since the S&P 500 Index includes
common stocks of foreign issuers, Tactical Allocation Fund is also subject to
certain risks associated with investments in foreign securities.
Investing in securities of foreign companies involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the
-------------
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
companies operate and to changes in foreign currency values. Values may also
be affected by foreign tax laws, changes in foreign economic or monetary
policies, exchange control regulations and regulations involving prohibitions
on the repatriation of foreign currencies.
In general, less information may be available about foreign companies than
about U.S. companies, and they are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of foreign investing frequently
are higher than those in the United States. These costs include relatively
higher brokerage commissions and foreign custody expenses.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements. In a
typical repurchase agreement, a Fund buys a security and simultaneously agrees
to sell it back at an agreed-upon price and time, usually no more than seven
days after purchase. The time and price reflect a market rate
of interest unrelated to the coupon rate or maturity of the purchased
securities. Risks associated with repurchase agreements include a possible
decline in the value of the underlying securities and delays and costs to the
Fund if the other party to the repurchase agreement becomes insolvent.
In addition to these general risks, investments in each Fund are subject to
other risk considerations:
BALANCED FUND
BOND RATINGS. The Fund invests in a broad range of bonds rated investment
grade. Investment grade quality means that the securities are rated within the
four highest categories by S&P and Moody's. Bonds rated in the fourth highest
category (BBB by S&P or Baa by Moody's) include securities which
have speculative features in the opinions of the rating agencies.
The Fund may invest up to 10% of its total assets in convertible bonds rated
lower than investment grade, that is, below BBB by S&P or Baa by Moody's.
These bonds, which are commonly referred to as "junk bonds", are considered to
be predominantly speculative with respect to the issuer's ability to pay
interest and repay principal and may be more sensitive to adverse conditions.
The Fund's policy of investing a portion of its assets in lower rated
securities thus entails greater risks than those associated with investment in
higher rated securities. The Fund also may invest in securities that are
comparably rated by another NRSRO and unrated securities deemed by Mitchell
Hutchins to be of comparable quality.
RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of
the mortgage- and asset-backed securities in which the Fund may invest differ
from those of traditional debt securities. Among the major differences are
that interest and principal payments 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. Generally, prepayments on fixed-rate mortgage loans
will increase during a period of falling interest rates and decrease during a
period of rising interest rates. Mortgage- and asset-backed securities may
also 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. 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 Fund's yield. 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
variety of investment characteristics, such as yield, effective maturity and
interest 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
either above or below market rates at the time of issuance, so 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 receive all
or a portion of the interest but none of the principal from the underlying
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 interest
(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
discount generally are extremely sensitive to the rate of principal payments
(including 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
-----------
- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
fully his or her initial investment even if the security is government issued
or guaranteed or is rated AAA or the equivalent.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which the Fund may invest, including IO and PO
classes of mortgage-backed 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 interest rate changes or
other factors that may affect the volatility of securities held by the Fund,
the Fund's ability to meet its investment objective may be reduced.
See Appendix A to the Statement of Additional Information for more information
concerning the types of mortgage-backed securities in which the Fund may
invest.
RISKS OF ZERO COUPON SECURITIES. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. government securities. Zero coupon
securities 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
distribute as dividends amounts that are greater than the total amount of cash
it actually 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 reduced 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 comparable maturities that make current distributions of
interest in cash.
TACTICAL ALLOCATION FUND
LIMITS OF ASSET ALLOCATION STRATEGY. Although it seeks total return,
consisting of both capital appreciation and current income, in following its
asset allocation strategy, the Fund may not achieve as high a level of either
capital appreciation or current income as a fund that has only one of those
objectives as its primary objective. In addition, the need to qualify as a
regulated investment company for federal income tax purposes may limit the
Fund's ability to adhere rigidly to the recommendations of the Model. See
"Dividends & Taxes."
INDEX INVESTING AND OPEN-END INVESTMENT COMPANIES. While the Fund's stock
portion attempts to duplicate, before deduction of operating expenses, the
investment results of the S&P 500 Index, the investment results of the stock
portion generally are not identical to those of the Index. Deviations from the
performance of the S&P 500 Index may result from shareholder purchases and
sales of shares that occur daily, as well as from expenses borne by the Fund.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND RELATED STRATEGIES. In an attempt to reduce the overall risk of
its investments, known as hedging, to enhance income or return or to increase
or decrease its exposure to an asset class prior to purchasing or selling
securities, each Fund may use certain strategies, known as "hedging"
strategies. These hedging strategies involve derivative contracts, including
options (on securities, futures and indexes) and futures contracts (on stock
indexes and interest rates). In addition, new financial products and risk
management techniques continue to be developed and may be used if consistent
with the Funds' investment objectives and policies. The Funds' ability to use
the strategies may be limited by market conditions, regulatory limits and tax
considerations. The Statement of Additional Information for the Funds contains
further information on these strategies.
Each Fund may enter into options and futures contracts under which the full
value of its portfolio is at risk. Under normal circumstances, however, the
Fund's use of these strategies will place at risk a much smaller portion of
its assets.
The Funds might not use any hedging strategies, and there can be no assurance
that any strategy used will succeed. If Mitchell Hutchins is incorrect in its
judgment on interest rates, market values or other economic factors in using a
particular hedging strategy, a Fund might have lower net income and a net loss
on the investment. Each of these strategies involves certain risks, which
include:
. the fact that the skills needed to use hedging instruments are different
from those needed to select securities for the Funds,
----------
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
. the possibility of imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the
securities being hedged,
. possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to "cover"
or to segregate securities, and
. the possibility that the Fund is unable to close out or liquidate its
position.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as "derivatives" because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used in hedging strategies.
There is only limited consensus as to what constitutes a "derivative"
security. However, in Mitchell Hutchins' view, derivative securities also
include "stripped" securities and specialty structured types of mortgage- and
asset-backed securities, such as IOs, POs and inverse floaters. The market
value of derivative instruments and securities sometimes is more volatile than
that of other investments, and each type of derivative instrument may pose its
own special risks. Mitchell Hutchins takes these risks into account in its
management of the Funds.
OTHER INFORMATION. Each Fund may purchase securities on a when-issued basis or
may purchase or sell securities for delayed delivery. A Fund generally would
not pay for such securities or start earning interest on them until they are
delivered, but it would immediately assume the risks of ownership, including
the risk of price fluctuation. Each Fund may borrow money for temporary or
emergency purposes, but not in excess of 10% (Balanced Fund) or 20% (Tactical
Allocation Fund) of its total assets, including (in the case of Balanced Fund)
reverse repurchase agreements involving up to 5% of its total assets.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities, including repurchase agreements maturing in more than
seven days, certain cover for over-the-counter ("OTC") options and securities
whose disposition is restricted under the federal securities laws. The Funds
do not consider securities that are eligible for resale under SEC Rule 144A to
be illiquid if Mitchell Hutchins has determined them to be liquid, based upon
the trading markets for the securities under procedures approved by the Funds'
boards.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
U.S. and foreign brokers, dealers and banks in an amount up to 33% of the
Fund's total assets taken at market value. The Fund's loans of securities will
be collateralized in an amount at least equal to the current market value of
the loaned securities. Lending securities enables the Funds to earn additional
income, but could result in a loss or delay in recovering these securities.
- -------------------------------------------------------------------------------
How to Buy Shares
- -------------------------------------------------------------------------------
Class Y shares are sold to eligible investors at the net asset value next
determined after the purchase order is received at PaineWebber's New York City
headquarters. No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to rule 12b-1 distribution or service fees. The
Funds and Mitchell Hutchins reserve the right to reject any purchase order and
to suspend the offering of the Class Y shares for a period of time. Mitchell
Hutchins, the distributor for each Fund's Class Y shares, has appointed
PaineWebber to serve as the exclusive dealer for each Fund's Class Y shares.
INSIGHT
An investor who purchases $50,000 or more of shares of the mutual funds that
are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing System SM and certain other specified mutual
funds) may take part in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase Class Y shares.
INSIGHT offers comprehensive investment services, including a personalized
asset allocation investment strategy using an appropriate combination of
funds, monitoring of investment performance and comprehensive quarterly
reports that cover market trends, portfolio summaries and personalized account
information.
Participating in INSIGHT is subject to payment of an advisory fee to
PaineWebber at the maximum annual rate of 1.5% of assets held through the
program (generally charged quarterly in advance), which covers all INSIGHT
investment advisory services and program administration fees. Employees of
PaineWebber and its affiliates are entitled to a 50%
----------
- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Tactical Allocation Fund
Balanced Fund
reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT
clients may elect to have their INSIGHT fees charged to their PaineWebber
accounts (by the automatic redemption of money market fund shares) or, if a
qualified plan, invoiced.
Please contact your PaineWebber investment executive or PaineWebber
correspondent firm or call 1-800-647-1568 for more information concerning
mutual funds that are available to INSIGHT participants or for other INSIGHT
program information.
ACQUISITION OF CLASS Y SHARES BY OTHERS
Present holders of Class Y shares of a former Mitchell Hutchins/Kidder,
Peabody ("MH/KP") mutual fund who are not current INSIGHT participants may
acquire Class Y shares of a Fund only when those shares are issued in
connection with the reorganization of the MH/KP mutual fund into that Fund.
This category includes former employees of Kidder, Peabody & Co., Incorporated
("Kidder, Peabody"), their associated accounts, present and former directors
and trustees of the MH/KP mutual funds.
Dividends and other distributions on Class Y shares of a Fund issued in
connection with the reorganization will be paid in additional Class Y shares
at net asset
value, unless the shareholder has requested cash payments. These holders may
not otherwise purchase additional Class Y shares.
Each Fund is authorized to offer Class Y shares to certain other investment
advisory programs that are sponsored by PaineWebber and that may invest in
PaineWebber mutual funds. At present, however, INSIGHT participants are the
only purchasers in this category.
- -------------------------------------------------------------------------------
How to Sell Shares
- -------------------------------------------------------------------------------
Class Y shares may be redeemed at their net asset value and redemption
proceeds will be paid after receipt of a redemption request, as described
below.
REDEMPTIONS THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS
INSIGHT participants who are Class Y shareholders may submit redemption
requests to their investment executives or correspondent firms in person or by
telephone, mail or wire. As agent for the Funds, PaineWebber may honor a
redemption request by repurchasing Class Y shares from a redeeming shareholder
at the shares net asset value next determined after receipt of the request by
PaineWebber's New York City headquarters. Within three Business Days after
receipt of the request, repurchase proceeds will be paid by check or credited
to the shareholder's brokerage account at the election of the shareholder.
PaineWebber investment executives and correspondent firms are responsible for
promptly forwarding redemption requests to PaineWebber's New York City
headquarters. A "Business Day" is any day, Monday through Friday, on which the
New York Stock Exchange is open for business.
PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to PFPC Inc., the Funds'
Transfer Agent ("Transfer Agent"), for treatment as described below.
REDEMPTIONS THROUGH THE TRANSFER AGENT
Shareholders also may redeem Fund shares through the Transfer Agent.
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. A redemption request will be executed at the net asset value next
computed after it is received in "good order," 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, partnerships and
corporations and (4) duly endorsed share certificates, if any. Shareholders
are responsible for ensuring that a request for redemption is received in
"good order."
----------
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
ADDITIONAL INFORMATION ON REDEMPTIONS
A shareholder may have redemption proceeds of $1 million or more wired to the
shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's investment
executive at PaineWebber or one of its correspondent firms. If a shareholder
requests redemption of shares which were purchased recently, a 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 each Fund incurs certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to redeem all Fund shares in any
shareholder account having a net asset value below $500. If a 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. A
Fund will not redeem accounts that fall below the minimum required level solely
as a result of a reduction in net asset value per share.
- --------------------------------------------------------------------------------
Management
- --------------------------------------------------------------------------------
Balanced Fund is a series of PaineWebber Master Series, Inc. ("Corporation")
and Tactical Allocation Fund is a series of PaineWebber Investment Trust
("Trust"). The board of directors for the Corporation, and the board of
trustees of the Trust oversee the Funds' operations and, as part of this
overall management responsibility, oversee various organizations responsible
for the day-to-day management of each Fund. Each board has appointed Mitchell
Hutchins as investment adviser and administrator responsible for the Fund's
operations (subject to the authority of the board).
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On May 31, 1996, Mitchell Hutchins was adviser or sub-adviser
of 31 investment companies with 65 separate portfolios and aggregate assets of
approximately $30.4 billion.
Each board has determined that brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.
ABOUT THE INVESTMENT ADVISER
As investment adviser for Balanced Fund and Tactical Allocation Fund, Mitchell
Hutchins makes and implements all investment decisions and supervises all
aspects of each Fund's operations.
T. Kirkham Barneby is responsible for the asset allocation decisions for both
Balanced Fund and Tactical Allocation Fund. He has been responsible for the
day-to-day management of Tactical Allocation Fund since February 1995. Mr.
Barneby is a managing director and chief investment officer of quantitative
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 a senior
vice president responsible for quantitative management and asset allocation
models.
Mark A. Tincher is responsible for the day-to-day management of the equity
portion of Balanced Fund. Mr. Tincher is a managing director and chief
investment officer of equities of Mitchell Hutchins responsible for overseeing
the management of equity investments. From March 1988 to March 1995, Mr.
Tincher worked for Chase Manhattan Private Bank where he was a vice president.
Mr. Tincher directed the U.S. funds management and equity research area at
Chase and oversaw the management of all Chase U.S. equity funds (the Vista
Funds and Trust Investment Funds).
Dennis L. McCauley is responsible for the day-to-day management of the debt
securities portion of Balanced Fund. Mr. McCauley is a managing director and
chief investment officer of fixed income investments of Mitchell Hutchins
responsible for overseeing 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 investments responsible for developing and managing
investment strategy for all fixed income and cash management investments of
IBM's pension fund and self-insured 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 investment committee.
----------
- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Nirmal Singh and Craig M. Varrelman, CFA, assist Mr. McCauley in managing
Balanced Fund's debt securities. Mr. Singh and Mr. Varrelman are both first
vice presidents of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
September 1993, Mr. Singh was with Merrill Lynch Asset Management, Inc., where
he was a member of the portfolio management team. From 1990 to 1993, Mr. Singh
was a senior portfolio manager at Nomura Mortgage Fund Management Corporation.
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
Balanced 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 Balanced
Fund in August 1995.
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 each Fund's
investments.
Mitchell Hutchins 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.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. For the most
recent fiscal year, Mitchell Hutchins received a monthly fee from Balanced
Fund for these services at the effective annual rate of 0.75% of the Fund's
average daily net assets and from Tactical Allocation Fund at the effective
annual rate of 0.50% of the Fund's average daily net assets. The management
fee payable to Mitchell Hutchins by Balanced Fund is greater than those paid
by most funds.
Balanced Fund also pays PaineWebber an annual fee of $4.00 per active
shareholder account held at PaineWebber for certain services not provided by
the Transfer Agent. Tactical Allocation Fund does not pay this fee. The Funds
incur other expenses, such as custody and transfer agency fees and
professional fees.
- -------------------------------------------------------------------------------
Determining the Shares' Net Asset Value
- -------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
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.
Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available,
assets are valued at fair value as determined in good faith by or under the
direction of its board. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining to maturity,
unless its board determines that this does not represent fair value.
Investments denominated in foreign currencies are valued daily in U.S. dollars
based on the then-prevailing exchange rates.
- -------------------------------------------------------------------------------
Dividends & Taxes
- -------------------------------------------------------------------------------
DIVIDENDS
Tactical Allocation Fund pays dividends quarterly from its net investment
income and Balanced Fund pays dividends semi-annually from its net investment
income. Each Fund also may distribute net short-term capital gain, if any,
with the periodic dividend. Net investment income includes dividend income,
accrued
----------
- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
- --------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
interest and discount, less amortization of premium and accrued expenses.
Substantially all of each Fund's net capital gain (the excess of net long-term
capital gain over net short-term capital loss), if any, and any undistributed
net short-term capital gain, is distributed at least annually. The Funds may
make additional distributions if necessary to avoid income or excise taxes.
While the Funds will not declare any dividend in excess of the amount of net
investment 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 Class Y shares of each Fund are
calculated at the same time and in the same manner as dividends and
distributions on other classes of shares.
The Funds' dividends and capital gain distributions are paid in additional Fund
shares of the same class at net asset value, unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
capital gain distributions in cash, either mailed to the shareholder by check
or credited to the shareholder's PaineWebber account, should contact their
investment executive at PaineWebber or one of its correspondent firms or
complete the appropriate section of the account application. For PW SIP
participants, the Fund's Class Y dividends and distributions are paid in
additional Class Y shares at net asset value unless the transfer agent is
instructed otherwise.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will not have to
pay Federal income tax on the part of its investment company taxable income
(generally consisting of net investment income and net short-term capital gain)
and net capital gain that it distributes to its shareholders. These
requirements may limit the ability of Tactical Allocation Fund to reallocate
its assets under certain circumstances.
Dividends from each Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) generally are taxable to shareholders as
ordinary income. Distributions of each 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 generally will not be required
to pay tax on amounts distributed to them.
Balanced 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.
YEAR-END TAX REPORTING
Each 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 special
treatment.
WITHHOLDING REQUIREMENTS
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate is also required from dividends
and capital gain distributions payable so those shareholders who otherwise are
subject to backup withholding.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
When shareholders sell (redeem) shares, it may result in a taxable gain or
loss. This depends upon whether the shareholders receive more or less than
their adjusted basis for the shares (which normally takes into account any
initial sales charge paid on Class A shares). An exchange of a Fund's shares
for shares of another PaineWebber mutual fund generally will have similar tax
consequences. In addition, if a Fund's shares are bought within 30 days before
or after selling other shares of the Fund (regardless of class) at a loss, all
or a portion of that loss will not be deductible and will increase the basis of
the newly purchased shares.
Qualified profit-sharing plans such as the PW SIP generally pay no Federal
income tax. Individual participants in the PW SIP should consult the plan
documents and their own advisers for information on the tax consequences
associated with participating in the PW SIP.
* * * *
Because the foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders, a further discussion
is contained in the Statement of Additional Information. Prospective
shareholders are urged to consult their tax advisors.
----------
- --------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
- -------------------------------------------------------------------------------
General Information
- -------------------------------------------------------------------------------
ORGANIZATION
BALANCED FUND
Balanced Fund is a diversified series of the Corporation, an open-end
management investment company that was incorporated in Maryland on October 29,
1985. The Corporation commenced operations as an investment company on March
27, 1986. The Corporation has authority to issue 10 billion shares of common
stock of separate series, par value $.001 per share; three billion of these
shares are classified as shares of Balanced Fund, and the remaining shares are
classified as shares of the Corporation's other series. Prior to August 1995,
Balanced Fund was known as "PaineWebber Asset Allocation Fund."
TACTICAL ALLOCATION FUND
Tactical Allocation Fund is a series of the Trust, which was formed as a
business trust under the laws of The Commonwealth of Massachusetts on March
28, 1991. The Fund commenced operations on July 22, 1992. The Declaration
authorizes the Trust's board of trustees to create separate series, and within
each series separate Classes, of an unlimited number of shares of beneficial
interest, par value $.001 per share. As of the date of this Prospectus, the
trustees have established two such series, representing interests in Tactical
Allocation Fund described in this Prospectus and in one other series.
SHARES
The shares of each Fund are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. Each class represents an identical
interest in the respective Fund's investment portfolio and has the same
rights, privileges and preferences. However, each class may differ with
respect to sales charges, if any, distribution and/or service fees, if any,
other expenses allocable exclusively to each class, voting rights on matters
exclusively affecting that class, and its exchange privilege. The different
sales charges and other expenses applicable to the different classes of shares
of the Funds will effect the performance of those classes.
Each share of each Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due
to the differing expenses of the classes, dividends on Class B and Class C
shares are likely to be lower than for Class A shares and are likely to be
lower on Class Y shares than for any other class of shares.
More information concerning Class A, Class B and Class C shares may be
obtained from an investment executive at PaineWebber or one of its
correspondent firms or by calling toll-free 1-800-647-1568.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for misstatements in the Prospectus about another Fund.
The boards have considered this factor in approving the use of a single,
combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of all the shares of
the Corporation or the Trust may elect all of the board members of the
respective Fund. The shares of the Funds will be voted separately except when
an aggregate vote of all series in the Corporation or the Trust is required by
law and except that only the shareholders of a particular class of a Fund may
vote on matters affecting only that class, such as the terms of a Plan as it
relates to a class.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Corporation or the Trust may remove a board member through a declaration
in writing or by vote cast in person or by proxy at a meeting called for that
purpose. A meeting will be called to vote on the removal of a board member at
the written request of holders of 10% of the Corporation's or Trust's
outstanding shares.
REPORTS TO SHAREHOLDERS
Each Fund sends Fund shareholders audited annual and unaudited semi-annual
reports, each of which includes a list of the investment securities held by
the Fund as of the end of the period covered by the report. The Statement of
Additional Information is available to shareholders upon request.
----------
- --------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
- -------------------------------------------------------------------------------
-------------------
PaineWebber Balanced Fund Tactical Allocation Fund
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Funds' custodian and recordkeeping
agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds'
transfer and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
-----------
- --------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
- --------------------------------------------------------------------------------
------------------
- ----------------------------------------------------------------------------
PaineWebber Family of Funds
----------------------------------------------------------------------------
. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Value Fund
U.S. Government Income Fund Utility Income Fund
. PAINEWEBBER TAX-FREE . PAINEWEBBER GLOBAL FUNDS
BOND FUNDS
Emerging Markets Equity Fund
California Tax-Free Income Fund Global Equity Fund
Municipal High Income Fund Global Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund . PAINEWEBBER MONEY MARKET FUND
. PAINEWEBBER ASSET
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation 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. Please read it carefully before
investing. It is important you have all the information you need to make a
sound investment decision.
---------
- --------------------------------------------------------------------------------
<PAGE>
PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The two funds named above (each a "Fund" and, collectively, "Funds") are
series of open-end management investment companies. PaineWebber Balanced Fund
("Balanced Fund") is a diversified series of PaineWebber Master Series, Inc.
("Corporation"), a professionally managed mutual fund. Balanced 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.
PaineWebber Tactical Allocation Fund ("Tactical Allocation Fund") is a
diversified series of PaineWebber Investment Trust ("Trust"), a professionally
managed mutual fund. Tactical Allocation Fund seeks total return, consisting
of long-term capital appreciation and current income, by utilizing a
systematic investment strategy that actively allocates the Fund's assets among
common stocks, U.S. Treasury Notes and U.S. Treasury bills.
The investment adviser, administrator and distributor for each Fund 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 Funds' current Prospectus, dated July 1,
1996. 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, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELD FACTORS AND RATINGS. Standard & Poor's, a division of The McGraw Hill
Companies, Inc. ("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. Balanced 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 Balanced Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the
<PAGE>
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 Balanced Fund invests
are dependent on a variety of factors, including general money market
conditions, general conditions in the bond market, the financial condition of
the issuer, the size of the offering, the maturity of the obligation and its
rating. There is a wide variation in the quality of bonds, both within a
particular classification and between classifications. An issuer's obligations
under its bonds are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of bond holders or other
creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the
payment of interest and principal on their bonds.
MORTGAGE- AND ASSET-BACKED SECURITIES. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable from,
mortgage loans secured by real property and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Multi-class
pass-through securities and collateralized mortgage obligations are
collectively referred to herein as CMOs. The U.S. Government mortgage-backed
securities in which Balanced 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, including savings
associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively "Private Mortgage Lenders"). Payments
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
issued 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 Balanced Fund may
invest, see Appendix B to this Statement of Additional Information.
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
installment sale contracts, other installment sale contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving 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 certain time period by a letter of credit or pool insurance
policy issued by a financial institution unaffiliated with the issuer, or
other credit enhancements may be present.
ADJUSTABLE RATE AND FLOATING RATE MORTGAGE-BACKED SECURITIES. Balanced 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
2
<PAGE>
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 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
3
<PAGE>
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
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.
HEDGING AND RELATED INCOME STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins may use a variety of financial instruments ("Strategic
Instruments"), including certain options, futures contracts (sometimes
referred to as "futures") and options on futures contracts to attempt to hedge
Funds' portfolios and to enhance income and return, and to increase or
decrease a Fund's exposure to an asset class in anticipation of purchasing or
selling securities. Appendix C to the Statement of Additional Information
describes the Strategic Instruments that the Funds may use.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Strategic Instrument
intended partially or fully to offset potential declines in the value of one
or more investments held in a Fund's portfolio. Thus, in a short hedge a Fund
takes a position in a Strategic Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged. For
example, a Fund might purchase a put option on a security to hedge against a
potential decline in the value of that security. If the price of the security
declined below the exercise price of the put, the Fund could exercise that put
and thus limit its loss below the exercise price to the premium paid plus
transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, the
Fund might be able to close out the put option and realize a gain to offset
the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Strategic Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a
long hedge a Fund takes a position in a Strategic Instrument whose price is
expected to move in
4
<PAGE>
the same direction as the price of the prospective investment being hedged.
For example, a Fund might purchase a call option on a security it intends to
purchase in order to hedge against an increase in the cost of the security. If
the price of the security increased above the exercise price of the call, the
Fund could exercise the call and thus limit its acquisition cost to the
exercise price plus the premium paid and transaction costs. Alternatively, the
Fund might be able to offset the price increase by closing out an appreciated
call option and realizing a gain.
Each Fund may purchase and write (sell) covered straddles on securities or
indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where
the exercise price of the put is less than or equal to the exercise price of
the call. The Fund might enter into a long straddle when Mitchell Hutchins
believes it likely that interest rates will be more volatile during the term
of the option than the option pricing implies. A short straddle is a
combination of a call and a put written on the same security where the
exercise price of the put is less than or equal to the exercise price of the
call. A Fund might enter into a short straddle when Mitchell Hutchins believes
it unlikely that interest rates will be as volatile during the term of the
option as the option pricing implies.
Strategic Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund
owns or intends to acquire. Strategic Instruments on debt securities may be
used to hedge either individual securities or broad fixed income market
sectors.
The use of Strategic Instruments is subject to applicable regulations of the
Securities and Exchange Commission ("SEC"), the several options and futures
exchanges upon which they are traded, the Commodity Futures Trading Commission
("CFTC") and various state regulatory authorities. In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expect to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develop new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent
that they are consistent with the Funds' investment objectives and permitted
by the Funds' investment limitations and applicable regulatory authorities.
