As filed with the Securities and Exchange Commission on March 15, 2000
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ___ [ ] Post-Effective Amendment No. ___
PAINEWEBBER MASTER SERIES, INC.
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, ESQ.
1285 Avenue of the Americas
18th Floor
New York, New York 10019
(Name and address of agent for service)
COPIES TO:
BENJAMIN J. HASKIN, ESQ.
MARK C. AMOROSI, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., 2nd Floor
Washington, D.C. 20036
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: as soon as practicable after
this Registration Statement becomes effective under the Securities Act of 1933.
It is proposed that this filing will become effective on April 14, 2000,
pursuant to Rule 488.
Title of securities being registered: Class A Shares of PaineWebber
Balanced Fund, Class B Shares of PaineWebber Balanced Fund, Class C Shares of
PaineWebber Balanced Fund, and Class Y Shares of PaineWebber Balanced Fund, each
with a par value of $0.001 per share.
No filing fee is required because of reliance on Section 24(f) of the
Investment Company Act of 1940, as amended.
<PAGE>
PAINEWEBBER MASTER SERIES, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o Form N-14 Cross Reference Sheet
o Shareholder Letter and Notice of Special Meeting
o Part A - Prospectus/Proxy Statement
o Form of Proxy
o Current Prospectus for PaineWebber Balanced Fund
o Annual Report to Shareholders of PaineWebber Balanced Fund
o Part B - Statement of Additional Information
o Statement of Additional Information for Balanced Fund
o Annual Report to Shareholders of PaineWebber Utility Income Fund
o Semi-Annual Report to Shareholders of PaineWebber Utility Income Fund
o Part C - Other Information
o Signature Page
o Exhibits
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
FORM N-14 CROSS REFERENCE SHEET
Part A Item No. Prospectus/Proxy
and Caption Statement Caption
- ----------- -----------------
1. Beginning of Registration Statement and Cover Page
Outside Front Cover Page of Prospectus
2. Beginning and Outside Back Cover Page Table of Contents
of Prospectus
3. Fee Table, Synopsis Information, and Synopsis; Comparative Fee Table;
Risk Factors The Proposed Reorganization;
Reasons for the Reorganization;
Comparison of the Funds;
Comparison of Principal Risk
Factors
4. Information about the Transaction Terms of the Reorganization;
Description of Securities to be
issued; Reason for the
Reorganization; Additional
Information about the
Reorganization; Federal Income
Tax Considerations;
Capitalization
5. Information about the Registrant Synopsis; Comparison of the
Funds; Reasons for the
Reorganization; Comparison of
Principal Risk Factors;
Organization of the Funds;
Capitalization. See also the
Prospectus for PaineWebber
Balanced Fund, dated December 10,
1999, previously filed on EDGAR,
Accession Number
0000930413-99-001443
6. Information about the Company Being Synopsis; Comparison of the
Acquired Funds; Reasons for the
Reorganization; Comparison of
Principal Risk Factors;
Organization of the Funds;
Capitalization. See also the
prospectus of PaineWebber Utility
Income Fund dated August 1, 1999,
previously filed on EDGAR
Accession Number
0000928385-99-002400
7. Voting Information Introduction
8. Interest of Certain Persons and Experts Not Applicable
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
FORM N-14 CROSS REFERENCE SHEET
9. Additional Information Required for Not Applicable
Re-offering by Persons Deemed to be
Underwriters
Part B Item No. Statement of Additional
and Caption Information Caption
- ----------- -------------------
10. Cover Page Cover Page
11. Table of Contents Not Applicable
12. Additional Information about the Statement of Additional
Registrant Information of PaineWebber
Balanced Fund, dated December 10,
1999 and previously filed on
EDGAR, Accession Number
0000930413-99-001443
13. Additional Information about the Statement of Additional
Company Being Acquired Information of PaineWebber
Utility Income Fund, dated August
1, 1999 and previously filed on
EDGAR, Accession Number
0000928385-99-002400
14. Financial Statements Annual Report to Shareholders of
PaineWebber Balanced Fund for the
fiscal year ended August 31,
1999, previously filed on EDGAR,
Accession Number
0000930413-99-001247; Annual
Report to Shareholders of
PaineWebber Utility Income Fund
for the period ended March 31,
1999, previously filed on EDGAR,
Accession Number
0000950130-99-003490; Semi-Annual
Report to Shareholders of
PaineWebber Utility Income Fund
for the six months ended
September 30, 1999, previously
filed on EDGAR, Accession Number
0000889812-99-003577
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 West 52nd Street
New York, New York 10019
April ___, 2000
Dear Shareholder:
Enclosed is a combined proxy statement and prospectus that seeks your
approval of an important proposal for your PaineWebber Utility Income Fund. YOUR
VOTE ON THIS PROPOSAL WILL HELP DECIDE THE FUND'S FUTURE.
The Board of Trustees of PaineWebber Utility Income Fund ("Utility Income
Fund") proposes to reorganize the Fund into PaineWebber Balanced Fund ("Balanced
Fund"). Under the proposed reorganization, each shareholder of each class of
shares of Utility Income Fund automatically would become a holder of the
corresponding class of shares of Balanced Fund, and Utility Income Fund would be
liquidated.
Utility Income Fund and Balanced Fund have similar investment objectives
and investment policies in that both are conservative funds relative to other
funds that invest in equity securities. Utility Income Fund's investment
objective is to achieve current income and capital appreciation. Balanced Fund's
investment objective is to achieve high total return with low volatility.
Utility Income Fund pursues its objective by investing primarily in
income-producing stocks and bonds issued by U.S. and foreign utility companies
(I.E., companies that own or operate facilities for telecommunications or for
generating, transmitting or distributing electricity, gas or water). The Fund
also may invest, to a lesser extent, in stocks and bonds issued by companies
outside the utility industries and in high quality money market instruments.
Balanced Fund pursues its objective by allocating investments among stocks,
bonds and money market instruments. The Fund normally has investments in each
asset class but it always keeps at least 25% of its total assets in a
combination of bonds and cash.
Due to the similar investment objectives and investment policies of
Utility Income Fund and Balanced Fund, along with the more flexible investment
parameters of Balanced Fund, the proposed merger is believed to be in the
overall best interests of all Utility Income Fund shareholders. AFTER CAREFUL
CONSIDERATION, THE BOARD HAS UNANIMOUSLY APPROVED THE PROPOSAL AND RECOMMENDS
THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY AND THEN VOTE "FOR" THE
REORGANIZATION PROPOSAL.
The enclosed document describes the proposed reorganization and compares
the investment policies, operating expenses and performance histories of Utility
Income Fund and Balanced Fund in more detail. Please read it carefully. We have
included a section of questions and answers that we think will be of interest to
most investors. After reviewing the enclosed document, please complete, date and
sign your proxy card and return it in the enclosed postage-paid return envelope.
<PAGE>
YOUR VOTE IS VERY IMPORTANT. Please take a moment to review the enclosed
materials and to date, sign and return your proxy card TODAY. Voting your shares
early will permit Utility Income Fund to avoid costly follow-up mail and
telephone solicitation.
THE BOARD URGES THAT YOU VOTE "FOR" THE PROPOSED REORGANIZATION.
Sincerely,
Margo N. Alexander
President
2
<PAGE>
PAINEWEBBER UTILITY INCOME FUND MERGER
QUESTIONS AND ANSWERS
On Thursday, February 10, 2000, the Board of Trustees of PaineWebber Utility
Income Fund unanimously approved the merger of PaineWebber Utility Income Fund
into PaineWebber Balanced Fund. Here are answers to some of the most commonly
asked questions.
WHAT IS A MERGER?
A fund is said to merge when it combines with another fund, transferring
substantially all of its net assets into that other fund, and subsequently the
old fund ceases to operate.
WHY IS THIS MERGER BEING PROPOSED?
Utility Income Fund was launched in July 1993. Unfortunately, Fund assets have
not grown significantly since that time, and there is no reason to believe that
they will increase significantly in the future. As of February 2000, the Fund's
assets were approximately $30 million. If shareholders of Utility Income Fund
approve the merger of Utility Income Fund into Balanced Fund, you should benefit
from economies of scale - which could mean lower operating expenses - and from
the opportunity for broader investment diversification.
WHEN WILL THE PROPOSED MERGER OCCUR?
The Funds will merge on or about June 23, 2000 pending Utility Income Fund
shareholder approval at a special meeting to be held on June 12, 2000.
HOW WILL THE MERGER EFFECT FUND EXPENSES?
The combined Fund is expected to have lower overall expenses than Utility Income
Fund currently has, due to its larger asset base. Based on preliminary
calculations for the current fiscal year, Mitchell Hutchins has estimated that,
on a pro forma basis, each class of shares of the combined fund would have lower
total annual operating expenses as a result of the merger.
The table below shows comparative expenses for Class A shares of Utility Income
Fund (for the six months ended September 30, 1999), Balanced Fund (for the
fiscal year ended August 31, 1999), and the pro forma expense ratios for Class A
shares of Balanced Fund, as of August 31, 1999, after the Reorganization. A pro
forma comparison of the expense ratios of each of the other classes of the Funds
shows similar reductions in total expenses. (For more details about fees and
expenses of each class of shares, see "Comparative Fee Table" on page 7 of the
proxy statement/prospectus.)
3
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES UTILITY INCOME BALANCED FUND PRO FORMA
FUND (CLASS A) (CLASS A) COMBINED FUND
(SIX MONTHS (FISCAL YEAR (CLASS A) (AS
ENDED ENDED AUGUST OF AUGUST 31,
SEPTEMBER 30, 31, 1999) 1999)
1999
- --------------------------------------------------------------------------------
Management Fees 0.70% 0.75% 0.75%
- --------------------------------------------------------------------------------
Distribution and/or Service 0.25% 0.25% 0.25%
(12b-1) Fees
- --------------------------------------------------------------------------------
Other Expenses 0.61% 0.22% 0.21%
- --------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING 1.56% 1.22% 1.21%
EXPENSES
- --------------------------------------------------------------------------------
Each Fund will pay its own expenses of the Reorganization. These expenses are
estimated to be $165,000 for Utility Income Fund and $30,000 for Balanced Fund.
HOW MANY SHARES WILL I RECEIVE AT THE TIME OF THE MERGER?
If the merger is approved, you will receive shares of Balanced Fund in exchange
for shares of Utility Income Fund. You will receive full and fractional shares
of the corresponding class of Balanced Fund having an aggregate value equal to
the net asset value of your Utility Income Fund shares at the time of the
merger. Net asset values will be calculated as of the closing date which is
expected to be June 23, 2000.
IF I CURRENTLY ELECT TO RECEIVE MY UTILITY INCOME FUND DIVIDEND AS CASH OR IF I
HAVE THE DIVIDEND AUTOMATICALLY REINVESTED INTO THE FUND, WILL MY DISTRIBUTION
CHOICE REMAIN THE SAME FOR MY BALANCED FUND SHARES AFTER THE MERGER?
If you do not currently own shares of Balanced Fund, your dividend distribution
election for Utility Income Fund will remain the same after the merger.
If you currently own shares of BOTH Balanced Fund and Utility Income Fund, your
dividend distribution after the merger will be the choice you currently have
selected for your Balanced Fund shares.
WILL THE MERGER SUBJECT ME TO ANY TAXES?
The merger has been structured as a tax-free transaction, which means that no
gain or loss will be recognized by either Fund. This means that you will not
realize any gain or loss on your receipt of Balanced Fund shares, and that a
Utility Income Fund shareholder's basis for its Balanced Fund shares received in
the merger will be the same as its basis for its Utility Income Fund shares.
Immediately prior to the merger, Utility Income Fund will have to distribute all
of its undistributed income or capital gain, if any, to its shareholders, and
that distribution will be taxable to Utility Income Fund shareholders.
4
<PAGE>
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF EACH FUND?
Utility Income Fund and Balanced Fund have similar investment objectives and
policies in that both are conservative funds relative to other funds that invest
in equity securities. More detailed descriptions follow in the table below. (See
"Comparison of the Funds" on p.8 of the proxy statement/prospectus for more
information on the investment policies and risks of each Fund.)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
UTILITY INCOME FUND BALANCED FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Objective achieve current income and achieve high total return with
capital appreciation low volatility
- -----------------------------------------------------------------------------------------------------------
Investment Strategies pursues objective by investing pursues its objective by
at least 65% of its total assets in allocating investments among stocks,
income-producing stocks and bonds bonds, and money market instruments
issued by U.S. and foreign utility
companies normally has investments in
each asset class but it always
may invest up to 35% of its keeps at least 25% of its total
total assets in stocks and bonds assets in a combination of bonds
issued by companies outside the and cash
utility industries and in high
quality money market instruments
- -----------------------------------------------------------------------------------------------------------
</TABLE>
HOW HAVE BALANCED FUND AND UTILITY INCOME FUND PERFORMED?
The following tables show the average annual total returns over several time
periods for each class of shares of each Fund. The tables do reflect sales
charges on shares of the Funds. The tables also compare each Fund's returns to
returns of a broad-based market index. In addition, the table for Utility Income
Fund compares the Fund's returns to a more narrowly based index that reflects
the utility industries market sector. The comparative indices are unmanaged and,
therefore, do not include any sales charges or expenses.
- --------------------------------------------------------------------------------
BALANCED FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
CLASS CLASS A CLASS B* CLASS C CLASS Y S&P 500
(INCEPTION DATE) (7/1/91) (12/12/86) (7/2/92) (3/26/98) INDEX
One Year (2.22%) (2.95%) 0.84% 2.78% 21.04%
Five Years 15.41% 15.37% 15.61% N/A 28.56%
Ten Years N/A 10.92% N/A N/A 18.21%
Life of Class 11.38% 9.91% 11.28% 6.08% **
- --------------------------------------------------------------------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** The average annual total return for the S&P 500 Index (1) for the life of
Class A shares was 20.30%, (2) for the period since December 31, 1986 (the
approximate period since the inception of Class B shares) was 18.01%, (3) for
the period since June 30, 1992 (the approximate period since the inception of
Class C shares) was 21.25%, and (4) for the period since March 31, 1998 (the
approximate period since the inception of Class Y shares) was 19.50%.
5
<PAGE>
- --------------------------------------------------------------------------------
UTILITY INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
CLASS CLASS A CLASS B* CLASS C CLASS Y S&P 500 S&P UTILITY
(INCEPTION DATE) (7/2/93) (7/2/93) (7/2/93) (9/10/98) INDEX INDEX
One Year (1.20%) (2.41%) 1.71% 3.76% 21.04% (8.88)%
Five Years 14.28% 14.21% 14.46% N/A 28.56% 13.66%
Life of Class 8.96% 8.96% 8.91% 13.76% ** ***
- --------------------------------------------------------------------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** The average annual total return for the S&P 500 Index (1) for the period
since June 30, 1993 (the approximate period since the inception of Class A,
Class B, and Class C shares) was 22.47%, and (2) for the period since September
30, 1998 (the approximate period since the inception of Class Y shares) was
35.97%. *** The average annual total return for the S&P Utility Index (1) for
the period since June 30, 1993 (the approximate period since the inception of
Class A, Class B, and Class C shares) was 9.11%, and (2) for the period since
September 30, 1998 (the approximate period since the inception of Class Y
shares) was (5.32%).
CAN I REDEEM OR EXCHANGE MY UTILITY INCOME FUND SHARES BEFORE THE
REORGANIZATION?
If you do not wish to receive shares of Balanced Fund, you are free to redeem or
exchange your Utility Income Fund shares any time prior to the merger. You will
be subject to any applicable contingent deferred sales charges and taxes if you
redeem your Utility Income Fund shares. If you elect to exchange your shares
prior to the merger, you may be subject to capital gains taxes. Consult your tax
adviser for the tax implications of an exchange. Please call your Financial
Advisor to discuss your investment options or with any questions.
WHAT IS THE BOARD'S RECOMMENDATION?
Your Board of Trustees recommends a vote "FOR" the merger.
6
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 West 52nd Street
New York, New York 10019-6114
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JUNE 12, 2000
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders ("Meeting")
of PaineWebber Utility Income Fund ("Utility Income Fund"), a portfolio of
PaineWebber Managed Investments Trust ("Trust"), will be held on June 12, 2000,
at 1285 Avenue of the Americas, 14th Floor, New York, New York, 10019, at 2:00
p.m., Eastern time, for the following purpose:
To approve an Agreement and Plan of Reorganization and Termination
("Plan") that provides for the reorganization of Utility Income Fund into
PaineWebber Balanced Fund ("Balanced Fund"), a portfolio of PaineWebber
Master Series, Inc. ("Master Series"). Pursuant to the Plan, Utility
Income Fund will transfer all its assets to Balanced Fund, which will
assume all the liabilities of Utility Income Fund, and Master Series will
issue to each Utility Income Fund shareholder the number of full and
fractional shares of the applicable class of Balanced Fund having an
aggregate value that, on the effective date of the reorganization, is
equal to the aggregate net asset value of the shareholder's shares in
Utility Income Fund.
Shareholders of record as of the close of business on March 31, 2000, are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
Please execute and return promptly in the enclosed envelope the
accompanying proxy, which is being solicited by the Board of Trustees of the
Trust. Returning your proxy promptly is important to ensure a quorum at the
Meeting. You may revoke your proxy at any time before it is exercised by the
subsequent execution and submission of a revised proxy, by giving written notice
of revocation to the Trust at any time before the proxy is exercised or by
voting in person at the Meeting.
By Order of the Board of Trustees,
Dianne E. O'Donnell
Secretary
April [__], 2000
51 West 52nd Street
New York, New York 10019-6114
<PAGE>
- -------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN.
Please indicate your voting instructions on the enclosed proxy card, sign
and date the card and return it in the envelope provided. IF YOU SIGN, DATE AND
RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED
"FOR" THE PROPOSAL DESCRIBED ABOVE. In order to avoid the additional expense of
further solicitation, we ask your cooperation in mailing your proxy card
promptly.
For more information or questions regarding casting your vote for the
Meeting, please call 1-800- .