The Fund's Prospectus or Statement of Additional Information will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
Special Risks of Hedging Strategies. The use of Strategic Instruments
involves special considerations and risks, as described below. Risks
pertaining to particular Strategic Instruments are described in the sections
that follow:
(1) Successful use of most Strategic Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Strategic Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Strategic Instrument and price movements of the
investments being hedged. For example, if the value of a Strategic Instrument
used in a short hedge increased by less than the decline in value of the
hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors
5
<PAGE>
unrelated to the value of the investments being hedged, such as speculative or
other pressures on the markets in which Strategic Instruments are traded. The
effectiveness of hedges using Strategic Investments Indices will depend on the
degree of correlation between price movements in the index and price movements
in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Strategic Instrument. Moreover, if the price of
the Strategic Instrument declined by more than the increase in the price of
the security, the Fund could suffer a loss. In either such case, the Fund
would have been in a better position had it not hedged at all.
(4) As described below, the Funds might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Strategic Instruments involving obligations to third parties
(i.e., Strategic Instruments other than purchased options). If the Fund were
unable to close out its positions in such Strategic Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a
Fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. A Fund's ability to close out a
position in a Strategic Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of a contra party to enter into a
transaction closing out the position. Therefore, there is no assurance that
any hedging position can be closed out at a time and price that is favorable
to a Fund.
Cover for Hedging Strategies. Transactions using Strategic Instruments,
other than purchased options, expose the Funds to an obligation to another
party. A Fund will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities or other options on
futures contracts or (2) cash, receivables and short-term liquid debt
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. The Funds will
comply with SEC guidelines regarding cover for hedging transactions and will,
if the guidelines so require, set aside cash, U.S. government securities or
other liquid, high-grade debt securities in a segregated account with its
custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Strategic Instrument is open, unless they
are replaced with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Options. The Funds may purchase put and call options, and write (sell)
covered put and call options, on equity and debt securities. The purchase of
call options serves as a long hedge, and the purchase of put options serves as
a short hedge. Writing covered put or call options can enable a Fund to
enhance income by reason of the premiums paid by the purchasers of such
options. In addition, writing covered put options serves as a limited long
hedge, because increases in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options serves as a
limited short hedge, because declines in the value of the hedged investment
would be offset to the extent of the premium received for
6
<PAGE>
writing the option. However, if the security appreciates to a price higher
than the exercise price of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to sell the security at less
than its market value. The securities or other assets used as cover for OTC
options written by the Funds would be considered illiquid to the extent
described below under "Investment Policies and Restrictions--Illiquid
Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Generally, over-the-counter ("OTC") options on
debt securities are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option. Options that expire unexercised have no value.
The Funds may effectively terminate their rights or obligations under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or
call option it had purchased by writing an identical put or call option; this
is known as a closing sale transaction. Closing transactions permit the Funds
to realize profits or limit losses on an option position prior to its exercise
or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. in contrast, OTC
options are contracts between a Fund and its contra party (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the contra party
to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction. The Funds will enter into OTC option transactions only with
contra parties that have a net worth of at least $20 million.
The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected
to be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
7
<PAGE>
The Funds may purchase and write put and call options on common stock
indices and indices of debt securities in much the same manner as the more
traditional options discussed above, except the index options may serve as a
hedge against overall fluctuations in the equity or debt securities market (or
market sectors) rather than anticipated increases or decreases in the value of
a particular security.
Guidelines for Options. The Funds' use of options is governed by the
following guidelines, which can be changed by each Fund's board of directors
without shareholder vote:
1. Each Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums
on all other options purchased by the Fund, does not exceed 5% of the Fund's
total assets.
2. The aggregate value of securities underlying put options written by each
Fund, determined as of the date the put options are written, will not exceed
50% of the Fund's net assets.
3. The aggregate premiums paid on all options (including options on
securities, stock indices and indices of debt securities and options on
futures contracts) purchased by each Fund that are held at any time will not
exceed 20% of the Fund's net assets.
Futures. The Funds may purchase and sell interest rate futures contracts,
stock index futures contracts and debt securities index futures contracts. The
Funds also may purchase put and call options, and write covered put and call
options, on the futures contracts they are allowed to purchase and sell. The
purchase of futures or call options thereon can serve as a long hedge, and the
sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a
limited short hedge, and writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar to that used for
writing covered call options on securities or indices.
Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of a Fund, the Fund may sell an interest rate futures contract or a call
option thereon, or purchase a put option on that futures contract. If Mitchell
Hutchins wishes to lengthen the average duration of a Fund, the Fund may buy
an interest rate futures contract or a call option thereon or sell a put
option thereon.
The Funds may also write put options on interest rate futures contracts
while at the same time purchasing call options on the same futures contracts
in order synthetically to create a long futures contract position. Such
options would have the same strike prices and expiration dates. The Fund will
engage in this strategy only when it is more advantageous to the Fund than is
purchasing the futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is returned to the Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally
in the future by regulatory action.
8
<PAGE>
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a put or call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures
may be closed only on an exchange or board of trade that provides a secondary
market. Each Fund intends to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid, secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or options position due to the
absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to
market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might
be increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
Guidelines for Futures and Related Options. The Funds' use of futures and
related options is governed by the following guidelines, which can be changed
by each Fund's board without shareholder vote:
1. To the extent each Fund enters into futures contracts and options on
futures positions traded on a commodities exchange that are not for bona fide
hedging purposes (as defined by the CFTC), the aggregate
9
<PAGE>
initial margin and premiums on those positions (excluding the amount by which
options are "in-the-money") may not exceed 5% of the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities, stock indices and indices of debt securities and options on
futures contracts) purchased by each Fund that are held at any time will not
exceed 20% of the Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by each Fund will not exceed 5% of the Fund's total
assets.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
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. Each 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 a 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. Each 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 each Fund's board. Mitchell Hutchins will review and
monitor the creditworthiness of those institutions under the board's general
supervision.
REVERSE REPURCHASE AGREEMENTS. Balanced 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 a Fund's net asset value.
When a 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."
Each 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.
10
<PAGE>
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities. Under current guidelines of the staff of the 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 Balanced
Fund's board. 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 each Fund's
board). 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, a Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, 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 a 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.
Each Fund's board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of
factors in reaching liquidity decisions, including (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins 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 Balanced Fund may
invest include securities issued by major corporations without registration
under the 1933 Act in reliance on the exemption from such
11
<PAGE>
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 Fund's board. 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 each
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 a 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.
Balanced 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 Funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign
taxes to which the Fund would be subject.
CONVERTIBLE SECURITIES. Balanced Fund is permitted to invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security
entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are
usually subordinated to comparable non-convertible securities. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed
income security. Convertible securities have unique investment characteristics
in that they generally (1) have higher yields than common stocks, but lower
yields than comparable non-convertible securities, (2) are less subject to
fluctuation in value than the underlying stock because they have fixed income
characteristics and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases.
12
<PAGE>
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 each 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." Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to 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. Each Fund 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.
LENDING PORTFOLIO SECURITIES. As indicated in the Prospectus, each Fund is
authorized to lend up to 33 1/3 of its portfolio securities to broker-dealers
or institutional investors that Mitchell Hutchins deems qualified, but only
when the borrower maintains acceptable collateral with the Fund's custodian,
marked to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral
is limited to cash, U.S. government securities and irrevocable letters of
13
<PAGE>
credit that meet certain guidelines established by Mitchell Hutchins. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each will retain authority to terminate any
loan at any time. A Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. A Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. A Fund will retain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the Fund's
interest.
INVESTMENT LIMITATIONS OF THE FUNDS
Each Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that issuer
or the Fund would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Fund's total assets
may be invested without regard to this limitation, and except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued by
other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more
of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities.
(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ("1940 Act") and then not in excess of
33 1/3% of the Fund's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the Fund
may borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a
loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Fund may
14
<PAGE>
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by
reason of such enforcement until that real estate can be liquidated in an
orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or
enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
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 a Fund or (2) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at
the time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.
The following investment restrictions may be changed by the vote of the
Fund's board without shareholder approval. Each 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 (in
the case of Balanced Fund) or Trust (in the case of Tactical Allocation
Fund) 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.
(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.
(6) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make
margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(7) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b) maintain
short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
15
<PAGE>
(8) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition.
(9) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not
apply to securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation, or merger.
(10) purchase securities while borrowing in excess of 5% of its total
assets are outstanding.
(11) invest in real estate limited partnerships.
16
<PAGE>
DIRECTORS, TRUSTEES AND OFFICERS
The directors, trustees and executive officers of the Corporation and/or the
Trust, their ages, business addresses and principal occupations during the
past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 49 Director/Trustee and Mrs. Alexander is president, chief
President executive officer and a director of
Mitchell Hutchins (since January
1995) and also is an executive vice
president and a director of
PaineWebber. Mrs. Alexander is
president and a director or trustee
of 30 investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment advis-
er.
Richard Q. Armstrong; 60 Director/Trustee Mr. Armstrong is chairman and prin-
78 West Brother Drive cipal of RQA Enterprises (manage-
Greenwich, CT 06830 ment consulting firm) (since April
1991 and principal occupation since
March 1995). Mr. Armstrong is also
a director of HiLo Automotive, Inc.
He was chairman of the board, chief
executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-
March 1995). Mr. Armstrong was a
partner of The New England Consult-
ing Group (management consulting
firm) (December 1992-September
1993). He was managing director of
LVMH U.S. Corporation (U.S. subsid-
iary of the French luxury goods
conglomerate, Luis Vuitton Moet
Hennessey Corporation) (1987-1991)
and chairman of its wine and spir-
its subsidiary, Schieffelin & Som-
erset Company (1987-1991). Mr. Arm-
strong is a director or trustee of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as in vestment adviser.
E. Garrett Bewkes, Director/Trustee and Mr. Bewkes is a director of Paine
Jr.**; 69 Chairman of the Board of Webber Group Inc. ("PW Group")
Directors/Trustees (holding company of PaineWebber and
Mitchell Hutchins). Prior to Decem-
ber 1995, he was a consultant to PW
Group. Prior to 1988, he was chair-
man of the board, presi-
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
dent and chief executive officer of
American Bakeries Company.
Mr. Bewkes is a director of Inter-
state Bakeries Corporation and
NaPro BioTherapeutics, Inc. Mr.
Bewkes is a director or trustee of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Richard R. Burt; 49 Director/Trustee Mr. Burt is chairman of Interna-
1101 Connecticut Avenue, N.W. tional Equity Partners (interna-
Washington, D.C. 20036 tional investments and consulting
firm) (since March 1994) and a
partner of McKinsey & Company (man-
agement consulting firm) (since
1991). He is also a director of
American Publishing Company. He was
the chief negotiator in the Strate-
gic Arms Reduction Talks with the
former Soviet Union (1989-1991) and
the U.S. Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 46 Director/Trustee Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982.
She is a member of the Financial
Women's Association and Women's
Economic Roundtable, and is em-
ployed as a regular panelist on
Wall Street Week with Louis
Rukeyser. She also serves on the
Board of Overseers of New York
University's Stern School of Busi-
ness. Ms. Farrell is a director or
trustee of 29 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Meyer Feldberg; 54 Director/Trustee 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. Mr. Feldberg is
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
also a director of AMSCO Interna-
tional Inc., Federated Department
Stores, Inc. and New World Communi-
cations Group Incorporated. Mr.
Feldberg is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment advis-
er.
George W. Gowen; 66 Director/Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York Miller. Prior to May 1994, he was a
10017 partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a direc-
tor of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a director
or trustee of 29 investment compa-
nies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Frederic V. Malek; 59 Director/Trustee 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. Commercial Group Inc. (real es-
20005 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, res-
taurants, airline catering and con-
tract feeding), where he most re-
cently was an executive vice presi-
dent and president of Marriott Ho-
tels and Resorts. Mr. Malek is also
a director of American Management
Systems, Inc. (management consult-
ing and computer-related services),
Automatic Data processing, Inc.,
Avis, Inc. (passenger car rental),
FPL Group, Inc. (electric servic-
es), National Education Corporation
and Northwest Airlines Inc. Mr.
Malek is a director or trustee of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
Carl W. Schafer; 60 Director/Trustee Mr. Schafer is president of the At-
P.O. Box 1164 lantic Foundation (charitable foun-
Princeton, New Jersey dation supporting mainly oceano-
08542 graphic exploration and research).
He also is a director of Roadway
Express, Inc. (trucking), The
Guardian Group of Mutual Funds, Ev-
ans Systems, Inc. (a motor fuels,
convenience store and diversified
company), Hidden Lake Gold Mines
Ltd. (gold mining), Electronic
Clearing House, Inc. (financial
transactions processing), Wainoco
Oil Corporation and Nutraceutix
Inc. (biotechnology). Prior to Jan-
uary 1993, Mr. Schafer was chairman
of the Investment Advisory Commit-
tee of the Howard Hughes Medical
Institute. Mr. Schafer is a direc-
tor or trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment
adviser.
John R. Torell III; 56 Director/Trustee Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial advi-
Suite 4605 sory firm), chairman of Telesphere
New York, NY 10153 Corporation (electronic provider of
financial information), and a part-
ner of Zilkha & Company (merchant
banking and private investment com-
pany). He is the former chairman
and chief executive officer of For-
tune Bancorp (1990-1991 and 1990-
1994, respectively), the former
chairman, president and chief exec-
utive officer of CalFed, Inc. (sav-
ings association) (1988 to 1989)
and former president of Manufactur-
ers Hanover Corp. (bank) (prior to
1988). Mr. Torell is also a direc-
tor of American Home Products
Corp., Volt Information Sciences
Inc., and New Colt Inc. (armament
manufacturer). Mr. Torell is a di-
rector or trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
T. Kirkham Barneby; 49 Vice President Mr. Barneby is a managing director
and chief investment officer--quan-
titative investments of Mitchell
Hutchins. Prior to September 1994,
he was a senior vice president at
Vantage Global Management. Prior to
June 1993, he was a senior vice
president at Mitchell Hutchins. Mr.
Barneby is a vice president of four
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 37 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
manager--legal administration of
Mitchell Hutchins. Ms. Boyle is a
vice president of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. Mr. Maher is a vice pres-
ident and assistant treasurer of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director
(Master Series, Inc.) and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income investments of IBM
Corporation. Mr. McCauley is a vice
president of 19 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Susan P. Messina; 35 Vice President Ms. Messina is a senior vice presi-
(Master Series, Inc.) dent and portfolio manager of
Mitchell Hutchins. Ms. Messina has
been with Mitchell
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
Hutchins since 1982. Ms. Messina is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment
adviser.
Ann E. Moran; 38 Vice President Ms. Moran is a vice president of
and Assistant Treasurer Mitchell Hutchins. Ms. Moran is a
vice president and assistant trea-
surer of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
45 and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is
a vice president of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice presi-
and Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 1994, he was a vice pres-
ident of BlackRock Financial Man-
agement L.P. Prior to August 1992,
he was an audit manager with Ernst
& Young LLP. Mr. Schubert is a vice
president and assistant treasurer
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president
(Master Series, Inc.) and a portfolio manager of Mitchell
Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH CORPORATION/TRUST OTHER DIRECTORSHIPS
----------------- ---------------------- --------------------
<S> <C> <C>
Lynch Asset Management, Inc. Mr.
Singh is a vice president of five
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment
adviser.
Julian F. Sluyters; 35 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 a vice
president and treasurer of 30 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director
(Master Series, Inc.) and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and eq-
uity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
a vice president of 14 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment
adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice presi-
(Master Series, Inc.) dent and a portfolio manager of
Mitchell Hutchins. Mr. Varrelman is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to May
1995, he was an attorney in private
practice. Mr. Weller is a vice
president and assistant secretary
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Corporation and the Trust as defined in the 1940 Act by virtue of their
positions with PW Group, PaineWebber and/or Mitchell Hutchins.
23
<PAGE>
Each Fund pays directors/trustees who are not interested persons of the
Corporation/Trust ("disinterested directors/trustees") $1,000 annually per
Fund. Each Fund also pay its disinterested directors/trustees $150 per meeting
of the board or any committee thereof. Directors/trustees are reimbursed for
any expenses incurred in attending meetings of the board or any committee
thereof. Directors, trustees and officers of the Corporation/Trust 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, the Trust and the Funds, the Corporation and the
Trust require no employees. No officer, director or employee of PaineWebber or
Mitchell Hutchins presently receives any compensation from the Corporation or
the Trust for acting as director, trustee or officer. The table below includes
certain information relating to the compensation of the Corporation's and the
Trust's current directors/trustees who held office during the fiscal year
ended February 29, 1996 and August 31, 1995, respectively.
24
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
AGGREGATE CORPORATION,
COMPENSATION AGGREGATE THE TRUST
FROM THE COMPENSATION AND THE
NAME OF PERSON, POSITION CORPORATION* FROM THE TRUST* COMPLEX+
- ------------------------ ------------ --------------- ------------
<S> <C> <C> <C>
Richard Q. Armstrong, $ 9,000
Director/Trustee...................
Richard R. Burt, Director/Trustee... 7,750
Meyer Feldberg, Director/Trustee.... $3,250 106,375
George W. Gowen, Director/Trustee... 3,250 99,750
Frederic V. Malek, 3,250 99,750
Director/Trustee...................
Carl W. Schafer, Director/Trustee... $20,625 118,175
John R. Torell, III, 28,125
Director/Trustee...................
</TABLE>
- --------
Only independent members of the board are compensated by the Corporation or
the Trust and identified above; directors/trustees who are "interested
persons," as defined by the 1940 Act, do not receive compensation.
* Represents fees paid to each director/trustee during the fiscal years ended
February 29, 1996 and August 31, 1995, respectively; neither the Corporation
nor the Trust has a pension or retirement plan.
+ Represents total compensation paid to each director during the calendar year
ended December 31, 1995.
BENEFICIAL OWNERSHIP OF GREATER THAN 5% OF FUND SHARES
The following shareholder is shown in the Trust's records as owning more
than 5% of Tactical Allocation Fund's shares.
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES BENEFICIALLY
NAME AND ADDRESS* OWNED AS OF JUNE 5, 1996
- ----------------- ------------------------
<S> <C> <C>
E. Boch.............................................. 434,842.736 (6.8%)
</TABLE>
- --------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to a contract with the
Corporation dated August 4, 1988 and a contract with the Trust dated April 13,
1995, (each an "Advisory Contract"). Under the Advisory Contracts, each Fund
pays Mitchell Hutchins an annual fee, computed daily and paid monthly,
according to the schedule set forth below:
BALANCED FUND
<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>
25
<PAGE>
TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
------------------------ ------
<S> <C>
Up to $250 million................................................. 0.500%
Over $250 million.................................................. 0.450
</TABLE>
During the fiscal years ended February 29, 1996, February 28, 1995 and
February 28, 1994, the Corporation paid (or accrued) to Mitchell Hutchins
investment advisory and administrative fees of $1,584,083, $1,934,650 and
$2,326,697, respectively, with respect to Balanced Fund.
For the fiscal years ended August 31, 1995, August 31, 1994 and August 31,
1993, the Trust paid (or accrued) management fees with respect to the Fund of
$279,950, $505,878 and $419,426, respectively, to Tactical Allocation Fund's
investment adviser and administrator during those periods.
Under a service agreement with the Corporation that is reviewed by the
Corporation's board of directors annually, PaineWebber provides certain
services to Balanced Fund not otherwise provided by the Fund's transfer agent.
Pursuant to the service agreement, during the fiscal years ended February 29,
1996, February 28, 1995 and February 28, 1994, PaineWebber earned fees in the
amounts of $77,050, $100,272 and $116,755, respectively, with respect to the
Fund.
Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Corporation or the Trust not readily
identifiable as belonging to the Funds or to the Corporation's or Trust's
other series are allocated among series by or under the direction of the board
in such manner as the board deems to be fair and equitable. Expenses borne by
each 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/Trust
under federal and state securities laws and maintenance of such registrations
and qualifications; (5) fees and salaries payable to board members who are not
interested persons of the Corporation/Trust or Mitchell Hutchins; (6) all
expenses incurred in connection with the board members' 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/Trust or the Fund for violation of any law; (10)
legal, accounting and auditing expenses, including legal fees of special
counsel for the independent board members; (11) charges of custodians,
transfer agents and other agents; (12) costs of preparing share certificates;
(13) expenses of setting in type and printing prospectuses and supplements
thereto, statements of additional information and supplements thereto, reports
and proxy materials for existing shareholders, and costs of mailing such
materials to existing shareholders; (14) any extraordinary expenses (including
fees and disbursements of counsel) incurred by the Corporation/Trust 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 board members and officers; and
(18) costs of mailing, stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse each Fund
if and to the extent that the aggregate operating expenses of that Fund exceed
applicable limits in any fiscal year. Currently the most
26
<PAGE>
restrictive such limit applicable to each Fund is 2.5% of the first $30
million of a 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 $100 million. Certain expenses, such as brokerage commissions,
distribution fees, taxes, interest, certain expenses attributable to investing
outside the United States and extraordinary items, are excluded from this
limitation. For the fiscal years ended February 29, 1996, February 28, 1995
and February 28, 1994 (for Balanced Fund) and for the fiscal years ended
August 31, 1995, August 31, 1994 and August 31, 1993 (for Tactical Allocation
Fund) no reimbursements were required pursuant to such limitations for either
Fund.
Under the Advisory Contracts, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by either Fund in
connection with the performance of the Advisory Contracts, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Each Advisory Contract
terminates automatically with respect to a Fund upon assignment and is
terminable at any time without penalty by the Corporation's board of directors
or the Trust's board of trustees or by vote of the holders of a majority of a
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the
Corporation or the Trust.
The following table shows the approximate net assets as of May 31, 1996,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market).............................. $ 5,608.2
Global......................................................... 2,833.3
Equity/Balanced................................................ 3,127.4
Fixed Income (excluding Money Market).......................... 5,314.1
Taxable Fixed Income......................................... 3,683.0
Tax-Free Fixed Income........................................ 1,631.1
Money Market Funds............................................. $21,968.9
</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 funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other
Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class Y shares of each Fund under separate distribution contracts with the
Corporation and the Trust (collectively, "Distribution Contracts") that
require Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of each Fund. Class Y shares of the Funds are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber dated relating to the Class Y shares of the
Funds (collectively, "Exclusive Dealer Agreements"), PaineWebber and its
correspondent firms sell each Fund's shares.
27
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of directors/trustees, Mitchell
Hutchins is responsible for the execution of each Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins seeks to obtain the best net results
for the Funds, taking into account such factors as 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 Balanced Fund, for the fiscal
years ended February 29, 1996, February 28, 1995, and February 28, 1994, the
Fund paid $335,166, $495,853, and $540,773, respectively, in aggregate
brokerage commissions. For Tactical Allocation Fund, for the fiscal years
ended August 31, 1995, August 31, 1994 and August 31, 1993, the Fund paid
$82,091, $56,965 and $58,975 respectively, in aggregate brokerage commissions.
Neither Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. Each Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board of each Fund 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 each Advisory Contract authorize Mitchell
Hutchins and any of its affiliates that are members of a national securities
exchange to effect portfolio transactions for each Fund on such exchange and
to retain compensation in connection with such transactions. Any such
transactions will be effected and related compensation paid only in accordance
with applicable SEC regulations. For Balanced Fund, for the fiscal years ended
February 28, 1995 and February 28, 1994, the Fund paid $7,266 and $67,570,
respectively, in brokerage commissions to PaineWebber. For the fiscal year
ended February 29, 1996, the Fund paid $1,350 in brokerage commissions to
PaineWebber, which represented .04% of the total brokerage commissions paid by
that Fund and .05% of the aggregate dollar amount of transactions involving
the payment of commissions. For Tactical Allocation Fund, for the fiscal year
ended August 31, 1995, the Fund paid no brokerage commissions to PaineWebber.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Funds' transactions in
futures contracts, including procedures permitting the use of Mitchell
Hutchins and its affiliates, are similar to those in effect with respect to
brokerage transactions in securities.
Consistent with the interest of each Fund and subject to the review of the
board of directors/trustees, Mitchell Hutchins may cause each 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
Balanced Fund's fiscal year ended February 28, 1996, Mitchell Hutchins
directed $74,360,254 in portfolio transactions to brokers chosen because they
provided research services, for which Balanced 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
28
<PAGE>
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 a 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 Contracts.
Investment decisions for each 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 a Fund and one or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between a 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 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 Funds 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 each Fund's board 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 for each Fund 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 Balanced Fund, for the
fiscal years ended February 29, 1996 and February 28, 1995, the portfolio
turnover rates were 188% and 107%, respectively. For Tactical Allocation Fund,
for the fiscal years ended August 31, 1995 and August 31, 1994, the portfolio
turnover rates were 53% and 4%, respectively. The higher turnover for the most
recent fiscal year was due to reallocations of Tactical Allocation Fund's
portfolio in accordance with its Fund's systematic asset allocation strategy.
29
<PAGE>
VALUATION OF SHARES
Each 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 or the
Trust's board of trustees. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining to maturity,
unless the Corporation's board of directors determines that this does not
represent fair value.
PERFORMANCE INFORMATION
Each 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 each Fund's Performance Advertisements are calculated according to the
following formula:
<TABLE>
<S> <C> <C> <C>
P(1 + T)n = 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.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over
the period. All dividends and other distributions are assumed to have been
reinvested at net asset value.
30
<PAGE>
Each 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"). Each 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.
The following table shows performance information for the Class Y shares of
Tactical Allocation Fund for the periods indicated. All returns for periods of
more than one year are expressed as an average return. As of February 29,
1996, the Class Y shares of Balanced Fund had not yet commenced operations and
no performance information was therefore available.
<TABLE>
TACTICAL ALLOCATION FUND
<CAPTION>
CLASS Y
-------
<S> <C>
Fiscal year ended August 31, 1995:
Standardized Return*.................................................. 18.79%
Non-Standardized Return............................................... 18.79%
Inception** to August 31, 1995:
Standardized Return*.................................................. 12.28%
Non-Standardized Return............................................... 12.28%
</TABLE>
- --------
* Class Y shares do not impose an initial or contingent deferred sales
charge; therefore, Non-Standardized Return is identical to Standardized
Return.
** The inception date for Class Y shares of Tactical Allocation Fund was May
10, 1993.
OTHER INFORMATION. In Performance Advertisements, each 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.
Each 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
31
<PAGE>
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.
Each 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 a 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 each Fund generally have
longer maturities than most CDs and may reflect interest rate fluctuations for
longer term securities. An investment in either 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, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-
term capital gain) ("Distribution Requirement") and must meet several
additional requirements. With respect to each Fund, these requirements include
the following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities, or other
income (including gains from options and futures) derived with respect to its
business of investing in securities ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options or futures 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 each Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will
be taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or 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.
32
<PAGE>
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back
as a taxable distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Balanced 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" ("QEF")
then in lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the QEF 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 by the QEF. 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 Balanced Fund,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was
in effect).
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains
and losses each Fund realizes in connection therewith. Gains from options and
futures will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures will be subject to
the Short-Short limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent the Fund does not
qualify for this treatment, it may be forced to defer the closing out of
certain options and futures beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.
33
<PAGE>
Balanced 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
Prior to August 1995, Balanced Fund was named "PaineWebber Asset Allocation
Fund."
CLASS-SPECIFIC EXPENSES. Each 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 a Fund bear higher transfer agency fees per shareholder account than
those borne by Class A or Class C shares. The higher fee is imposed due to the
higher costs incurred by the Transfer Agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Ave., N.W., Washington, D.C., 20036-1800, counsel to the Corporation and the
Trust, 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 AUDITORS. Price Waterhouse LLP, 1177 Avenue of the Americas, New
York, New York 10036, serves as the Balanced Fund's independent accountants.
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as
Tactical Allocation Fund's independent auditors.
FINANCIAL STATEMENTS
Balanced Fund's Annual Report to Shareholders for the fiscal year ended
February 29, 1996, and Tactical Allocation Fund's Annual Report to
Shareholders for the fiscal year ended August 31, 1995, and its Semi-Annual
Report to Shareholders for the six months ended February 29, 1996, each is a
separate document supplied with this Statement of Additional Information, and
the financial statements, accompanying notes and (with respect to the Annual
Report to Shareholders) report of independent accountants appearing therein
are incorporated by reference in this Statement of Additional Information.
34
<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 hav-
ing an adequate capacity to pay interest and repay principal. Whereas it nor-
mally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in higher
rated categories; BB, B. Debt rated BB or B is regarded as having predomi-
nantly 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 protective characteristics, these are outweighed by large uncer-
tainties 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>
APPENDIX B
MORTGAGE-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES
The U.S. government securities in which Balanced 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 issued 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-government 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 Balanced Fund. Mortgage pools
consist of whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. Lending institutions that originate mortgages
for the pools are subject to certain standards, including credit and other
underwriting criteria for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES
Fannie Mae facilitates a national secondary market in residential mortgage
loans insured or guaranteed by U.S. government agencies and in privately
insured or uninsured residential mortgage loans (sometimes referred to as
"conventional mortgage loans" or "conventional loans") through its mortgage
purchase and mortgage-backed securities sales activities. Fannie Mae issues
guaranteed mortgage pass-through certificates ("Fannie Mae certificates"),
which represent pro rata shares of all interests 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
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC
represents a pro rata share of all interest and principal payments made and
owed on the underlying pool. Freddie Mac generally guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal, but it also
has a PC program under which it guarantees timely payment of both principal
and interest. GMCs also represent a pro rata interest in a pool of mortgages.
These instruments, however, pay interest semi-annually and return
B-1
<PAGE>
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
obligations ("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 securities 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 guaranteed 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 enhancement. 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
associations, 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 orderly manner, RTC has established a vehicle registered with the
SEC through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and holds or has acquired, 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
mortgage pass-through securities (such collateral collectively being called
"Mortgage 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 indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal of and interest on the
mortgage assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make schedule
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 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, quarterly 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 structure, payments of principal, including any
principal prepayments, on the mortgage assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal 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 basis, until other classes
of the CMO are paid in full.
B-2
<PAGE>
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
supported 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
payments, 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 underlying assets and collection of all amounts recoverable
directly from the obligor 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 transferred 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. Protection 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 letters 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 enhancement, 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.
Examples of credit enhancement arising out of the structure of the
transaction 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 reserve against future losses) and "over-
collateralization" (where the scheduled payments on, or the principal amount
of, the underlying assets exceed that required 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 adversely
affect the return on an investment in such a security.
B-3
<PAGE>
APPENDIX C
DESCRIPTION OF STRATEGIC INSTRUMENTS
Certain Portfolios may use the following instruments in connection with
hedging and related income and return strategies:
OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a
premium, has the right to buy the security or currency underlying the
option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation,
upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A
put option is a similar contract that gives its purchaser, in return for a
premium, the right to sell the underlying security or currency at a
specified price during the option term. The writer of the put option, who
receives the premium, has the obligation, upon exercise of the option
during the option term, to buy the underlying security or currency at the
exercise price.
OPTIONS ON INDEXES--An index assigns relative values to the securities
included in the index and fluctuates with changes in the market values of
these securities. Index options operate in the same way as more traditional
options, except that the exercise of an index option is effected with cash
payment and does not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price and the closing
price of the index.
INDEX FUTURES CONTRACT--An index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value at the close of trading
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the securities comprising the index is
made. Generally, contracts are closed out prior to the expiration date of
the contract.
INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the
other party agrees to accept, delivery of a specified type of debt security
at a specified future time and at a specified price. Although such futures
contracts by their terms call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase
or sell a security or currency, at a specified price at any time during the
option term. Upon exercise of the option, the delivery of the futures
position to the holder of the option will be accompanied by delivery of the
accumulated balance that represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the future. The
writer of an option, upon exercise, will assume a short position in the
case of a call and a long position in the case of a put.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 1
Directors, Trustees and Officers........................................... 17
Investment Advisory and Distribution Arrangements.......................... 25
Portfolio Transactions..................................................... 28
Valuation of Shares........................................................ 30
Performance Information.................................................... 30
Taxes...................................................................... 32
Other Information.......................................................... 34
Financial Statements....................................................... 34
Appendix A.................................................................
Appendix B.................................................................
Appendix C.................................................................
</TABLE>
(C)1996 PaineWebber Incorporated
[RECYCLED PAPER LOGO APPEARS HERE]
PAINEWEBBER
BALANCED FUND
PAINEWEBBER
TACTICAL ALLOCATION FUND
CLASS Y SHARES
- --------------------------------------------------------------------------------
Statement of Additional Information
July 1, 1996
- --------------------------------------------------------------------------------
[PAINEWEBBER LOGO APPEARS HERE]
<PAGE>
The Fund is a series of PaineWebber Master Series, Inc. This Prospectus con-
cisely 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, 1996 (which is incorporated
by reference herein) has been filed with the Securities and Exchange Commis-
sion. The Statement of Additional Information can be obtained without charge,
and further inquiries can be made, by contacting the Fund, your PaineWebber
investment executive or PaineWebber's correspondent firms or by calling toll-
free 1-800-647-1568.
- -------------------------------------------------------------------------------
A professionally managed mutual fund seeking maximum current income consistent
with liquidity and conservation of capital. The Fund invests in high-grade
money market instruments.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT. WHILE THE FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE, THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
- -------------------------------------------------------------------------------
July 1, 1996
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PAINEWEBBER
MONEY MARKET FUND
1285 Avenue of the Americas
New York, New York 10019
- -------------------------------------------------------------------------------
. Maximum Current Income Consistent with Liquidity and Conservation of Capital
. Professional Management
. Daily Dividends
. Exchange Privileges
- -------------------------------------------------------------------------------
A PaineWebber Mutual Fund
<PAGE>
[This Page Intentionally Left Blank]
2
<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.
--------------
PAINEWEBBER MONEY MARKET FUND
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the
topics discussed in this summary.
<TABLE>
<C> <S>
The Fund: PaineWebber Money Market Fund ("Fund") is a series of
PaineWebber Master Series, Inc., an open-end,
diversified management investment company organized as
a Maryland corporation ("Corporation").
Investment Objective Maximum current income consistent with liquidity and
and Policies: conservation of capital; invests in high-grade money
market instruments.
Total Net Assets at Over $48.6 million.
May 31, 1996:
Investment Adviser: Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber" or "PW"),
manages over $44.2 billion in assets.
See "Management."
Investing in the Class A shares, Class B shares and Class C shares of
Fund: the Fund may be obtained only through an exchange of
shares of the corresponding Class of most other
PaineWebber mutual funds. Exchanges may be made
through PaineWebber or PFPC Inc., the Fund's transfer
agent ("Transfer Agent"). See "Investing in the Fund."
(Investors who are clients of PaineWebber or its
correspondent firms are referred to herein as
"PaineWebber clients.")
Exchanges: Shares may be exchanged for shares of the
corresponding Class of most PaineWebber mutual funds.
Redemptions: PaineWebber clients may redeem through PaineWebber;
other shareholders must redeem through the Transfer
Agent.
Dividends: Declared daily and paid monthly. See "Dividends and
Taxes."
Reinvestment: All dividends are paid in Fund shares of the same
Class at net asset value unless the shareholder has
requested cash.
Net Asset Value: The Fund seeks to maintain its net asset value at
$1.00 per share.
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
WHO SHOULD INVEST. The Fund invests primarily in various types of high-grade
money market instruments. Accordingly, the Fund is designed for investors in
other PaineWebber mutual funds whose investment objectives or needs have
changed so that they presently seek current income and preservation of capital
for all or a portion of their investment.
RISK FACTORS. There can be no assurance that the Fund will achieve its in-
vestment objective. In periods of declining interest rates, the Fund's yield
will tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates, the Fund's yield generally will be somewhat lower. See
"Investment Objective and Policies."
EXPENSES OF INVESTING IN THE FUND. The following tables are intended to as-
sist investors in understanding the expenses associated with investing in Class
A, B and C shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum sales charge on purchases of shares
(as a percentage of public offering price)... None(1) None(1) None(1)
Sales charge on reinvested dividends.......... None(2) None(2) None(2)
Exchange fee.................................. $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a
percentage of net asset value at the time of
investment or redemption, whichever is less). None 5%(3) 0.75%(4)
ANNUAL FUND OPERATING EXPENSES(5)
(as a percentage of average net assets)
CLASS A CLASS B CLASS C
------- ------- -------
Management fees............................... 0.50% 0.50% 0.50%
12b-1 fees(6)................................. 0.25 0.75 0.75
Other expenses................................ 0.56 0.54 0.54
---- ---- ----
Total operating expenses...................... 1.31% 1.79% 1.79%
==== ==== ====
</TABLE>
- -------
(1) Shares of the Fund may be acquired solely through an exchange of shares
of the corresponding Class of another PaineWebber mutual fund. No initial sales
charge is imposed when Class A shares of the Fund are acquired through an ex-
change. See "Investing in the Fund."
(2) Exchange fee waivers are available for all Classes.
(3) Redemptions of Class B shares of the Fund that were acquired through an
exchange of Class B shares of PaineWebber Low Duration U.S. Government Income
Fund will be subject to a maximum contingent deferred sales charge ("CDSC") of
3%, provided that the exchanged shares would have been subject to the lower
schedule had they been redeemed rather than exchanged for Class B shares of the
Fund. The maximum 3% CDSC applies to redemptions during the first year after
purchase; the charge generally declines by 1% following each of the first,
third and fourth years after purchase, reaching zero after four years. Redemp-
tions of Class B shares of the Fund that were acquired through an exchange of
Class B shares of any other PaineWebber mutual fund will be subject to a maxi-
mum CDSC of 5%. The maximum 5% CDSC applies to redemptions during the first
year after purchase; the charge generally declines by 1% annually thereafter,
reaching zero after six years. The holding period of Class B shares acquired
through an exchange with another PaineWebber mutual fund will be calculated
from the date that the Class B shares were initially acquired in one of the
other funds. See "Redemptions."
(4) Redemptions of Class C shares acquired through an exchange and held less
than one year will be subject to the same contingent deferred sales charge that
would have been imposed on Class C shares of the
4
<PAGE>
- -------
PaineWebber mutual fund originally purchased that were subsequently exchanged
into Class C shares of the Fund. The maximum CDSC applicable to Class C shares
sold within one year of the purchase date is 1.00% (0.75% for funds that invest
predominantly in debt securities) of net asset value of the shares at the time
of purchase or sale, whichever is less.
(5) See "Management" for additional information. All expenses are those actu-
ally incurred for the fiscal year ended February 29, 1996.
(6) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS CLASS CLASS
A B C
----- ----- -----
<S> <C> <C> <C>
12b-1 service fees......................................... 0.25% 0.25% 0.25%
12b-1 distribution fees.................................... 0.00 0.50 0.50
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C 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.
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares....................... $13 $42 $ 72 $158
Class B Shares:
Assuming a complete redemption at
end of period (1)(2)............... $68 $86 $117 $186
Assuming no redemption (2).......... $18 $56 $ 97 $186
Class C Shares.......................
Assuming a complete redemption at
end of period (1).................. $93 $56 $ 97 $211
Assuming no redemption ............. $18 $56 $ 97 $211
</TABLE>
- -------
(1) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(2) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.
This Example assumes that all dividends are reinvested and that the percent-
age amounts listed under Annual Fund Operating Expenses remain the same in the
years shown. The above tables and the assumption in the Example of a 5% annual
return are required by regulations of the Securities and Exchange Commission
("SEC") applicable to all mutual funds; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
any Class of Fund 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 Fund shares will de-
pend 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 C 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 29, 1996, which are incorporated by reference
into the Statement of Additional Information. The financial statements and
notes and the information in the table below, insofar as it relates to the pe-
riod July 1, 1991 to February 29, 1992 and to each of the four years in the
period ended February 29, 1996, have been audited by Price Waterhouse LLP, in-
dependent accountants, whose report thereon is also included in the Annual Re-
port to Shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
FOR THE YEARS ENDED
-------------------------------------- FOR THE PERIOD
FEBRUARY 29, FEBRUARY 28, JULY 1, 1991+
------------ ------------------------- TO FEBRUARY 29,
1996 1995 1994 1993 1992
------------ ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------
Net investment income... 0.046 0.037 0.016 0.022 0.026
Dividends from net
investment income...... (0.046) (0.037) (0.016) (0.022) (0.026)
------- ------- ------- ------- ------
Net asset value:
End of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======
Total investment return
(1).................... 4.69% 3.95% 1.64% 2.25% 2.47%
======= ======= ======= ======= ======
Ratios/supplemental
data:
Net assets, end of
period (000's)......... $23,735 $21,042 $14,204 $11,716 $3,806
Ratio of expenses to
average net assets..... 1.31% 1.06% 1.72% 1.74% 1.90%*
Ratio of net investment
income to average net
assets................. 4.68% 3.85% 1.70% 2.18% 3.61%*
</TABLE>
- -------
* Annualized.
** Formerly Class D.
+ Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all divi-
dends 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 re-
ported. The figures do not include sales charges; results for each class
would be lower if sales charges were included. Total return information
for periods less than one year is not annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS B
- ---------------------------------------------------- ------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
- ---------------------------------------------------- FOR THE YEARS ENDED SEPTEMBER 26,
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28 OR 29, 1986+ TO
- ------------ ------------------------ ------------ ---------------------------------- FEBRUARY 28,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------ ------- ------ ------- ------------ ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
0.041 0.032 0.011 0.016 0.039 0.068 0.076 0.068 0.055 0.012
(0.041) (0.032) (0.011) (0.016) (0.039) (0.068) (0.076) (0.068) (0.055) (0.012)
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ====== ======= ======= ======= ======= ======= ======= =======
4.18% 3.41% 1.12% 1.73% 4.16% 6.98% 8.18% 6.75% 5.57% 1.65%
======= ======= ====== ======= ======= ======= ======= ======= ======= =======
$26,592 $39,123 $9,819 $15,280 $29,341 $50,842 $50,392 $50,320 $44,744 $ 620
1.79% 1.55% 2.25% 2.28% 2.06% 1.40% 1.48% 1.25% 1.25% 1.25%*
4.17% 3.46% 1.16% 1.69% 4.07% 6.82% 7.77% 6.88% 5.89% 4.71%*
</TABLE>
7
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C**
---------------------------------------------
FOR THE YEARS ENDED
---------------------------- FOR THE PERIOD
FEBRUARY 29, FEBRUARY 28, JULY 14, 1992+
------------ --------------- TO FEBRUARY 28,
1996 1995 1994 1992
------------ ------- ------ ---------------
<S> <C> <C> <C> <C>
Net asset value:
Beginning of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------- ------ ------
Net investment income............ 0.041 0.033 0.012 0.009
Dividends from net investment
income.......................... (0.041) (0.033) (0.012) (0.009)
------ ------- ------ ------
Net asset value:
End of period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ======= ====== ======
Total investment return (1)...... 4.14% 3.44% 1.19% 0.81%
====== ======= ====== ======
Ratios/supplemental data:
Net assets, end of period
(000's)......................... $5,754 $16,137 $9,430 $2,220
Ratio of expenses to average net
assets.......................... 1.79% 1.55% 2.14% 2.14%*
Ratio of net investment income to
average net assets.............. 4.27% 3.35% 1.36% 1.67%*
</TABLE>
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide maximum current income consis-
tent with liquidity and conservation of capital. The Fund's investments include
(1) U.S. Treasury bills and other obligations issued or guaranteed as to inter-
est and principal by the U.S. government, its agencies or instrumentalities;
such obligations may or may not be backed by the full faith and credit of the
United States; (2) obligations of U.S. banks, including certificates of depos-
it, bankers' acceptances, time deposits maturing in seven days or less and sim-
ilar obligations of foreign branches of domestic banks and obligations issued
by domestic branches of foreign banks; issuing banks must have total assets at
the time of purchase in excess of $1.5 billion; the Fund may also make inter-
est-bearing savings deposits in U.S. commercial and savings banks having total
assets of $1.5 billion or less, in principal amounts at each such bank not
greater than are insured by the Federal Deposit Insurance Corporation, provided
that the aggregate amount of such deposits (plus interest earned) does not ex-
ceed 5% of the Fund's net asset value; (3) commercial paper of U.S. companies,
including variable amount master notes and other short-term corporate obliga-
tions; and (4) repurchase agreements relating to any of the foregoing. The Fund
may also purchase participation interests in any of the securities in which it
is permitted to invest. Participation interests are pro rata interests in secu-
rities held by others. The Fund invests in securities with a remaining maturity
of up to 13 months and maintains a dollar-weighted average maturity of 90 days
or less.
The commercial paper and other short-term obligations purchased by the Fund
consist only of obligations that Mitchell Hutchins determines, pursuant to pro-
cedures adopted by the Corporation's board of directors, present minimal credit
risks and are either (1) rated in one of the two highest short-term ratings
categories by at least two nationally recognized statistical rating organiza-
tions ("NRSROs"), (2) rated in one of the two highest short-term ratings cate-
gories by a single NRSRO if only that NRSRO has assigned the obligations a
short-term rating or (3) unrated, but determined by Mitchell Hutchins to be of
comparable quality ("Eligible Securities").
The Fund may invest no more than 5% of its total assets in obligations that
are Eligible Securities but have not been rated in the highest short-term rat-
ings category by at least two NRSROs (or by one NRSRO if only one NRSRO has as-
signed the obligation a short-term rating) or, if the obligations are unrated,
determined by Mitchell Hutchins to be of comparable quality ("Second Tier Secu-
rities"). The Fund also may invest no more than the greater of 1% of its total
assets or $1 million in Second Tier Securities of a single issuer. Furthermore,
the Fund generally may invest no more than 5% of its total assets in the secu-
rities of a single issuer (other than securities issued by the U.S. government,
its agencies or instrumentalities).
In managing the Fund's portfolio, Mitchell Hutchins may employ a number of
professional money management techniques, including varying the composition and
the average weighted maturity of the Fund's portfolio based upon its assessment
of the relative values of the various money market instruments and future in-
terest rate patterns in order to respond to changing economic and money market
conditions and to shifts in fiscal and monetary policy. Mitchell Hutchins may
also seek to improve the Fund's yield by purchasing or selling securities in
order to take advantage of yield disparities among similar or dissimilar money
market instruments that regularly occur in the money market.
In periods of declining interest rates the Fund's yield will tend to be some-
what higher than prevailing market rates, and in periods of
9
<PAGE>
rising interest rates the opposite will be true. Also, when interest rates are
falling, net cash inflows from the continuous sale of Fund shares are likely to
be invested in portfolio instruments producing lower yields than the balance of
the Fund's portfolio, thereby reducing the Fund's yield. In periods of rising
interest rates, the opposite can be true. There can be no assurance that the
Fund will achieve its investment objective.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
may invest include direct obligations of the U.S. Treasury (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 Government National Mortgage Association certificates), securities
supported primarily or solely by the creditworthiness of the issuer (such as
securities of the Resolution Funding Corporation and the Tennessee Valley Au-
thority) and securities that are supported primarily or solely by specific
pools of assets and the creditworthiness of a U.S. government-related issuer
(such as mortgage-backed securities issued by the Federal National Mortgage As-
sociation and the Federal Home Loan Mortgage Corporation).
The Fund may also acquire securities issued or guaranteed as to principal and
interest by the U.S. government in the form of custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds. Such notes and bonds are held in custody by a
bank on behalf of the owners of such notes or bonds. These custodial receipts
are known by various names, including "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"). The
Fund also may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and inter-
est components of selected securities are traded independently under the Sepa-
rate Trading of Registered Interest and Principal of Securities ("STRIPS") pro-
gram. Under the STRIPS program, the principal and interest components are indi-
vidually numbered and separately issued by the U.S. Treasury at the request of
depository financial institutions, which then trade the component parts inde-
pendently.
VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate securities with remaining maturities in excess of 13 months is-
sued by U.S. government agencies or instrumentalities or guaranteed by the U.S.
government, or (if subject to a demand feature exercisable within 13 months or
less) issued by U.S. companies. The yield on these securities is adjusted in
relation to changes in specific money market rates, such as the prime rate, and
different securities may have different adjustment rates. The Fund's investment
in these securities must comply with conditions established by the SEC under
which they may be considered to have remaining maturities of 13 months or less.
Certain of these obligations carry a demand feature that gives the Fund the
right to tender them back to the issuer or a remarketing agent and receive the
principal amount of the security prior to maturity. The demand feature may or
may not be backed by letters of credit or other credit support arrangements
provided by banks or other financial institutions, the credit standing of which
affects the credit quality of the obligation.
Securities purchased by the Fund may include variable amount master demand
notes, which are unsecured redeemable obligations that permit investment of va-
rying amounts at fluctuating interest rates under a direct agreement between
the issuer and the Fund. The principal amount of these notes may be in-
10
<PAGE>
creased from time to time by the parties (subject to specified maximums) or de-
creased by the Fund or the issuer. These notes are payable on demand and are
typically unrated.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and si-
multaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. Although repurchase
agreements carry certain risks not associated with direct investments in secu-
rities, including possible decline in the market value of the underlying secu-
rities and delays and costs to the Fund if the other party to the repurchase
agreement becomes insolvent, the Fund intends to enter into repurchase agree-
ments 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.
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. Lending securities en-
ables the Fund to earn additional income, but could result in a loss or delay
in recovering securities.
OTHER INFORMATION. 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. The Fund may not invest more than 10%
of its net assets in illiquid securities, including repurchase agreements with
maturities in excess of seven days. The Fund's investment objective of seeking
maximum current income consistent with liquidity and conservation of capital
may not be changed without the affirmative vote of its shareholders. Certain
investment limitations, as described in the Statement of Additional Informa-
tion, also may not be changed without shareholder approval. All other invest-
ment policies may be changed by the Corporation's board of directors without
shareholder approval.
INVESTING IN THE FUND
Shares of the Fund are available only through an exchange of shares of the
corresponding Class of other PaineWebber mutual funds. No initial sales charge
is imposed on the Fund shares being acquired, and no contingent deferred sales
charge is imposed on the shares of the other PaineWebber mutual fund being dis-
posed of, through an exchange. However, contingent deferred sales charges may
apply to redemptions of Fund shares acquired through an exchange. See "Redemp-
tions." A $5.00 exchange fee is charged for each exchange, and exchanges may be
subject to minimum investment requirements of the fund into which exchanges are
made.
The other PaineWebber mutual funds with which Fund shares may be exchanged
include the following:
PaineWebber Income Funds
.GLOBAL INCOME FUND
.HIGH INCOME FUND
.INVESTMENT GRADE INCOME FUND
.LOW DURATION U.S. GOVERNMENT INCOME FUND
.STRATEGIC INCOME FUND
.U.S. GOVERNMENT INCOME FUND
PaineWebber Tax-Free Income Funds
.CALIFORNIA TAX-FREE INCOME FUND
11
<PAGE>
.MUNICIPAL HIGH INCOME FUND
.NATIONAL TAX-FREE INCOME FUND
.NEW YORK TAX-FREE INCOME FUND
PaineWebber Growth Funds
.CAPITAL APPRECIATION FUND
.EMERGING MARKETS EQUITY FUND
.GLOBAL EQUITY FUND
.FINANCIAL SERVICES GROWTH FUND
.GROWTH FUND
.SMALL CAP GROWTH FUND
.SMALL CAP VALUE FUND
PaineWebber Growth and Income Funds
.BALANCED FUND
.GROWTH AND INCOME FUND
.TACTICAL ALLOCATION FUND
.UTILITY INCOME FUND
PaineWebber clients must place exchange orders through their PaineWebber in-
vestment executives or correspondent firms. Shareholders who are not
PaineWebber clients must place exchange orders in writing with the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. All exchanges will be effected based on the relative net asset
values per share next determined after the exchange order is received at
PaineWebber's New York City offices or by the Transfer Agent. See "Valuation of
Shares." Exchanges may be made on any Business Day. A "Business Day" is each
day, Monday through Friday, on which the New York Stock Exchange, Inc. ("NYSE")
is open.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by SEC rules. See the State-
ment of Additional Information for further details. This exchange privilege is
available only in those jurisdictions where the sale of the PaineWebber mutual
fund shares to be acquired may be legally made. Before making any exchange,
shareholders should contact their PaineWebber investment executives or corre-
spondent firms or the Transfer Agent to obtain more information and prospec-
tuses of the PaineWebber mutual funds to be acquired through the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value (subject to any applica-
ble contingent deferred sales charge) and redemption proceeds will be paid af-
ter receipt of a redemption request, as described below. PaineWebber clients
may redeem shares through PaineWebber or its correspondent firms; all other
shareholders must redeem through the Transfer Agent. If a redeeming shareholder
owns shares of more than one Class, the shares will be redeemed in the follow-
ing order unless the shareholder specifically requests otherwise: Class A
shares, then Class C shares, and finally Class B shares.