If we do not receive your completed proxy cards after several weeks, you
may be contacted by our proxy solicitor, Shareholder Communications Corporation.
Our proxy solicitor will remind you to vote your shares.
- -------------------------------------------------------------------------------
2
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance
to you and avoid the time and expense to the Trust involved in validating your
vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration on the
proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:
REGISTRATION VALID SIGNATURE
Corporate Accounts
(1) ABC Corp.......................... ABC Corp.
John Doe, Treasurer
(2) ABC Corp.......................... John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer. John Doe
(4) ABC Corp. Profit Sharing Plan..... John Doe, Trustee
Partnership Accounts
(1) The XYZ Partnership............... Jane B. Smith, Partner
(2) Smith and Jones, Limited Partnership Jane B. Smith, General
Partner
Trust Accounts
(1) ABC Trust Account................. Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust. f/b/o
John B. Smith, Jr.,
UGMA/UTMA......................... John B. Smith
(2) Estate of John B. Smith........... John B. Smith, Jr.,
Executor
3
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
(A PORTFOLIO OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
PAINEWEBBER BALANCED FUND
(A PORTFOLIO OF PAINEWEBBER MASTER SERIES, INC.)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
COMBINED PROXY STATEMENT AND PROSPECTUS
Dated: April __, 2000
This Combined Proxy Statement and Prospectus ("Proxy
Statement/Prospectus") is being furnished in connection with a Special Meeting
of Shareholders of PaineWebber Utility Income Fund ("Utility Income Fund"), a
portfolio of PaineWebber Managed Investments Trust, a Massachusetts business
trust ("Trust"), to be held on June 12, 2000, at 1285 Avenue of the Americas,
14th Floor, New York, New York, 10019, at 2:00 p.m., Eastern time (such meeting
and any adjournments thereof are referred to collectively as the "Meeting"). At
the Meeting, the shareholders of Utility Income Fund are being asked to consider
and approve an Agreement and Plan of Reorganization and Termination ("Plan")
that provides for the reorganization ("Reorganization") of Utility Income Fund
into PaineWebber Balanced Fund ("Balanced Fund"), a series of PaineWebber Master
Series, Inc., a Maryland corporation ("Master Series"). A form of the Plan is
attached as Appendix A to this Proxy Statement/Prospectus. The Board of Trustees
of the Trust has unanimously approved the Plan as being in the best interests of
Utility Income Fund and its shareholders. (Utility Income Fund and Balanced Fund
sometimes are referred to individually as a "Fund" and together as "Funds.")
Pursuant to the Plan, Utility Income Fund will transfer all its assets to
Balanced Fund, which will assume all the liabilities of Utility Income Fund, and
Master Series will issue to each Utility Income Fund shareholder the number of
full and fractional shares of common stock of the applicable class of Balanced
Fund having an aggregate net asset value ("NAV") that, on the effective date of
the Reorganization, is equal to the aggregate NAV of the shareholder's shares of
beneficial interest in the corresponding class of Utility Income Fund. The value
of each Utility Income Fund shareholder's account with Balanced Fund immediately
after the Reorganization will be the same as the value of such shareholder's
account with Utility Income Fund immediately prior to the Reorganization. The
Reorganization has been structured as a tax-free transaction. As a result of the
Reorganization, shareholders of each class of shares of Utility Income Fund will
become shareholders of the corresponding class of shares of Balanced Fund. No
sales charges will be assessed in connection with the Reorganization.
<PAGE>
Balanced Fund is a diversified series of Master Series, which is an
open-end management investment company comprised of two outstanding series.
Balanced Fund's investment objective is to achieve high total return with low
volatility. The Fund seeks to achieve its investment objective by allocating
investments among stocks, bonds, and money market instruments. The Fund normally
has investments in each asset class, but it always keeps at least 25% of its
total assets in a combination of bonds and cash.
This Proxy Statement/Prospectus sets forth the information that a
shareholder of Utility Income Fund shareholder should know before voting on the
Plan. It should be read carefully and retained for future reference.
A Statement of Additional Information ("SAI") dated ______ ____,
containing additional information about the Reorganization, including historical
financial statements, has been filed with the Securities and Exchange Commission
("SEC") and is hereby incorporated by reference in its entirety into this Proxy
Statement/Prospectus. A Prospectus and SAI for Balanced Fund, each dated
December 10, 1999, as supplemented, and Balanced Fund's Annual Report to
Shareholders for the fiscal year ended August 31, 1999, have been filed with the
SEC and are hereby incorporated herein by reference. A copy of the current
Prospectus of Balanced Fund and its Annual Report accompany this Proxy
Statement/Prospectus. Because Balanced Fund's Prospectus is a joint prospectus
for two funds, it includes information on one other fund, PaineWebber Tactical
Allocation Fund, which is not relevant to this Proxy Statement/Prospectus.
Please disregard all references to PaineWebber Tactical Allocation Fund.
Information about Utility Income Fund is included in its current Prospectus and
SAI, each dated August 1, 1999, as supplemented, which are on file with the SEC
and are hereby incorporated by reference into this Proxy Statement/Prospectus.
Copies of the other referenced documents, as well as Utility Income Fund's
Semi-Annual Report to Shareholders for the six months ended September 30, 1999,
and its Annual Report to Shareholders for the fiscal year ended March 31, 1999,
are available without charge by writing either Utility Income Fund or Balanced
Fund at the address shown above, or by calling (800) 647-1568. The SEC maintains
a Web site at http://www.sec.gov that contains the documents described above and
other information about the Trust and Master Series. Additional information
about the Funds also may be obtained on the Web at http://www.painewebber.com.
AS WITH ALL OTHER MUTUAL FUND SECURITIES, THE SEC HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
2
<PAGE>
TABLE OF CONTENTS
SECTION TITLE PAGE
SYNOPSIS.....................................................................6
The Proposed Reorganization...............................................6
Comparative Fee Table.....................................................7
Comparison of the Funds...................................................8
Investment Objectives..................................................8
Investment Policies....................................................8
Operations of Balanced Fund Following the Reorganization..............10
Performance...........................................................11
Sales Charges and Distribution and Service Fees.......................12
Distribution, Purchase, Exchange and Redemption.......................13
Fund Board Members and Officers.......................................14
Investment Advisers and Portfolio Management..........................14
Accountants...........................................................16
COMPARISON OF PRINCIPAL RISK FACTORS........................................16
Risks Common to Both Funds...............................................16
Investing in Securities Generally.....................................16
Equity Risk...........................................................16
Interest Rate Risk and Credit Risk....................................16
Derivatives Risk......................................................17
Primary Differences in Investment Risks of the Funds.....................17
Utility Industries Concentration Risk.................................17
Asset Allocation Risk.................................................18
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION.............................18
Reasons for the Reorganization...........................................18
Terms of the Reorganization..............................................19
Description of Securities to be Issued...................................21
Dividends and other Distributions........................................21
Temporary Waiver of Investment Restrictions..............................21
Federal Income Tax Considerations........................................22
ORGANIZATION OF THE FUNDS...................................................23
FINANCIAL HIGHLIGHTS........................................................23
CAPITALIZATION..............................................................23
LEGAL MATTERS...............................................................24
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION...............25
EXPERTS.....................................................................25
APPENDIX A: Form of Agreement and Plan of Reorganization and Termination...A-1
APPENDIX B: Security Ownership of Certain Beneficial Owners................B-1
3
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to shareholders of
Utility Income Fund, a portfolio of the Trust, in connection with the
solicitation of proxies by the Board for use at the Meeting. All properly
executed and unrevoked proxies received in time for the Meeting will be voted in
accordance with the instructions contained therein. If no instructions are
given, shares represented by proxies will be voted "FOR" approval of the Plan.
The presence in person or by proxy of Utility Income Fund shareholders entitled
to cast a majority of all the votes entitled to be cast at the Meeting will
constitute a quorum. If a quorum is not present at the Meeting or a quorum is
present but sufficient votes to approve the Plan are not received, the persons
named as proxies may propose one or more adjournments of the Meeting to permit
further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of the shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote "FOR" the Plan in favor of such an adjournment and
will vote those proxies required to be voted "AGAINST" the Plan against such
adjournment.
Approval of the Plan requires the affirmative vote of a majority of the
votes entitled to be cast on the Plan.
Broker non-votes are shares held in "street name" for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be counted
as shares present at the Meeting for quorum purposes but will not be considered
votes cast at the Meeting. Abstentions and broker non-votes are effectively
votes against the Plan because the required affirmative vote is a specified
majority of the total shares outstanding.
Any person giving a proxy has the power to revoke it at any time prior to
its exercise by executing a superseding proxy or by submitting a written notice
of revocation to the Secretary of the Trust ("Secretary"). To be effective, such
revocation must be received by the Secretary prior to the Meeting. In addition,
although mere attendance at the Meeting will not revoke a proxy, a shareholder
present at the Meeting may withdraw his or her proxy by voting in person.
Shareholders of record as of the close of business on March 31, 2000
("Record Date"), are entitled to vote at the Meeting. On the Record Date, there
were [_____] Class A, [_____] Class B shares, [_____] Class C shares, and
[_____] Class Y shares of Utility Income Fund outstanding. Each share is
entitled to one vote for each full share held and a fractional vote for each
fractional share held.
Except as set forth in Appendix B, as of the Record Date, Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), the investment adviser,
administrator and distributor of both Funds, does not know of any other person
who owns beneficially 5% or more of any class of shares of either Fund.
4
<PAGE>
The Trust has engaged the services of Shareholder Communications
Corporation ("SCC") to assist it in the solicitation of proxies for the Meeting.
The Trust expects to solicit proxies principally by mail, but it or SCC may also
solicit proxies by telephone. The Trust officers and employees of Mitchell
Hutchins who assist in the proxy solicitation will not receive any additional or
special compensation for any such efforts. Each Fund will bear its expenses
incurred in connection with the Reorganization, which are estimated to be
$165,000 for Utility Income Fund and $30,000 for Balanced Fund. SCC will be paid
approximately $25,000 for proxy solicitation services. The Trust will request
broker/dealer firms, custodians, nominees and fiduciaries to forward proxy
materials to the beneficial owners of the shares held of record by such persons.
The Trust may reimburse such broker/dealer firms, custodians, nominees and
fiduciaries for their reasonable expenses incurred in connection with such proxy
solicitation.
The Trust intends to mail this Proxy Statement/Prospectus and the
accompanying proxy card on or about April __, 2000.
5
<PAGE>
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus, the Prospectus and SAI of each Fund and the
Plan. As discussed more fully below, the Trust's Board believes that the
proposed Reorganization will benefit Utility Income Fund's shareholders. The
Funds have similar investment objectives and policies. Furthermore, it is
anticipated that, following the Reorganization, the total annual operating
expenses for the combined Fund will be lower as a percentage of net assets than
those of Utility Income Fund.
THE PROPOSED REORGANIZATION
Each Board, including its Trustees who are not "interested persons," as
that term is defined in the Investment Company Act of 1940, as amended ("1940
Act"), of the Trust or Master Series ("Independent Board Members" of the Trust
or Master Series, as appropriate), considered and approved the Plan at a meeting
held on February 10, 2000. The Plan provides for the acquisition by Balanced
Fund of all of Utility Income Fund's assets in exchange for Balanced Fund shares
and the assumption by Balanced Fund of all of Utility Income Fund's liabilities.
Utility Income Fund will then distribute the Balanced Fund shares to its
shareholders, by class, so that each Utility Income Fund shareholder will
receive the number of full and fractional shares of the corresponding class of
Balanced Fund equal in aggregate value to the net asset value of the
shareholder's shares of Utility Income Fund at the time of the Reorganization.
These transactions are scheduled to occur as of 4:00 p.m., Eastern time, on June
23, 2000, or on such later date as the conditions to consummation of the
Reorganization are satisfied ("Closing Date"). Utility Income Fund will be
terminated as soon as is practicable after the Closing Date. See "Additional
Information About the Reorganization," below.
The Trust and Master Series each will receive an opinion of Kirkpatrick &
Lockhart LLP, the counsel to each Fund, to the effect that the Reorganization
will constitute a tax-free reorganization within the meaning of section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code").
Accordingly, neither Fund nor any of its shareholders will recognize any gain or
loss for federal income tax purposes as a result of the Reorganization. To the
extent Utility Income Fund sells securities prior to the Closing Date, it may
recognize net gains or losses. Any such net recognized gains would increase the
amount of any distribution made to shareholders of Utility Income Fund prior to
the Closing Date. See "Additional Information About the Reorganization --
Federal Income Tax Considerations," below.
For the reasons set forth below under "Additional Information About the
Reorganization - Reasons for the Reorganization," the Board has determined that
the Reorganization is in the best interests of Utility Income Fund and that the
interests of existing Utility Income Fund shareholders will not be diluted as a
result of the Reorganization. Accordingly, the Trust's Board recommends approval
of the transaction.
6
<PAGE>
COMPARATIVE FEE TABLE
The table below describes the fees and expenses that you would pay if you
buy and hold Utility Income Fund shares, Balanced Fund shares before the
Reorganization and Balanced Fund shares after the Reorganization. The
information set forth below is based on the fees and expenses for the fiscal
year ended August 31, 1999, for Balanced Fund and for the six months ended
September 30, 1999, for Utility Income Fund. The PRO FORMA information reflects
the anticipated effects of the Reorganization.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
UTILITY INCOME FUND BALANCED FUND BALANCED FUND
PRO FORMA
- ----------------------------------------------------------------------------------------------------------------------------------
Class Class Class Class Class Class Class Class Class Class Class Class
A B C Y A B C Y A B C Y
- ----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
(load) Imposed on
Purchases (AS A 4.5% None None None 4.5% None None None 4.5% None None None
PERCENTAGE OF
OFFERING PRICE)
- ----------------------------------------------------------------------------------------------------------------------------------
Maximum Deferred
Sales Charge (load)
(AS A PERCENTAGE OF None(1) 5% 1% None None(1) 5% 1% None None(1) 5% 1% None
ORIGINAL PURCHASE
PRICE OR REDEMPTION
PROCEEDS, WHICHEVER
IS LESS)
- ----------------------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None None None None None None None None None
- ----------------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (FEES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------------------------------------------------------------------------------------------------------------------
Management Fees 0.70% 0.70% 0.70% 0.70% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
- ----------------------------------------------------------------------------------------------------------------------------------
Distribution and/or
Service (12b-1) Fees 0.25% 1% 1% None 0.25% 1% 1% None 0.25% 1% 1% None
- ----------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.61% 0.68% 0.64% 0.79% 0.22% 0.23% 0.20% 0.21% 0.21% 0.22% 0.19% 0.20%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Annual Fund
Operating Expenses(2)
1.56% 2.38% 2.34% 1.49% 1.22% 1.98% 1.95% 0.96% 1.21% 1.97% 1.94% 0.95%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For investments of $1,000,000 and over, a contingent deferred sales charge
of 1% of the shares' offering price or their net asset value at the time of
sale by the shareholder, whichever is less, is charged on sales of shares
made within one year of the purchase date. Class A shares representing
reinvestment of dividends and other distributions are not subject to this 1%
charge. Withdrawals in the first year after purchase of up to 12% of the
value of the Fund account under the Funds' Systematic Withdrawal Plan are
not subject to this charge.
(2) Total Annual Fund Operating Expenses for Utility Income Fund for the fiscal
year ended March 31, 1999, were as follows: Class A - 1.59%; Class B -
2.35%; Class C - 2.35%; and Class Y - 1.25%.
The example below is intended to help you compare the costs of investing
in each Fund, both before and after the Reorganization.
The example assumes that you invest $10,000 in each Fund and the combined
Fund for the time periods indicated and then redeem all of your shares at the
end of those periods. The example also assumes that your investments each have a
5% return each year and that each Fund's operating expenses remain the same.
Although your actual returns and costs may be higher or lower, based on these
assumptions your costs would be:
7
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
UTILITY INCOME FUND
Class A $604 $ 929 $1,277 $2,254
Class B (assuming sale of all shares at end of period) 738 1,033 1,455 2,323
Class B (assuming no sale of shares) 238 733 1,255 2,323
Class C (assuming sale of all shares at end of period) 338 733 1,255 2,686
Class C (assuming no sale of shares) 238 733 1,255 2,686
Class Y 127 397 686 1,511
BALANCED FUND
Class A 569 820 1,090 1,861
Class B (assuming sale of all shares at end of period) 701 921 1,268 1,930
Class B (assuming no sale of shares) 201 621 1,068 1,930
Class C (assuming sale of all shares at end of period) 298 612 1,052 2,275
Class C (assuming no sale of shares) 198 612 1,052 2,275
Class Y 98 306 525 1,178
PRO FORMA BALANCED FUND
Class A 568 817 1,085 1,850
Class B (assuming sale of all shares at end of period) 700 918 1,262 1,919
Class B (assuming no sale of shares) 200 618 1,062 1,919
Class C (assuming sale of all shares at end of period) 297 609 1,047 2,264
Class C (assuming no sale of shares) 197 609 1,047 2,264
Class Y 97 303 525 1,166
</TABLE>
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVES
The Funds have similar investment objectives in that both are conservative
funds relative to other funds that invest in equity securities. Balanced Fund's
investment objective is to achieve high total return with low volatility.
Utility Income Fund's investment objective is to achieve current income and
capital appreciation.
INVESTMENT POLICIES
The primary difference in the Funds' investment policies is that Utility
Income Fund concentrates its investments in income-producing stocks and bonds
issued by U.S. and foreign utility companies, while Balanced Fund pursues an
asset allocation strategy and does not concentrate its investments in any
particular industry.
Balanced Fund allocates investments among stocks, bonds, and money market
instruments. The Fund normally has investments in each asset class, but it
always keeps at least 25% of its total assets in a combination of bonds and
cash. This is intended to limit changes in the value of fund shares compared to
funds that invest solely in stocks. The Fund's bonds are primarily investment
grade, but it may invest to a lesser extent in lower quality bonds.