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES. Class A shares held less
than one year are subject to a contingent deferred sales charge if the Class A
shares of the PaineWebber mutual fund initially purchased and subsequently ex-
changed for Class C shares of the Fund were purchased without an initial sales
charge due to the sales charge waiver for purchases of $1 million or more. This
contingent deferred sales charge is equal to 1% of the lower of (a) the net as-
set value of the shares at the time of initial purchase or (b) the net asset
value of the shares at the time of redemption. The holding period of Class A
shares of the Fund is calculated from the date the Class A shares of the other
PaineWebber mutual fund were initially purchased. Class A shares will be
12
<PAGE>
considered to represent, as applicable, dividend and capital gain distribution
reinvestments in such other funds. Redemption order will be determined as de-
scribed for Class B shares (see "Contingent Deferred Sales Charge--Class B
Shares"). Class A shares acquired through reinvestment of dividends and capital
gain distributions are not subject to this contingent deferred sales charge.
The contingent deferred sales charge is waived for exchanges and for most re-
demptions in connection with the systematic withdrawal plan. THIS CONTINGENT
DEFERRED SALES CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS A SHARES PURCHASED
PRIOR TO NOVEMBER 10, 1995. 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.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge is imposed upon most redemptions of Class B shares. The amount of the
contingent deferred sales charge will be calculated by multiplying the percent-
age indicated below by the lower of (a) the net asset value of the shares at
the time of initial purchase or (b) the net asset value of the shares at the
time of redemption. Class B shares held six years or longer (four years or
longer for Fund shares acquired in certain exchanges for Class B shares of
PaineWebber Low Duration U.S. Government Income Fund) and Class B shares ac-
quired through reinvestment of dividends or capital gain distributions are not
subject to the contingent deferred sales charge.
REDEMPTIONS OF FUND SHARES ACQUIRED THROUGH AN EXCHANGE FOR SHARES OF
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- -----------------
<S> <C>
1st Year Since Purchase....................................... 3%
2nd Year Since Purchase....................................... 2
3rd Year Since Purchase....................................... 2
4th Year Since Purchase....................................... 1
5th Year Since Purchase....................................... None
</TABLE>
The schedule above will apply only if the exchanged shares would have been
subject to the same lower schedule had they been redeemed rather than exchanged
for Class B shares of the Fund.
REDEMPTIONS OF FUND SHARES ACQUIRED THROUGH AN EXCHANGE FOR SHARES OF ANY
OTHER PAINEWEBBER MUTUAL FUND.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- -----------------
<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 the reinvestment of dividends and capital gain distributions and
then of other shares held by the shareholder for the longest period of time.
The holding period of Class B shares acquired through an exchange with another
PaineWebber mutual fund will be calculated from the date that the Class B
shares were initially acquired in one of the other funds, and Class B shares
being redeemed will be considered to represent, as applicable, dividend and
capital gain distribution reinvest
13
<PAGE>
ments in such other funds. This will result in any contingent deferred sales
charge being imposed at the lowest possible rate. For federal income tax pur-
poses, the amount of the contingent deferred sales charge will reduce the gain
or increase the loss, as the case may be, realized on the redemption. The
amount of any contingent deferred sales charge will be paid to Mitchell
Hutchins.
SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge
will be waived for exchanges, as described above, and for most redemptions in
connection with the Fund's systematic withdrawal plan. In addition, the contin-
gent deferred sales charge will be waived for a total or partial redemption if
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 share-
holder or owns the shares with his or her spouse as a joint tenant with right
of survivorship. This waiver applies only to redemption of shares held at the
time of death. The contingent deferred sales charge will also be waived in con-
nection with a lump-sum or other distribution in the case of an individual re-
tirement account ("IRA"), a self-employed individual retirement plan (so-called
"Keogh Plan") or a custodial account under Section 403(b) of the Internal Reve-
nue Code following attainment of age 59 1/2; a total or partial redemption re-
sulting from a distribution following retirement in the case of a tax-qualified
retirement plan; and any redemption resulting from a tax-free return of an ex-
cess contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to confir-
mation (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 share-
holder's status or holdings, as the case may be.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. Class C shares held less
than one year are subject to the same contingent deferred sales charge that
would have been imposed on the Class C shares of the PaineWebber mutual fund
initially purchased and subsequently exchanged for Class C shares of the Fund.
This contingent deferred sales charge will be either 1% or 0.75% of the lower
of (a) the net asset value of the shares at the time of initial purchase or (b)
the net asset value of the shares at the time of redemption. The holding period
of Class C shares of the Fund is calculated from the date the Class C shares of
the other PaineWebber mutual fund were initially purchased. Class C shares will
be considered to represent, as applicable, dividend and capital gain distribu-
tion reinvestments in such other funds. Redemption order will be determined as
described for Class B shares (see "Contingent Deferred Sales Charge--Class B
Shares"). Class C shares acquired through reinvestment of dividends and capital
gain distributions are not subject to this contingent deferred sales charge.
The contingent deferred sales charge is waived for exchanges and for most re-
demptions in connection with the systematic withdrawal plan. THIS CONTINGENT
DEFERRED SALES CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS C SHARES PURCHASED
PRIOR TO NOVEMBER 10, 1995. 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.
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
14
<PAGE>
from a redeeming shareholder at the shares' net asset value next determined af-
ter receipt of the request by PaineWebber's New York City offices. Within three
Business Days after receipt of the request, repurchase proceeds (less any ap-
plicable contingent deferred sales charge) will be paid by check or credited to
the shareholder's brokerage account at the election of the shareholder.
PaineWebber investment executives and correspondent firms are responsible for
promptly forwarding redemption requests to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients must redeem their shares through the Transfer Agent by
mail; other shareholders also may redeem Fund shares through the Transfer
Agent. Shareholders should mail redemption requests directly to the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. A redemption request will be executed at the net asset value
next determined after it is received in "good order," and redemption proceeds
will be paid within seven days of receipt of the request. "Good order" means
that the request must be accompanied by the following: (1) a letter of instruc-
tion or a stock assignment specifying the number of shares or amount of invest-
ment to be redeemed (or that all shares credited to a Fund account be re-
deemed), 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 accor-
dance with SEC rules, such as a commercial bank, trust company or member of a
recognized stock exchange and (3) other supporting legal documents for estates,
trusts, guardianships, custodianships, partnerships and corporations. Share-
holders are responsible for ensuring that a request for redemption is received
in "good order."
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder may have redemption pro-
ceeds of $1 million or more wired to the shareholder's PaineWebber brokerage
account or a commercial bank account designated by the shareholder. Questions
about this option, or redemption requirements generally, should be referred to
the shareholder's PaineWebber investment executive or correspondent firm, or to
the Transfer Agent if the shares are not held in a PaineWebber brokerage ac-
count.
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 share holder 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.
TRANSFER OF ACCOUNTS. If a shareholder holding Fund shares 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. How-
ever, 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.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A shares
approxi-
15
<PAGE>
mately six years after the date of issuance, together with a pro rata portion
of all Class B shares representing dividends and other distributions paid in
additional Class B shares. The Class B shares so converted will no longer be
subject to the higher expenses borne by Class B shares. The conversion will be
effected at the relative net asset values per share of the two Classes (nor-
mally $1.00) on the first Business Day of the month in which the sixth anniver-
sary 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.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund declares dividends daily from its net investment income
and pays them monthly. The Fund distributes its net short-term capital gain an-
nually but may make more frequent distributions of such gain if necessary to
maintain its net asset value per share at $1.00 or to avoid income or excise
taxes. The Fund does not expect to realize net long-term capital gain and thus
does not anticipate pay-ment of any long-term capital gain distributions. Divi-
dends paid on all Classes of shares are calculated at the same time and in the
same manner. Dividends on Class B and Class C shares are expected to be lower
than those on Class A shares because of the higher expenses resulting from the
distribution fees borne by the Class B and Class C shares. Dividends on each
Class also might be affected differently by the allocation of other Class-spe-
cific expenses.
Dividends are paid in additional Fund shares of the same Class unless the
shareholder has requested cash payments. Shareholders who wish to receive divi-
dends 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.
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,
if any) that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) are taxable to its shareholders as ordinary
income to the extent of the Fund's earnings and profits. Shareholders not sub-
ject to tax on their income will not be required to pay tax on amounts distrib-
uted to them.
The Fund notifies its shareholders following the end of each calendar year of
the amount of dividends paid that year.
The Fund is required to withhold 31% of all dividends payable to any individ-
uals 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 payable to such shareholders who otherwise are subject
to backup withholding.
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
16
<PAGE>
shareholders are urged to consult their tax advisers.
VALUATION OF SHARES
The Fund uses its best efforts to maintain its net asset value at $1.00 per
share. Net asset value per share is determined by dividing the Fund's net as-
sets by the total number of Fund shares outstanding. The Fund's net assets are
equal to the value of the Fund's investments and its other assets minus its li-
abilities. Net asset value is determined separately for each Class as of the
close of regular trading on the NYSE (currently 4:00 p.m., Eastern time) each
Business Day.
The Fund values its portfolio securities using the amortized cost method of
valuation, under which market value is approximated by amortizing the differ-
ence between the acquisition cost and value at maturity of an instrument on a
straight-line basis over its remaining life. All cash, receivables and current
payables are carried at their face value. Other assets, if any, are valued at
fair value as determined in good faith by or under the direction of the Corpo-
ration's board of directors.
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 Fund's investment adviser and adminis-
trator, 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 0.50% of the Fund's average daily net as-
sets.
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent.
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 PaineWebber Group Inc., a publicly owned financial services
holding company. As of May 31, 1996, Mitchell Hutchins was adviser or sub-
adviser of 31 investment companies with 65 separate portfolios and aggregate
assets of over $30.4 billion.
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 Fund
shares and has appointed PaineWebber as the exclusive dealer for the sale of
Fund shares. Under separate plans of distribution pertaining to the Class A
shares, the Class B shares and the Class C shares ("Class A Plan", "Class B
Plan" and "Class C 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. In addition, the Fund pays Mitchell
Hutchins monthly distribution fees at the annual rate of 0.50% of the average
daily net assets of the Class B and Class C 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
17
<PAGE>
Fund by PaineWebber clients. PaineWebber passes on a portion of these fees to
its investment executives to compensate them for shareholder servicing that
they perform and retains the remainder to offset its own expenses in servicing
and maintaining shareholder accounts. These expenses may include costs of the
PaineWebber branch office in which the investment executive is based, such as
rent, communications equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to offset the Fund's marketing costs attributable to those Classes, such
as preparation of sales literature, advertising and printing and distributing
prospectuses and other shareholder materials to prospective investors. Mitchell
Hutchins also may use the distribution fees to pay additional compensation to
PaineWebber and other costs allocated to Mitchell Hutchins' and PaineWebber's
distribution activities, including employee salaries, bonuses and other over-
head expenses. These expenses may include the branch office costs noted above.
Because shares of the Fund may be acquired only through an exchange of shares
of other PaineWebber mutual funds, Mitchell Hutchins does not pay commissions
to PaineWebber for selling Fund shares.
Mitchell Hutchins receives the proceeds of the contingent deferred sales
charges paid upon certain redemptions and may use these proceeds for any of the
expenses described above. See "Redemptions."
During the period they are in effect, the Plans and related distribution con-
tracts pertaining to each Class of shares ("Distribution Contracts") obligate
the Fund to pay service and distribution fees to Mitchell Hutchins as compensa-
tion for its service and distribution activities, not as reimbursement for spe-
cific expenses incurred. Thus, even if Mitchell Hutchins' expenses exceed its
service or distribution fees, 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 Dis-
tribution 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 each Plan, 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
From time to time the Fund may advertise its "yield" and "effective yield."
Both yield figures are based on historical earnings and are not intended to in-
dicate future performance. The "yield" of the Fund is the income on an invest-
ment in the Fund over a specified seven-day period. This income is then
"annualized" (that is, assumed to be earned each week over a 52-week period)
and shown as a percentage of the investment. The "effective yield" is calcu-
lated similarly, but when annualized the income earned is assumed to be rein-
vested. The "effective yield" will be higher than the "yield" because of the
compounding effect of this assumed reinvestment.
GENERAL INFORMATION
ORGANIZATION. PaineWebber Master Series, Inc. is registered with the SEC as a
diversified, open-end management investment com-pany and was incorporated in
Maryland on
18
<PAGE>
October 29, 1985. The Fund commenced operations on September 26, 1986. The
Corporation has authority to issue 10 billion shares of common stock of sepa-
rate series, par value $.001 per share; one billion of these shares are classi-
fied as shares of the Fund, and the remaining shares are classified as shares
of the Corporation's other series.
The outstanding shares of common stock of the Fund are divided into three
Classes, designated Class A shares, Class B shares and Class C shares. Each
Class represents interests in the same assets of the Fund. The Classes differ
as follows: (1) each Class of shares has exclusive voting rights on matters
pertaining to its plan of distribution; (2) Class B shares bear ongoing distri-
bution fees, are subject to a contingent deferred sales charge upon most re-
demptions and will automatically convert to Class A shares approximately six
years after issuance; (3) Class C shares are not subject to an initial sales
charge, but are subject to a contingent deferred sales charge if redeemable
within one year of purchase, bear ongoing distribution expenses and do not con-
vert into another Class; and (4) each Class may bear differing amounts of cer-
tain Class-specific expenses. The different sales charges and other expenses
applicable to the different classes of Fund shares may affect the performance
of those classes.
The Corporation does not hold annual shareholder meetings. There normally
will 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 vot-ing 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 are likely to be lower for the Class B and Class C shares
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.
CERTIFICATES. To avoid additional operating costs and for investor conve-
nience, the Fund does not issue share certificates. Ownership of Fund shares is
recorded on a stock register by the Transfer Agent and shareholders have the
same rights of ownership with respect to such shares as if certificates had
been issued.
CUSTODIAN AND TRANSFER AGENT. PNC Bank, National Association, whose principal
business address is Broad & Chestnut Streets, Land Title Bldg., Philadelphia,
Pennsylvania 19101, is custodian of the Fund's assets. PFPC Inc., a subsidiary
of PNC Bank, National Association, whose principal business address is 400
Bellevue Parkway, Wilmington, Delaware 19809, is the Fund's transfer and divi-
dend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of Fund shares. 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 Paine-
Webber clients receive quarterly statements from the Transfer Agent. Sharehold-
ers also receive audited annual and unaudited semi-annual financial statements
of the Fund.
19
<PAGE>
Shares of the Fund can be exchanged for shares of the following PaineWebber
Mutual Funds:
INCOME FUNDS
.Global Income Fund
.High Income Fund
.Investment Grade Income Fund
.Low Duration U.S. Government Income Fund
.U.S. Government Income Fund
TAX-FREE INCOME FUNDS
.California Tax-Free Income Fund
.Municipal High Income Fund
.National Tax-Free Income Fund
.New York Tax-Free Income Fund
GROWTH FUNDS
.Capital Appreciation Fund
.Emerging Markets Equity Fund
.Financial Services Growth Fund
.Global Equity Fund
.Growth Fund
.Small Cap Growth Fund
.Small Cap Value Fund
GROWTH AND INCOME FUNDS
.Balanced Fund
.Growth and Income Fund
.Utility Income Fund
.Tactical Allocation 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) 1996 PaineWebber Incorporated
[LOGO OF RECYCLING APPEARS HERE] Recycled Paper
PAINEWEBBER
MONEY
MARKET
FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Financial Highlights....................................................... 6
Investment Objective and Policies.......................................... 9
Investing in the Fund...................................................... 11
Redemptions................................................................ 12
Conversion of Class B Shares............................................... 15
Dividends and Taxes........................................................ 16
Valuation of Shares........................................................ 17
Management................................................................. 17
Performance Information.................................................... 18
General Information........................................................ 18
</TABLE>
PROSPECTUS
July 1, 1996
<PAGE>
PAINEWEBBER MONEY MARKET FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Money Market Fund ("Fund") is a diversified series of PaineWebber
Master Series, Inc. ("Corporation"), a professionally managed mutual fund. 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, 1996. 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, 1996.
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 OF MONEY MARKET INSTRUMENTS. The yields on the
money market instruments in which the Fund invests (such as commercial paper
and bank obligations) are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the
obligation, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and the ratings of the issue. The ratings of
nationally recognized statistical rating organizations ("NRSROs") represent
their opinions as to the quality of the obligations they undertake to rate.
Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices. Subsequent to its purchase by the Fund, an issue
may cease to be rated or its rating may be reduced. In the event that a
security in the Fund's portfolio ceases to be a "First Tier" security, as
defined in the Prospectus, or Mitchell Hutchins becomes aware that a security
has received a rating below the second highest rating by any NRSRO, Mitchell
Hutchins, and in certain cases the Fund's board of directors, will consider
whether the Fund should continue to hold the obligation. A "First Tier"
security is a security that is either (1) rated in the highest short-term
rating category by at least two NRSROs, (2) rated in the highest short-term
rating category by a single NRSRO if only that NRSRO has assigned the
obligation a short-term rating or (3) unrated, but determined by Mitchell
Hutchins to be of comparable quality. A First Tier security rated in the
highest short-term rating category by a single NRSRO at the time of purchase
that subsequently receives a rating below the highest rating category from a
different NRSRO will continue to be considered a First Tier security.
OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. The Fund may
invest in obligations of domestic branches of foreign banks and foreign
branches of domestic banks. Such investments may involve risks that are
different from investments in obligations of domestic branches of domestic
banks. These risks may include unfavorable political and economic developments,
withholding taxes, seizure of foreign deposits, currency controls, interest
limitations
<PAGE>
or other governmental restrictions which might affect the payment of principal
or interest on the securities held by the Fund. Additionally, there may be less
publicly available information about foreign banks and their branches, as these
institutions may not be subject to the same regulatory requirements as domestic
banks.
REPURCHASE AGREEMENTS. As stated in the Prospectus, the Fund may enter into
repurchase agreements with respect to any security in which it is authorized to
invest, except that securities subject to repurchase agreements may have
maturities in excess of 13 months. The Fund maintains custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or
securities dealer to pay the repurchase price on the date agreed to is, in
effect, secured by such securities. If the value of these securities is less
than the repurchase price, plus any agreed-upon additional amount, the other
party to the agreement must provide additional collateral so that at all times
the collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by the Fund upon
acquisition is accrued as interest and included in the Fund's net investment
income.
Repurchase agreements carry certain risks not associated with direct
investments in securities. 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 the Fund's agreement to repurchase the
securities at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes. While a reverse repurchase
agreement is outstanding, the Fund will maintain with its custodian in a
segregated account cash, U.S. government securities or other liquid, high-grade
debt obligations, marked to market daily, in an amount at least equal to the
Fund's obligations under the reverse repurchase agreement.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of its net assets
in illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and restricted securities other than those Mitchell
Hutchins has determined to be liquid pursuant to guidelines established by the
Corporation's board of directors. Commercial paper issues in which the Fund may
invest include securities issued by major corporations without registration
under the Securities Act of 1933 ("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 which is 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.
2
<PAGE>
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 (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.
LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, the Fund is
authorized to lend up to 33 1/3% of its portfolio securities to broker-dealers
or institutional investors that Mitchell Hutchins deems qualified, but only
when the borrower maintains acceptable collateral with the Fund's custodian,
marked to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral
is limited to cash, U.S. government securities and irrevocable letters of
credit that meet certain guidelines established by Mitchell Hutchins. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loan at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The Fund will retain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the Fund's
interest.
3
<PAGE>
INVESTMENT LIMITATIONS. The Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of the
Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities
of that issuer, except that up to 25% of the Fund's total assets may be
invested without regard to this limitation, and except that this limitation
does not apply to securities issued or guaranteed by the U.S. government,
its agencies and instrumentalities or to securities issued by other
investment companies.
(2) purchase any security if, as a result of that purchase, 25% or more of the
Fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities
(or to certificates of deposit and bankers' acceptances of domestic
branches of U.S. banks). The following interpretation applies to, but is
not a part of, this fundamental restriction: With respect to this
limitation, domestic and foreign banking will be considered to be different
industries.
(3) issue senior securities or borrow money, except as permitted under the 1940
Act and then not in excess of 33 1/3% of the Fund's total assets (including
the amount of the senior securities issued but reduced by any liabilities
not constituting senior securities) at the time of the issuance or
borrowing, except that the Fund may borrow up to an additional 5% of its
total assets (not including the amount borrowed) for temporary or emergency
purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a
loan.
(5) engage in the business of underwriting securities of other issuers, except
to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Fund may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to hold
real estate acquired by reason of such enforcement until that real estate
can be liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of owning
securities or other instruments, but the Fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.
4
<PAGE>
The following investment restrictions are not fundamental and may be changed
by the vote of the Corporation's board of directors without shareholder
approval: the Fund will not
(1) purchase or retain the securities of any issuer if, to the knowledge of the
Fund's management, the officers and directors of the Corporation and
Mitchell Hutchins (each owning beneficially more than 1/2 of 1% of the
outstanding securities of the issuer) own in the aggregate more than 5% of
the securities of such issuer.
(2) make investments in warrants, if such investments, valued at the lower of
cost or market, exceed 5% of the value of the Fund's net assets, which
amount may include warrants that are not listed on the New York Stock
Exchange, Inc. ("NYSE") or the American Stock Exchange, Inc., provided such
unlisted warrants, valued at the lower of cost or market, do not exceed 2%
of the Fund's net assets, and further provided that this restriction does
not apply to warrants attached to, or sold as a unit with, other
securities.
(3) purchase securities on margin, except for short-term credit necessary for
clearance of portfolio transactions and except that the Fund may make
margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(4) engage in short sales of securities or maintain a short position, except
that the Fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures,
forward and spot currency contracts, swap transactions and other financial
contracts or derivative instruments.
(5) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition.
(6) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange,
or as a result of reorganization, consolidation, or merger.
DIRECTORS AND OFFICERS
The directors and executive officers of the Corporation, their business
addresses, 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>
Margo N. Alexander**; 49 Director and Mrs. Alexander is president,
President chief executive officer and a
director of Mitchell Hutchins
(since January 1995) and also an
executive vice president and a
director of PaineWebber. Mrs.
Alexander is president and a di-
rector or trustee of 30 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Richard Q. Armstrong; 60 Director Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and principal
occupation since March 1995).
Mr. Armstrong is also a director
of HiLo Automotive, Inc. He was
chairman of the board, chief
exec-
utive officer and co-owner of
Adirondack Beverages (producer
and distributor of soft drinks
and sparkling/still waters) (Oc-
tober 1993-March 1995). Mr. Arm-
strong was a partner of The New
England Consulting Group (man-
agement consulting firm) (Decem-
ber 1992-September 1993). He was
managing director of LVMH U.S.
Corporation (U.S. subsidiary of
the French luxury goods conglom-
erate, Luis Vuitton Moet
Hennessey Corporation) (1987-
1991) and chairman of its wine
and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a
director or trustee of 29 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
E. Garrett Bewkes, Jr.**; 69 Director and Mr. Bewkes is a director of Paine
Chairman of the Webber Group Inc. ("PW Group")
Board (holding company of PaineWebber
and Mitchell Hutchins). Prior to
December 1995 he was a consul-
tant to PW Group. Prior to 1988,
he was chairman of the board,
president and chief executive
officer of American Bakeries
Company. Mr. Bewkes is a di-
rector of Interstate Bakeries
Corporation and NaPro
BioTherapeutics, Inc. Mr. Bewkes
is a director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Richard R. Burt; 49 Director Mr. Burt is chairman of Interna-
1101 Connecticut Avenue, N.W. tional Equity Partners (interna-
Washington, D.C. 20036 tional investments and consult-
ing firm) (since March 1994) and
a partner of McKinsey & Company
(management consulting firm)
(since 1991). He is also a di-
rector of American Publishing
Company. He was the chief nego-
tiator in
the Strategic Arms Reduction
Talks with the former Soviet
Union (1989-1991) and the U.S.
Ambassador to the Federal Repub-
lic of Germany (1985-1989). Mr.
Burt is a director or trustee of
29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 46 Director Ms. Farrell is a managing direc-
tor, senior investment strate-
gist and member of the Invest-
ment Policy Committee of
PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a
member of the Financial Women's
Association and Women's Economic
Roundtable, and is employed as a
regular panelist on Wall Street
Week with Louis Rukeyser. She
also serves on the Board of
Overseers of New York
University's Stern School of
Business. Ms. Farrell is a di-
rector or trustee of 29 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 54 Director Mr. Feldberg is Dean and Profes-
Columbia University sor of Management of the Gradu-
101 Uris Hall ate School of Business, Columbia
New York, New York 10027 University. Prior to 1989, he
was president of the Illinois
Institute of Technology. Mr.
Feldberg is also a director of
AMSCO International Inc., Feder-
ated Department Stores, Inc. and
New World Communications Group
Incorpo-
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
rated. Mr. Feldberg is a direc-
tor or trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves
as an investment adviser.
George W. Gowen; 66 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 a director of Columbia Real
Estate Investments, Inc. Mr.
Gowen is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Frederic V. Malek; 59 Director Mr. Malek is chairman of Thayer
901 15th St., N.W. Capital Partners (investment
Suite 300 bank) and a co-chairman and di-
Washington, D.C. 20005 rector of CB Commercial Group
Inc. (real estate). From January
1992 to November 1992, he was
campaign manager of Bush-Quayle
'92. From 1990 to 1992, he was
vice chairman and, from 1989 to
1990, he was president of North-
west Airlines Inc., NWA Inc.
(holding company of Northwest
Airlines Inc.) and Wings Hold-
ings Inc. (holding company of
NWA Inc.). Prior to 1989, he was
employed by the Marriott Corpo-
ration (hotels, restaurants,
airline catering and contract
feeding), where he most recently
was an executive vice president
and president of Marriott Hotels
and Resorts. Mr. Malek is also a
director of American Management
Systems, Inc. (management con-
sulting and computer-related
services), Automatic Data
Processing, Inc., Avis, Inc.
(passenger car rental), FPL
Group, Inc. (electric services),
National Education Corporation
and Northwest Airlines Inc. Mr.
Malek is a director or trustee
of 29
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Carl W. Schafer; 60 Director Mr. Schafer is president of the
P. O. Box 1164 Atlantic Foundation (charitable
Princeton, New Jersey foundation supporting mainly
08542 oceanographic exploration and
research). He also is a director
of Roadway Express, Inc. (truck-
ing), The Guardian Group of Mu-
tual Funds, Evans Systems, Inc.