For Balanced Fund, Mitchell Hutchins uses a fundamental valuation
technique to adjust the allocation of its assets among asset classes. Mitchell
Hutchins believes investors tend to reach a consensus as to the likely effect of
changes
8
<PAGE>
in key economic variables (for example, interest rates, profits and inflation)
on each asset class. Mitchell Hutchins also believes that prices of securities
in each asset class tend to move toward a level that reflects that consensus,
but that this takes time. Mitchell Hutchins attempts to adjust the allocation of
Balanced Fund's assets among asset classes before prices fully reflect the
consensus view.
In buying and selling individual securities for Balanced Fund, Mitchell
Hutchins uses the following process:
o STOCKS. Mitchell Hutchins uses its own Factor Valuation Model to
identify companies that appear to be undervalued. The model ranks
companies based on "value" factors, such as dividends, cash flows,
earnings and book values, as well as on "growth" factors, such as
earnings momentum and industry performance forecasts. Mitchell
Hutchins then applies fundamental analysis to select specific stocks
from among those identified by the model.
o BONDS. Mitchell Hutchins selects bonds based on its analysis of
their duration and risk structures (comparing yields on U.S.
Treasury bonds to yields on riskier types of bonds).
Unlike Balanced Fund, Utility Income Fund invests primarily in
income-producing stocks and bonds issued by U.S. and foreign utility companies
(I.E., companies that own or operate facilities for telecommunications or for
generating, transmitting or distributing electricity, gas or water). The Fund
also invests, to a lesser extent, in stocks and bonds issued by companies
outside the utility industries and in high quality money market instruments.
For Utility Income Fund, Mitchell Hutchins seeks to find companies that
should benefit from a changing operating environment. Long-term changes include
a trend toward deregulation in all utility industries, an increasing ability of
telephone companies to enter new businesses and consolidation among electric
utilities. Mitchell Hutchins allocates Utility Income Fund's investments between
stocks and bonds based on its judgment of what will achieve the best balance of
income and growth under prevailing economic conditions. Mitchell Hutchins
evaluates individual issuers based on the issuer's business and regulatory
environment, its ability to maintain low production costs and other measures of
fundamental value.
SECURITIES OF FOREIGN ISSUERS. Both Funds may invest in U.S.
dollar-denominated securities of foreign companies. Utility Income Fund also may
invest in non-U.S. dollar-denominated securities of foreign companies.
BONDS RATED BELOW INVESTMENT GRADE. The bonds held by each Fund are
primarily investment grade, although Balanced Fund may invest up to 10% of its
total assets in bonds and other securities that are rated below investment
grade, while Utility Income Fund may invest only up to 5% of its net assets in
bonds and convertible securities that are rated lower than investment grade.
9
<PAGE>
DERIVATIVES. Both Funds have similar policies with respect to the use of
options, futures, and other derivatives. Utility Income Fund may invest in
derivatives as part of its investment strategy or to help manage portfolio
risks, including foreign currency risks, while Balanced Fund may invest in
derivatives to adjust its exposure to different asset classes, to manage the
duration of its bond investments and to maintain exposure to stocks or bonds
while maintaining a cash balance for fund management purposes.
OTHER INVESTMENT POLICIES. Each Fund may invest up to 10% of its net
assets in illiquid securities and may purchase securities on a when-issued basis
or may purchase or sell securities for delayed delivery. Each Fund may lend up
to 33-1/3% of its total assets to qualified broker-dealers or institutional
investors. Neither Fund may purchase securities while borrowings in excess of 5%
of its total assets are outstanding. Each Fund may enter into repurchase
agreements. Both Funds also may take a temporary or defensive position that is
different from its normal investment strategies in order to protect itself from
adverse market conditions.
PORTFOLIO TURNOVER. Each Fund may engage in frequent trading (high
portfolio turnover) to achieve its investment objectives. Frequent trading may
increase the portion of a Fund's capital gains that are realized for tax
purposes in any given year, which may increase the Fund's taxable dividends in
that year. Frequent trading also may increase the portion of a Fund's realized
capital gains that are considered "short-term" for tax purposes. Shareholders
will pay higher taxes on dividends that represent net short-term capital gains
than they would pay on dividends that represent net long-term capital gains.
Frequent trading also may result in higher fund expenses due to transaction
costs. Neither Fund restricts the frequency of trading to limit expenses or the
tax effect that its dividends may have on shareholders. While both Funds have
substantially similar policies with respect to portfolio turnover, Balanced
Fund's portfolio turnover rate has generally been higher than Utility Income
Fund's portfolio turnover rate because its asset allocation model actively moves
assets among stocks, bonds, and cash. For example, portfolio turnover rates for
Utility Income Fund for the last two fiscal years ended March 31, 1998, and
1999, were 10% and 21%, respectively, while the portfolio turnover rates for
Balanced Fund's last two fiscal years ended August 31, 1998, and 1999, were 190%
and 234%, respectively.
OPERATIONS OF BALANCED FUND FOLLOWING THE REORGANIZATION
Although there are some differences in the Funds' investment objectives
and investment policies, it is not expected that Balanced Fund will revise its
investment objective or any of its policies following the Reorganization to
reflect those of Utility Income Fund. Mitchell Hutchins has reviewed Utility
Income Fund's current portfolio and determined that Utility Income Fund's
holdings generally are compatible with Balanced Fund's portfolio. As a result,
Mitchell Hutchins believes that, if the Reorganization is approved, a majority
of Utility Income Fund's assets could be transferred to and held by Balanced
Fund. However, prior to the effective time of the Reorganization, Utility Income
Fund will sell the assets that are deemed by Balanced Fund's portfolio managers
to be incompatible with Balanced Fund's current portfolio composition, and the
proceeds of those sales will be held in temporary investments or reinvested in
assets that qualify to be held by Balanced Fund. It also is expected that some
of Utility Income Fund's holdings may not remain at the time of the
Reorganization due to normal portfolio turnover. Mitchell Hutchins currently
10
<PAGE>
estimates that Utility Income Fund will sell approximately 42% of its total
assets in connection with the Reorganization. The need for Utility Income Fund
to dispose of assets prior to the effective time of the Reorganization may
result in the Fund's selling securities at a disadvantageous time, and could
result in Utility Income Fund's realizing gains (or losses) that would not
otherwise have been realized.
PERFORMANCE
The following bar chart provides information about the performance of
Balanced Fund Class B shares, and thus gives some indication of the risks of
investing in the Fund. The bar chart shows how Balanced Fund's performance has
varied from year to year. (Class B shares have the longest performance history
of any class of Balanced Fund's shares.) The chart does not take into account
the contingent deferred sales charges imposed on sales of Class B shares of
Balanced Fund. If it did, the total returns shown for the Fund would be lower.
Balanced Fund's past performance does not necessarily indicate how it will
perform in the future.
BALANCED FUND - TOTAL RETURN ON CLASS B SHARES
The chart below contains the following plot points:
1990 1.95%
1991 18.52%
1992 4.46%
1993 14.66%
1994 -10.51%
1995 22.23%
1996 13.81%
1997 23.63%
1998 18.02%
1999 2.42%
[Total return January 1 to March 31, 2000 -- __%]
Best quarter during years shown: 4th quarter, 1998 - 15.09%
11
<PAGE>
Worst quarter during years shown: 3rd quarter, 1998 - (8.21%)
The following tables show the average annual total returns over several
time periods for each class of shares of each Fund. The tables do reflect sales
charges on shares of the Funds. The tables also compare each Fund's returns to
returns of a broad-based market index. In addition, the table for Utility Income
Fund compares the Fund's returns to a more narrowly based index that reflects
the utility industries market sector. The comparative indices are unmanaged and,
therefore, do not include any sales charges or expenses.
- --------------------------------------------------------------------------------
BALANCED FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
- --------------------------------------------------------------------------------
CLASS CLASS A CLASS B* CLASS C CLASS Y S&P 500
(INCEPTION DATE) (7/1/91) (12/12/86) (7/2/92) (3/26/98) INDEX
- --------------------------------------------------------------------------------
One Year (2.22%) (2.95%) 0.84% 2.78% 21.04%
- --------------------------------------------------------------------------------
Five Years 15.41% 15.37% 15.61% N/A 28.56%
- --------------------------------------------------------------------------------
Ten Years N/A 10.92% N/A N/A 18.21%
- --------------------------------------------------------------------------------
Life of Class 11.38% 9.91% 11.28% 6.08% **
- --------------------------------------------------------------------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** The average annual total return for the S&P 500 Index (1) for the life of
Class A shares was 20.30%, (2) for the period since December 31, 1986 (the
approximate period since the inception of Class B shares) was 18.01%, (3) for
the period since June 30, 1992 (the approximate period since the inception of
Class C shares) was 21.25%, and (4) for the period since March 31, 1998 (the
approximate period since the inception of Class Y shares) was 19.50%.
- --------------------------------------------------------------------------------
UTILITY INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
- --------------------------------------------------------------------------------
CLASS CLASS A CLASS B* CLASS C CLASS Y S&P 500 S&P UTILITY
(INCEPTION DATE) (7/2/93) (7/2/93) (7/2/93) (9/10/98) INDEX INDEX
- --------------------------------------------------------------------------------
One Year (1.20%) (2.41%) 1.71% 3.76% 21.04% (8.88%)
- --------------------------------------------------------------------------------
Five Years 14.28% 14.21% 14.46% N/A 28.56% 13.66%
- --------------------------------------------------------------------------------
Life of Class 8.96% 8.96% 8.91% 13.76% ** ***
- --------------------------------------------------------------------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** The average annual total return for the S&P 500 Index (1) for the period
since June 30, 1993 (the approximate period since the inception of Class A,
Class B, and Class C shares) was 22.47%, and (2) for the period since September
30, 1998 (the approximate period since the inception of Class Y shares) was
35.97%.
*** The average annual total return for the S&P Utility Index (1) for the period
the period since June 30, 1993 (the approximate period since the inception of
Class A, Class B, and Class C shares) was 9.11%, and (2) for the period since
September 30, 1998 (the approximate period since the inception of Class Y
shares) was (5.32%).
SALES CHARGES AND DISTRIBUTION AND SERVICE FEES
NO SALES CHARGES ARE APPLICABLE TO BALANCED FUND SHARES RECEIVED IN
CONNECTION WITH THE REORGANIZATION. The Class A shares of both Funds are
normally sold subject to a maximum initial sales charge of 4.5%. Class B and
Class C shares of both Funds are sold subject to a maximum contingent deferred
sales charge ("CDSC") of 5% and 1% (as a percentage of original purchase price
or redemption proceeds, whichever is less), respectively. For purposes of
calculating the CDSC, the holding period for the Class B and Class C shares of
12
<PAGE>
Balanced Fund distributed to Class B and Class C shareholders of Utility Income
Fund will include the holding period for the shares of Utility Income Fund. The
Class Y shares of each Fund are sold without initial sales charges or CDSCs. New
purchases of Class A, Class B, Class C and Class Y shares of Balanced Fund by
any shareholders will be subject to their terms. For more information about
sales charges for each class of shares of Balanced Fund and Utility Income Fund,
see "Flexible Pricing" in the Balanced Fund Prospectus and Utility Income Fund
Prospectus.
The Class A shares of both Funds pay an annual fee to Mitchell Hutchins
for shareholder services in the amount of 0.25% of average daily net assets
pursuant to a Rule 12b-1 plan (the "12b-1 fee"). The Class B and Class C shares
of both Funds pay an annual 12b-1 distribution fee of 0.75% of average daily net
assets, as well as an annual 12b-1 service fee of 0.25% of average daily net
assets. If you hold your Class B shares for six years, they will automatically
convert to Class A shares, which have lower ongoing expenses. Class C shares do
not convert to another class of shares. The Class Y shares of both Funds are not
subject to a 12b-1 fee.
DISTRIBUTION, PURCHASE, EXCHANGE AND REDEMPTION
Mitchell Hutchins is the distributor of shares of both Funds and has
appointed PaineWebber Incorporated ("PaineWebber") to be the exclusive dealer
for the sale of those shares. The minimum initial investment in Balanced Fund is
$1,000; each additional investment must be $100 or more. These minimums may be
waived or reduced for investments by employees of PaineWebber or its affiliates,
certain pension plans, retirement accounts, unaffiliated investment programs or
participants in Balanced Fund's automatic investment plan.
Purchase and redemption procedures are identical for both Funds. If you
are a PaineWebber client, or a client of a PaineWebber correspondent firm, you
can purchase Fund shares through your Financial Advisor. Otherwise, you can
invest in the Funds through the Funds' transfer agent, PFPC Inc. For a more
complete discussion of share purchases, see "Buying Shares" in either the
Balanced Fund Prospectus or the Utility Income Fund Prospectus.
You can sell your Fund shares at any time. If you own more than one class
of shares, you should specify which class you want to sell. If you do not, the
Fund will assume that you want to sell shares in the following order: first
Class A, then Class C, then Class B, and last, Class Y. For a more complete
discussion of share redemption procedures, see "Selling Shares" in either the
Balanced Fund Prospectus or the Utility Income Fund Prospectus.
You may exchange Class A, Class B, or Class C shares of each Fund for
shares of the same class of most other PaineWebber funds. You may not exchange
Class Y shares of either Fund. No front-end or contingent deferred sales charge
is imposed on the shares acquired through an exchange. However, you may have to
pay a contingent deferred sales charge if you later sell the shares you acquired
in the exchange. Exchanges are subject to minimum investment and other
requirements of the PaineWebber fund into which exchanges are made. For a more
complete discussion of share exchange procedures, see "Exchanging Shares" in
either the Balanced Fund Prospectus or the Utility Income Fund Prospectus.
13
<PAGE>
The price at which you may buy, sell, or exchange Fund shares is based on
the net asset value per share. Each Fund calculates NAV on days that the New
York Stock Exchange ("NYSE") is open. Each Fund calculates NAV separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.
Eastern time). The NYSE normally is not open, and the Funds do not price their
shares, on most national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the Funds' NAV per share will
be calculated as of the time trading was halted. Your price for buying, selling
or exchanging shares will be based on the NAV that is next calculated after the
Fund accepts your order. For more information on the pricing and valuation of
shares, see ""Pricing and Valuation" in either the Balanced Fund Prospectus or
the Utility Income Fund Prospectus.
FUND BOARD MEMBERS AND OFFICERS
Following the Reorganization, the Board of Directors and officers of
Master Series will continue to serve in that capacity for Master Series. The
current members of the Board of Directors of Master Series are the same persons
who are currently Trustees of the Trust, with the exception of Mary Farrell, who
is not a Trustee of the Trust. Ms. Farrell is a managing director, senior
investment strategist and member of the Investment Policy Committee of
PaineWebber. She joined PaineWebber in 1982. Ms. Farrell is a director or
trustee of 30 investment companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser. For more information about
Master Series' officers, see the Balanced Fund SAI, incorporated by reference
herein.
INVESTMENT ADVISERS AND PORTFOLIO MANAGEMENT
Utility Income Fund paid advisory fees to Mitchell Hutchins for the fiscal
year ended March 31, 1999, at the rate of 0.70% of the Fund's average daily net
assets. Balanced Fund paid advisory fees to Mitchell Hutchins for the fiscal
year ended August 31, 1999, at the rate of 0.75% of the Fund's average daily net
assets. Under the advisory contract between Balanced Fund and Mitchell Hutchins,
the Fund pays Mitchell Hutchins an annual fee, computed daily and paid monthly,
as follows:
AVERAGE DAILY NET ASSETS ANNUAL RATE
Up to $500 million..............................0.750%
In excess of $500 million up to $1.0 billion....0.725%
In excess of $1.0 billion up to $1.5 billion 0.700%
In excess of $1.5 billion up to $2.0 billion 0.675%
Over $2.0 billion...............................0.650%
Under the advisory agreement between Utility Income Fund and Mitchell
Hutchins, the Fund pays advisory fees to Mitchell Hutchins at the rate of 0.70%
of the Fund's average daily net assets. If the Reorganization is approved,
current shareholders of each class of shares of Utility Income Fund will pay a
slightly higher management fee than they currently pay, although it is
14
<PAGE>
anticipated that current Utility Income Fund shareholders will pay lower total
annual operating expenses as a result of the Reorganization due to economies of
scale.
Mitchell Hutchins is located at 51 West 52nd Street, New York, New York
10019, and is a wholly owned asset management subsidiary of PaineWebber
Incorporated, which is wholly owned by Paine Webber Group Inc., a publicly owned
financial services holding company. Mitchell Hutchins supervises all aspects of
the Funds' operations and provides investment advisory services to each Fund,
including obtaining and evaluating economic, statistical and financial
information to formulate and implement investment programs for the Funds. On
January 31, 2000, Mitchell Hutchins was adviser or sub-adviser of 31 investment
companies with 75 separate portfolios and aggregate assets of approximately
$52.7 billion.
Mark Tincher and Christopher T. Solmssen are responsible for the
day-to-day management of Utility Income Fund's stock portfolio. Mr. Tincher also
is responsible for determining the allocation of fund assets between stocks and
bonds. James F. Keegan and Julieanna Berry are responsible for the day-to-day
management of the Fund's bond portfolio. Mr. Tincher and Mr. Solmssen assumed
their responsibilities for Utility Income Fund in May 1999. Mr. Tincher is a
managing director and chief investment officer of equities of Mitchell Hutchins,
responsible for overseeing the management of equity investments. Prior to
joining Mitchell Hutchins, Mr. Tincher was a vice president at Chase Manhattan
Private Bank, where he directed the U.S. funds management and equity research
area and oversaw the management of all Chase U.S. equity funds. Mr. Solmssen is
a vice president of Mitchell Hutchins and an equity analyst covering utilities,
telecommunications and energy. Prior to joining Mitchell Hutchins in January
1998, Mr. Solmssen worked at Sun America Asset Management as an equity analyst.
Mrs. Berry and Mr. Keegan have held their fund responsibilities since
March and April 1996, respectively. Mrs. Berry is a first vice president of
Mitchell Hutchins, where she has been employed as a portfolio manager since
1989. Mr. Keegan is a senior vice president of Mitchell Hutchins and oversees
all corporate bond investments. Prior to joining Mitchell Hutchins in 1995, Mr.