(a motor fuels, convenience
store and diversified company),
Hidden Lake Gold Mines Ltd.
(gold mining), Electronic Clear-
ing House, Inc. (financial
transactions processing),
Wainoco Oil Corporation and
Nutraceutix Inc. (biotechnolo-
gy). Prior to January 1993, Mr.
Schafer was chairman of the In-
vestment Advisory Committee of
the Howard Hughes Medical Insti-
tute. Mr. Schafer is a director
or trustee of 29 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
John R. Torell III; 56 Director Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial ad-
Suite 4605 visory firm), chairman of
New York, New York 10153 Telesphere Corporation (elec-
tronic provider of financial in-
formation), and a partner of
Zilkha & Company (merchant bank-
ing and private investment com-
pany). He is the former chairman
and chief executive officer of
Fortune Bancorp (1990-1991 and
1990-1994, respectively), the
former chairman, president and
chief executive officer of
CalFed, Inc. (savings associa-
tion) (1988 to 1989) and former
president of Manufacturers Hano-
ver Corp. (bank) (prior to
1988). Mr. Torell is also a di-
rector of American Home Products
Corp., Volt
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Information Sciences Inc., and
New Colt Inc. (armament manufac-
turer). Mr. Torell is a director
or trustee of 29 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
T. Kirkham Barneby; 49 Vice President Mr. Barneby is a managing direc-
tor and chief investment offi-
cer--quantitative investments of
Mitchell Hutchins. Prior to Sep-
tember 1994, he was a senior
vice president at Vantage Global
Management. Prior to June 1993,
he was a senior vice president
at Mitchell Hutchins. Mr.
Barneby is a vice president of
four investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice presi-
dent and manager--advisory ad-
ministration of Mitchell
Hutchins. Prior to November
1993, she was compliance manager
of Hyperion Capital Management,
Inc., an investment advisory
firm. Prior to April 1993, Ms.
Boyle was a vice president and
manager--legal administration of
Mitchell Hutchins. Ms. Boyle is
a vice president of 30
investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
C. William Maher; 34 Vice President and Assistant Treasurer Mr. Maher is a first vice presi-
dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. Mr. Maher is
a vice president and assistant
treasurer of 30 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Dennis McCauley; 49 Vice President Mr. McCauley is a managing direc-
tor and chief investment offi-
cer--fixed income of Mitchell
Hutchins. Prior to December,
1994, he was director of fixed
income investments of IBM Corpo-
ration. Mr. McCauley is a vice
president of 19 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Susan Messina; 35 Vice President Ms. Messina is a senior vice
president and portfolio manager
of Mitchell Hutchins. Ms. Mes-
sina has been with Mitchell
Hutchins since 1982. Ms. Messina
is a vice president of five in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is
a vice president and assistant
treasurer of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general
counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice presi-
dent and secretary of 29 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing di-
rector and general counsel of
Mitchell Hutchins. Prior to May
1994, she was a partner in the
law firm of Arnold & Porter. Ms.
Schonfeld is a vice president of
30 investment companies 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>
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice
Assistant Treasurer president and a senior manager
of the mutual fund finance divi-
sion of Mitchell Hutchins. From
August 1992 to August 1994, he
was a vice president of Black-
Rock Financial Management L.P.
Prior to August
1992, he was an audit manager
with Ernst & Young LLP. Mr.
Schubert is a vice president and
assistant treasurer of 30 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Prior to Sep-
tember 1993, he was a member of
the portfolio management team at
Merrill Lynch Asset Management,
Inc. Mr. Singh is a vice presi-
dent of five investment compa-
nies for which Mitchell Hutchins
or PaineWebber serves as invest-
ment adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice
Treasurer president and the director of
the mutual fund finance division
of Mitchell Hutchins. Prior to
1991, he was an audit senior
manager with Ernst & Young LLP.
Mr. Sluyters is a vice president
and treasurer of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing direc-
tor and chief investment offi-
cer--U.S. equity investments of
Mitchell Hutchins. Prior to
March 1995, he was a vice presi-
dent and directed the U.S. funds
management and equity research
areas of Chase Manhattan Private
Bank. Mr. Tincher is a vice
president of 14 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
---------------------- -------------------- --------------------
<S> <C> <C>
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice
president and a portfolio man-
ager of Mitchell Hutchins. Mr.
Varrelman is a vice president of
five investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice presi-
Assistant Secretary dent and associate general coun-
sel of Mitchell Hutchins. Prior
to May 1995, he was an attorney
in private practice. Mr. Weller
is a vice president and assis-
tant secretary of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, N.Y. 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell 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, PaineWebber and/or Mitchell
Hutchins.
The Corporation pays directors who are not interested persons of the
Corporation $1,000 annually per series of the Corporation and 1% per meeting of
the board or any committee thereof. Directors are reimbursed for any expenses
incurred in attending meetings of the board 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.
13
<PAGE>
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 29, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM THE
COMPENSATION CORPORATION
FROM THE AND THE
NAME OF PERSON, POSITION CORPORATION* COMPLEX+
- ------------------------ ------------ ------------
<S> <C> <C>
Richard Q. Armstrong, Director........................ $ 9,000
Richard R. Burt, Director............................. 7,750
Meyer Feldberg, Director.............................. $2,375 106,375
George W. Gowen, Director............................. 2,375 99,750
Frederic V. Malek, Director........................... 2,375 99,750
Carl W. Schafer, Director............................. 118,175
John R. Torell, III, Director......................... 28,125
</TABLE>
- --------
Only independent members of the board of directors are compensated by the
Corporation and identified above; directors who are "interested persons," as
defined by the 1940 Act, do not receive compensation.
* Represents fees paid to each director during the fiscal year ended February
29, 1996; the Corporation does not have a pension or retirement plan.
+ Represents total compensation paid to each director during the calendar year
ended December 31, 1995.
BENEFICIAL OWNERSHIP OF GREATER THAN 5% OF FUND SHARES
The following shareholder is shown in the Trust's records as owning more than
5% of Money Market Fund's shares.
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF
SHARES BENEFICIALLY
OWNED
NAME AND ADDRESS* AS OF JUNE 5, 1996
- ----------------- ----------------------
<S> <C> <C>
H. Cherrick.............................................. 6,022,113.190 (12.38%)
</TABLE>
- --------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
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 a fee, computed daily and paid
monthly, at the annual rate of 0.50% of the Fund's average daily net assets.
During the fiscal years ended February 29, 1996, February 28, 1995 and
February 28, 1994, the Fund paid (or accrued) to Mitchell Hutchins investment
advisory and administrative fees of $312,991, $536,405 and $134,243,
respectively.
Under a service agreement that is reviewed annually by the Corporation's
board of directors, 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 29, 1996,
14
<PAGE>
February 28, 1995 and February 28, 1994, the Fund paid or accrued to
PaineWebber, $17,432, $21,549 and $11,227, respectively.
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) 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; (13) any
extraordinary expenses (including fees and disbursements of counsel) incurred
by the Corporation or the Fund; (14) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (15) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (16) the cost
of investment company literature and other publications provided to directors
and officers; and (17) costs of mailing, stationery and communications
equipment.
As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees and extraordinary items, are excluded from this limitation. No such
reimbursements were required for the fiscal years ended February 29, 1996,
February 28, 1995 and February 28, 1994.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Advisory Contract terminates
automatically upon assignment and is terminable with respect to the Fund at any
time without penalty by the Corporation's board of directors or by vote of the
holders of a majority of the Fund's outstanding voting securities on 60 days'
written notice to Mitchell Hutchins, or by Mitchell Hutchins on 60 days'
written notice to the Fund.
15
<PAGE>
The following table shows the approximate net assets as of May 31, 1996,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
INVESTMENT CATEGORY NET ASSETS ($ MIL)
------------------- -------------------
<S> <C>
Domestic (excluding Money Market)..................... $ 5,608.2
Global................................................ 2,833.3
Equity/Balanced....................................... 3,127.4
Fixed Income (excluding Money Market)................. 5,314.1
Taxable Fixed Income................................ 3,683.0
Tax-Free Fixed Income............................... 1,631.1
Money Market Funds.................................... 21,968.9
</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 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 C 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 C shares of the Fund (collectively, "Exclusive Dealer
Agreements"), PaineWebber and its correspondent firms sell the Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of the Fund adopted by the Corporation in the manner prescribed
under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class
C 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 and Class C Plans,
the Fund pays Mitchell Hutchins distribution fees, accrued daily and payable
monthly, at the annual rate of 0.50% of the average daily net assets of the
Class B shares and the Class C shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the board of directors of the Corporation 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
16
<PAGE>
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 29, 1996, the Fund paid (or accrued) fees
to Mitchell Hutchins under the Plans as follows: Class A--$44,610, Class B--
$255,457 and Class C--$80,194.
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Fund for the fiscal year ended February 29, 1996:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <C> <C>
Marketing and advertising........................... $ 23,771 $15,992 $ 20,190
Amortization of commissions......................... NA 166,290 16,194
Printing of prospectuses and statements of addi-
tional information for other than current share-
holders............................................ 213 239 51
Service fees paid to PaineWebber investment execu-
tives.............................................. 20,045 33,129 10,111
Branch network costs allocated and interest expense
................................................... 125,416 99,717 108,771
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins in 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 Class A Plan, the directors considered all the features of
the distribution system, including (1) the benefit to the Fund and its
shareholders of the Fund being available as an exchange vehicle for the Class A
shares of other PaineWebber mutual funds such that Class A Fund shares could be
exchanged with Class A shares of other PaineWebber mutual funds without an
initial sales charge being incurred, (2) the advantages to the shareholders of
economies of scale resulting from growth in the Fund's assets and potential
continued growth, (3) the services provided to the Fund and its shareholders by
Mitchell Hutchins, (4) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (5) Mitchell Hutchins'
shareholder service-related expenses and costs.
In approving the Class B Plan, 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
benefit to the Fund and its shareholders of the Fund being available as an
exchange vehicle for shares of the corresponding class of other PaineWebber
mutual funds such that Class B Fund shares could be exchanged with shares of
the corresponding class of other PaineWebber mutual funds without a contingent
deferred sales charge
17
<PAGE>
being incurred; (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
and distribution-related expenses and costs.
In approving the Class C Plan, the directors considered all the features of
the distribution system, including (1) the benefit to the Fund and its
shareholders of the Fund being available as an exchange vehicle for shares of
the corresponding class of other PaineWebber mutual funds, (2) the advantage to
investors in paying for distribution on an ongoing basis, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales compensation for their sales of Class C
shares on an ongoing basis, along with continuing service fees, while their
customers invest their entire purchase payments immediately in Class C shares
and do not face contingent deferred sales charges for shares held more than one
year, 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 of shares
held more than one year, was conditioned upon its expectation of being
compensated under the Class C Plan.
With respect to each Plan, the directors considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, 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 which are calculated based upon
a percentage of the average net assets of the Fund, which fees would increase
if the Plan were successful and the Fund attained and maintained significant
asset levels.
For the fiscal year ended February 29, 1996, Mitchell Hutchins earned and
retained the following contingent deferred sales charges paid upon certain
redemptions of Class A, Class B and Class C shares:
<TABLE>
<S> <C>
Class A....................................... $ 0
Class B....................................... $285,185
Class C....................................... $ 0
</TABLE>
PORTFOLIO TRANSACTIONS
The Advisory Contract authorizes Mitchell Hutchins (with the approval of the
Corporation's board of directors) to select brokers and dealers to execute
purchases and sales of the Fund's portfolio securities. It directs Mitchell
Hutchins to use its best efforts to obtain the best available price and most
favorable execution with respect to all transactions for the Fund. To the
extent that
18
<PAGE>
the execution and price offered by more than one dealer are comparable,
Mitchell Hutchins may, in its discretion, effect transactions in portfolio
securities with dealers who provide the Fund with research, analysis, advice
and similar services. The Fund will not purchase portfolio securities at a
higher price or sell such securities at a lower price in connection with
transactions effected with a dealer, acting as principal, who furnishes
research services to Mitchell Hutchins than would be the case if no weight were
given by Mitchell Hutchins to the dealer's furnishing of such services. 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 over-the-counter ("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 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 dealers in connection with other funds or accounts that
Mitchell Hutchins advises may be used by Mitchell Hutchins in advising the
Fund. Since its inception, the Fund has not paid any brokerage commissions, nor
has it allocated any transactions to dealers for research, analysis, advice and
similar services. Information and research received from such dealers will be
in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Advisory Contract.
The Fund purchases portfolio securities from dealers and underwriters as well
as from issuers. Securities are usually traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. 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. When securities are purchased
directly from an issuer, no commissions or discounts are paid. When securities
are purchased in underwritten offerings, they include a fixed amount of
compensation to the underwriter.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s)
as to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned or upon
its ability to complete its entire order, in other cases it is believed that
coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
Mitchell Hutchins may seek to obtain an undertaking from issuers of
commercial paper or dealers selling the commercial paper to consider the
repurchase of such securities from the Fund
19
<PAGE>
prior to their maturity at their original cost plus interest (sometimes
adjusted to reflect the actual maturity of the securities), if it believes that
the Fund's anticipated need for liquidity makes such actions desirable. Any
such repurchase prior to maturity reduces the possibility that the Fund would
incur a capital loss in liquidating commercial paper for which there is no
established market, especially if interest rates have risen since acquisition
of the particular commercial paper.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION; REDUCED SALES CHARGES
As discussed in the Prospectus, eligible shares of the Fund may be exchanged
only for shares of the corresponding Class of most other PaineWebber mutual
funds.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or the Fund temporarily
delays or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the Fund's investment objective, policies and
restrictions.
If conditions exist which make cash payments undesirable, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The 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 Securities and
Exchange Commission ("SEC") permits its withdrawal. The Fund may suspend
redemption privileges or postpone the date of payment during any period (1)
when the NYSE is closed or trading on the NYSE is restricted as determined by
the SEC, (2) when an emergency exists, as defined by the SEC, which makes it
not reasonably practicable for the Fund to dispose of securities owned by it or
to determine fairly the value of its assets or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of the Fund's portfolio at the time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only
to redemptions 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 the time of purchase of at least $1 million.
20
<PAGE>
As discussed 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 needed in obtaining such investments.
CONVERSION OF CLASS B SHARES
Class B shares of the Fund will automatically convert to Class A shares,
based on the relative net asset values per share of the two Classes, as of the
close of business on the first Business Day (as defined 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 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.
Under normal circumstances, the net asset values per share of the two Classes
will be the same. However, if the Fund's accrued expenses on any Business Day
were to exceed the Fund's accrued income for that Business Day, the net asset
value per share of the Class B shares could be lower than that of the Class A
shares because of the higher ongoing expenses borne by the Class B shares. If
such a divergence existed on a conversion date, a shareholder would receive
fewer Class A shares than the number of Class B shares converted, although the
dollar value would be the same. As set forth below under "Valuation of Shares,"
the Fund uses its best efforts to maintain its net asset value for each Class
at $1.00 per share, and Mitchell Hutchins considers the possibility that the
net asset values per share of the two Classes will diverge to be remote.
VALUATION OF SHARES
The Fund determines its net asset value per share separately for each Class
as of the close of regular trading (currently 4:00 p.m., Eastern time) on the
NYSE on 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.
21
<PAGE>
The Fund values its portfolio securities in accordance with the amortized
cost method of valuation under Rule 2a-7 under the 1940 Act. To use amortized
cost to value its portfolio securities, the Fund must adhere to certain
conditions under that Rule relating to the Fund's investments, some of which
are discussed in the Prospectus. Amortized cost is an approximation of market
value of an instrument, whereby the difference between its acquisition cost and
value at maturity is amortized on a straight-line basis over the remaining life
of the instrument. The effect of changes in the market value of a security as a
result of fluctuating interest rates is not taken into account and thus the
amortized cost method of valuation may result in the value of a security being
higher or lower than its actual market value. In the event that a large number
of redemptions take place at a time when interest rates have increased, the
Fund may have to sell portfolio securities prior to maturity and at a price
that might not be as desirable.
The Corporation's board of directors has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share, which
include a review of the extent of any deviation of net asset value per share,
based on available market quotations, from the $1.00 amortized cost per share.
Should that deviation exceed 1/2 of 1%, the directors will promptly consider
whether any action should be initiated to eliminate or reduce material dilution
or other unfair results to shareholders. Such action may include redeeming
shares in kind, selling portfolio securities prior to maturity, reducing or
withholding dividends and utilizing a net asset value per share as determined
by using available market quotations. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will not purchase any
instrument with a remaining maturity greater than 13 months, will limit
portfolio investments, including repurchase agreements, to those U.S. dollar-
denominated instruments that are of high quality and that the directors
determine present minimal credit risks as advised by Mitchell Hutchins, and
will comply with certain reporting and recordkeeping procedures. There is no
assurance that constant net asset value will be maintained. In the event
amortized cost ceases to represent fair value per share, the board will take
appropriate action.
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried at their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the Corporation's board
of directors.
CALCULATION OF YIELD
The Fund computes its yield and effective yield quotations for each Class of
shares using standardized methods required by the SEC. The Fund from time to
time advertises for each Class of shares (1) the current yield based on a
recently ended seven-day period, computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one share of such Class at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from that
shareholder account, dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent, and (2) the effective
yield based on the same seven-day
22
<PAGE>
period by compounding the base period return and by adding 1, raising the sum
to a power equal to (365/7) and subtracting 1 from the result, according to the
following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)/3//6//5///7/] - 1
For the seven days ended February 29, 1996, the yield of the Fund's Class A
shares was 3.95%, of the Class B shares was 3.44% and of the Class C shares was
3.34%. The effective yield of the Fund's Class A shares was 4.03%, of the Class
B shares was 3.50% and of the Class C shares was 3.40%.
Yield may fluctuate daily and does not provide a basis for determining future
yields. Because the yield of each Class of shares of the Fund fluctuates, it
cannot be compared with yields on savings accounts or other investment
alternatives that provide an agreed-to or guaranteed fixed yield for a stated
period of time. However, yield information may be useful to an investor
considering temporary investments in money market instruments. In comparing the
yield of one money market fund to another, consideration should be given to
each fund's investment policies, including the types of investments made, the
average maturity of the portfolio securities and whether there are any special
account charges which may reduce the yield.
OTHER 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 results. The return of an
investment in the Fund will fluctuate. In Performance Advertisements, the Fund
may compare its yield with data published by Lipper Analytical Services, Inc.
for money funds ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
IBC/Donoghue's Money Market Fund Report ("Donoghue"), 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 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 the Consumer Price Index as published by
the U.S. Department of Commerce. The Fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Donoghue, Wiesenberger, ICD
or Morningstar. Performance Advertisements also may refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals, including THE WALL STREET JOURNAL, MONEY Magazine, FORBES,
BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE
CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in
Performance Advertisements may be in graphic form.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
23
<PAGE>
The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquote(R) Money Markets. In comparing the Fund's
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Fund shares are not insured or guaranteed by the U.S.
government, its returns will fluctuate and, while the Fund attempts to maintain
a stable net asset value of $1.00 per share, there is no assurance that it will
be able to do so.
TAXES
In order to continue to qualify for treatment as a regulated investment
company 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, if any) and must meet several additional requirements. Among
these requirements are the following: (1) the Fund must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
securities and certain other income; (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; (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 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 (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) of any one
issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
OTHER INFORMATION
Prior to July 1, 1991, the Fund's name was "PaineWebber Master Money Fund."
CLASS-SPECIFIC EXPENSES. The Fund might determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of its
shares to which those expenses are attributable. For example, Class B shares
bear higher transfer agency fees per shareholder account than those borne by
Class A or Class C shares. The higher fee is imposed due to the higher costs
incurred by the transfer agent in tracking shares subject to a multi-year
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the transfer
agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected
24
<PAGE>
by the number of shareholder accounts in each Class and the relative amounts of
net assets in each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue Street, N.W., Washington, D.C., 20036-1800, 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 Corporation's independent accountants.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended February
29, 1996 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.
25
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 1
Directors and Officers..................................................... 5
Investment Advisory and Distribution Arrangements.......................... 14
Portfolio Transactions..................................................... 18
Additional Exchange and Redemption Information; Reduced Sales Charges...... 20
Conversion of Class B Shares............................................... 21
Valuation of Shares........................................................ 21
Calculation of Yield....................................................... 22
Taxes...................................................................... 24
Other Information.......................................................... 24
Financial Statements....................................................... 25
</TABLE>
(C) 1996 PaineWebber Incorporated
[LOGO OF RECYCLED PAPER
APPEARS HERE]
PaineWebber
Money Market Fund
- --------------------------------------------------------------------------------
Statement of Additional Information July 1, 1996
- --------------------------------------------------------------------------------
[LOGO OF PAINE
WEBBER APPEARS HERE]
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
PaineWebber Balanced Fund
- -------------------------
Included in part A of this Registration Statement:
Financial Highlights for one Class A share of the Fund for each of the four
years in the period ended February 29, 1996 and for the period July 1, 1991
(commencement of offering) through February 29, 1992.
Financial Highlights for one Class B share of the Fund for each of the nine
years in the period ended February 29, 1996 and for the period December 12,
1986 (commencement of operations) through February 28, 1987.
Financial Highlights for one Class C share of the Fund for each of the
three years in the period ended February 29, 1996 and for the period July
2, 1992 (commencement of offering) through February 28, 1993.
Included in part B of this Registration Statement through incorporation by
reference from the Annual Report to Shareholders filed with the Securities and
Exchange Commission through EDGAR on May 6, 1996, Accession No. 0000950130-96-
001528:
Portfolio of Investments at February 29, 1996.
Statement of Assets and Liabilities at February 29, 1996.
Statement of Operations for the year ended February 29, 1996.
Statement of Changes in Net Assets for each of the two years in the period
ended February 29, 1996.
Notes to Financial Statements.
Financial Highlights for one Class A share of the Fund for each of the four
years in the period ended February 29, 1996 and for the period July 1, 1991
(commencement of offering) through February 29, 1992.
Financial Highlights for one Class B share of the Fund for each of the five
years in the period ended February 29, 1996.
Financial Highlights for one Class C share of the Fund for each of the
three years in the period ended February 29, 1996 and for the
C - 1
<PAGE>
period July 2, 1992 (commencement of offering) through February 28,
1993.
Report of Independent Accountants dated April 15, 1996.
PaineWebber Money Market Fund
- -----------------------------
Included in part A of this Registration Statement:
Financial Highlights for one Class A share of the Fund for each of the four
years in the period ended February 29, 1996 and for the period July 1, 1991
(commencement of offering) through February 29, 1992.
Financial Highlights for one Class B share of the Fund for each of the nine
years in the period ended February 29, 1996 and for the period September
26, 1986 (commencement of operations) through February 28, 1987.
Financial Highlights for one Class C share of PaineWebber Money Market Fund
for each of the three years in the period ended February 29, 1996 and for
the period July 14, 1992 (commencement of offering) through February 28,
1993.
Included in part B of this Registration Statement through incorporation by
reference from the Annual Report to Shareholders filed with the Securities and
Exchange Commission through EDGAR on April 29, 1996, Accession No. 0000780403-
96-000001:
Statement of Net Assets at February 29, 1996.
Statement of Operations for the year ended February 29, 1996.
Statement of Changes in Net Assets for each of the two years in the period
ended February 29, 1996.
Notes to Financial Statements.
Financial Highlights for one Class A share of the Fund for each of the four
years in the period ended February 29, 1996 and for the period July 1, 1991
(commencement of offering) to February 29, 1992.
Financial Highlights for one Class B share of the Fund for each of the five
years in the period ended February 29, 1996.
Financial Highlights for one Class C share of the Fund for each of the
three years in the period ended February 29, 1996 and for the period July
14, 1992 (commencement of offering) to February 28, 1993.
C - 2
<PAGE>
Report of Independent Accountants dated April 15, 1996.
(b) Exhibits:
(1) (a) Amended and Restated Articles of Incorporation effective
July 1, 1991 5/
-
(b) Articles of Amendment effective July 24, 1995 (filed
herewith)
(c) Articles of Amendment effective November 9, 1995 (filed
herewith)
(d) Articles Supplementary effective November 20, 1995 (filed
herewith)
(e) Articles Supplementary effective June 26, 1996 (filed
herewith)
(2) (a) Amended By-Laws 1/
-
(b) Certificate of Amendment dated September 24, 1994 to By-Laws
11/
--
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's
common stock 12/
--
(5) Investment Advisory and Administration Contract 2/
-
(6) (a) Distribution Contract with respect to Class A shares 10/
--
(b) Distribution Contract with respect to Class B shares 10/
--
(c) Distribution Contract with respect to Class C shares (filed
herewith)
(d) Distribution Contract with respect to Class Y shares (filed
herewith)
(e) Exclusive Dealer Agreement with respect to Class A shares
10/
--
(f) Exclusive Dealer Agreement with respect to Class B shares
10/
--
(g) Exclusive Dealer Agreement with respect to Class C shares
(filed herewith)
(h) Exclusive Dealer Agreement with respect to Class Y shares
(filed herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
-
(9) (a) Transfer Agency Agreement 4/
-
(b) Service Contract 3/
-
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant with respect to Class A and Class B Shares
5/
-
(b) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant with respect to Class C Shares 7/
-
(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant with respect to Class Y Shares of
PaineWebber Balanced Fund (filed herewith)
(11) Other opinions, appraisals, rulings and consents:
C - 3
<PAGE>
Accountant's Consent (filed herewith)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent 1/
-
(14) Prototype Retirement Plan 6/
-
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class A Shares 7/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares 7/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares 8/
-
(16) (a) Schedule for Computation of Performance Quotations with
respect to Class B Shares 5/
-
(b) Schedule for Computation of Performance Quotations with
respect to Class A Shares 7/
-
(c) Schedule for Computation of Performance Quotations with
respect to Class C Shares 9/
-
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
____________________
1/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
- -
registration statement, SEC File No. 33-2524, filed March 11, 1986.
2/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- -
registration statement, SEC File No. 33-2524, filed April 28, 1989.
3/ Incorporated by reference from Post-Effective Amendment No. 11 to the
- -
registration statement, SEC File No. 33-2524, filed June 29, 1990.
4/ Incorporated by reference from Post-Effective Amendment No. 13 to the
- -
registration statement, SEC File No. 33-2524, filed May 3, 1991.
5/ Incorporated by reference from Post-Effective Amendment No. 14 to the
- -
registration statement, SEC File No. 33-2524, filed June 27, 1991.
6/ Incorporated by reference from Post-Effective Amendment No. 20 to the
- -
registration statement of PaineWebber Managed Investments Trust, SEC File
No. 2-91362, filed April 1, 1992.
7/ Incorporated by reference from Post-Effective Amendment No. 16 to the
- -
registration statement, SEC File No. 33-2524, filed May 1, 1992.
8/ Incorporated by reference from Post-Effective Amendment No. 18 to
- -
C - 4
<PAGE>
the registration statement, SEC File No. 33-2524, filed April 30, 1993.
9/ Incorporated by reference from Post-Effective Amendment No. 19 to the
- -
registration statement, SEC File No. 33-2524, filed July 1, 1993.
10/ Incorporated by reference from Post-Effective Amendment No. 21 to the
- --
registration statement, SEC File No. 33-2524, filed July 1, 1994.
11/ Incorporated by reference from Post-Effective Amendment No. 24 to the
- --
registration statement, SEC File No. 33-2524, filed June 27, 1995.
12/ Incorporated by reference from Articles Sixth, Seventh, Eighth, Eleventh
- --
and Twelfth of the Registrant's Articles of Incorporation and from Articles
II, VIII, X, XI and XII of the Registrant's By-Laws, as amended September
28, 1994.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
None.
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Number of Record
Shareholders as of
Title of Class June 5, 1996
-------------- -------------------
<S> <C>
Shares of common stock
($.001 par value)
PaineWebber Balanced Fund
- Class A shares 13,340
- Class B shares 2,403
- Class C Shares 603
PaineWebber Money Market Fund
- Class A shares 1,430
- Class B shares 1,506
- Class C shares 324
</TABLE>
Item 27. Indemnification
---------------
Article Eleventh of the Amended and Restated Articles of Incorporation provides
that the directors and officers of the Registrant shall not be liable to the
Registrant or to any of its stockholders for monetary
C - 5
<PAGE>
damages to the maximum extent permitted by applicable law. Article Eleventh also
provides that any repeal or modification of Article Eleventh or adoption, or
modification of any other provision of the Articles or By-Laws inconsistent with
Article Eleventh shall not adversely affect any limitation of liability of any
director or officer of the Registrant with respect to any act or failure to act
which occurred prior to such repeal, modification or adoption.
Article Eleventh of the Amended and Restated Articles of Incorporation and
Section 10.01 of Article X of the By-Laws provide that the Registrant shall
indemnify and advance expenses to its present and past directors, officers,
employees and agents, and any persons who are serving or have served at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or enterprise, to the fullest
extent permitted by law.
Section 10.02 of Article X of the By-Laws further provides that the Registrant
may purchase and maintain insurance on behalf of any person who is or was a
director, officer or employee of the Registrant, or is or was serving at the
request of the Registrant as a director, officer or employee of a corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or out of his or her status as such whether or not the
Registrant would have the power to indemnify him or her against such liability.
Section 9 of the Investment Advisory and Administration Contract provides that
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
Registrant in connection with the matters to which the Contract relates except
for a loss resulting from willful misfeasance, bad faith or gross negligence of
Mitchell Hutchins in the performance of its duties or from its reckless
disregard of its obligations and duties under the Contract. Section 9 further
provides that any person, even though also an officer, partner, employee or
agent of Mitchell Hutchins, who may be or become an officer, director, employee
or agent of Registrant shall be deemed, when rendering services to the
Registrant or acting with respect to any business of the Registrant, to be
rendering such service to or acting solely for the Registrant and not as an
officer, partner, employee, or agent or one under the control or direction of
Mitchell Hutchins even though paid by it.
Section 9 of each Distribution Contract provides that the Registrant will
indemnify Mitchell Hutchins and its officers, directors or controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Registrant for use in the
C - 6
<PAGE>
Registration Statement; and provided that this indemnity agreement shall not
protect any such persons against liabilities arising by reason of their bad
faith, gross negligence or willful misfeasance; and shall not inure to the
benefit of any such persons unless a court of competent jurisdiction or
controlling precedent determines that such result is not against public policy
as expressed in the Securities Act of 1933. Section 9 of each Distribution
Contract also provides that Mitchell Hutchins agrees to indemnify, defend and
hold the Registrant, its officers and directors free and harmless of any claims
arising out of any alleged untrue statement or any alleged omission of material
fact contained in information furnished by Mitchell Hutchins for use in the
Registration Statement or arising out of an agreement between Mitchell Hutchins
and any retail dealer, or arising out of supplementary literature or advertising
used by Mitchell Hutchins in connection with each Distribution Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Section 7 of the Service Contract provides that PaineWebber shall be indemnified
and held harmless by the Registrant against all liabilities, except those
arising out of bad faith, gross negligence, willful misfeasance or reckless
disregard of its duties under the Service Contract.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be provided to directors, officers and controlling persons
of the Registrant, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Registrant by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered investment adviser
and is a wholly owned subsidiary of PaineWebber which is, in turn, a wholly
owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is primarily
engaged in the investment advisory business.
C - 7
<PAGE>
Information as to the officers and directors of Mitchell Hutchins is included in
its Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-13219) and is incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER INVESTMENT TRUST III
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant.
The directors and officers of Mitchell Hutchins, their principal
business addresses, and their positions and offices with Mitchell
Hutchins are identified in its Form ADV, as filed with the Securities
and Exchange Commission (registration number 801-13219). The directors
and officers of PaineWebber, their principal business addresses, and
their positions and offices with PaineWebber are identified in its
Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby
incorporated herein by reference. The information set forth below is
furnished for those directors and officers of Mitchell Hutchins or
PaineWebber who also serve as directors or officers of the Registrant:
C - 8
<PAGE>
<TABLE>
<CAPTION>
Position and Offices
Name and Principal Position With With Underwriter or
Business Address Registrant Exclusive Dealer
- ------------------ ------------- ---------------------
<S> <C> <C>
Margo N. Alexander President President, Chief
1285 Avenue of the Americas Executive Officer and a
New York, New York 10019 Director of Mitchell
Hutchins; Executive Vice
President and Director
of PaineWebber
T. Kirkham Barneby Vice President Managing Director and
1285 Avenue of the Americas Chief Investment Officer
New York, New York 10019 - Quantitative
Investments of Mitchell
Hutchins
Teresa M. Boyle Vice President First Vice President and
1285 Avenue of the Americas Manager - Advisory
New York, New York 10019 Administration of
Mitchell Hutchins
Mary C. Farrell Trustee Managing Director,
1285 Avenue of the Americas Senior Investment
New York, New York 10019 Strategist and Member of
the Investment Policy
Committee of PaineWebber
C. William Maher Vice President First Vice President and
1285 Avenue of the Americas and Assistant a Senior Manager of the
New York, New York 10019 Treasurer Mutual Fund Finance
Division of Mitchell
Hutchins
</TABLE>
C - 9
<PAGE>
<TABLE>
<CAPTION>
Position and Offices
Name and Principal Position With With Underwriter or
Business Address Registrant Exclusive Dealer
- ------------------ ------------- --------------------
<S> <C> <C>
Dennis McCauley Vice President Managing Director and
1285 Avenue of the Americas Chief Investment Officer
New York, New York 10019 - Fixed Income of
Mitchell Hutchins
Susan Messina Vice President Senior Vice President of
1285 Avenue of the Americas Mitchell Hutchins
New York, New York 10019
Ann E. Moran Vice President Vice President of
1285 Avenue of the Americas and Assistant Mitchell Hutchins
New York, New York 10019 Treasurer
Dianne E. O'Donnell Vice President Senior Vice President
1285 Avenue of the Americas and Secretary and Deputy General
New York, New York 10019 Counsel of Mitchell
Hutchins
Victoria E. Schonfeld Vice President Managing Director and
1285 Avenue of the Americas General Counsel of
New York, New York 10019 Mitchell Hutchins
Paul H. Schubert Vice President Vice President of and a
1285 Avenue of the Americas and Assistant Senior Manager of the
New York, New York 10019 Treasurer Mutual Fund Finance
Division of Mitchell
Hutchins
Nirmal Singh Vice President First Vice President and
1285 Avenue of the Americas a Portfolio Manager at
New York, New York 10019 Mitchell Hutchins
</TABLE>
C - 10
<PAGE>
<TABLE>
<CAPTION>
Position and Offices
Name and Principal Position With With Underwriter or
Business Address Registrant Exclusive Dealer
- ------------------ ------------- ---------------------
<S> <C> <C>
Julian F. Sluyters Vice President and Senior Vice President
1285 Avenue of the Americas Treasurer and Director of Mutual
New York, New York 10019 Fund Finance Division of
Mitchell Hutchins
Mark A. Tincher Vice President Managing Director and
1285 Avenue of the Americas Chief Investment Officer
New York, New York 10019 - U.S. Equity
Investments of Mitchell
Hutchins
Craig Varrelman Vice President First Vice President and
1285 Avenue of the Americas a Portfolio Manager of
New York, New York 10019 Mitchell Hutchins
Keith A. Weller Vice President First Vice President and
1285 Avenue of the Americas and Assistant Associate General
New York, New York 10019 Secretary Counsel of Mitchell
Hutchins
</TABLE>
C) None
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and (d) of Rule
31a-1 under the Investment Company Act of 1940 are maintained in the physical
possession of Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York
10019. All other accounts, books and documents required by Rule 31a-1 are
maintained in the physical possession of Registrant's transfer agent and
custodian.
Item 31. Management Services
-------------------
Not applicable.
C - 11
<PAGE>
Item 32. Undertakings
------------
Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C - 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
all the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 27th day of June, 1996.
PAINEWEBBER MASTER SERIES, INC.
By: /s/ Dianne E. O'Donnell
--------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Margo N. Alexander President and Director June 27, 1996
--------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/E. Garrett Bewkes, Jr. Director and Chairman June 27, 1996
--------------------------- of the Board of Directors
E. Garrett Bewkes, Jr. *
/s/Richard Q. Armstrong Director June 27, 1996
---------------------------
Richard Q. Armstrong *
/s/Richard R. Burt Director June 27, 1996
---------------------------
Richard R. Burt *
/s/Mary C. Farrell Director June 27, 1996
---------------------------
Mary C. Farrell *
/s/Meyer Feldberg Director June 27, 1996
---------------------------
Meyer Feldberg *
/s/George W. Gowen Director June 27, 1996
---------------------------
George W. Gowen *
/s/Frederic V. Malek Director June 27, 1996
---------------------------
Frederic V. Malek *
/s/Carl W. Schafer Director June 27, 1996
---------------------------
Carl W. Schafer *
/s/John R. Torell III Director June 27, 1996
---------------------------
John R. Torell III *
/s/Julian F. Sluyters Vice President and Treasurer
--------------------------- (Chief Financial and Accounting June 27, 1996
Julian F. Sluyters Officer)
</TABLE>
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 25 of PaineWebber RMA Tax-Free Fund, Inc., SEC File No. 2-78319, filed
June 27, 1996.
<PAGE>
PAINEWEBBER MASTER SERIES, INC.
EXHIBIT INDEX
-------------
Exhibit
(1) (a) Amended and Restated Articles of Incorporation effective July 1, 1991
5/
-
(b) Articles of Amendment effective July 24, 1995 (filed herewith)
(c) Articles of Amendment effective November 9, 1995 (filed herewith)
(d) Articles Supplementary effective November 20, 1995 (filed herewith)
(e) Articles Supplementary effective June 26, 1996 (filed herewith)
(2) (a) Amended By-Laws 1/
-
(b) Certificate of Amendment dated September 24, 1994 to By-Laws 11/
--
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's common
stock 12/
--
(5) Investment Advisory and Administration Contract 2/
-
(6) (a) Distribution Contract with respect to Class A Shares 10/
--
(b) Distribution Contract with respect to Class B Shares 10/
--
(c) Distribution Contract with respect to Class C Shares (filed
herewith)
(d) Distribution Contract with respect to Class Y Shares (filed
herewith)
(e) Exclusive Dealer Agreement with respect to Class A Share 10/
--
(f) Exclusive Dealer Agreement with respect to Class B Shares 10/
--
(g) Exclusive Dealer Agreement with respect to Class C Shares
(filed herewith)
(h) Exclusive Dealer Agreement with respect to Class Y Shares
(filed herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
-
(9) (a) Transfer Agency Agreement 4/
-
(b) Service Contract 3/
-
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A and B Shares 5/
-
(b) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class C Shares 7/
-
(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y Shares of PaineWebber Balanced
Fund (filed herewith)
(11) Other opinions, appraisals, rulings and consents:
<PAGE>
Accountant's Consent (filed herewith)
(12) Financial Statements omitted from prospectus - none
(13) Letter of investment intent 1/
-
(14) Prototype Retirement Plan 6/
-
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares 7/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares 7/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
C Shares 8/
-
(16) (a) Schedule for Computation of Performance Quotations with respect
to Class B Shares 5/
-
(b) Schedule for Computation of Performance Quotations with respect
to Class A Shares 7/
-
(c) Schedule for Computation of Performance Quotations with respect
to Class C Shares 9/
-
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
_______________
1/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
- -
registration statement, SEC File No. 33-2524, filed March 11, 1986.
2/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- -
registration statement, SEC File No. 33-2524, filed April 28, 1989.
3/ Incorporated by reference from Post-Effective Amendment No. 11 to the
- -
registration statement, SEC File No. 33-2524, filed June 29, 1990.
4/ Incorporated by reference from Post-Effective Amendment No. 13 to the
- -
registration statement, SEC File No. 33-2524, filed May 3, 1991.
5/ Incorporated by reference from Post-Effective Amendment No. 14 to the
- -
registration statement, SEC File No. 33-2524, filed June 27, 1991.
6/ Incorporated by reference from Post-Effective Amendment No. 20 to the
- -
registration statement of PaineWebber Managed Investments Trust, SEC
File No. 2-91362, filed April 1, 1992.
7/ Incorporated by reference from Post-Effective Amendment No. 16 to the
- -
registration statement, SEC File No. 33-2524, filed May 1, 1992.
8/ Incorporated by reference from Post-Effective Amendment No. 18 to the
- -
registration statement, SEC File No. 33-2524, filed April 30, 1993.
<PAGE>
9/ Incorporated by reference from Post-Effective Amendment No. 19 to the
- -
registration statement, SEC File No. 33-2524, filed July 1, 1993.
10/ Incorporated by reference from Post-Effective Amendment No. 21 to the
- --
registration statement, SEC File No. 33-2524, filed July 1, 1994.
11/ Incorporated by reference from Post-Effective Amendment No. 24 to the
- --
registration statement, SEC File No. 33-2524, filed June 27, 1995.
12/ Incorporated by reference from Articles Sixth, Seventh, Eighth,
- --
Eleventh and Twelfth of the Registrant's Articles of Incorporation and from
Articles II, VIII, X, XI and XII of the Registrant's By-Laws, as amended
September 28, 1994.
<PAGE>
Exhibit 1(b)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
PAINEWEBBER MASTER SERIES, INC.
Pursuant to Sections 2-605(a)(4) and 2-607 of the Maryland General
Corporation Law, PaineWebber Master Series, Inc. ("Corporation") adopts the
following Articles of Amendment to the Corporation's Articles of Incorporation,
effective as of July 21, 1995:
FIRST: The name of the following Series of capital stock of the
Corporation is changed as follows:
PaineWebber Asset Allocation Fund to PaineWebber Balanced Fund
--
SECOND: The Amendments herein contained were approved by a majority of the
entire Board of Directors of the Corporation and are limited to a change
expressly permitted by Section 2-605(a)(4) of the Maryland General Corporation
Law to be made without action by the stockholders of the Corporation.
THIRD: The Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended.
IN WITNESS WHEREOF, the undersigned vice-president of PaineWebber Master
Series, Inc. hereby executes these Articles of Amendment on behalf of said
Corporation, acknowledging them to be the act of said Corporation and certifies
that, to the best of her knowledge, information and belief, the matters and
facts wet forth herein are true in all material respects, under the penalties of
perjury.
Dated: July 21, 1995 PAINEWEBBER MASTER SERIES, INC.
Attest: /s/Gregory K. Todd By: /s/Dianne E. O'Donnell
--------------------- -----------------------
Gregory K. Todd Dianne E. O'Donnell
Assistant Secretary Vice President
<PAGE>
Exhibit 1 (c)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
PAINEWEBBER MASTER SERIES, INC.
Pursuant to Sections 2-605(a)(4) and 2-607 of the Maryland General
Corporation Law, PaineWebber Master Series, Inc. ("Corporation") adopts the
following Articles of Amendment to the Corporation's Articles of Incorporation,
effective as of November 10, 1995:
FIRST: The Class D Common Stock of each Series of the Corporation is
renamed Class C Common Stock.
SECOND: The Amendment herein contained was approved by a majority of the
entire Board of Directors of the Corporation and is limited to a change
expressly permitted by Section 2-605(a)(4) of the Maryland General Corporation
Law to be made without action by the stockholders of the Corporation.
THIRD: The Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended.
IN WITNESS WHEREOF, the undersigned vice-president of the Corporation
hereby executes these Articles of Amendment on behalf of said Corporation,
acknowledging them to be the act of said Corporation and certifies that, to the
best of her knowledge, information and belief, the matters and facts set forth
herein are true in all material respects, under the penalties of perjury.
Dated: November 6, 1995 PAINEWEBBER MASTER SERIES, INC.
Attest: /s/ Gregory K. Todd By: /s/ Dianne E. O'Donnell
--------------------- -----------------------
Gregory K. Todd Dianne E. O'Donnell
Assistant Secretary Vice President
<PAGE>
Exhibit 1(d)
ARTICLES SUPPLEMENTARY
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PAINEWEBBER MASTER SERIES, INC.
Pursuant to Section 2-208.1 of the Maryland General Corporation Law, as
amended ("Code"), PaineWebber Master Series, Inc. ("Corporation"), adopts the
following Articles Supplementary to the Corporation's Amended and Restated
Articles of Incorporation.
FIRST: The Corporation, organized on October 29, 1985, is authorized to
-----
issue ten billion (10,000,000,000) shares of capital stock of separate series,
one tenth of one cent ($0.001) par value per share, having an aggregate par
value of $10 million dollars ($10,000,000.00).
The Board of Directors ("Board") of the Corporation has previously
authorized the allocation of the ten billion authorized shares of capital stock
among the Corporation's four series as follows: three billion (3,000,000,000)
shares to the PaineWebber Blue Chip Growth Fund series ("Blue Chip Growth
Fund"), three billion (3,000,000,000) shares to the PaineWebber Balanced Fund
series ("Balanced Fund") (formerly named Asset Allocation Fund), three billion
(3,000,000,000) shares to the former PaineWebber Income Fund series ("Income
Fund"), and one
<PAGE>
billion (1,000,000,000) shares to the PaineWebber Money Market Fund series
("Money Market Fund"). The shares of capital stock of each series of the
Corporation were divided into three classes, Class A shares, Class B shares and
Class D shares, each class of which represents interests in the same assets of
each Fund. Effective November 10, 1995, pursuant to Board approval, the Class D
capital stock was renamed Class C capital stock.
Prior to these Articles Supplementary, pursuant to Board and shareholder
approved reorganizations, the assets of each of Income Fund and Blue Chip Growth
Fund were acquired and its liabilities were assumed by separate series of other
open-end management investment companies organized as Massachusetts business
trusts. Thereafter, both Income Fund and Blue Chip Growth Fund were terminated
and all of their authorized and issued capital shares (all classes) were
reclassified as authorized and unissued.
As of the date of these Articles Supplementary, the total aggregate amount
of shares held by the Corporation as authorized and unissued for its two
terminated series is six billion (6,000,000,000) capital shares. The Board has
no present intention or plan to reclassify any class of shares of either of its
two terminated series to its two remaining series, Balanced Fund or Money Market
Fund, but reserves the right to reclassify such shares as it may from time to
time determine in accordance
- 2 -
<PAGE>
with Section 2-105(c) of the Code and Article Sixth of the Corporation's Amended
and Restated Articles of Incorporation.
The par value of the shares of capital stock of the Corporation remains
$0.001 per share. The Corporation's Class A, Class B and Class C shares of both
Balanced Fund and Money Market Fund shall continue to represent investment in
the same pool of assets and shall continue to have the same preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, as is
presently provided in the Corporation's Amended and Restated Articles of
Incorporation.
SECOND: The Corporation is registered with the U.S. Securities and
------
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940, as amended.
THIRD: The total number of shares of capital stock that the Corporation
-----
has authority to issue remains unchanged.
IN WITNESS WHEREOF, the undersigned Vice President of PaineWebber Master
Series, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further certifies under the penalties for perjury that,
to the best of her knowledge, information and belief, the
- 3 -
<PAGE>
matters and facts set forth herein are true in all material respects.
Dated: November 16, 1995
Attest: PAINEWEBBER MASTER SERIES, INC.
By: /s/Gregory K. Todd By: /s/ Dianne E. O'Donnell
--------------------- ------------------------
Gregory K. Todd Dianne E. O'Donnell
Assistant Secretary Vice President
- 4 -
<PAGE>
Exhibit 1 (e)
ARTICLES SUPPLEMENTARY
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PAINEWEBBER MASTER SERIES, INC.
Pursuant to Section 2-208.1 of the Maryland General Corporation Law, as
amended ("Code"), PaineWebber Master Series, Inc., a Maryland corporation
("Corporation"), adopts the following Articles Supplementary to the
Corporation's Amended and Restated Articles of Incorporation.
FIRST: The Board of Directors of the Corporation, by action on July 20,
-----
1995, has classified, out of the 10 billion (10,000,000,000) shares of capital
stock, $0.001 par value per share ("Shares"), it is authorized to issue, one
billion (1,000,000,000) unissued Shares as Class Y Common Stock of the
PaineWebber Balanced Fund series.
As so classified, the ten billion (10,000,000,000) Shares the Corporation
is authorized to issue shall be comprised of four billion (4,000,000,000) Shares
of the PaineWebber Balanced Fund, consisting of one billion (1,000,000,000)
shares of each of Class A Common Stock, Class B Common Stock, Class C Common
Stock and Class Y Common Stock, and one billion (1,000,000,000) Shares of the
PaineWebber Money Market Fund, consisting of three hundred thirty million
(330,000,000) shares of each of Class A Common Stock and Class B Common Stock
and three hundred forty million (340,000,000) shares of Class C Common Stock,
and five billion (5,000,000,000) Shares of the Corporation remain unclassified.
The Class A Common Stock, Class B Common Stock, Class C Common Stock and
Class Y Common Stock of PaineWebber Balanced Fund represent interests in the
same investment portfolio. The Board of Directors of the Corporation, also by
action on July 20, 1995, determined that the dividends and distributions of
investment income and capital gains with respect to the Class A Common Stock,
Class B Common Stock, Class C Common Stock and Class Y Common Stock of
PaineWebber Balanced Fund may vary among the Classes to reflect differing
allocations of expenses of that Series among the Classes to such extent and for
such purposes as the Board of Directors deems appropriate.
<PAGE>
Except as set forth above, the unissued Shares of the Corporation as so
classified for PaineWebber Balanced Fund, the Shares of PaineWebber Balanced
Fund already issued and outstanding and any other Shares that may from time to
time be authorized, established or classified or reclassified by the Board of
Directors shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption specified in the Corporation's Amended and Restated
Articles of Incorporation, as currently in effect.
SECOND: The Board of Directors has classified such Shares under the
------
authority contained in Section 2-105(c) of the Code and Article Sixth of the
Corporation's Amended and Restated Articles of Incorporation, as currently in
effect. The total number of shares of capital stock that the Corporation has
authority to issue remains unchanged.
THIRD: The Corporation is registered with the U.S. Securities and Exchange
-----
Commission as an open-end investment company under the Investment Company Act of
1940, as amended.
IN WITNESS WHEREOF, the undersigned Vice President of PaineWebber Master
Series, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further certifies under the penalties for perjury that,
to the best of her knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Dated: June 24, 1996
Attest: PAINEWEBBER MASTER SERIES, INC.
By:/s/Dianne E. O'Donnell
-------------------------
Dianne E. O'Donnell
Vice President and Secretary
ATTEST:/s/Ilene Shore
--------------------
Ilene Shore
Assistant Secretary
- 2 -
<PAGE>
EXHIBIT 6(C)
PAINEWEBBER MASTER SERIES, INC.
DISTRIBUTION CONTRACT
CLASS C SHARES
CONTRACT made as of November 10, 1995 between PAINEWEBBER MASTER SERIES,
INC., a Maryland corporation ("Fund") and MITCHELL HUTCHINS ASSET MANAGEMENT
INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of l940, as
amended ("l940 Act"), as an open-end management investment company and currently
has two distinct series of shares of common stock ("Series"), which correspond
to distinct portfolios and have been designated as the PaineWebber Money Market
Fund and PaineWebber Balanced Fund; and
WHEREAS the Fund's board of directors ("Board") has established shares of
common stock of the above-referenced Series as Class C shares ("Class C Shares")
(previously known as Class D shares); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act for its Class C Shares ("Plan") and desires to retain
Mitchell Hutchins as principal distributor in connection with the offering and
sale of the Class C Shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Board and have Class C Shares
established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of the
Class C Shares of each such Series on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins as its
-----------
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class C Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class C Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
state ment of the Fund, and any supplements thereto, under the
<PAGE>
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. Services and Duties of Mitchell Hutchins.
----------------------------------------
(a) Mitchell Hutchins agrees to sell Class C Shares on a best efforts
basis from time to time during the term of this Contract as agent for the Fund
and upon the terms described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Class C Shares to the public by a Series, Mitchell Hutchins will
hold itself available to receive purchase orders, satisfactory to Mitchell
Hutchins, for Class C Shares of that Series and will accept such orders on
behalf of the Fund as of the time of receipt of such orders and promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class C Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class C Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office. The Fund shall promptly
furnish Mitchell Hutchins with a statement of each computation of net asset
value .
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class C Shares.
(f) To facilitate redemption of Class C Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class C Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement. Such price shall reflect the subtraction
of the contingent deferred sales charge, if any, computed in accordance with and
in the manner set forth in the Registration Statement.
(g) Mitchell Hutchins shall provide ongoing shareholder services,
which include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class C Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Section 26(d) of the National Association of
- 2 -
<PAGE>
Securities Dealers, Inc. ("NASD") Rules of Fair Practice (collectively, "service
activities"). "Service activities" do not include the transfer agency-related
and other services for which PaineWebber receives compensation under the Service
Contract between PaineWebber and the Fund.