Keegan was the director of fixed income strategy and research at the Merrion
Group, L.P.
T. Kirkham Barneby is responsible for the asset allocation decisions for
Balanced Fund. 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. Mr. Tincher is responsible for the day-to-day management of
the equity portion of Balanced Fund. Information about Mr. Tincher's background
may be found above.
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, since 1994.
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Nirmal Singh assists Mr. McCauley in managing Balanced Fund's debt
securities. Mr. Singh has been a senior vice president of Mitchell Hutchins
since September 1993. Susan Ryan is responsible for the day-to-day management of
the portion of Balanced Fund's assets invested in money market instruments. Ms.
Ryan has been with Mitchell Hutchins since 1982 and is a senior vice president
of Mitchell Hutchins.
ACCOUNTANTS
PricewaterhouseCoopers LLP serves as Balanced Fund's independent
accountants. Ernst & Young LLP serves as Utility Income Fund's independent
auditors. Upon completion of the Reorganization, PricewaterhouseCoopers LLP will
continue to provide services to the combined Fund. PricewaterhouseCoopers LLP
has no direct financial interest or material indirect financial interest in
Balanced Fund. The independent accountants examine annual financial statements
for Balanced Fund and provide other audit and tax-related services.
COMPARISON OF PRINCIPAL RISK FACTORS
RISKS COMMON TO BOTH FUNDS
Both Funds are subject to similar risk factors associated with their
investments in equities, bonds, and money market instruments.
INVESTING IN SECURITIES GENERALLY
An investment in either Balanced Fund or Utility Income Fund is not
guaranteed; an investor may lose money by investing in either Fund.
EQUITY RISK
Because both Funds invest in common stocks and other equity securities,
the Funds are subject to equity risk. The prices of common stocks and other
equity securities generally fluctuate more than those of other investments. They
reflect changes in the issuing company's financial condition and changes in the
overall market. A Fund may lose a substantial part, or even all, of its
investment in a company's stock.
INTEREST RATE RISK AND CREDIT RISK
Because both Funds invest in bonds, the Funds also are subject to interest
rate risk and credit risk. Balanced Fund must invest at least 25% of its total
assets in a combination of bonds and cash. Utility Income Fund does not have a
similar policy.
The value of bonds generally can be expected to fall when interest rates
rise and to rise when interest rates fall. Interest rate risk is the risk that
interest rates will rise, so that the value of a fund's investments in bonds
will fall. Because interest rate risk is the primary risk presented by U.S.
government and other very high quality bonds, changes in interest rates may
actually have a larger effect on the value of those bonds than on lower quality
bonds.
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Credit risk is the risk that the issuer of a bond will not make principal
or interest payments when they are due. Even if an issuer does not default on a
payment, a bond's value may decline if the market believes that the issuer has
become less able, or less willing, to make payments on time. Even high quality
bonds are subject to some credit risk.
The bonds held by each Fund are primarily investment grade, although
Balanced Fund may invest up to 10% of its total assets in bonds and other
securities that are rated below investment grade, while Utility Income Fund may
invest only up to 5% of its net assets in bonds and convertible securities that
are rated lower than investment grade. Credit risk is higher for lower quality
bonds than for higher quality bonds. Bonds that are not investment grade involve
high credit risk and are considered speculative. Lower quality bonds may
fluctuate in value more than higher quality bonds and, during periods of market
volatility, may be more difficult to sell at the time and price a fund desires.
DERIVATIVES RISK
Both Funds may engage in hedging transactions, including options and
futures contracts, to attempt to hedge market risks, to manage the effective
maturity or interest rate sensitivity of the portfolios, or to enhance income or
realize gains. As a result, both Funds are subject to the risks of investing in
derivatives.
The value of "derivatives" - so called because their value derives from
the value of an underlying asset, reference rate or index - may rise or fall
more rapidly than other investments. For some derivatives, it is possible for a
fund to lose more than the amount it invested in the derivative. Options,
futures contracts and forward currency contracts are examples of derivatives. If
a fund uses derivatives to adjust or "hedge" the overall risk of its portfolio,
it is possible that the hedge will not succeed. This may happen for various
reasons, including unexpected changes in the value of the derivatives that are
not matched by opposite changes in the value of the rest of the fund's
portfolio.
PRIMARY DIFFERENCES IN INVESTMENT RISKS OF THE FUNDS
The investment risks of Utility Income Fund differ from those of Balanced
Fund in that Utility Income Fund is subject to the risks of concentrating its
investments in income-producing stocks and bonds issued by U.S. and foreign
utility companies, while Balanced Fund pursues an asset allocation strategy and
does not concentrate its investments in any particular industry.
UTILITY INDUSTRIES CONCENTRATION RISK
Utility Income Fund concentrates its investments in the utility
industries. Therefore, it will be more affected by economic, competitive, and
regulatory developments in those industries than it would be if it invested in a
broad range of businesses.
Interest rate changes may affect the value of the Fund's assets. When
interest rates decline, prices of utility stocks and bonds tend to increase.
When interest rates rise, these prices tend to decrease.
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The same trend toward deregulation that present opportunities in the
utility industries also presents special risks. Some companies may be faced with
increased competition and may become less profitable.
Electric utility companies are subject to increases in fuel and other
operating costs, increases in interest costs, compliance costs relating to
environmental, nuclear facility and other safety regulations. Other types of
utilities face similar problems.
ASSET ALLOCATION RISK
Balanced Fund allocates its investments among stocks, bonds, and cash
(money market instruments). Mitchell Hutchins may not be successful in choosing
the best allocation among different asset classes. A fund, such as Balanced
Fund, that allocates its assets among different asset classes is more dependent
on Mitchell Hutchins' ability to successfully assess the relative values in each
asset class than are funds that do not do so.
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION
REASONS FOR THE REORGANIZATION
At a meeting of the Trust's Board held on February 10, 2000, Mitchell
Hutchins proposed that the Trust's Board approve the Reorganization of Utility
Income Fund into Balanced Fund. Mitchell Hutchins explained that it had reviewed
whether it is in the best interests of shareholders of Utility Income Fund to
continue to operate the Fund as a stand-alone series of the Trust. As part of
its review, Mitchell Hutchins noted that (1) the Fund has a very small asset
base (approximately $32 million as of February 3, 2000), despite its almost
seven-year existence, (2) the Fund's performance record is weak relative to its
benchmark indices and peers, and (3) there is insufficient interest to indicate
that the Fund could achieve an economically viable size in the foreseeable
future. Mitchell Hutchins further noted that the performance of Balanced Fund
generally has been better than Utility Income Fund's performance. (See
"Comparison of the Funds - Performance" for more information about the
performance of each Fund.)
Mitchell Hutchins informed the Trust's Board that both Funds are
conservative funds relative to other funds that invest in equity securities and
also noted that both Funds appeal to similar investors. Mitchell Hutchins noted
to the Trust's Board the similarities and differences of the investment
objectives and policies of the Funds (as described above). Mitchell Hutchins
also informed the Trust's Board that the investment objective and policies of
Balanced Fund do not preclude it from investing in securities of companies in
the utility industries.
Mitchell Hutchins also reviewed the compatibility of the current portfolio
holdings of the Funds: (1) as of December 31, 1999, Balanced Fund was invested
to a limited extent (about 5.39%) in securities of companies in the utility
industries; (2) Utility Income Fund may invest up to 35% of its total assets in
stocks and bonds issued by companies outside the utility industries and in high
quality money market instruments; and (3) as of December 31, 1999, 19.08% of
Utility Income Fund's net assets were invested outside of utility industries,
and 4.13% of its net assets were invested in bonds or money market instruments.
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Mitchell Hutchins estimated that Utility Income Fund will sell approximately 42%
of its total assets in connection with the Reorganization.
Mitchell Hutchins additionally estimated that, on a PRO FORMA basis, each
class of Balanced Fund shares would likely have lower total annual operating
expenses as a result of the Reorganization than either Fund currently has based
on preliminary calculations for the current fiscal year. (See "Comparative Fee
Table" above for a more complete description of the fees and expenses of the
Funds, both before and after the Reorganization.) Mitchell Hutchins noted that
the reduction in total annual operating expenses would be due primarily to
significantly lower "Other Expenses" incurred by Balanced Fund, although this
reduction would be offset by a slightly higher management fee payable to
Mitchell Hutchins.
Finally, Mitchell Hutchins reviewed with the Trust's Board the principal
terms of the Plan. Mitchell Hutchins informed the Board that that the
Reorganization would be tax-free to Utility Income Fund and its shareholders,
would permit current Utility Income Fund shareholders to exchange into other
PaineWebber open-end funds after the Reorganization without having to pay a
sales load should their investment priorities change, and that no sales charges
would be imposed on any Utility Income Fund shares issued in connection with the
Reorganization. Furthermore, Mitchell Hutchins informed the Trust's Board that,
for purposes of calculating the contingent deferred sales charge, the holding
period for the Class B and Class C shares distributed to Class B and Class C
shareholders of Utility Income Fund will include the holding period for the
shares of Utility Income Fund.
As part of its consideration, the Trust's Board examined a number of
factors with respect to the Reorganization, including: (1) the compatibility of
the Funds' investment objectives, policies and restrictions; (2) the Funds'
respective investment performances; (3) the likely impact of the Reorganization
on the expense ratio of Balanced Fund and that expense ratio relative to Utility
Income Fund's current expense ratio; (4) the costs to be incurred by each Fund
as a result of the Reorganization; (5) the tax consequences of the
Reorganization; (6) the benefits of the broader investment policies of Balanced
Fund, (7) the potential benefits of the Reorganization to other persons,
including Mitchell Hutchins and its affiliates, (8) Mitchell Hutchins'
assessment that the proposed Reorganization will not dilute the interests of
shareholders of Utility Income Fund; (9) the advisory arrangements in place for
the Funds and the level and quality of investment advisory services provided by
Mitchell Hutchins; and (10) the terms of the proposed Plan.
On the basis of the information provided to the Trust's Board and its
evaluation of that information, the Trust's Board, including a majority of its
Independent Board Members, determined that the Reorganization would be in the
best interests of Utility Income Fund and that the interests of existing Utility
Income Fund shareholders will not be diluted as a result of the Reorganization.
Therefore, the Trust's Board unanimously approved the Reorganization and
recommended the approval of the Plan by the shareholders of Utility Income Fund
at the Meeting.
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TERMS OF THE REORGANIZATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan. A copy of the form of Agreement and Plan of Reorganization and Termination
is attached as Appendix A to this Proxy Statement/Prospectus.
The Plan contemplates (a) Balanced Fund's acquiring on the Closing Date
all the assets of Utility Income Fund in exchange solely for Balanced Fund
shares and Balanced Fund's assumption of all of Utility Income Fund's
liabilities and (b) the distribution of those shares to Utility Income Fund
shareholders. Utility Income Fund's assets include all cash, cash equivalents,
securities, receivables (including interest and dividends receivable), claims
and rights of action, rights to register shares under applicable securities
laws, books and records, deferred and prepaid expenses shown as assets on its
books and other property owned by it as of the close of business on the Closing
Date ("Effective Time") (collectively, the "Assets"). Balanced Fund will assume
from Utility Income Fund all its liabilities, debts, obligations and duties of
whatever kind or nature, whether absolute, accrued, contingent or otherwise,
whether or not arising in the ordinary course of business, whether or not
determinable at the Effective Time and whether or not referred to in the Plan
(collectively, the "Liabilities"); provided, however, that Utility Income Fund
will use its best efforts to discharge all of its known Liabilities prior to the
Effective Time. Balanced Fund will deliver its shares to Utility Income Fund,
which then will be distributed to Utility Income Fund's shareholders. As a
result of the Reorganization, shareholders of each class of Utility Income Fund
shares will become shareholders of the corresponding class of Balanced Fund
shares.
The value of the Assets to be acquired, and the amount of the Liabilities
to be assumed, by Balanced Fund and the NAV of a Balanced Fund share will be
determined as of the close of regular trading on the NYSE on the Closing Date
("Valuation Time"), using the applicable valuation procedures described in each
Fund's then-current Prospectus and SAI. Utility Income Fund's net asset value
will be the value of its assets to be acquired by Balanced Fund, less the amount
of Utility Income Fund's liabilities, as of the Valuation Time.
On, or as soon as practicable after, the Closing Date, Utility Income Fund
will distribute to its shareholders of record as of the Effective Time the
Balanced Fund shares it receives, by class, so that each Utility Income Fund
shareholder will receive the number of full and fractional shares of the
corresponding class of Balanced Fund equal in aggregate NAV to the shareholder's
shares in Utility Income Fund. That distribution will be accomplished by opening
accounts on the books of Balanced Fund in the names of Utility Income Fund's
shareholders and crediting those accounts with Balanced Fund shares equal in
aggregate NAV to the shareholders' shares in Utility Income Fund. Fractional
shares of Balanced Fund will be rounded to the third decimal place.
Immediately after the Reorganization, each former shareholder of Utility
Income Fund will own shares of the class of Balanced Fund equal in NAV to the
aggregate NAV of that shareholder's shares of the corresponding class of Utility
Income Fund immediately prior to the Reorganization. The NAV per share of
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Balanced Fund will not change as a result of the Reorganization. Thus, the
Reorganization will not result in a dilution of any shareholder interest.
Each Fund will bear its own expenses in connection with the
Reorganization, which are estimated to be $165,000 for Utility Income Fund and
$30,000 for Balanced Fund. Utility Income Fund will be terminated after the
Reorganization.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Plan, some of which may be waived by either Fund. In
addition, the Plan may be amended in any mutually agreeable manner, except that
no amendment may be made subsequent to the Meeting that would have a material
adverse effect on the interests of Utility Income Fund shareholders. If the
Reorganization is not approved by shareholders at the Meeting, Utility Income
Fund will continue to operate as a portfolio of the Trust and the Trust's Board
will then consider other options and alternatives for the future of the Fund.
DESCRIPTION OF SECURITIES TO BE ISSUED
Balanced Fund has an authorized capital of four billion shares of common
stock, par value $0.001 per share, divided into four classes, designated Class
A, Class B, Class C and Class Y shares. A share of each class of Balanced Fund
represents an identical interest in the Fund's investment portfolio and has the
same rights, privileges and preferences, except as noted in the Balanced Fund
SAI. Each share of the Fund is entitled to participate equally in dividends and
other distributions of the Fund. Shares of Balanced Fund entitle their holders
to one vote per full share and fractional votes for fractional shares held.
Balanced Fund does not hold annual meetings. Shares of the Fund are voted
together, except that only the shareholders of a particular class of the Fund
may vote on matters affecting only that class.
DIVIDENDS AND OTHER DISTRIBUTIONS
Balanced Fund normally declares and pays dividends semi-annually and
distributes any net capital gains annually. A shareholder of Balanced Fund
receives dividends in additional shares of the distributing class unless the
shareholder elects to receive cash.
On or before the Closing Date, Utility Income Fund will declare as a
distribution substantially all of its undistributed net investment income, net
capital gain, net short-term capital gain and net gains from foreign currency
transactions, if any, in order to continue to maintain its tax status as a
regulated investment company.
TEMPORARY WAIVER OF INVESTMENT RESTRICTIONS
Certain fundamental investment restrictions of Utility Income Fund, which
prohibit it from acquiring more than a stated percentage of ownership of another
company, might be construed as restricting its ability to carry out the
Reorganization. By approving the Plan, shareholders of Utility Income Fund will
be agreeing to waive, only for the purpose of the Reorganization, those
fundamental investment restrictions that could prohibit or otherwise impede the
transaction.
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FEDERAL INCOME TAX CONSIDERATIONS
The Reorganization is intended to be a tax-free reorganization within the
meaning of section 368(a)(1)(C) of the Code. The Trust and Master Series will
each receive an opinion of Kirkpatrick & Lockhart LLP, their counsel,
substantially to the following effect:
(1) Balanced Fund's acquisition of the Assets in exchange solely for
Balanced Fund shares and Balanced Fund's assumption of the Liabilities,
followed by Utility Income Fund's distribution of those shares PRO RATA to
its shareholders constructively in exchange for their Utility Income Fund
shares, will qualify as a reorganization within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
(2) Utility Income Fund will recognize no gain or loss on its transfer of
the Assets to Balanced Fund in exchange solely for Balanced Fund shares
and Balanced Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to Utility Income Fund's shareholders in
constructive exchange for their Utility Income Fund shares;
(3) Balanced Fund will recognize no gain or loss on its receipt of the
Assets in exchange solely for Balanced Fund shares and its assumption of
the Liabilities;
(4) Balanced Fund's basis for the Assets will be the same as Utility
Income Fund's basis therefor immediately before the Reorganization, and
Balanced Fund's holding period for the Assets will include Utility Income
Fund's holding period therefor;
(5) A Utility Income Fund shareholder will recognize no gain or loss on
the constructive exchange of all its Utility Income Fund shares solely for
Balanced Fund shares pursuant to the Reorganization; and
(6) A Utility Income Fund shareholder's aggregate basis for the Balanced
Fund shares to be received by it in the Reorganization will be the same as
the aggregate basis for its Utility Income Fund shares to be
constructively surrendered in exchange for those Balanced Fund shares, and
its holding period for those Balanced Fund shares will include its holding
period for those Utility Income Fund shares, provided the shareholder
holds them as capital assets on the Closing Date.
The opinion may state that no opinion is expressed as to the effect of the
Reorganization on the Funds or any shareholder with respect to any asset as to
which any unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.
Utilization by Balanced Fund after the Reorganization of any
pre-Reorganization capital losses realized by Utility Income Fund could be
subject to limitation in future years under the Code.
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Shareholders of Utility Income Fund should consult their tax advisers
regarding the effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
ORGANIZATION OF THE FUNDS
Balanced Fund is a diversified series of Master Series and commenced
operations on December 12, 1986. Master Series was organized as a Maryland
corporation on October 29, 1985, and is registered under the 1940 Act as an
open-end management investment company. The operations of Master Series, as a
Maryland corporation, are governed by its Articles of Incorporation and By-Laws
and Maryland law.
Utility Income Fund is a diversified series of the Trust and commenced
operations on July 2, 1993. The Trust was organized as a Massachusetts business
trust on November 21, 1986, and is registered under the 1940 Act as an open-end
management investment company. The operations of the Trust, as a Massachusetts
business trust, are governed by its Amended and Restated Declaration of Trust
and Massachusetts law.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand Balanced
Fund's financial performance for the past five years. Shorter periods are shown
for classes of Fund shares that have existed for less than five years. Certain
information reflects financial results for a single Fund share. In the tables,
"total investment return" represents the rate that an investor would have earned
(or lost) on an investment in the Fund, assuming reinvestment of all dividends
and distributions. The table is included in Balanced Fund's current Prospectus,
dated December 10, 1999, which is incorporated herein by reference and
accompanies this Proxy Statement/Prospectus. The information has been audited by
PricewaterhouseCoopers LLP, independent accountants for Balanced Fund, whose
report, along with the Fund's financial statements, are included in the Fund's
Annual Report to Shareholders, dated August 31, 1999.
CAPITALIZATION
The following table shows the capitalization of Utility Income Fund and
Balanced Fund as of December 31, 1999, and on a PRO FORMA combined basis as of
December 31, 1999, giving effect to the Reorganization:
UTILITY INCOME BALANCED FUND: PRO FORMA CLASS A
FUND: CLASS A CLASS A COMBINED
Net Assets $18,508,760 $192,152,489 $210,661,249
Shares
Outstanding 1,287,676 17,400,670 19,077,188
Net Asset Value
Per Share $14.37 $11.04 $11.04
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UTILITY INCOME BALANCED FUND: PRO FORMA CLASS B
FUND: CLASS B CLASS B COMBINED
Net Assets $6,006,860 $25,842,907 $31,849,767
Shares
Outstanding 417,047 2,281,970 2,812,611
Net Asset Value
Per Share $14.40 $11.32 $11.32
UTILITY INCOME BALANCED FUND: PRO FORMA CLASS C
FUND: CLASS C CLASS C COMBINED
Net Assets $7,190,911 $18,545,176 $25,736,087
Shares
Outstanding 500,821 1,675,744 2,325,329
Net Asset Value
Per Share $14.36 $11.07 $11.07
UTILITY INCOME BALANCED FUND: PRO FORMA CLASS Y
FUND: CLASS Y CLASS Y COMBINED
Net Assets $121,559 $375,048 $496,607
Shares
Outstanding 8,489 34,003 45,024
Net Asset Value
Per Share $14.32 $11.03 $11.03
REQUIRED VOTE. The proposal to approve the Plan requires the affirmative
vote of a majority of the votes entitled to be cast on the proposal.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PLAN OF REORGANIZATION.
----------------------
LEGAL MATTERS
Certain legal matters concerning the issuance of Balanced Fund shares as
part of the Reorganization and the tax consequences of the Reorganization will
be passed upon by Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036-1800, counsel to Master Series and to the Trust.
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INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
Master Series and the Trust are each subject to the information
requirements of the Securities Exchange Act of 1934 and the 1940 Act and in
accordance therewith each files reports and other information with the SEC.
Reports, proxy statements, registration statements and other information may be
inspected without charge and copied at the Public Reference Room maintained by
the SEC at 450 Fifth Street, N.W., Washington, DC 20549, and at the following
regional offices of the SEC: 7 World Trade Center, Suite 1300, New York, NY
10048, and 500 West Madison Street, 14th floor, Chicago, IL 60661. Copies of
such material may also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington, DC, 20549 at the prescribed rates. The SEC maintains an Internet web
site at http://www.sec.gov that contains information regarding Master Series and
the Trust, and other registrants that file electronically with the SEC.
EXPERTS
The audited financial statements of Utility Income Fund incorporated by
reference herein and incorporated by reference or included in its Statement of
Additional Information for the fiscal year ended March 31, 1999 have been
audited by Ernst & Young LLP, independent auditors, whose report thereon is
included in Utility Income Fund's Annual Report to Shareholders for the fiscal
year ended March 31, 1999. The financial statements audited by Ernst & Young LLP
have been incorporated herein by reference in reliance on its report given on
its authority as experts in auditing and accounting.
The audited financial statements of Balanced Fund incorporated by
reference herein and incorporated by reference or included in its SAI for the
fiscal year ended August 31, 1999, have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report thereon is included in Balanced
Fund's Annual Report to Shareholders for the fiscal year ended August 31, 1999.
The financial statements audited by PricewaterhouseCoopers LLP have been
incorporated herein by reference in reliance on its report given on its
authority as experts in auditing and accounting.
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APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of ________, 2000, between PaineWebber Master Series, Inc., a Maryland
corporation ("Master Series"), on behalf of PaineWebber Balanced Fund, a
segregated portfolio of assets ("series") thereof ("Acquiring Fund"), and
PaineWebber Managed Investments Trust, a Massachusetts business trust ("Trust"),
on behalf of PaineWebber Utility Income Fund, a series thereof ("Target").
(Acquiring Fund and Target are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and Master Series and Trust are
sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies.") All agreements, representations,
actions, and obligations described herein made or to be taken or undertaken by
Acquiring Fund or Target are made and shall be taken or undertaken by Master
Series or Trust, respectively.
The Investment Companies wish to effect a reorganization described in
section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"),
and intend this Agreement to be, and adopt it as, a "plan of reorganization"
within the meaning of the regulations under section 368 of the Code
("Regulations"). The reorganization will involve the transfer of Target's assets
to Acquiring Fund in exchange solely for voting shares of common stock of
Acquiring Fund ("Acquiring Fund Shares") and the assumption by Acquiring Fund of
Target's liabilities, followed by the constructive distribution of those shares
PRO RATA to the holders of shares of beneficial interest in Target ("Target
Shares") in exchange therefor, all on the terms and conditions set forth herein.
The foregoing transactions are referred to herein collectively as the
"Reorganization."
The Target Shares are divided into four classes, designated Class A, Class
B, Class C, and Class Y shares ("Class A Target Shares," "Class B Target
Shares," "Class C Target Shares," and "Class Y Target Shares," respectively).
The Acquiring Fund Shares also are divided into four classes, also designated
Class A, Class B, Class C, and Class Y shares ("Class A Acquiring Fund Shares,"
"Class B Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class Y
Acquiring Fund Shares," respectively). Each class of Acquiring Fund Shares is
substantially similar to the identically designated class of Target Shares.
In consideration of the mutual promises contained herein, the parties
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and
fractional (rounded to the third decimal place) (i) Class A
Acquiring Fund Shares determined by dividing the net value of
Target (computed as set forth in paragraph 2.1) ("Target Value")
attributable to the Class A Target Shares by the net asset value
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("NAV") of a Class A Acquiring Fund Share (computed as set forth
in paragraph 2.2), (ii) Class B Acquiring Fund Shares determined
by dividing the Target Value attributable to the Class B Target
Shares by the NAV of a Class B Acquiring Fund Share (as so
computed), (iii) Class C Acquiring Fund Shares determined by
dividing the Target Value attributable to the Class C Target
Shares by the NAV of a Class C Acquiring Fund Share (as so
computed), and (iv) Class Y Acquiring Fund Shares determined by
dividing the Target Value attributable to the Class Y Target
Shares by the NAV of a Class Y Acquiring Fund Share (as so
computed), and
(b) to assume all of Target's liabilities described in paragraph
1.3 ("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement.
Notwithstanding the foregoing, Target agrees to use its best efforts to
discharge all its known Liabilities before the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without regard
to any deduction for dividends paid) and substantially all of its realized net
capital gain, if any, for the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall distribute the Acquiring Fund Shares received by it
pursuant to paragraph 1.1 to Target's shareholders of record, determined as of
the Effective Time (each a "Shareholder" and collectively "Shareholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by Master Series's transfer agent's opening accounts on Acquiring
Fund's share transfer books in the Shareholders' names and transferring such
Acquiring Fund Shares thereto. Each Shareholder's account shall be credited with
the respective PRO RATA number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares due that Shareholder, by class (I.E., the
account for a Shareholder of Class A Target Shares shall be credited with the
respective PRO RATA number of Class A Acquiring Fund Shares due that
Shareholder, the account for a Shareholder of Class B Target Shares shall be
credited with the respective PRO RATA number of Class B Acquiring Fund Shares
due that Shareholder, the account for a Shareholder of Class C Target Shares
shall be credited with the respective PRO RATA number of Class C Acquiring Fund
Shares due that Shareholder, and the account for a Shareholder of Class Y Target
Shares shall be credited with the respective PRO RATA number of Class Y
Acquiring Fund Shares due that Shareholder). All outstanding Target Shares,
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including any represented by certificates, shall simultaneously be canceled on
Target's share transfer books. Acquiring Fund shall not issue certificates
representing the Acquiring Fund Shares issued in connection with the
Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, but in all events within six months
after the Effective Time, Target shall be terminated as a series of Trust and
any further actions shall be taken in connection therewith as required by
applicable law.
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable on issuance of Acquiring Fund Shares in a
name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
---------
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the New York
Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"), using the
valuation procedures set forth in Target's then-current prospectus and statement
of additional information ("SAI"), less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of each class of an
Acquiring Fund Share shall be computed as of the Valuation Time, using the
valuation procedures set forth in Acquiring Fund's then-current prospectus and
SAI.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
--------------------------
3.1. The Reorganization, together with related acts necessary to consummate the
same ("Closing"), shall occur at the Funds' principal office on or about [June
23], 2000, or at such other place and/or on such other date as to which the
Investment Companies may agree. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the date
thereof or at such other time as to which the Investment Companies may agree
("Effective Time"). If, immediately before the Valuation Time, (a) the NYSE is
closed to trading or trading thereon is restricted or (b) trading or the
reporting of trading on the NYSE or elsewhere is disrupted, so that accurate
appraisal of the Target Value and the NAV of each class of Acquiring Fund Shares
is impracticable, the Effective Time shall be postponed until the first business
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day after the day when such trading shall have been fully resumed and such
reporting shall have been restored.
3.2. Trust's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets,
including all portfolio securities, transferred by Target to Acquiring Fund, as
reflected on Acquiring Fund's books immediately after the Closing, does or will
conform to such information on Target's books immediately before the Closing.
Trust's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be transferred to
Acquiring Fund at the Effective Time and (b) all necessary taxes in conjunction
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made.
3.3. Trust shall deliver to Master Series at the Closing a list of the
names and addresses of the Shareholders and the number of outstanding Target
Shares (by class) owned by each Shareholder, all as of the Effective Time,
certified by Trust's Secretary or an Assistant Secretary thereof. Master
Series's transfer agent shall deliver at the Closing a certificate as to the
opening on Acquiring Fund's share transfer books of accounts in the
Shareholders' names. Master Series shall issue and deliver a confirmation to
Trust evidencing the Acquiring Fund Shares to be credited to Target at the
Effective Time or provide evidence satisfactory to Trust that such Acquiring
Fund Shares have been credited to Target's account on Acquiring Fund's books. At
the Closing, each Investment Company shall deliver to the other bills of sale,
checks, assignments, stock certificates, receipts, or other documents the other
Investment Company or its counsel reasonably requests.
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
4.1. Target represents and warrants as follows:
4.1.1.Trust is a trust operating under a written declaration of
trust, the beneficial interest in which is divided into transferable
shares ("Business Trust"), that is duly organized and validly existing
under the laws of the Commonwealth of Massachusetts; and a copy of its
Amended and Restated Agreement and Declaration of Trust ("Declaration of
Trust") is on file with the Secretary of the Commonwealth of
Massachusetts;
4.1.2.Trust is duly registered as an open-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"),
and such registration will be in full force and effect at the Effective
Time;
4.1.3. Target is a duly established and designated series of Trust;
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4.1.4.At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and on
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.5.Target's current prospectus and SAI conform in all material
respects to the applicable requirements of the Securities Act of 1933, as
amended ("1933 Act"), and the 1940 Act and the rules and regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
4.1.6.Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Massachusetts law or any provision of
the Declaration of Trust or Trust's By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Target is a party or by which it is bound, except as previously
disclosed in writing to and accepted by Master Series;
4.1.7.Except as otherwise disclosed in writing to and accepted by
Master Series, all material contracts and other commitments of or
applicable to Target (other than this Agreement and investment contracts,
including options, futures, and forward contracts) will be terminated, or
provision for discharge of any liabilities of Target thereunder will be
made, at or prior to the Effective Time, without either Fund's incurring
any liability or penalty with respect thereto and without diminishing or
releasing any rights Target may have had with respect to actions taken or
omitted or to be taken by any other party thereto prior to the Closing;
4.1.8.Except as otherwise disclosed in writing to and accepted by
Master Series, no litigation, administrative proceeding, or investigation
of or before any court or governmental body is presently pending or (to
Target's knowledge) threatened against Trust with respect to Target or any
of its properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition or the
conduct of its business; and Target knows of no facts that might form the
basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially or adversely affects its business or its ability to consummate
the transactions contemplated hereby;
4.1.9.The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the
part of Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to approval by
Target's shareholders, this Agreement constitutes a valid and legally
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binding obligation of Target, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
4.1.10. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Target's
shareholders;
4.1.11. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934, as amended ("1934 Act"), or the 1940 Act for the execution or
performance of this Agreement by Trust, except for (a) the filing with the
Securities and Exchange Commission ("SEC") of a registration statement by
Master Series on Form N-14 relating to the Acquiring Fund Shares issuable
hereunder, and any supplement or amendment thereto ("Registration
Statement"), including therein a prospectus/proxy statement ("Proxy
Statement"), and (b) such consents, approvals, authorizations, and filings
as have been made or received or as may be required subsequent to the
Effective Time;
4.1.12. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading; provided that the foregoing shall not apply to statements in
or omissions from the Proxy Statement made in reliance on and in
conformity with information furnished by Master Series for use therein;
4.1.13. The Liabilities were incurred by Target in the ordinary
course of its business and are associated with the Assets; and there are
no Liabilities other than liabilities disclosed or provided for in Trust's
financial statements referred to in paragraph 4.1.18 and liabilities
incurred by Target in the ordinary course of its business subsequent to
[September 30], 1999, or otherwise previously disclosed to Master Series,
none of which has been materially adverse to the business, assets, or
results of Target's operations;
4.1.14. Target is a "fund" as defined in section 851(g)(2) of the
Code; it qualified for treatment as a regulated investment company under
Subchapter M of the Code ("RIC") for each past taxable year since it
commenced operations and will continue to meet all the requirements for
such qualification for its current taxable year; it has no earnings and
profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it; and the Assets will be invested at all
times through the Effective Time in a manner that ensures compliance with
the foregoing;
4.1.15. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case within
the meaning of section 368(a)(3)(A) of the Code;
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4.1.16. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested
in the stock and securities of any one issuer, and not more than 50% of
the value of such assets is invested in the stock and securities of five
or fewer issuers;
4.1.17. Target's federal income tax returns, and all applicable state
and local tax returns, for all taxable years through and including the
taxable year ended March 31, 1999, have been timely filed and all taxes
payable pursuant to such returns have been timely paid; and
4.1.18. Trust's financial statements for the year ended March 31,
1999, and for the six months ended September 30, 1999, to be delivered to
Master Series, fairly represent Target's financial position as of each
such date and the results of its operations and changes in its net assets
for the period then ended.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1.Master Series is a corporation that is duly organized, validly
existing, and in good standing under the laws of the State of Maryland;
and its Articles of Incorporation are on file with the Department of
Assessments and Taxation of Maryland;
4.2.2.Master Series is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
Master Series;
4.2.4.No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5.The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued
and outstanding shares of Acquiring Fund, fully paid and non-assessable;
4.2.6.Acquiring Fund's current prospectus and SAI conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations thereunder and do not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
4.2.7.Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Maryland law or any
provision of Master Series's Articles of Incorporation or By-Laws or of
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any provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as previously disclosed in writing to and
accepted by Trust;
4.2.8.Except as otherwise disclosed in writing to and accepted by
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against Master Series with respect
to Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; and Acquiring Fund
knows of no facts that might form the basis for the institution of any
such litigation, proceeding, or investigation and is not a party to or
subject to the provisions of any order, decree, or judgment of any court
or governmental body that materially or adversely affects its business or
its ability to consummate the transactions contemplated hereby;
4.2.9.The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the
part of Master Series's board of directors (together with Trust's board of
trustees, the "Boards"), which has made the determinations required by
Rule 17a-8(a) under the 1940 Act; and this Agreement constitutes a valid
and legally binding obligation of Acquiring Fund, enforceable in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights and by general
principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by Master Series, except
for (a) the filing with the SEC of the Registration Statement and (b) such
consents, approvals, authorizations, and filings as have been made or
received or as may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading; provided that the foregoing shall not apply to statements in
or omissions from the Proxy Statement made in reliance on and in
conformity with information furnished by Trust for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(g)(2) of
the Code; it qualified for treatment as a RIC for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year;
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Acquiring Fund intends to continue to meet all such requirements for the
next taxable year; and it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M of the Code did not
apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, except to the extent it is
required by the 1940 Act to redeem any of its shares presented for
redemption at NAV in the ordinary course of that business;
4.2.14. Following the Reorganization, Acquiring Fund (a) will
continue Target's "historic business" (within the meaning of section
1.368-1(d)(2) of the Regulations), (b) use a significant portion of
Target's "historic business assets" (within the meaning of section
1.368-1(d)(3) of the Regulations) in a business, (c) has no plan or
intention to sell or otherwise dispose of any of the Assets, except for
dispositions made in the ordinary course of that business and dispositions
necessary to maintain its status as a RIC, and (d) expects to retain
substantially all the Assets in the same form as it receives them in the
Reorganization, unless and until subsequent investment circumstances
suggest the desirability of change or it becomes necessary to make
dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or a business trust or any
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock and
securities of any one issuer and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or fewer
issuers;
4.2.17. Acquiring Fund does not directly or indirectly own, nor at
the Effective Time will it directly or indirectly own, nor has it directly
or indirectly owned at any time during the past five years, any shares of
Target;
4.2.18. Acquiring Fund's federal income tax returns, and all
applicable state and local tax returns, for all taxable years through and
including the taxable year ended August 31, [1999], have been timely filed
and all taxes payable pursuant to such returns have been timely paid; and
4.2.19. Master Series's financial statements for the year ended
August 31, 1999, to be delivered to Trust, fairly represent Acquiring
Fund's financial position as of that date and the results of its
operations and changes in its net assets for the year then ended.