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
3. Authorization to Enter into Exclusive Dealer Agreements and to
--------------------------------------------------------------
Delegate Duties as Distributor. With respect to the Class C Shares of any or
- ------------------------------
all Series, Mitchell Hutchins may enter into an exclusive dealer agreement with
PaineWebber or any other registered and qualified dealer with respect to sales
of the Class C Shares or the provision of service activities. In a separate
contract or as part of any such exclusive dealer agreement, Mitchell Hutchins
also may delegate to PaineWebber or another registered and qualified dealer
("sub-distributor") any or all of its duties specified in this Contract,
provided that such separate contract or exclusive dealer agreement imposes on
the sub-distributor bound thereby all applicable duties and conditions to which
Mitchell Hutchins is subject under this Contract, and further provided that such
separate contract or exclusive dealer agreement meets all requirements of the
1940 Act and rules thereunder.
4. Services Not Exclusive. The services furnished by Mitchell Hutchins
----------------------
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a director, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. Compensation.
-------------
(a) As compensation for its service activities under this contract
with respect to the Class C Shares, Mitchell Hutchins shall receive from the
Fund a service fee at the rate and under the terms and conditions of the Plan
adopted by the Fund with respect to the Class C Shares of the Series, as such
Plan is amended from time to time, and subject to any further limitations on
such fee as the Board may impose.
- 3 -
<PAGE>
(b) As compensation for its activities under this contract with
respect to the distribution of the Class C Shares, Mitchell Hutchins shall
receive from the Fund a distribution fee at the rate and under the terms and
conditions of the Plan adopted by the Fund with respect to the Class C Shares of
the Series, as such Plan is amended from time to time, and subject to any
further limitations on such fee as the Board may impose.
(c) As compensation for its activities under this contract with
respect to the distribution of the Class C Shares, Mitchell Hutchins shall
receive all contingent deferred sales charges imposed on redemptions of Class C
Shares of each Series. Whether and at what rate a contingent deferred sales
charge will be imposed with respect to a redemption shall be determined in
accordance with, and in the manner set forth in, the Registration Statement.
(d) Mitchell Hutchins may reallow any or all of the distribution
fees, contingent deferred sales charges, or service fees which it is paid under
this Contract to such dealers as Mitchell Hutchins may from time to time
determine.
6. Duties of the Fund.
-------------------
(a) The Fund reserves the right at any time to withdraw offering
Class C Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class C Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing Class C Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing Class C Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of Class C Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class C Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
- 4 -
<PAGE>
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class C Shares under the 1933 Act to the end that there will be available for
sale such number of Class C Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class C Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Articles of Incorporation or By-Laws to comply with the
laws of any jurisdiction, to maintain an office in any jurisdiction, to change
the terms of the offering of the Class C Shares in any jurisdiction from the
terms set forth in its Registration Statement, to qualify as a foreign
corporation in any jurisdiction, or to consent to service of process in any
jurisdiction other than with respect to claims arising out of the offering of
the Class C Shares. Mitchell Hutchins shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such qualifications.
7. Expenses of the Fund. The Fund shall bear all costs and expenses
--------------------
of registering the Class C Shares with the Securities and Exchange Commission
and state and other regulatory bodies, and shall assume expenses related to
communications with shareholders of each Series, including (i) fees and
disbursements of its counsel and independent public accountant; (ii) the
preparation, filing and printing of registration statements and/or prospectuses
or statements of additional information required under the federal securities
laws; (iii) the preparation and mailing of annual and interim reports,
prospectuses, state ments of additional information and proxy materials to
shareholders; and (iv) the qualifications of Class C Shares for sale and of the
Fund as a broker or dealer under the securities laws of such jurisdictions as
shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph 6(e)
hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. Expenses of Mitchell Hutchins. Mitchell Hutchins shall bear all
-----------------------------
costs and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale
- 5 -
<PAGE>
of Class C Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class C Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class C Shares as
may be incurred in connection with their sales efforts.
9. Indemnification.
---------------
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or director
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with
- 6 -
<PAGE>
respect to any claim made against Mitchell Hutchins or any person indemnified
unless Mitchell Hutchins or other such person shall have notified the Fund in
writing of the claim within a reasonable time after the summons or other first
written notification giving information of the nature of the claim shall have
been served upon Mitchell Hutchins or such other person (or after Mitchell
Hutchins or the person shall have received notice of service on any designated
agent). However, failure to notify the Fund of any claim shall not relieve the
Fund from any liability which it may have to Mitchell Hutchins or any person
against whom such action is brought otherwise than on account of this indemnity
agreement. The Fund shall be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this indemnity agreement. If the Fund elects to
assume the defense of any such claim, the defense shall be conducted by counsel
chosen by the Fund and satisfactory to indemnified defendants in the suit whose
approval shall not be unreasonably withheld. In the event that the Fund elects
to assume the defense of any suit and retain counsel, the indemnified defendants
shall bear the fees and expenses of any additional counsel retained by them. If
the Fund does not elect to assume the defense of a suit, it will reimburse the
indemnified defendants for the reasonable fees and expenses of any counsel
retained by the indemnified defendants. The Fund agrees to notify Mitchell
Hutchins promptly of the commencement of any litigation or proceedings against
it or any of its officers or directors in connection with the issuance or sale
of any of its Class C Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the Fund,
its officers and directors and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its directors or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising
out of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of
any supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
- 7 -
<PAGE>
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. Services Provided to the Fund by Employees of Mitchell Hutchins.
---------------------------------------------------------------
Any person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
11. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date hereabove
written, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those directors of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in the operation of the Plan relating to the Series or in any
agreements related thereto (all such directors collectively being referred to
herein as the "Independent Directors"), cast in person at a meeting called for
the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Directors, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class C Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Directors or by vote
of a majority of the outstanding voting securities of the Class C Shares of such
Series on sixty days' written notice to Mitchell Hutchins or by
- 8 -
<PAGE>
Mitchell Hutchins at any time, without the payment of any penalty, on sixty
days' written notice to the Fund or such Series. This Contract will
automatically terminate in the event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
12. Amendment of this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. Governing Law. This Contract shall be construed in accordance with
-------------
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the l940 Act, the latter shall control.
14. Notice. Any notice required or permitted to be given by either party
------
to the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
15. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the
- 9 -
<PAGE>
outstanding voting securities," "interested person" and "assignment" shall have
the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: PAINEWEBBER MASTER SERIES, INC.
_________________________ By: __________________________
ATTEST: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
_________________________ By: _________________________
- 10 -
<PAGE>
EXHIBIT 6(D)
PAINEWEBBER MASTER SERIES, INC.
DISTRIBUTION CONTRACT
CLASS Y SHARES
CONTRACT made as of July 1, 1996 between PAINEWEBBER MANAGED MASTER
SERIES, INC., a Maryland corporation ("Fund"), and MITCHELL HUTCHINS ASSET
MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of
l940, as amended ("l940 Act"), as an open-end management investment company and
currently offers for public sale two distinct series of shares of common stock
("Series"), which correspond to distinct portfolios and have been designated as
PaineWebber Balanced Fund and PaineWebber Money Market Fund; and
WHEREAS the Fund's board of directors ("Board") has established shares
of common stock of Balanced Fund as Class Y shares ("Class Y Shares"); and
WHEREAS the Fund desires to retain Mitchell Hutchins as principal
distributor in connection with the offering and sale of the Class Y Shares of
the above-referenced Series and of such other Series as are now or may hereafter
be designated by the Board and have Class Y Shares established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor
of the Class Y Shares of each such Series on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins as its
-----------
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class Y Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class Y Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the
<PAGE>
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. Services and Duties of Mitchell Hutchins.
----------------------------------------
(a) Mitchell Hutchins agrees to sell Class Y Shares on a best
efforts basis from time to time during the term of this Contract as agent for
the Fund and upon the terms described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Class Y Shares by a Series, Mitchell Hutchins will hold itself
available to receive purchase orders, satisfactory to Mitchell Hutchins, for
Class Y Shares of that Series and will accept such orders on behalf of the Fund
as of the time of receipt of such orders and promptly transmit such orders as
are accepted to the Fund's transfer agent. Purchase orders shall be deemed
effective at the time and in the manner set forth in the Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements
to sell Class Y Shares to such registered and qualified retail dealers,
including but not limited to PaineWebber Incorporated ("PaineWebber"), as it may
select. In making agreements with such dealers, Mitchell Hutchins shall act only
as principal and not as agent for the Fund.
(d) The offering price of the Class Y Shares of each Series shall
be the net asset value per Share as next determined by the Fund following
receipt of an order at Mitchell Hutchins' principal office. The Fund shall
promptly furnish Mitchell Hutchins with a statement of each computation of net
asset value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class Y Shares.
(f) To facilitate redemption of Class Y Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class Y Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement.
(g) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
3. Authorization to Enter into Exclusive Dealer Contracts and to
-------------------------------------------------------------
Delegate Duties as Distributor. With respect to the Class
- ------------------------------
- 2 -
<PAGE>
Y Shares of any or all Series, Mitchell Hutchins may enter into an exclusive
dealer agreement with PaineWebber or any other registered and qualified dealer
with respect to sales of the Class Y Shares. In a separate contract or as part
of any such exclusive dealer agreement, Mitchell Hutchins also may delegate to
PaineWebber or another registered and qualified dealer ("sub-distributor") any
or all of its duties specified in this Contract, provided that such separate
contract or exclusive dealer agreement imposes on the sub-distributor bound
thereby all applicable duties and conditions to which Mitchell Hutchins is
subject under this Contract, and further provided that such separate contract or
exclusive dealer agreement meets all requirements of the 1940 Act and rules
thereunder.
4. Services Not Exclusive. The services furnished by Mitchell
----------------------
Hutchins hereunder are not to be deemed exclusive and Mitchell Hutchins shall be
free to furnish similar services to others so long as its services under this
Contract are not impaired thereby. Nothing in this Contract shall limit or
restrict the right of any director, officer or employee of Mitchell Hutchins,
who may also be a director, officer or employee of the Fund, to engage in any
other business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar or a
dissimilar nature.
5. Compensation and Reimbursement of Distribution Expenses. The Fund
-------------------------------------------------------
shall have no obligation to compensate or reimburse Mitchell Hutchins for any
services performed by it hereunder.
6. Duties of the Fund.
------------------
(a) The Fund reserves the right at any time to withdraw offering
Class Y Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class Y Shares. If the Fund
has determined that certificates shall be issued, the Fund will not cause
certificates representing Class Y Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund
will cause certificates evidencing Class Y Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and
other papers which Mitchell Hutchins may reasonably request for use in
connection with the distribution of Class Y Shares,
- 3 -
<PAGE>
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class Y Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class Y Shares under the 1933 Act to the end that there will be available for
sale such number of Class Y Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain
the qualification of an appropriate number of Class Y Shares of each Series for
sale under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Articles of Incorporation or By-Laws to comply with the
laws of any jurisdiction, to maintain an office in any jurisdiction, to change
the terms of the offering of the Class Y Shares in any jurisdiction from the
terms set forth in its Registration Statement, to qualify as a foreign
corporation in any jurisdiction, or to consent to service of process in any
jurisdiction other than with respect to claims arising out of the offering of
the Class Y Shares. Mitchell Hutchins shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such qualifications.
7. Expenses of the Fund. The Fund shall bear all costs and expenses
---------------------
of registering the Class Y Shares with the Securities and Exchange Commission
and state and other regulatory bodies, and shall assume expenses related to
communications with shareholders of each Series, including (i) fees and
disbursements of its counsel and independent public accountant; (ii) the
preparation, filing and printing of registration statements and/or prospectuses
or statements of additional information required under the federal securities
laws; (iii) the preparation and mailing of annual and interim reports,
prospectuses, statements of additional information and proxy materials to share-
holders; and (iv) the qualifications of Class Y Shares for sale
- 4 -
<PAGE>
and of the Fund as a broker or dealer under the securities laws of such
jurisdictions as shall be selected by the Fund and Mitchell Hutchins pursuant to
Paragraph 6(e) hereof, and the costs and expenses payable to each such
jurisdiction for continuing qualification therein.
8. Expenses of Mitchell Hutchins. Mitchell Hutchins shall bear all
-----------------------------
costs and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of Class Y Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class Y Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class Y Shares as
may be incurred in connection with their sales efforts.
9. Indemnification.
---------------
(a) The Fund agrees to indemnify, defend and hold Mitchell
Hutchins, its officers and directors, and any person who controls Mitchell
Hutchins within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which
Mitchell Hutchins, its officers, directors or any such controlling person may
incur under the 1933 Act, or under common law or otherwise, arising out of or
based upon any alleged untrue statement of a material fact contained in the
Registration Statement or arising out of or based upon any alleged omission to
state a material fact required to be stated in the Registration Statement or
necessary to make the statements therein not mis leading, except insofar as such
claims, demands, liabilities or expenses arise out of or are based upon any such
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement; provided,
however, that this indemnity agreement shall not inure to the benefit of any
person who is also an officer or director of the Fund or who controls the Fund
within the meaning of Section 15 of the 1933 Act, unless a court of competent
jurisdiction shall determine, or it shall have been
- 5 -
<PAGE>
determined by controlling precedent, that such result would not be against
public policy as expressed in the 1933 Act; and further provided, that in no
event shall anything contained herein be so construed as to protect Mitchell
Hutchins against any liability to the Fund or to the shareholders of any Series
to which Mitchell Hutchins would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations under this Contract. The
Fund shall not be liable to Mitchell Hutchins under this indemnity agreement
with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to Mitchell Hutchins or
any person against whom such action is brought otherwise than on account of this
indemnity agreement. The Fund shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any claims subject to this indemnity agreement. If the Fund
elects to assume the defense of any such claim, the defense shall be conducted
by counsel chosen by the Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the defense of a
suit, it will reimburse the indemnified defendants for the reasonable fees and
expenses of any counsel retained by the indemnified defendants. The Fund agrees
to notify Mitchell Hutchins promptly of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with
the issuance or sale of any of its Class Y Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the Fund,
its officers and directors, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its directors or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration State-
- 6 -
<PAGE>
ment, arising out of or based upon any alleged omission to state a material fact
in connection with such information required to be stated in the Registration
Statement necessary to make such information not misleading, or arising out of
any agreement between Mitchell Hutchins and any retail dealer, or arising out
of any supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell
Hutchins elects to assume the defense of any suit and retain counsel, the
defendants in the suit shall bear the fees and expenses of any additional
counsel retained by them. If Mitchell Hutchins does not elect to assume the
defense of any suit, it will reimburse the indemnified defendants in the suit
for the reasonable fees and expenses of any counsel retained by them.
10. Services Provided to the Fund by Employees of Mitchell Hutchins.
---------------------------------------------------------------
Any person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
11. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date
hereinabove written, provided that, with respect to any Series, this Contract
shall not take effect unless such action has first been approved by vote of a
majority of the Board and by vote of a majority of those directors of the Fund
who are not interested persons of the Fund, and have no direct or indirect
financial interest in this Contract or in any agreements related thereto (all
such directors collectively being referred to herein as the "Independent
Directors") cast in person at a meeting called for the purpose of voting on such
action.
(b) Unless sooner terminated as provided herein, this Contract
shall continue in effect for one year from the above written date. Thereafter,
if not terminated, this Contract shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of the Independent
Directors, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or with respect to
- 7 -
<PAGE>
any given Series by vote of a majority of the outstanding voting securities of
the Class Y Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series,
this Contract may be terminated at any time, without the payment of any penalty,
by vote of the Board, by vote of a majority of the Independent Directors or by
vote of a majority of the outstanding voting securities of the Class Y Shares of
such Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
Hutchins at any time, without the payment of any penalty, on sixty days'
written notice to the Fund or such Series. This Contract will automatically
terminate in the event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
12. Amendment of this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. Governing Law. This Contract shall be construed in accordance
-------------
with the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the l940 Act, the latter shall control.
14. Notice. Any notice required or permitted to be given by either
------
party to the other shall be deemed sufficient upon receipt in writing at the
other party's principal offices.
15. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: PAINEWEBBER MASTER SERIES, INC.
_________________________ By: ___________________________________
ATTEST: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
_________________________ By: ___________________________________
- 9 -
<PAGE>
Exhibit 6(g)
EXCLUSIVE DEALER AGREEMENT
CLASS C SHARES OF PAINEWEBBER MASTER SERIES, INC.
AGREEMENT made as of November 10, 1995, between Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and PaineWebber
Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS PaineWebber Master Series, Inc. ("Fund") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company; and
WHEREAS the Fund currently has two distinct series of shares of common
stock ("Series"), which correspond to distinct portfolios and have been
designated as the PaineWebber Money Market Fund and PaineWebber Balanced Fund;
and
WHEREAS the Fund's board of directors ("Board") has established shares of
common stock of the above-referenced Series as Class C shares ("Class C Shares")
(previously known as Class D shares) and has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Plan") with respect to the Class C
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class C Shares established; and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with the
Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class C
Shares of each such Series; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class C Shares of each
Series and to delegate to PaineWebber performance of certain of the services
which Mitchell Hutchins provides to the Fund under the Distribution Contract;
and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive agent
in connection with the offering and sale of such Class C Shares and to perform
such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
- 1 -
<PAGE>
1. Appointment. Mitchell Hutchins hereby appoints PaineWebber as its
-----------
exclusive agent to sell and to arrange for the sale of the Class C Shares on the
terms and for the period set forth in this Agreement. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class C Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Agreement,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. Services, Duties and Representations of PaineWebber.
---------------------------------------------------
(a) PaineWebber agrees to sell the Class C Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms des cribed in this Agreement and the Registration
Statement.
(b) Upon the later of the date of this Agreement or the initial
offering of Class C Shares by a Series to the public, PaineWebber will hold
itself available to receive orders, satis factory to PaineWebber and Mitchell
Hutchins, for the purchase of Class C Shares and will accept such orders on
behalf of Mitchell Hutchins and the Fund as of the time of receipt of such
orders and will promptly transmit such orders as are accepted to the Fund's
transfer agent. Purchase orders shall be deemed effective at the time and in
the manner set forth in the Registration Statement.
(c) PaineWebber in its discretion may sell Class C Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall act
only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class C Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office. Mitchell Hutchins shall promptly
furnish or arrange for the furnishing to PaineWebber of a statement of each
computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain number of
Class C Shares.
- 2 -
<PAGE>
(f) To facilitate redemption of Class C Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class C Shares presented
to it by shareholders, its correspondent firms and other dealers at the price
determined in accordance with, and in the manner set forth in, the Registration
Statement. Such price shall reflect the subtraction of the applicable contingent
deferred sales charge, if any, computed in accordance with and in the manner set
forth in the Registration Statement.
(g) Painewebber shall provide ongoing shareholder services, which
include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class C Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Section 26(d) of the National Association of Securities Dealers,
Inc. ("NASD") Rules of Fair Practice (collectively, "service activities").
"Service activities" do not include the transfer agency-related and other
services for which PaineWebber receives compensation under the Service Contract
between PaineWebber and the Fund.
(h) PaineWebber represents and warrants that: (i) it is a member in
good standing of the NASD and agrees to abide by the Rules of Fair Practice of
the NASD; (ii) it is registered as a broker-dealer with the Securities and
Exchange Commission; (iii) it will maintain any filings and licenses required by
federal and state laws to conduct the business contemplated under this
Agreement; and (iv) it will comply with all federal and state laws and
regulations applicable to the offer and sale of the Class C Shares.
(i) PaineWebber shall not incur any debts or obliga tions on behalf
of Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it
incurs in selling the Class C Shares and in complying with the terms and
conditions of this Agreement as more specifically set forth in paragraph 8.
(j) PaineWebber shall not permit any employee or agent to offer or
sell Class C Shares to the public unless such person is duly licensed under
applicable federal and state laws and regulations.
(k) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class C Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class C Shares in jurisdictions in which they have not been
approved for offer and sale.
- 3 -
<PAGE>
3. Services Not Exclusive. The services furnished by PaineWebber
----------------------
hereunder are not to be deemed exclusive and PaineWebber shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby. Nothing in this Agreement shall limit or restrict the
right of any director, officer or employee of PaineWebber who may also be a
director, officer or employee of Mitchell Hutchins or the Fund, to engage in any
other business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar or a
dissimilar nature.
4. Compensation.
------------
(a) As compensation for its service activities under this Agreement
with respect to the Class C Shares, Mitchell Hutchins shall pay to PaineWebber
service fees with respect to Class C Shares maintained in shareholder accounts
serviced by PaineWebber employees, correspondent firms and other dealers in such
amounts as Mitchell Hutchins and PaineWebber may from time to time agree upon.
(b) As compensation for its activities under this Agreement with
respect to the distribution of the Class C Shares, Mitchell Hutchins shall pay
to PaineWebber such commissions for sales of the Class C shares by PaineWebber
employees, correspondent firms and other dealers and such other compensation as
Mitchell Hutchins and PaineWebber may from time to time agree upon.
(c) Mitchell Hutchins' obligation to pay compensation to PaineWebber
as agreed upon pursuant to this paragraph 4 is not contingent upon receipt by
Mitchell Hutchins of any compensation from the Fund or Series. Mitchell
Hutchins shall advise the Board of any agreements or revised agreements as to
compensation to be paid by Mitchell Hutchins to PaineWebber at their first
regular meeting held after such agreement but shall not be required to obtain
prior approval for such agreements from the Board.
(d) PaineWebber may reallow all or any part of the service fees,
commissions or other compensation which it is paid under this Agreement to its
correspondent firms or other dealers, in such amounts as PaineWebber may from
time to time determine.
5. Duties of Mitchell Hutchins.
---------------------------
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class C Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to
- 4 -
<PAGE>
PaineWebber copies of all information, financial statements and other papers
which PaineWebber may reasonably request for use in connection with the
distribution of Class C Shares, including, without limitation, certified copies
of any financial statements prepared for the Fund by its independent public
accountant and such reasonable number of copies of the most current prospectus,
statement of additional information, and annual and interim reports of any
Series as PaineWebber may request, and Mitchell Hutchins shall cooperate fully
in the efforts of PaineWebber to sell and arrange for the sale of the Class C
Shares and in the performance of PaineWebber under this Agreement.
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class C Shares.
6. Advertising. Mitchell Hutchins agrees to make available such sales
-----------
and advertising materials relating to the Class C Shares as Mitchell Hutchins in
its discretion determines appropriate. PaineWebber agrees to submit all sales
and advertising materials developed by it relating to the Class C Shares to
Mitchell Hutchins for approval. PaineWebber agrees not to publish or distribute
such materials to the public without first receiving such approval in writing.
Mitchell Hutchins shall assist PaineWebber in obtaining any regulatory approvals
of such materials that may be required of or desired by PaineWebber.
7. Records. PaineWebber agrees to maintain all records required by
-------
applicable state and federal laws and regulations relating to the offer and sale
of the Class C Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. Expenses of PaineWebber. PaineWebber shall bear all costs and
-----------------------
expenses of (i) preparing, printing, and distributing any materials not prepared
by the Fund or Mitchell Hutchins and other materials used by PaineWebber in
connection with its offer ing of Class C Shares for sale to the public; (ii) any
expenses of advertising incurred by PaineWebber in connection with such
offering; (iii) the expenses of registration or qualification of PaineWebber as
a dealer or broker under federal or state laws and the expenses of continuing
such registration or qualification; and (iv) all compensation paid to
PaineWebber's Investment Executives or other employees and others for selling
Class C Shares, and all expenses of PaineWebber, its Investment Executives and
employees and others who engage in or support the sale of Class C Shares as may
be incurred in connection with their sales efforts. PaineWebber shall bear such
additional costs and expenses as it and Mitchell Hutchins may agree upon, such
agreement to be evidenced in a writing signed by both parties. Mitchell Hutchins
shall advise the Board of any such agreement as to additional costs and expenses
borne by
- 5 -
<PAGE>
PaineWebber at their first regular meeting held after such agreement but shall
not be required to obtain prior approval for such agreements from the Board.
9. Indemnification.
---------------
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Class C Shares
provided by Mitchell Hutchins to PaineWebber. However, this indemnity agreement
shall not apply to any claims, demands, liabilities, or expenses that arise out
of or are based upon any such untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with information
furnished in writing by PaineWebber to Mitchell Hutchins or the Fund for use in
the Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement.
(b) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and directors,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending against such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Mitchell Hutchins or its officers or
directors or the Fund, its officers or directors, or any such controlling person
may incur under the 1933 Act, under common law or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration State-
- 6 -
<PAGE>
ment; arising out of or based upon any alleged omission to state a material fact
in connection with such information required to be stated in the Registration
Statement or necessary to make such information not misleading; or arising out
of any agreement between PaineWebber and a correspondent firm or any other
retail dealer; or arising out of any sales or advertising material used by
PaineWebber in connection with its duties under this Agreement.
10. Duration and Termination.
------------------------
(a) This Agreement shall become effective upon the date written above,
provided that, with respect to any Series, this Contract shall not take effect
unless such action has first been approved by vote of a majority of the Board
and by vote of a majority of those directors of the Fund who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements related thereto (all such directors
collectively being referred to herein as the "Independent Directors"), cast in
person at a meeting called for the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Agreement shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Agreement shall continue automatically for successive periods
of twelve months each, provided that such continuance is specifically approved
at least annually (i) by a vote of a majority of the Independent Directors, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or with respect to any given Series by vote of a majority of
the outstanding voting securities of the Class C Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Agreement may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Agreement may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Directors or by vote of a majority of the outstanding voting
securities of the Class C Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
(d) Termination of this Agreement with respect to any given Series
shall in no way affect the continued validity of this Agreement or the
performance thereunder with respect to any other Series. This Agreement will
automatically terminate in the event of its assignment or in the event that the
Distribution Contract is terminated.
- 7 -
<PAGE>
(e) Notwithstanding the foregoing, Mitchell Hutchins may terminate
this Agreement without penalty, such termination to be effective upon the giving
of written notice to PaineWebber in the event that the Plan is terminated or is
amended to reduce the compensation payable to Mitchell Hutchins thereunder or in
the event that the Registration Statement is amended so as to reduce the amount
of compensation payable to Mitchell Hutchins under the Distribution Contract,
provided that Mitchell Hutchins gives notice of termination pursuant to this
provision within 90 days of such amendment or termination of the Plan or
amendment of the Registration Statement.
11. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
amended, changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
12. Use of PaineWebber Name. PaineWebber hereby authorizes Mitchell
-----------------------
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class C Shares, but
only for so long as this Agreement or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of
- 8 -
<PAGE>
the outstanding voting securities," "interested person" and "assignment" shall
have the same meaning as such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: _______________________ By: ________________________
PAINEWEBBER INCORPORATED
Attest: _______________________ By: ________________________
- 9 -
<PAGE>
Exhibit 6 (h)
EXCLUSIVE DEALER AGREEMENT
CLASS Y SHARES OF PAINEWEBBER MASTER SERIES, INC.
AGREEMENT made as of July 1, 1996 between Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and PaineWebber
Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS PaineWebber Master Series, Inc. ("Fund") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company; and
WHEREAS the Fund currently offers for public sale two distinct series of
shares of common stock ("Series"), which correspond to distinct portfolios and
have been designated as PaineWebber Balanced Fund and PaineWebber Money Market
Fund; and
WHEREAS the Fund's board of directors ("Board") has established shares of
common stock of the above-referenced Series as Class Y shares ("Class Y
Shares"); and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with the
Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class Y
Shares of the above-referenced Series and of such other Series as are now or may
hereafter be designated by the Board and have Class Y Shares established; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class Y Shares of each
such Series and to delegate to PaineWebber performance of certain of the
services which Mitchell Hutchins provides to the Fund under the Distribution
Contract; and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive agent
in connection with the offering and sale of such Class Y Shares and to perform
such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
1. Appointment. Mitchell Hutchins hereby appoints PaineWebber as its
-----------
exclusive agent to sell and to arrange for the
<PAGE>
sale of the Class Y Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins also appoints PaineWebber as its agent for the
performance of certain other services set forth herein which Mitchell Hutchins
provides to the Fund under the Distribution Contract. PaineWebber hereby accepts
such appointments and agrees to act hereunder. It is understood, however, that
these appointments do not preclude sales of Class Y Shares directly through the
Fund's transfer agent in the manner set forth in the Registration Statement. As
used in this Contract, the term "Registration Statement" shall mean the
currently effective Registration Statement of the Fund, and any supplements
thereto, under the Securities Act of 1933, as amended ("1933 Act"), and the 1940
Act.
2. Services, Duties and Representations of PaineWebber.
---------------------------------------------------
(a) PaineWebber agrees to sell the Class Y Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms des cribed in this Contract and the Registration
Statement.
(b) Upon the later of the date of this Contract or the initial
offering of Class Y Shares by a Series, PaineWebber will hold itself available
to receive orders, satisfactory to PaineWebber and Mitchell Hutchins, for the
purchase of Class Y Shares and will accept such orders on behalf of Mitchell
Hutchins and the Fund as of the time of receipt of such orders and will promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) PaineWebber in its discretion may sell Class Y Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall
act only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class Y Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office. Mitchell Hutchins shall promptly
furnish or arrange for the furnishing to PaineWebber of a statement of each
computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain number of
Class Y Shares.
(f) To facilitate redemption of Class Y Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class Y Shares presented
to it by
- 2 -
<PAGE>
shareholders, its correspondent firms and other dealers at the price determined
in accordance with, and in the manner set forth in, the Registration Statement.
(g) PaineWebber represents and warrants that: (i) it is a member in
good standing of the National Association of Securities Dealers, Inc. and agrees
to abide by the Rules of Fair Practice of such Association; (ii) it is
registered as a broker-dealer with the Securities and Exchange Commission; (iii)
it will maintain any filings and licenses required by federal and state laws to
conduct the business contemplated under this Agreement; and (iv) it will comply
with all federal and state laws and regulations applicable to the offer and sale
of the Class Y Shares.
(h) PaineWebber shall not incur any debts or obliga tions on behalf
of Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it
incurs in selling the Class Y Shares and in complying with the terms and
conditions of this Contract as more specifically set forth in paragraph 8.
(i) PaineWebber shall not permit any employee or agent to offer or
sell Class Y Shares unless such person is duly licensed under applicable federal
and state laws and regulations.
(j) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class Y Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class Y Shares in jurisdictions in which they have not been
approved for offer and sale.
3. Services Not Exclusive. The services furnished by PaineWebber
----------------------
hereunder are not to be deemed exclusive and PaineWebber shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of PaineWebber who may also be a
director, officer or employee of Mitchell Hutchins or the Fund, to engage in any
other business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar or a
dissimilar nature.
4. Compensation.
------------
Mitchell Hutchins shall not be obligated to pay any compensation to
PaineWebber hereunder nor to reimburse any of PaineWebber's expenses incurred
hereunder.
- 3 -
<PAGE>
5. Duties of Mitchell Hutchins.
---------------------------
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class Y Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the distribution of Class Y
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of any Series as
PaineWebber may request, and Mitchell Hutchins shall cooperate fully in the
efforts of PaineWebber to sell and arrange for the sale of the Class Y Shares
and in the performance of PaineWebber under this Contract.
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class Y Shares.
6. Advertising. Mitchell Hutchins agrees to make available such sales
-----------
and advertising materials relating to the Class Y Shares as Mitchell Hutchins in
its discretion determines appropriate. PaineWebber agrees to submit all sales
and advertising materials developed by it relating to the Class Y Shares to
Mitchell Hutchins for approval. PaineWebber agrees not to publish or distribute
such materials without first receiving such approval in writing. Mitchell
Hutchins shall assist PaineWebber in obtaining any regulatory approvals of such
materials that may be required of or desired by PaineWebber.
7. Records. PaineWebber agrees to maintain all records required by
-------
applicable state and federal laws and regulations relating to the offer and sale
of the Class Y Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. Expenses of PaineWebber. PaineWebber shall bear all costs and
-----------------------
expenses of (i) preparing, printing, and distributing any materials not prepared
by the Fund or Mitchell Hutchins and other materials used by PaineWebber in
connection with its offer ing of Class Y Shares for sale to the public; (ii) any
expenses of advertising incurred by PaineWebber in connection with such
offering; (iii) the expenses of registration or qualification of PaineWebber as
a dealer or broker under federal or state laws and the expenses of continuing
such registration or qualification; and (iv) all compensation paid to
PaineWebber's investment executives or other employees and others for selling
Class Y
- 4 -
<PAGE>
Shares, and all expenses of PaineWebber, its investment executives and employees
and others who engage in or support the sale of Class Y Shares as may be
incurred in connection with their sales efforts. PaineWebber shall bear such
additional costs and expenses as it and Mitchell Hutchins may agree upon, such
agreement to be evidenced in a writing signed by both parties. Mitchell Hutchins
shall advise the Board of any such agreement as to additional costs and expenses
borne by PaineWebber at their first regular meeting held after such agreement
but shall not be required to obtain prior approval for such agreements from the
Board.
9. Indemnification.
---------------
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Class Y Shares
provided by Mitchell Hutchins to PaineWebber. However, this indemnity agreement
shall not apply to any claims, demands, liabilities, or expenses that arise out
of or are based upon any such untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with information
furnished in writing by PaineWebber to Mitchell Hutchins or the Fund for use in
the Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Contract.
(b) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and directors,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investi-
- 5 -
<PAGE>
gating or defending against such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins or its officers
or directors or the Fund, its officers or directors, or any such controlling
person may incur under the 1933 Act, under common law or otherwise arising out
of or based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration State ment; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Contract.
10. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date written above,
provided that, with respect to any Series, this Contract shall not take effect
unless such action has first been approved by vote of a majority of the Board
and by vote of a majority of those directors of the Fund who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of this Contract or in any agreements related thereto (all such
directors collectively being referred to herein as the "Independent Directors"),
cast in person at a meeting called for the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Directors, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board with respect to any given Series or by vote of a majority of the
outstanding voting securities of the Class Y Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Contract may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Directors or by vote of a majority of the outstanding voting
securities of the Class Y Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
- 6 -
<PAGE>
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series. This Contract will
automatically terminate in the event of its assignment or in the event that the
Distribution contract is terminated.
11. Amendment of this Agreement. No provision of this Contract may be
---------------------------
amended, changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
12. Use of PaineWebber Name. PaineWebber hereby authorizes Mitchell
-----------------------
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class Y Shares, but
only for so long as this Contract or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. Governing Law. This Contract shall be construed in accordance with
-------------
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective succes sors. As used in this Contract,
the terms "majority of the
- 7 -
<PAGE>
outstanding voting securities," "interested person" and "assignment" shall
have the same meaning as such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: _______________________ By: ________________________
PAINEWEBBER INCORPORATED
Attest: _______________________ By: _________________________
- 8 -
<PAGE>
Exhibit 10 (c)
KIRKPATRICK & LOCKHART
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE 202-778-9000
July 1, 1996
PaineWebber Master Series, Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
PaineWebber Master Series, Inc. ("Company") is a corporation organized
under the laws of the State of Maryland on October 29, 1985. You have requested
our opinion as to certain matters in connection with the issuance by the Company
of Class Y shares of common stock ("Class Y Shares") of PaineWebber Balanced
Fund, a series of the Company.
We have, as counsel, participated in various corporate and other
proceedings relating to the Company. We have examined copies believed by us to
be genuine of the Company's Articles of Incorporation and By-Laws, minutes of
meetings of the Company's board of directors, and other documents relating to
the authorization and operation of the Company and we are generally familiar
with its business affairs. Based on the foregoing, it is our opinion that the
Class Y Shares of PaineWebber Balanced Fund, which are currently being
registered under the Securities Act of 1933, as amended ("1933 Act"), may be
legally and validly issued from time to time in accordance with the Company's
Articles of Incorporation and By-Laws and, subject to compliance with the 1933
Act, the Investment Company Act of 1940, as amended, and various state laws
regulating the offer and sale of securities, and when so issued, the Class Y
Shares of PaineWebber Balanced Fund will be legally issued, fully paid and non-
assessable by the Company.
<PAGE>
We consent to the filing of this opinion with Post-Effective Amendment No.
28 to the Company's Registration Statement on Form N-1A (SEC File Nos. ) to be
filed with the Securities and Exchange Commission. We also consent to the
reference to our firm under the caption "Other Information -- Counsel" in the
Statement of Additional Information filed as part of the Post-Effective
Amendment.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
/s/ Elinor W. Gammon
By: ___________________________
Elinor W. Gammon
<PAGE>
Exhibit 11
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10036 Facsimile 212 596 8910
Price Waterhouse LLP [LOGO OF PRICE WATERHOUSE LLP
APPEARS HERE]
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 28 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated April 15, 1996, relating to the financial
statements and financial highlights appearing in the February 29, 1996 Annual
Reports to Shareholders of PaineWebber Money Market Fund and PaineWebber
Balanced Fund (separately managed portfolios of PaineWebber Master Series,
Inc.), which are also incorporated by reference into the Registration Statement.
We also consent to the references to us under the heading "Financial Highlights"
in the Prospectuses and under the heading "Other Information - Independent
Auditors" in the Statements of Additional Information.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 27, 1996
<PAGE>
Exhibit 18
PAINEWEBBER MASTER SERIES, INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
PaineWebber Master Series, Inc. hereby adopts this amended and restated
Multiple Class Plan pursuant to Rule 18f-3 under the Investment Company Act of
1940, as amended ("1940 Act") on behalf of its current operating series,
PaineWebber Balanced Fund and PaineWebber Money Market Fund, and any series that
may be established in the future (referred to hereinafter collectively as the
"Funds" and individually as a "Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
-----------------------------------------------
1. CLASS A SHARES. Class A shares of each Fund are sold to the general
public subject to an initial sales charge. The initial sales charge for each
Fund is waived for certain eligible purchasers and reduced or waived for certain
large volume purchases.
The maximum sales charge is 4% of the public offering price for Class A
shares of any other Fund that invests primarily in debt securities.
The maximum sales charge is 4.5% of the public offering price for Class A
shares of a Fund that invests primarily in equity securities or a combination of
equity and debt securities.
Class A shares of each Fund are subject to an annual service fee of .25% of
the average daily net assets of the Class A shares of each Fund paid pursuant to
a plan of distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
Class A shares of each Fund will be subject to a contingent deferred sales
charge ("CDSC") on redemptions of shares (i) purchased without an initial sales
charge due to a sales charge waiver for purchases of $1 million or more and (ii)
held less than one year. The Class A CDSC is equal to 1% of the lower of: (i)
the net asset value of the shares at the time of purchase or (ii) the net asset
value of the shares at the time of redemption. Class A shares of each Fund held
one year or longer and Class A shares of each Fund acquired through reinvestment
of dividends or capital gains distributions on shares otherwise subject to a
Class A CDSC are not subject to the CDSC. The CDSC for Class A shares of each
Fund shall not apply to shares purchased prior to November 10, 1995 and will be
waived under certain circumstances.
2. CLASS B SHARES. Class B shares of each Fund are sold to the general
public subject to a CDSC, but without imposition of an initial sales charge.
<PAGE>
Paine Webber Master Series, Inc.
Multiple Class Plan
Page 2
The maximum CDSC for Class B shares of PaineWebber Money Market Fund is
equal to 5% of the lower of: (i) the net asset value of the shares at the time
of purchase or (ii) the net asset value of the shares at the time of redemption,
except that if the Class B shares of PaineWebber Money Market Fund were acquired
through exchange for Class B shares of PaineWebber Low Duration U.S. Government
Income Fund or other PaineWebber Fund that would have been subject to a 3%
maximum CDSC if they had been redeemed rather than exchanged, the maximum CSDC
for Class B shares of PaineWebber Money Market Fund is equal to 3% of the lower
of: (i) the net asset value of the shares at the time of purchase or (ii) the
net asset value of the shares at the time of redemption.
The maximum CDSC for Class B shares of each other Fund is equal to 5% of
the lower of: (i) the net asset value of the shares at the time of purchase or
(ii) the net asset value of the shares at the time of redemption.
Class B shares of each Fund held six years or longer (four years or longer
for Class B shares of PaineWebber Money Market Fund acquired through an exchange
for Class B shares of PaineWebber Low Duration U.S. Government Income Fund as
described above) and Class B shares of each Fund acquired through reinvestment
of dividends or capital gains distributions are not subject to the CDSC.
Class B shares of each Fund are subject to an annual service fee of .25% of
average daily net assets and a distribution fee of .75% (.50% for Class B shares
of PaineWebber Money Market Fund) of average daily net assets of the Class B
shares of each Fund, each paid pursuant to a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
Class B shares of each Fund convert to Class A shares approximately six
years after issuance at relative net asset value.
3. CLASS C SHARES. Class C shares of each Fund are sold to the general
public without imposition of a sales charge.
Class C shares of a Fund that invests primarily in debt securities are
subject to an annual service fee of .25% of average daily net assets and a
distribution fee of .50% of average daily net assets of Class C shares of such
Fund, each pursuant to a plan of distribution adopted pursuant to Rule 12b-1
under the 1940 Act.
Class C shares of a Fund that invests primarily in equity securities or a
combination of equity and debt securities are subject to an annual service fee
of .25% of average daily net assets and a distribution fee of .75% of average
daily net assets of Class C shares of such Fund, each pursuant to a plan of
distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
<PAGE>
Paine Webber Master Series, Inc.
Multiple Class Plan
Page 3
Class C shares of a Fund that invests primarily in debt securities will be
subject to a CDSC on redemptions of Class C shares held less than one year equal
to .75% of the lower of: (i) the net asset value of the shares at the time of
purchase or (ii) the net asset value of the shares at the time of redemption;
provided that such CDSC shall not apply to Class C shares purchased prior to
November 10, 1995.
Class C shares of a Fund that invests primarily in equity securities or in
a combination of equity and debt securities will be subject to a CDSC on
redemptions of Class C shares held less than one year equal to 1% of the lower
of: (i) the net asset value of the shares at the time of purchase or (ii) the
net asset value of the shares at the time of redemption; provided that such CDSC
shall not apply to Class C shares purchased prior to November 10, 1995.
Class C shares of each Fund held one year or longer and Class C shares of
each Fund acquired through reinvestment of dividends or capital gains
distributions are not subject to the CDSC. The CDSC for Class C shares of each
Fund will be waived under certain circumstances.
4. CLASS Y SHARES. Class Y shares are sold without imposition of an
initial sales charge or CDSC and are not subject to any service or distribution
fees.
Class Y shares of each Fund are available for purchase only by: (i)
employee benefit and retirement plans, other than individual retirement accounts
and self-employed retirement plans, of Paine Webber Group Inc. and its
affiliates; (ii) certain unit investment trusts sponsored by PaineWebber
Incorporated; (iii) participants in certain wrap fee investment programs that
are currently or in the future sponsored by PaineWebber Incorporated and that
may invest in PaineWebber proprietary funds, provided that shares are purchased
through or in connection with those programs; and (iv) the holders of Class Y
shares of any former Mitchell Hutchins/Kidder Peabody ("MH/KP") mutual fund
provided that such shares are issued in connection with the reorganization of a
MH/KP mutual fund into that Fund.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
---------------------------------
Certain expenses may be attributable to a particular Class of shares of
each Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the following other expenses:
<PAGE>
Paine Webber Master Series, Inc.
Multiple Class Plan
Page 4
(1) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses,
and proxies to current shareholders of a specific Class;
(2) Blue Sky registration fees incurred by a specific Class of
shares;
(3) SEC registration fees incurred by a specific Class of shares;
(4) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(5) Directors' fees incurred as a result of issues relating to a
specific Class of shares;
(6) litigation expenses or other legal expenses relating to a
specific Class of shares; and
(7) transfer agent fees identified as being attributable to a
specific Class.
C. EXCHANGE PRIVILEGES:
-------------------
Class A, Class B and Class C shares of each Fund may be exchanged for
shares of the corresponding Class of other PaineWebber mutual funds and MH/KP
mutual funds, or may be acquired through an exchange of shares of the
corresponding Class of those funds. Class Y shares of the Funds are not
exchangeable.
These exchange privileges may be modified or terminated by a Fund, and
exchanges may only be made into funds that are legally registered for sale in
the investor's state of residence.
D. CLASS DESIGNATION:
-----------------
Subject to approval by the Board of Directors of PaineWebber Master Series,
Inc., a Fund may alter the nomenclature for the designations of one or more of
its classes of shares.
E. ADDITIONAL INFORMATION:
----------------------
This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for the applicable Classes; provided, however, that none
of the terms set forth in any such prospectus shall be inconsistent with the
terms of the Classes contained in this Plan.
<PAGE>
Paine Webber Master Series, Inc.
Multiple Class Plan
Page 5
The prospectus for each Fund contains additional information about the Classes
and each Fund's multiple class structure.
F. DATE OF EFFECTIVENESS:
---------------------
This Multiple Class Plan is effective as of the date hereof, provided that
this Plan shall not become effective with respect to any Fund unless such action
has first been approved by the vote of a majority of the Board and by vote of a
majority of those directors of the Fund who are not interested persons of
PaineWebber Master Series, Inc.
February 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000780403
<NAME> PAINEWEBBER MASTER SERIES, INC.
<SERIES>
<NUMBER> 01
<NAME> PAINEWEBBER BALANCED FUND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 156,032
<INVESTMENTS-AT-VALUE> 171,876
<RECEIVABLES> 6,871
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 61
<TOTAL-ASSETS> 178,508
<PAYABLE-FOR-SECURITIES> 8,219
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 980
<TOTAL-LIABILITIES> 7,199
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 147,852
<SHARES-COMMON-STOCK> 15,814
<SHARES-COMMON-PRIOR> 17,830
<ACCUMULATED-NII-CURRENT> 672
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,241
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,844
<NET-ASSETS> 171,609
<DIVIDEND-INCOME> 1,122
<INTEREST-INCOME> 5,507
<OTHER-INCOME> 0
<EXPENSES-NET> (2,510)
<NET-INVESTMENT-INCOME> 4,119
<REALIZED-GAINS-CURRENT> 22,511
<APPREC-INCREASE-CURRENT> 8,386
<NET-CHANGE-FROM-OPS> 35,016
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,791
<DISTRIBUTIONS-OF-GAINS> 11,264
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,065
<NUMBER-OF-SHARES-REDEEMED> (4,486)
<SHARES-REINVESTED> 1,405
<NET-CHANGE-IN-ASSETS> (12,660)
<ACCUMULATED-NII-PRIOR> 1,098
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (3,971)
<GROSS-ADVISORY-FEES> 1,321
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,510)
<AVERAGE-NET-ASSETS> 172,979
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> (0.31)
<PER-SHARE-DISTRIBUTIONS> (0.75)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.85
<EXPENSE-RATIO> 1.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000780403
<NAME> PAINEWEBBER MASTER SERIES, INC.
<SERIES>
<NUMBER> 02
<NAME> PAINEWEBBER BALANCED FUND CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 24,210
<INVESTMENTS-AT-VALUE> 26,669
<RECEIVABLES> 1,066
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 9
<TOTAL-ASSETS> 27,744
<PAYABLE-FOR-SECURITIES> 965
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152
<TOTAL-LIABILITIES> 1,117
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,942
<SHARES-COMMON-STOCK> 2,420
<SHARES-COMMON-PRIOR> 3,747
<ACCUMULATED-NII-CURRENT> 104
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,123
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,458
<NET-ASSETS> 26,627
<DIVIDEND-INCOME> 174
<INTEREST-INCOME> 855
<OTHER-INCOME> 0
<EXPENSES-NET> (390)
<NET-INVESTMENT-INCOME> 639
<REALIZED-GAINS-CURRENT> 3,493
<APPREC-INCREASE-CURRENT> 1,301
<NET-CHANGE-FROM-OPS> 5,433
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 515
<DISTRIBUTIONS-OF-GAINS> 1,807
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 230
<NUMBER-OF-SHARES-REDEEMED> (1,754)
<SHARES-REINVESTED> 197
<NET-CHANGE-IN-ASSETS> (1,766)
<ACCUMULATED-NII-PRIOR> 170
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (616)
<GROSS-ADVISORY-FEES> 205
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (309)
<AVERAGE-NET-ASSETS> 30,787
<PER-SHARE-NAV-BEGIN> 9.9
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 1.86
<PER-SHARE-DIVIDEND> (0.20)
<PER-SHARE-DISTRIBUTIONS> (0.75)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.00
<EXPENSE-RATIO> 2.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000780403
<NAME> PAINEWEBBER MASTER SERIES, INC.
<SERIES>
<NUMBER> 03
<NAME> PAINEWEBBER BALANCED FUND CLASS C
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 6,791
<INVESTMENTS-AT-VALUE> 7,481
<RECEIVABLES> 259
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3
<TOTAL-ASSETS> 7,783
<PAYABLE-FOR-SECURITIES> 271
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 43
<TOTAL-LIABILITIES> 314
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,436
<SHARES-COMMON-STOCK> 687
<SHARES-COMMON-PRIOR> 868
<ACCUMULATED-NII-CURRENT> 29
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 315
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 690
<NET-ASSETS> 7,469
<DIVIDEND-INCOME> 49
<INTEREST-INCOME> 239
<OTHER-INCOME> 0
<EXPENSES-NET> (109)
<NET-INVESTMENT-INCOME> 179
<REALIZED-GAINS-CURRENT> 980
<APPREC-INCREASE-CURRENT> 365
<NET-CHANGE-FROM-OPS> 1,524
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 142
<DISTRIBUTIONS-OF-GAINS> 474
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 84
<NUMBER-OF-SHARES-REDEEMED> (318)
<SHARES-REINVESTED> 53
<NET-CHANGE-IN-ASSETS> (459)
<ACCUMULATED-NII-PRIOR> 48
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (173)
<GROSS-ADVISORY-FEES> 58
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (109)
<AVERAGE-NET-ASSETS> 7,444
<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> (0.22)
<PER-SHARE-DISTRIBUTIONS> (0.75)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.88
<EXPENSE-RATIO> 2.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000780403
<NAME> PAINEWEBBER MASTER SERIES, INC.
<SERIES>
<NUMBER> 04
<NAME> PAINEWEBBER MONEY MARKET FUND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 25,161
<INVESTMENTS-AT-VALUE> 25,161
<RECEIVABLES> 66
<ASSETS-OTHER> 126
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,353
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,619
<TOTAL-LIABILITIES> 1,619
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,741
<SHARES-COMMON-STOCK> 23,735
<SHARES-COMMON-PRIOR> 21,043
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 23,734
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,582
<OTHER-INCOME> 0
<EXPENSES-NET> (318)
<NET-INVESTMENT-INCOME> 1,264
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,265
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (832)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 73,225
<NUMBER-OF-SHARES-REDEEMED> (82,746)
<SHARES-REINVESTED> 962
<NET-CHANGE-IN-ASSETS> (8,559)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 132
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 318
<AVERAGE-NET-ASSETS> 17,796
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .046
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.046)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000780403
<NAME> PAINEWEBBER MASTER SERIES, INC.
<SERIES>
<NUMBER> 05
<NAME> PAINEWEBBER MONEY MARKET FUND CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 28,191
<INVESTMENTS-AT-VALUE> 28,191
<RECEIVABLES> 74
<ASSETS-OTHER> 141
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,406
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,814
<TOTAL-LIABILITIES> 1,814
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,599
<SHARES-COMMON-STOCK> 26,607
<SHARES-COMMON-PRIOR> 39,139
<ACCUMULATED-NII-CURRENT> 2
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 26,592
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,773
<OTHER-INCOME> 0
<EXPENSES-NET> (649)
<NET-INVESTMENT-INCOME> 1,124
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,125
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,417)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 82,042
<NUMBER-OF-SHARES-REDEEMED> (92,709)
<SHARES-REINVESTED> 1,077
<NET-CHANGE-IN-ASSETS> (9,590)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 148
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 649
<AVERAGE-NET-ASSETS> 33,968
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.041
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.041)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000780403
<NAME> PAINEWEBBER MASTER SERIES, INC.
<SERIES>
<NUMBER> 06
<NAME> PAINEWEBBER MONEY MARKET FUND CLASS C
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 6,100
<INVESTMENTS-AT-VALUE> 6,100
<RECEIVABLES> 16
<ASSETS-OTHER> 30
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,146
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 392
<TOTAL-LIABILITIES> 392
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,756
<SHARES-COMMON-STOCK> 5,758
<SHARES-COMMON-PRIOR> 16,141
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,734
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 384
<OTHER-INCOME> 0
<EXPENSES-NET> 66
<NET-INVESTMENT-INCOME> 318
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 318
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (455)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,753
<NUMBER-OF-SHARES-REDEEMED> (20,061)
<SHARES-REINVESTED> 233
<NET-CHANGE-IN-ASSETS> (2,073)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 66
<AVERAGE-NET-ASSETS> 10,663
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.041
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.041)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