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4.3. Each Fund represents and warrants as follows:
4.3.1.The fair market value of the Acquiring Fund Shares received by
each Shareholder will be approximately equal to the fair market value of
its Target Shares constructively surrendered in exchange therefor;
4.3.2.Its management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) any portion of
their Target Shares before the Reorganization to any person related
(within the meaning of section 1.368-1(e)(3) of the Regulations) to either
Fund or (ii) any portion of the Acquiring Fund Shares to be received by
them in the Reorganization to any person related (within such meaning) to
Acquiring Fund, (b) does not anticipate dispositions of those Acquiring
Fund Shares at the time of or soon after the Reorganization to exceed the
usual rate and frequency of dispositions of shares of Target as a series
of an open-end investment company, (c) expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be DE MINIMIS, and (d) does not
anticipate that there will be extraordinary redemptions of Acquiring Fund
Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4.Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto (in addition to the assets and liabilities
Acquiring Fund then held or was subject to), plus any liabilities and
expenses of the parties incurred in connection with the Reorganization;
4.3.5.The fair market value of the Assets on a going concern basis
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7.Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except (a) redemptions not made
as part of the Reorganization and (b) distributions made to conform to its
policy of distributing all or substantially all of its income and gains to
avoid the obligation to pay federal income tax and/or the excise tax under
section 4982 of the Code) [after the date of this Agreement] will be
included as assets held thereby immediately before the Reorganization;
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4.3.8.None of the compensation received by any Shareholder who is an
employee of or service provider to Target will be separate consideration
for, or allocable to, any of the Target Shares held by such Shareholder;
none of the Acquiring Fund Shares received by any such Shareholder will be
separate consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and the
consideration paid to any such Shareholder will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;
4.3.9. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" (within the meaning of section
304(c) of the Code) of Acquiring Fund; and
4.3.10. Neither Fund will be reimbursed for any expenses incurred by
it or on its behalf in connection with the Reorganization unless those
expenses are solely and directly related to the Reorganization (determined
in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1
C.B. 187).
5. COVENANTS
---------
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that --
(a) such ordinary course will include declaring and paying customary
dividends and other distributions and changes in operations
contemplated by each Fund's normal business activities, and
(b) each Fund will retain exclusive control of the composition of its
portfolio until the Closing; provided that (1) Target shall not
dispose of more than an insignificant portion of its historic
business assets during such period without Acquiring Fund's prior
consent and (2) if Target's shareholders approve this Agreement
(and the transactions contemplated hereby), then between the date
of such approval and the Closing, the Funds shall coordinate
their respective portfolios so that the transfer of the Assets to
Acquiring Fund will not cause it to fail to be in compliance with
all of its investment policies and restrictions immediately after
the Closing.
5.2. Target covenants to call a shareholders' meeting to consider and act
on this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
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5.4. Target covenants that it will assist Master Series in obtaining
information Master Series reasonably requests concerning the beneficial
ownership of Target Shares.
5.5. Target covenants that its books and records (including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Master Series at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal and state securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate to continue its operations after
the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
--------------------
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by each Board and shall have been approved by
Target's shareholders in accordance with the Declaration of Trust, Trust's
By-Laws, and applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
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necessary by either Investment Company to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on either Fund's assets or properties, provided that either
Investment Company may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Trust shall have received an opinion of Kirkpatrick & Lockhart LLP
("Counsel") substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Master Series,
a corporation duly organized, validly existing, and in good standing under
the laws of the State of Maryland with power under its Articles of
Incorporation to own all its properties and assets and, to the knowledge
of Counsel, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Master Series on behalf of Acquiring Fund and (b) assuming
due authorization, execution, and delivery of this Agreement by Trust on
behalf of Target, is a valid and legally binding obligation of Master
Series with respect to Acquiring Fund, enforceable in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar laws relating
to or affecting creditors' rights and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized, validly issued
and outstanding, and fully paid and non-assessable;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Master Series's Articles of Incorporation or By-Laws or any
provision of any agreement (known to Counsel, without any independent
inquiry or investigation) to which Master Series (with respect to
Acquiring Fund) is a party or by which it is bound or (to the knowledge of
Counsel, without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Master Series (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by
Trust;
6.4.5. To the knowledge of Counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by Master
Series on behalf of Acquiring Fund of the transactions contemplated
herein, except those obtained under the 1933 Act, the 1934 Act, and the
1940 Act and those that may be required under state securities laws;
-13-
<PAGE>
6.4.6. Master Series is registered with the SEC as an investment
company, and to the knowledge of Counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7.To the knowledge of Counsel (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Master Series (with respect to Acquiring Fund) or any of
its properties or assets attributable or allocable to Acquiring Fund and
(b) Master Series (with respect to Acquiring Fund) is not a party to or
subject to the provisions of any order, decree, or judgment of any court
or governmental body that materially and adversely affects Acquiring
Fund's business, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by Trust.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the State of Maryland, on an opinion of competent Maryland counsel, (2)
make assumptions regarding the authenticity, genuineness, and/or conformity of
documents and copies thereof without independent verification thereof, (3) limit
such opinion to applicable federal and state law, and (4) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
Counsel who have devoted substantive attention to matters directly related to
this Agreement and the Reorganization.
6.5. Master Series shall have received an opinion of Counsel substantially
to the effect that:
6.5.1.Target is a duly established series of Trust, a Business Trust
duly organized and validly existing under the laws of the Commonwealth of
Massachusetts with power under the Declaration of Trust to own all its
properties and assets and, to the knowledge of Counsel, to carry on its
business as presently conducted;
6.5.2.This Agreement (a) has been duly authorized, executed, and
delivered by Trust on behalf of Target and (b) assuming due authorization,
execution, and delivery of this Agreement by Master Series on behalf of
Acquiring Fund, is a valid and legally binding obligation of Trust with
respect to Target, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
6.5.3.The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate the Declaration of Trust or Trust's By-Laws or any provision of
any agreement (known to Counsel, without any independent inquiry or
investigation) to which Trust (with respect to Target) is a party or by
which it is bound or (to the knowledge of Counsel, without any independent
inquiry or investigation) result in the acceleration of any obligation, or
the imposition of any penalty, under any agreement, judgment, or decree to
which Trust (with respect to Target) is a party or by which it is bound,
except as set forth in such opinion or as previously disclosed in writing
to and accepted by Master Series;
-14-
<PAGE>
6.5.4. To the knowledge of Counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by Trust
on behalf of Target of the transactions contemplated herein, except those
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and those that
may be required under state securities laws;
6.5.5. Trust is registered with the SEC as an investment company,
and to the knowledge of Counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.5.6. To the knowledge of Counsel (without any independent inquiry
or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Trust (with respect to Target) or any of its properties
or assets attributable or allocable to Target and (b) Trust (with respect
to Target) is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially and
adversely affects Target's business, except as set forth in such opinion
or as otherwise disclosed in writing to and accepted by Master Series.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (2) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (3) limit such opinion to applicable federal
and state law, and (4) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with Counsel who have devoted substantive attention
to matters directly related to this Agreement and the Reorganization.
6.6. Each Investment Company shall have received an opinion of Counsel,
addressed to and in form and substance satisfactory to it, as to the federal
income tax consequences mentioned below ("Tax Opinion"). In rendering the Tax
Opinion, Counsel may rely as to factual matters, exclusively and without
independent verification, on the representations made in this Agreement, which
Counsel may treat as representations made to it, or in separate letters
addressed to Counsel and the certificates delivered pursuant to paragraph 3.4.
The Tax Opinion shall be substantially to the effect that, based on the facts
and assumptions stated therein and conditioned on consummation of the
Reorganization in accordance with this Agreement, for federal income tax
purposes:
6.6.1.Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares PRO RATA to
the Shareholders constructively in exchange for their Target Shares, will
qualify as a reorganization within the meaning of section 368(a)(1)(C) of
the Code, and each Fund will be "a party to a reorganization" within the
meaning of section 368(b) of the Code;
6.6.2.Target will recognize no gain or loss on the transfer of the
Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares and
-15-
<PAGE>
Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. Acquiring Fund will recognize no gain or loss on its receipt
of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4.Acquiring Fund's basis for the Assets will be the same as
Target's basis therefor immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5.A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6.A Shareholder's aggregate basis for the Acquiring Fund Shares
to be received by it in the Reorganization will be the same as the
aggregate basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares, and its holding period for those
Acquiring Fund Shares will include its holding period for those Target
Shares, provided the Shareholder held them as capital assets at the
Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder with respect to any asset as to which any unrealized gain or loss is
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-market
system of accounting.
At any time before the Closing, either Investment Company may waive any of
the foregoing conditions (except that set forth in paragraph 6.1) if, in the
judgment of its Board, such waiver will not have a material adverse effect on
its Fund's shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
---------------------------
7.1. Each Investment Company represents and warrants to the other that there are
no brokers or finders entitled to receive any payments in connection with the
transactions provided for herein.
7.2. Each Fund will bear its own Reorganization expenses.
8. ENTIRE AGREEMENT; NO SURVIVAL
-----------------------------
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall not
survive the Closing.
-16-
<PAGE>
9. TERMINATION OF AGREEMENT
------------------------
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material
breach of any representation, warranty, or covenant contained herein to be
performed at or prior to the Effective Time, (b) if a condition to its
obligations has not been met and it reasonably appears that such condition will
not or cannot be met, or (c) if the Closing has not occurred on or before
December 31, 2000; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the trustees/directors, or
officers of either Investment Company, to the other Fund.
10. AMENDMENT
---------
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in any manner
mutually agreed on in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
-------------
11.1. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Maryland; provided that, in the case of
any conflict between such laws and the federal securities laws, the latter shall
govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. Master Series acknowledges that Trust is a Business Trust. This
Agreement is executed by Trust on behalf of Target and by its trustees and/or
officers in their capacities as such, and not individually. Trust's obligations
under this Agreement are not binding on or enforceable against any of its
trustees, officers, or shareholders but are only binding on and enforceable
against Target's assets and property; and a trustee of Trust shall not be
personally liable hereunder to Master Series or its directors or shareholders
for any act, omission, or obligation of Trust or any other trustee thereof.
Master Series agrees that, in asserting any rights or claims under this
Agreement on behalf of Acquiring Fund, it shall look only to Target's assets and
property in settlement of such rights or claims and not to such trustees,
officers, or shareholders.
11.4. This Agreement may be executed in one or more counterparts, all
of which shall be considered one and the same agreement, and shall become
-17-
<PAGE>
effective when one or more counterparts have been executed by each Investment
Company and delivered to the other party hereto. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed
and delivered by its duly authorized officers as of the day and year first
written above.
ATTEST: PAINEWEBBER MANAGED INVESTMENTS TRUST, on
behalf its series, PaineWebber Utility
Income Fund
___________________ By:____________________________
Secretary Dianne E. O'Donnell
Vice President
ATTEST: PAINEWEBBER MASTER SERIES, INC.
on behalf of its series, PaineWebber
Balanced Fund
___________________ By:_____________________________
Secretary [ ]
Vice President
<PAGE>
APPENDIX B
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the Record Date, the following entities owned beneficially and of
record 5% or more of a class of either Fund's outstanding equity securities.
UTILITY INCOME FUND
SHAREHOLDER'S NAME/ADDRESS PERCENT BENEFICIAL PERCENT BENEFICIAL
OWNERSHIP OF UTILITY OWNERSHIP OF COMBINED
INCOME FUND FUND
BALANCED FUND
SHAREHOLDER'S NAME/ADDRESS PERCENT BENEFICIAL PERCENT BENEFICIAL
OWNERSHIP OF BALANCED OWNERSHIP OF COMBINED
FUND FUND
<PAGE>
PROXY PROXY
PAINEWEBBER UTILITY INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
SPECIAL MEETING OF SHAREHOLDERS - JUNE 12, 2000
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PAINEWEBBER
UTILITY INCOME FUND, A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST. The
undersigned hereby appoints as proxies SCOTT GRIFF and EVELYN DESIMONE and each
of them (with the power of substitution) to vote for the undersigned all shares
of common stock of the undersigned in PaineWebber Utility Income Fund, a series
of PaineWebber Managed Investments Trust, at the above referenced meeting and
any adjournment thereof, with all the power the undersigned would have if
personally present. The shares represented by this proxy will be voted as
instructed below. UNLESS INDICATED TO THE CONTRARY, THIS PROXY SHALL BE DEEMED
TO GRANT AUTHORITY TO VOTE "FOR" THE PROPOSAL RELATING TO PAINEWEBBER UTILITY
INCOME FUND.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL. PLEASE INDICATE
YOUR VOTE BY FILLING IN THE BOX COMPLETELY. EXAMPLE: /X/
PROPOSAL: FOR AGAINST ABSTAIN
Approval of the Agreement and Plan of / / / / / /
Reorganization and Termination that
provides for the combination of
PaineWebber Utility Income Fund, a
series of PaineWebber Managed
Investments Trust and PaineWebber
Balanced Fund, a series of PaineWebber
Master Series, Inc.
PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD.
<PAGE>
YOUR VOTE IS IMPORTANT.
PLEASE DATE AND SIGN THIS PROXY BELOW AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
If shares are held by an individual, sign
your name exactly as it appears on this card.
If shares are held jointly, either party may
sign, but the name of the party signing
should conform exactly to the name shown on
this proxy card. If shares are held by a
corporation, partnership or similar account,
the name and the capacity of the individual
signing the proxy card should be
indicated---for example: "ABC Corp., John
Doe, Treasurer."
---------------------------------------------
Signature
---------------------------------------------
Signature (if held jointly)
---------------------------------------------
Dated
PLEASE MARK YOUR VOTE ON THE REVERSE SIDE OF THIS CARD.
<PAGE>
PaineWebber
Balanced Fund
PaineWebber
Tactical Allocation Fund
---------------------
PROSPECTUS
DECEMBER 10, 1999
---------------------
This prospectus offers shares in PaineWebber's asset allocation funds. Each fund
offers four classes of shares, Classes A, B, C and Y. Each class has different
sales charges and ongoing expenses. You can choose the class that is best for
you based on how much you plan to invest and how long you plan to hold your fund
shares. Class Y shares are available only to certain types of investors.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved either fund's shares or determined whether this
prospectus is complete or accurate. To state otherwise is a crime.
<PAGE>
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
Contents
THE FUNDS
- --------------------------------------------------------------------------------
What every investor 3 PaineWebber Balanced Fund
should know about
the funds 6 PaineWebber Tactical Allocation Fund
9 More About Risks and Investment Strategies
YOUR INVESTMENT
- --------------------------------------------------------------------------------
Information for 11 Managing Your Fund Account
managing your fund -- Flexible Pricing
account -- Buying Shares
-- Selling Shares
-- Exchanging Shares
-- Pricing and Valuation
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional important 17 Management
information about
the funds 19 Dividends and Taxes
20 Financial Highlights
- --------------------------------------------------------------------------------
Where to learn more Back cover
about PaineWebber
mutual funds
-------------------------------------
The funds are not complete or
balanced investment programs.
-------------------------------------
- --------------------------------------------------------------------------------
Prospectus Page 2
<PAGE>
PaineWebber Balanced Fund
Balanced Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
High total return with low volatility.
PRINCIPAL INVESTMENT STRATEGIES
The fund allocates its investments among three asset classes:
o stocks
o bonds
o cash (money market instruments)
The fund normally has investments in each asset class but it always keeps at
least 25% of its total assets in a combination of bonds and cash. This is
intended to limit changes in the value of fund shares compared to funds that
invest solely in stocks.
The fund's bonds are primarily investment grade, but it may invest, to a lesser
extent, in lower quality bonds. The fund may invest in U.S. dollar-denominated
securities of foreign issuers. The fund may (but is not required to) use
options, futures contracts and other derivatives to adjust its exposure to
different asset classes, to manage the "duration" of its bond investments and to
maintain exposure to stocks or bonds while maintaining a cash balance for fund
management purposes. "Duration" is a measure of the fund's exposure to interest
rate risk.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser, believes
investors tend to reach a consensus as to the likely effect of changes in key
economic variables (for example, interest rates, profits and inflation) on each
asset class. Mitchell Hutchins also believes that prices of securities in each
asset class tend to move toward a level that reflects that consensus, but that
this takes time. By using fundamental valuation techniques, Mitchell Hutchins
attempts to adjust the allocation of the fund's assets among asset classes
before prices fully reflect the consensus view.
In buying and selling individual securities for the fund, Mitchell Hutchins uses
the following process:
o STOCKS. Mitchell Hutchins uses its own Factor Valuation Model to identify
companies that appear undervalued. The model ranks companies based on "value"
factors, such as dividends, cash flows, earnings and book values, as well as
on "growth" factors, such as earnings momentum and industry performance
forecasts. Mitchell Hutchins then applies fundamental analysis to select
specific stocks from among those identified by the model.
o BONDS. Mitchell Hutchins selects bonds based on its analysis of their
duration and risk structures (comparing yields on U.S. Treasury bonds to
yields on riskier types of bonds).
PRINCIPAL RISKS
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
Mitchell Hutchins may not be successful in choosing the best allocation among
the three asset classes. Because it invests in both stocks and bonds, the fund
is subject to both equity risk and interest rate risk. Equities, such as common
stocks, generally fluctuate in price more than other investments. The fund could
lose all of its investment in a company's stock. Interest rate risk means that
the value of the fund's bonds generally will fall when interest rates rise.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:
o Asset Allocation Risk
o Equity Risk
o Interest Rate Risk
o Credit Risk
o Foreign Securities Risk
o Derivatives Risk
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund
PERFORMANCE
- --------------------------------------------------------------------------------
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class B shares because they have a longer performance history than
any other class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. The table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index. The index is unmanaged and, therefore, does not reflect any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS B SHARES
[GRAPH]
Calendar
Years Percentages
- ------- -----------
1989 10.84%
1990 1.95%
1991 18.52%
1992 4.46%
1993 14.66%
1994 -10.51%
1995 22.23%
1996 13.81%
1997 23.63%
1998 18.02%
Total return January 1 to September 30, 1999: (4.68)%
Best quarter during years shown--4th quarter, 1998: 15.09%
Worst quarter during years shown--3rd quarter, 1998: (8.21)%
AVERAGE ANNUAL TOTAL RETURNS*
as of December 31, 1998
CLASS CLASS A CLASS B** CLASS C S&P 500
(INCEPTION DATE) (7/1/91) (12/12/86) (7/2/92) INDEX
- ---------------- -------- ---------- -------- -------
One Year 13.56% 13.02% 17.04% 28.60%
Five Years 12.50% 12.43% 12.68% 24.05%
Ten Years N/A 11.73% N/A 19.19%
Life of Class 12.63% 10.50% 12.82% ***
- ------------
* No return is shown for Class Y shares because they were not in existence
for a full calendar year.
** Assumes conversion of Class B shares to Class A after six years.
*** Average annual total returns for the S&P 500 Index for the life of each
class shown were as follows: Class A -- 20.19%, Class B -- 17.36% and Class
C -- 21.27%.
- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) .................................. 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price)` ................................. None 5% 1% None
Exchange Fee .................................................. None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Management Fees ............................................... 0.75% 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees ...................... 0.25 1.00 1.00 None
Other Expenses ................................................ 0.22 0.23 0.20 0.21
---- ---- ---- ----
Total Annual Fund Operating Expenses .......................... 1.22% 1.98% 1.95% 0.96%
==== ==== ==== ====
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A ....................................................... $569 $820 $1,090 $1,861
Class B (assuming sale of all shares at end of period) ........ 701 921 1,268 1,930
Class B (assuming no sale of shares) .......................... 201 621 1,068 1,930
Class C (assuming sale of all shares at end of period) ........ 298 612 1,052 2,275
Class C (assuming no sale of shares) .......................... 198 612 1,052 2,275
Class Y ....................................................... 98 306 531 1,178
</TABLE>
- --------------------------------------------------------------------------------
Prospectus Page 5
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Tactical Allocation Fund
Tactical Allocation Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Total return, consisting of long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES
The fund allocates its assets between
o a stock portion that is designed to track the performance of the Standard &
Poor's 500 Composite Stock Price Index and
o a fixed income portion that consists of either five-year U.S. Treasury notes
or U.S. Treasury bills with remaining maturities of 30 days.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
reallocates the fund's assets in accordance with the recommendations of its own
Tactical Allocation Model on the first business day of each month.
The Tactical Allocation Model attempts to track the performance of the S&P 500
Index in periods of strong market performance. The Model attempts to take a more
defensive posture by reallocating assets to bonds or cash when the Model signals
a potential bear market, prolonged downturn in stock prices or significant loss
in value. The Model can recommend stock allocations of 100%, 75%, 50%, 25% or
0%.
If the Tactical Allocation Model recommends a stock allocation of less than
100%, the Model also recommends a fixed income allocation for the remainder of
the fund's assets. The Model uses a bond risk premium determination to decide
whether to recommend five-year U.S. Treasury notes or 30-day U.S. Treasury
bills.
The fund may (but is not required to) use options and futures and other
derivatives to adjust its exposure to different asset classes or to maintain
exposure to stocks or bonds while maintaining a cash balance for fund management
purposes. Mitchell Hutchins also may use these instruments to reduce the risk of
adverse price movements while investing in cash received when investors buy fund
shares, to facilitate trading and to reduce transaction costs.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund is subject to asset allocation risk, in that the Tactical Allocation
Model may not correctly predict the appropriate times to shift the fund's assets
from one asset class to another. Equities, such as common stocks, generally
fluctuate in price more than other investments. The fund could lose all of its
investment in a company's stock. The S&P 500 Index includes some U.S.
dollar-denominated foreign securities. To the extent the fund invests in bonds,
it is subject to interest rate risk, which means that the value of these
investments generally will fall when interest rates rise.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:
o Asset Allocation Risk
o Equity Risk
o Index Tracking Risk
o Interest Rate Risk
o Derivatives Risk
o Foreign Securities Risk
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Tactical Allocation Fund
PERFORMANCE
- --------------------------------------------------------------------------------
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class C shares because they have a longer performance history than
any other class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. The table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index. The index is unmanaged and, therefore, does not reflect any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS C SHARES (1993 IS THE FUND'S FIRST FULL CALENDAR YEAR OF
OPERATIONS.)
[GRAPH]
Calendar
Years Percentages
- ------- -----------
1993 7.64%
1994 -1.28%
1995 34.09%
1996 20.66%
1997 31.01%
1998 26.78%
Total return January 1 to September 30, 1999: 4.07%
Best quarter during years shown--4th quarter, 1998: 20.82%
Worst quarter during years shown--3rd quarter, 1998: (10.33)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
CLASS CLASS A CLASS B CLASS C CLASS Y S&P 500
(INCEPTION DATE) (5/10/93) (1/30/96) (7/22/92) (5/10/93) INDEX
- ---------------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
One Year 22.01% 21.77% 25.78% 28.15% 28.60%
Five Years 21.33% N/A 21.55% 22.79% 24.05%
Life of Class 19.99% 25.25% 18.85% 21.30% *
</TABLE>
- -------------
* Average annual total returns for the S&P 500 Index for the life of each
class shown were as follows: Class A -- 22.60%, Class B -- 27.63%, Class C
-- 20.81% and Class Y -- 22.60%.
- --------------------------------------------------------------------------------
Prospectus Page 7
<PAGE>
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PaineWebber Tactical Allocation Fund
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------ ------ ------ ------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) ..................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price) ..................................... None 5% 1% None
Exchange Fee ..................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
CLASS A CLASS B CLASS C CLASS Y
------ ------ ------ ------
Management Fees .................................................. 0.46% 0.46% 0.46% 0.46%
Distribution and/or Service (12b-1) Fees ......................... 0.25 1.00 1.00 None
Other Expenses ................................................... 0.13 0.13 0.14 0.12
---- ---- ---- ----
Total Annual Fund Operating Expenses ............................. 0.84% 1.59% 1.60% 0.58%
==== ==== ==== ====
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class A .......................................................... $532 $706 $895 $1,440
Class B (assuming sale of all shares at end of period) ........... 662 802 1,066 1,503
Class B (assuming no sale of shares) ............................. 162 502 866 1,503
Class C (assuming sale of all shares at end of period) ........... 263 505 871 1,900
Class C (assuming no sale of shares) ............................. 163 505 871 1,900
Class Y .......................................................... 59 186 324 726
</TABLE>
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Prospectus Page 8
<PAGE>
MORE ABOUT RISKS AND INVESTMENT
STRATEGIES
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
The main risks of investing in one or both of the funds are described below. Not
all of these risks apply to each fund. You can find a list of the main risks
that apply to a particular fund by looking under the "Investment Objective,
Strategies and Risks" heading for that fund.
Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.
ASSET ALLOCATION RISK. Mitchell Hutchins may not be successful in choosing the
best allocation among different asset classes. A fund that allocates its assets
among different asset classes is more dependent on Mitchell Hutchins' ability to
successfully assess the relative values in each asset class than are funds that
do not do so.
The Mitchell Hutchins Tactical Allocation Model may not correctly predict the
times to shift Tactical Allocation Fund's assets from one type of investment to
another.
CREDIT RISK. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
higher for lower quality bonds. Bonds that are not investment grade involve high
credit risk and are considered speculative. Lower quality bonds may fluctuate in
value more than higher quality bonds and, during periods of market volatility,
may be more difficult to sell at the time and price a fund desires.
DERIVATIVES RISK. The value of "derivatives" - so-called because their value
"derives" from the value of an underlying asset, reference rate or index - may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options and futures contracts are examples of derivatives. If a fund uses
derivatives to adjust or "hedge" the overall risk of its portfolio, it is
possible that the hedge will not succeed. This may happen for various reasons,
including unexpected changes in the value of the derivatives that are not
matched by opposite changes in the value of the rest of the fund's portfolio.
EQUITY RISK. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial part, or even all, of its investment in a company's
stock.
FOREIGN SECURITIES RISK. Foreign securities involve risks that normally are not
associated with securities of U.S. issuers. These include risks relating to
political, social and economic developments abroad and differences between U.S.
and foreign regulatory requirements and market practices.
INDEX TRACKING RISK. Tactical Allocation Fund expects a close correlation
between the performance of the portion of its assets allocated to stocks and
that of the S&P 500 Index in both rising and falling markets. While the fund
attempts to replicate, before deduction of fees and operating expenses, the
investment results of the Index, the fund's investment results generally will
not be identical to those of the Index. Deviations from the performance of the
Index may result from shareholder purchases and sales of shares that can occur
daily. In addition, the fund must pay fees and expenses that are not borne by
the Index.
INTEREST RATE RISK. The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the risk
that interest rates will rise, so that the value of a fund's investments in
bonds will fall. Because interest rate risk is the primary risk presented by
U.S. government and other very high quality bonds, changes in interest rates may
actually have a larger effect on the value of those bonds than on lower quality
bonds.
ADDITIONAL RISKS
YEAR 2000 RISK. The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds' other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the funds, Mitchell Hutchins is working
to avoid these
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
problems with respect to its own computer systems and to obtain assurances from
service providers that they are taking similar steps.
Similarly, the companies in which the funds invest and trading systems used by
the funds could be adversely affected by this issue. The ability of a company or
trading system to respond successfully to the issue requires both technological
sophistication and diligence, and there can be no assurance that any steps taken
will be sufficient to avoid an adverse impact on the funds.
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself from adverse
market conditions, a fund may take a temporary defensive position that is
different from its normal investment strategy. This means that the fund may
temporarily invest a larger-than-normal part, or even all, of its assets in cash
or money market instruments. Since these investments provide relatively low
income, a defensive position may not be consistent with achieving a fund's
investment objective. Balanced Fund may invest in money market instruments on an
unlimited basis as part of its ordinary investment strategy. Tactical Allocation
Fund may invest all or any portion of its total assets in U.S. Treasury bills
when recommended by the Mitchell Hutchins Tactical Allocation Model. Each fund
normally maintains a limited amount of cash for liquidity purposes.
PORTFOLIO TURNOVER. Each fund may engage in frequent trading to achieve its
investment objective. Frequent trading can result in portfolio turnover of 100%
or more (high portfolio turnover).
Frequent trading may increase a fund's capital gains that are realized for tax
purposes in any given year. This may increase the fund's taxable dividends in
that year. Frequent trading also may increase the portion of a fund's realized
capital gains that are considered "short-term" for tax purposes. Shareholders
will pay higher taxes on dividends that represent net short-term capital gains
than they would pay on dividends that represent net long-term capital gains.
Frequent trading also may result in higher fund expenses due to transaction
costs.
The funds do not restrict the frequency of trading to limit expenses or the tax
effect that the fund's dividends may have on shareholders.
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
YOUR INVESTMENT
MANAGING YOUR FUND ACCOUNT
- --------------------------------------------------------------------------------
FLEXIBLE PRICING
The funds offer four classes of shares - Class A, Class B,
Class C and Class Y. Each class has different sales charges and ongoing
expenses. You can choose the class that is best for you, based on how much you
plan to invest and how long you plan to hold your fund investment. Class Y
shares are only available to certain types of investors.
Each fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service and (for Class B and Class C shares)
distribution fees for the sale of its shares and services provided to
shareholders. Because the 12b-1 distribution fees for Class B and Class C shares
are paid out of a fund's assets on an ongoing basis, over time they will
increase the cost of your investment and may cost you more than if you paid a
front-end sales charge.
CLASS A SHARES
Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.
The Class A sales charges for each fund are described in the following table.
CLASS A SALES CHARGES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF OFFERING PRICE
- -------------------- -------------- ------------------- --------------------------------
<S> <C> <C> <C>
Less than $50,000 ................ 4.50% 4.71% 4.25%
$50,000 to $99,999 ............... 4.00 4.17 3.75
$100,000 to $249,999 ............. 3.50 3.63 3.25
$250,000 to $499,999 ............. 2.50 2.56 2.25
$500,000 to $999,999 ............. 1.75 1.78 1.50
$1,000,000 and over (1) .......... None None 1.00(2)
</TABLE>
- ---------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of dividends are not subject
to this 1% charge. Withdrawals in the first year after purchase of up to 12%
of the value of the fund account under the funds' Systematic Withdrawal Plan
are not subject to this charge.
(2) Mitchell Hutchins pays 1% to PaineWebber.
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber mutual fund. You can combine the
value of Class A shares that you own in other PaineWebber funds and the purchase
amount of the Class A shares of the PaineWebber fund that you are buying.
You may also qualify for a lower sales charge if you combine your purchases with
those of:
o your spouse, parents or children under age 21;
o your Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o a company that you control;
o a trust that you created;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by you or by a group of investors for your children; or
o accounts with the same adviser.
You may qualify for a complete waiver of the sales charge if you:
o Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;
o Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that was
registered as a broker-dealer with the SEC, and
-- you were the Financial Advisor's client at the competing brokerage
firm;
-- within 90 days of buying shares in a fund, you sell shares of one or
more mutual funds that were principally underwritten by the competing
brokerage firm or its affiliates, and you either paid a sales charge to
buy those shares, pay a contingent deferred sales charge when selling
them or held those shares until the contingent deferred sales charge
was waived; and
-- you purchase an amount that does not exceed the total amount of money
you received from the sale of the other mutual fund;
o Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;
o Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets; or
o Are a participant in the PaineWebber Members OnlySM Program. For investments
made pursuant to this waiver, Mitchell Hutchins may make payments out of its
own resources to PaineWebber and to participating membership organizations in
a total amount not to exceed 1% of the amount invested; or
o Acquire fund shares through a PaineWebber InsightOneSM Program brokerage
account.
NOTE: See the funds' SAI for some other sales charge waivers. If you think you
qualify for any sales charge reductions or waivers, you will need to provide
documentation to PaineWebber or the fund. For more information, you should
contact your PaineWebber Financial Advisor or correspondent firm or call
1-800-647-1568. If you want information on the funds' Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.
CLASS B SHARES
Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
PERCENTAGE BY WHICH THE
IF YOU SELL SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
- -------------- -----------------------
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on withdrawals in any year of up to 12% of the
value of your Class B shares under the Systematic Withdrawal Plan.
To minimize your deferred sales charge, we will assume that you are selling:
o First, Class B shares representing reinvested dividends, and
o Second, Class B shares that you have owned the longest.
Sales Charge Waivers. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:
o You participate in the Systematic Withdrawal Plan;
o You are older than 591/2 and are selling shares to take a distribution from
certain types of retirement plans;
o You receive a tax-free return of an excess IRA contribution;
o You receive a tax-qualified retirement plan distribution following
retirement; or
o The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint tenant
with the right of survivorship.
o You are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000 and the proceeds are
used to purchase interests in one or more of these pools.
NOTE: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber Financial Advisor or correspondent firm or
call 1-800-647-1568. If you want information on the Systematic Withdrawal Plan,
see the SAI or contact your PaineWebber Financial Advisor or correspondent firm.
CLASS C SHARES
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 1.00% by the lesser of the net asset value of the Class C
shares at the time of purchase or the net asset value at the time of sale. We
will not impose the deferred sales charge on Class C shares representing
reinvestment of dividends or on withdrawals in the first year after purchase, of
up to 12% of the value of your Class C shares under the Systematic Withdrawal
Plan.
You may be eligible to sell your Class C shares without paying a contingent
deferred sales charge if you:
o Are a 401(k) or 403(b) qualified employee benefit plan with fewer than 100
employees or less than $1 million in assets, or
o Are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000 and the proceeds are
used to purchase interests in one or more of those pools.
NOTE: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber Financial Advisor or correspondent firm or
call 1-800-647-1568. If you want information on the funds' Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
o Buy shares through PaineWebber's PACESM Multi Advisor Program;
- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
o Buy $10 million or more of PaineWebber fund shares at any one time;
o Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or
o Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.
The trustee of PaineWebber's 401(k) Plus Plan for its employees is also eligible
to purchase Class Y shares.
Class Y shares do not pay ongoing distribution or service fees or sales charges.
The ongoing expenses for Class Y shares are the lowest for all the classes.
BUYING SHARES
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the funds through the funds' transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must complete and sign the
application and mail it, along with a check, to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you wish to invest in other PaineWebber Funds, you can do so by:
o Contacting your Financial Advisor (if you have an account at PaineWebber or
at a PaineWebber correspondent firm);
o Mailing an application with a check; or
o Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional investments
in the same fund.
The funds and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.
MINIMUM INVESTMENTS
- -------------------
To open an account ................... $1,000
To add to an account ................. $ 100
Each fund may waive or reduce these amounts for:
o Employees of PaineWebber or its affiliates; or
o Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.
FREQUENT TRADING. The interests of a fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as "market timing." When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on a fund's ability to manage its
investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. A fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.
SELLING SHARES
You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent firm, you
can sell shares by contacting your Financial Advisor.
If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:
o Your name and address;
o The fund's name;
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
o The fund account number;
o The dollar amount or number of shares you want to sell; and
o A guarantee of each registered owner's signature. A signature guarantee may
be obtained from a financial institution, broker, dealer or clearing agency
that is a participant in one of the medallion programs recognized by the
Securities Transfer Agents Association. These are: Securities Transfer Agents
Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the
New York Stock Exchange Medallion Signature Program (MSP). The funds will not
accept signature guarantees that are not a part of these programs.
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
It costs each fund money to maintain shareholder accounts. Therefore, the funds
reserve the right to repurchase all shares in any account that has a net asset
value of less than $500. If a fund elects to do this with your account, it will
notify you that you can increase the amount invested to $500 or more within 60
days. A fund will not repurchase shares in accounts that fall below $500 solely
because of a decrease in the fund's net asset value.
EXCHANGING SHARES
You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.
You will not pay either a front-end sales charge or a deferred sales charge when
you exchange shares. However, you may have to pay a deferred sales charge if you
later sell the shares you acquired in the exchange. Each fund will use the date
that you purchased the shares in the first fund to determine whether you must
pay a deferred sales charge when you sell the shares in the acquired fund.
Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.
You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.
PAINEWEBBER CLIENTS. If you bought your shares through PaineWebber or a
correspondent firm, you may exchange your shares by placing an order with your
PaineWebber Financial Advisor.
OTHER INVESTORS. If you are not a PaineWebber client, you may exchange your
shares by writing to the fund's transfer agent. You must include:
o Your name and address;
o The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;
o Your account number;
o How much you are exchanging (by dollar amount or by number of shares to be
sold); and
o A guarantee of your signature. (See "Buying Shares" for information on
obtaining a signature guarantee.)
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
A fund may modify or terminate the exchange privilege at any time.
PRICING AND VALUATION
The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. Each fund calculates net asset value on days that the New
York Stock Exchange is open. Each fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the funds do not price their
shares, on most national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the fund's net asset value
per share will be calculated as of the time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
responsible for making sure that your order is promptly sent to the fund.
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.
Each fund calculates its net asset value based on the current market value for
its portfolio securities. The funds normally obtain market values for their
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security, that
security is valued at a fair value determined by or under the direction of the
fund's board. The funds normally use the amortized cost method to value bonds
that will mature in 60 days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114. It is a wholly owned asset management subsidiary
of PaineWebber Incorporated, which is wholly owned by Paine Webber Group Inc., a
publicly owned financial services holding company. On October 31, 1999, Mitchell
Hutchins was adviser or sub-adviser of 33 investment companies with 76 separate
portfolios and aggregate assets of approximately $48.9 billion.
PORTFOLIO MANAGERS
BALANCED FUND. T. Kirkham Barneby is responsible for the asset allocation
decisions for Balanced Fund. 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. Prior to joining Mitchell Hutchins in
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.
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.
Nirmal Singh assists Mr. McCauley in managing Balanced Fund's debt securities.
Mr. Singh has been a senior vice president of Mitchell Hutchins since September
1993.
Susan Ryan is responsible for the day-to-day management of the portion of
Balanced Fund's assets invested in money market instruments. Ms. Ryan 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.
TACTICAL ALLOCATION FUND. T. Kirkham Barneby is responsible for the asset
allocation decisions for 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.
ADVISORY FEES
The funds paid advisory and administration fees to Mitchell Hutchins for the
most recent fiscal year ended August 31, 1999 at the following annual rates,
based on average daily net assets:
Balanced Fund ................................... 0.75%(1)
Tactical Allocation Fund ........................ 0.46%(1)
- ---------
(1) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The percentages excluding the waiver
are the same since the fee waiver represents less than 0.005%.
- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
MANAGEMENT
- --------------------------------------------------------------------------------
OTHER INFORMATION
The funds have received an exemptive order from the SEC that permits their
boards to appoint and replace sub-advisers and to amend sub-advisory contracts
without obtaining shareholder approval. A fund's shareholders must approve this
policy before its board may implement it. As of the date of this prospectus, the
funds have not asked their shareholders to do so.
- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Balanced Fund normally declares and pays dividends semi-annually and distributes
any gains annually. Tactical Allocation Fund normally declares and pays
dividends and distributes any gains annually.
Classes with higher expenses are expected to have lower dividends. For example,
Class B and Class C shares are expected to have the lowest dividends of any
class of a fund's shares, while Class Y shares are expected to have the highest.
You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its correspondent firms if you prefer to receive dividends in cash.
TAXES
The dividends that you receive from a fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) plan, dividends on your shares generally will not be subject to
tax.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange a fund's shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the fund's
shares, and any gain will be subject to federal income tax.
Each fund expects that its dividends will include capital gain distributions.
However, a portion of Balanced Fund's dividends will be taxed as ordinary
income, and Tactical Allocation Fund may also distribute dividends that are
taxed as ordinary income. A distribution of capital gains will be taxed at a
lower rate than ordinary income if the fund held the assets that generated the
gains for more than 12 months. Your fund will tell you how you should treat its
dividends for tax purposes.
- --------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for classes of fund shares that have existed for less than 5 years. Certain
information reflects financial results for a single fund share. In the tables,
"total investment return" represents the rate that an investor would have earned
(or lost) on an investment in a fund (assuming reinvestment of all dividends).
This information in the financial highlights has been audited by
PricewaterhouseCoopers LLP, independent accountants for Balanced Fund, and Ernst
& Young LLP, independent auditors for Tactical Allocation Fund, whose reports,
along with the funds' financial statements, are included in the funds' Annual
Reports to Shareholders. Annual Reports may be obtained without charge by
calling 1-800-647-1568.
<TABLE>
<CAPTION>
PAINEWEBBER BALANCED FUND
CLASS A
----------------------------------------------------------------------------------------
FOR THE
SIX FOR THE FOR THE
FOR THE YEARS ENDED MONTHS YEAR YEAR
AUGUST 31, ENDED ENDED ENDED
--------------------------------------- AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04
-------- -------- -------- -------- -------- --------
Net investment income ........... 0.22++ 0.23++ 0.23++ 0.12++ 0.27++ 0.26
Net realized and unrealized
gains (losses) from
investments, futures
and options ................... 1.56++ 0.31++ 2.79++ (0.12)++ 1.84++ (1.07)
-------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations .................... 1.78 0.54 3.02 0.00 2.11 (0.81)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income ............. (0.22) (0.22) (0.24) (0.10) (0.31) (0.23)
Distributions from
net realized gains
from investment
transactions .................. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders .................. (1.45) (1.77) (0.79) (0.58) (1.06) (1.43)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period ................. $ 11.60 $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80
======== ======== ======== ======== ======== ========
Total investment return (1) ..... 16.20% 4.69% 30.67% 0.03% 22.08% (6.02)%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end
of period (000's) ............. $196,684 $182,362 $176,403 $157,525 $171,609 $174,761
Expenses to average
net assets, net of
waivers from adviser (3) ...... 1.22% 1.26% 1.46% 1.34%* 1.29% 1.26%
Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 1.81% 1.88% 2.02% 2.19%* 2.55% 2.41%
Portfolio turnover rate ......... 234% 190% 188% 103% 188% 107%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of shares.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Class A, B and C shares would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
(2) Fiscal year changed to August 31.
(3) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.
- --------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
FOR THE
SIX FOR THE FOR THE
FOR THE YEARS ENDED MONTHS YEAR YEAR
AUGUST 31, ENDED ENDED ENDED
--------------------------------------- AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90 $ 12.10
-------- -------- -------- -------- -------- --------
Net investment income ........... 0.13++ 0.14++ 0.14++ 0.08++ 0.19++ 0.44
Net realized and unrealized
gains (losses) from
investments, futures
and options ................... 1.59++ 0.31++ 2.84++ (0.11)++ 1.86++ (1.32)
-------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations .................... 1.72 0.45 2.98 (0.03) 2.05 (0.88)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income ............. (0.13) (0.12) (0.15) (0.07) (0.20) (0.12)
Distributions from
net realized gains
from investment
transactions .................. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders .................. (1.36) (1.67) (0.70) (0.55) (0.95) (1.32)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period ................. $ 11.84 $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90
======== ======== ======== ======== ======== ========
Total investment return (1) ..... 15.28% 3.87% 29.70% (0.30)% 21.20% (6.68)%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end
of period (000's) ............. $ 28,719 $ 26,425 $ 22,768 $ 22,307 $ 26,627 $ 37,104
Expenses to average
net assets, net of
waivers from adviser (3) ...... 1.98% 2.03% 2.22% 2.09%* 2.05% 1.98%
Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 1.04% 1.13% 1.27% 1.43%* 1.81% 1.60%
Portfolio turnover rate ......... 234% 190% 188% 103% 188% 107%
CLASS C
----------------------------------------------------------------------------------------
FOR THE
SIX FOR THE FOR THE
FOR THE YEARS ENDED MONTHS YEAR YEAR
AUGUST 31, ENDED ENDED ENDED
--------------------------------------- AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
Net asset value,
beginning of period ........... $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82 $ 12.03
-------- -------- -------- -------- -------- --------
Net investment income ........... 0.14++ 0.14++ 0.14++ 0.08++ 0.19++ 0.19
Net realized and unrealized
gains (losses) from
investments, futures
and options ................... 1.56++ 0.31++ 2.80++ (0.12)++ 1.84++ (1.07)
-------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations .................... 1.70 0.45 2.94 (0.04) 2.03 (0.88)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income ............. (0.15) (0.14) (0.16) (0.07) (0.22) (0.13)
Distributions from
net realized gains
from investment
transactions .................. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders .................. (1.38) (1.69) (0.71) (0.55) (0.97) (1.33)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period ................. $ 11.60 $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82
======== ======== ======== ======== ======== ========
Total investment return (1) ..... 15.34% 3.89% 29.70% (0.38)% 21.12% (6.69)%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end
of period (000's) ............. $ 19,894 $ 14,581 $ 8,736 $ 6,979 $ 7,469 $ 8,525
Expenses to average
net assets, net of
waivers from adviser (3) ...... 1.95% 2.00% 2.21% 2.09%* 2.08% 2.01%
Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 1.08% 1.18% 1.27% 1.44%* 1.77% 1.62%
Portfolio turnover rate ......... 234% 190% 188% 103% 188% 107%
</TABLE>
<TABLE>
<CAPTION>
CLASS Y
-------------------------------
FOR THE
FOR THE PERIOD
YEAR MARCH 26, 1998+
ENDED THROUGH
AUGUST 31, AUGUST 31,
1999 1998
----------- ---------------
<S> <C> <C>
Net asset value,
beginning of period ........... $ 11.27 $ 12.55
-------- --------
Net investment income ........... 0.26++ 0.11++
Net realized and unrealized
gains (losses) from
investments, futures
and options ................... 1.55++ (1.28)++
-------- --------
Net increase (decrease)
from investment
operations .................... 1.81 (1.17)
-------- --------
Dividends from net
investment income ............. (0.26) (0.11)
Distributions from
net realized gains
from investment
transactions .................. (1.23) --
-------- --------
Total dividends and
distributions to
shareholders .................. (1.49) (0.11)
-------- --------
Net asset value,
end of period ................. $ 11.59 $ 11.27
======== ========
Total investment return (1) ..... 16.42% (9.41)%
======== ========
Ratios/supplemental data:
Net assets, end
of period (000's) ............. $ 519 $ 175
Expenses to average
net assets, net of
waivers from adviser (3) ...... 0.96% 0.89%*
Net investment income
to average net assets,
net of waivers from
adviser (3) ................... 2.11% 2.48%*
Portfolio turnover rate ......... 234% 190%
</TABLE>
- --------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAINEWEBBER TACTICAL ALLOCATION FUND
CLASS A
----------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995**
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 23.55 $ 22.23 $ 16.15 $ 14.86 $ 13.78
-------- -------- -------- -------- --------
Net investment income (loss) .................. 0.15 0.15 0.18@ 0.18 0.22
Net realized and unrealized gains
from investments ............................ 8.84 1.47 6.12@ 2.31 2.05
-------- -------- -------- -------- --------
Net increase from investment operations ....... 8.99 1.62 6.30 2.49 2.27
-------- -------- -------- -------- --------
Dividends from net
investment income ........................... (0.17) (0.12) (0.14) (0.14) (0.22)
Distributions from net realized gains
from investments transactions .............. (0.58) (0.18) (0.08) (1.06) (0.97)
-------- -------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.75) (0.30) (0.22) (1.20) (1.19)
-------- -------- -------- -------- --------
Net asset value, end of period ................ $31.79 $ 23.55 $ 22.23 $ 16.15 $ 14.86
======== ======== ======== ======== ========
Total investment return(1) .................... 38.65% 7.31% 39.26% 17.35% 18.43%
======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $702,580 $340,245 $170,759 $ 23,551 $1,944
Expenses to average net assets,
net of waivers from adviser(2) .............. 0.84% 0.95% 0.99% 1.17% 1.46%
Net investment income (loss) to average net
assets, net of waivers from adviser(2) ...... 0.56% 0.74% 0.88% 1.12% 1.60%
Portfolio turnover rate ....................... 6% 33% 6% 6% 53%
</TABLE>
- ----------
+ Commencement of issuance of shares.
* Annualized.
** Investment advisory functions for the fund were transferred from Kidder,
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Class A, B and C shares would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
(2) During the year ended August 31, 1999, Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.
# Actual amount is less than $0.005.
- --------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Balanced Fund PaineWebber Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED JANUARY 30,
AUGUST 31, 1996+ TO
--------------------------------------- AUGUST 31,
1999 1998 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 23.32 $ 22.08 $ 16.13 $ 15.54
-------- -------- -------- --------
Net investment income (loss) .................. (0.04) 0.00 0.03@ 0.02
Net realized and unrealized gains
from investments ............................ 8.73 1.43 6.09@ 0.57
-------- -------- -------- --------
Net increase from investment operations ....... 8.69 1.43 6.12 0.59
-------- -------- -------- --------
Dividends from net investment income .......... (0.02) (0.01) (0.09) --
Distributions from net realized gains
from investments transactions ............... (0.58) (0.18) (0.08) --
-------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.60) (0.19) (0.17) 0.00
-------- -------- -------- --------
Net asset value, end of period ................ $ 31.41 $ 23.32 $ 22.08 $ 16.13
======== ======== ======== ========
Total investment return(1) .................... 37.61% 6.49% 38.14% 3.80%
======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $964,933 $483,068 $239,836 $ 28,495
Expenses to average net assets,
net of waivers from adviser(2) .............. 1.59% 1.71% 1.74% 1.84%*
Net investment income (loss) to average net
assets, net of waivers from adviser (2) ..... (0.20)% (0.02)% 0.13% 0.47%*
Portfolio turnover rate ....................... 6% 33% 6% 6%
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995**
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 23.45 $ 22.18 $ 16.12 $ 14.87 $ 13.78
-------- -------- -------- -------- --------
Net investment income (loss) .................. (0.06) (0.01) 0.03@ 0.06 0.12
Net realized and unrealized gains
from investments ............................ 8.79 1.45 6.11@ 2.32 2.06
-------- -------- -------- -------- --------
Net increase from investment operations ....... 8.73 1.44 6.14 2.38 2.18
-------- -------- -------- -------- --------
Dividends from net investment income .......... (0.00)# -- -- (0.07) (0.12)
Distributions from net realized gains
from investments transactions ............... (0.58) (0.17) (0.08) (1.06) (0.97)
-------- -------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.58) (0.17) (0.08) (1.13) (1.09)
-------- -------- -------- -------- --------
Net asset value, end of period ................ $ 31.60 $ 23.45 $ 22.18 $ 16.12 $ 14.87
======== ======== ======== ======== ========
Total investment return(1) .................... 37.58% 6.49% 38.20% 16.52% 17.57%
======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $738,781 $397,767 $233,044 $ 73,630 $ 48,105
Expenses to average net assets,
net of waivers from adviser(2) .............. 1.60% 1.70% 1.75% 1.95% 2.22%
Net investment income (loss) to average net
assets, net of waivers from adviser(2) ..... (0.20)% (0.01)% 0.14% 0.35% 0.86%
Portfolio turnover rate ....................... 6% 33% 6% 6% 53%
CLASS Y
----------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995**
-------- -------- -------- -------- --------
Net asset value, beginning of period .......... $ 23.68 $ 22.33 $ 16.20 $ 14.88 $ 13.79
-------- -------- -------- -------- --------
Net investment income (loss) .................. 0.22 0.21 0.23@ 0.30 0.23
Net realized and unrealized gains
from investments ............................ 8.91 1.49 6.13@ 2.24 2.09
-------- -------- -------- -------- --------
Net increase from investment operations ....... 9.13 1.70 6.36 2.54 2.32
-------- -------- -------- -------- --------
Dividends from net investment income .......... (0.24) (0.17) (0.15) (0.16) (0.26)
Distributions from net realized gains
from investments transactions ............... (0.58) (0.18) (0.08) (1.06) (0.97)
-------- -------- -------- -------- --------
Total dividends and distributions
to shareholders ............................. (0.82) (0.35) (0.23) (1.22) (1.23)
-------- -------- -------- -------- --------
Net asset value, end of period ................ $ 31.99 $ 23.68 $ 22.33 $ 16.20 $ 14.88
======== ======== ======== ======== ========
Total investment return(1) .................... 39.03% 7.62% 39.55% 17.70% 18.79%
======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $129,893 $ 74,872 $ 36,467 $ 12,803 $ 2,506
Expenses to average net assets, net
of waivers from adviser(2) .................. 0.58% 0.67% 0.74% 0.95% 1.23%
Net investment income (loss) to average net
assets, net of waivers from adviser(2) ...... 0.82% 1.03% 1.16% 1.38% 1.86%
Portfolio turnover rate ....................... 6% 33% 6% 6% 53%
</TABLE>
- --------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TICKER SYMBOL: Balanced Fund Class A: PASAX Tactical Allocation Fund Class: A: PWTAX
B: PASBX B: PWTBX
C: PASCX C: KPAAX
Y: None Y: None
</TABLE>
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual reports,
you will find a discussion of the market conditions and investment strategies
that significantly affected the funds' performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the funds and is incorporated
by reference into this prospectus.
You may discuss your questions about the funds by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual reports
and the SAI by contacting the funds directly at 1-800-647-1568.
You may review and copy information about the funds, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies of reports and other information about
the funds and about the operations of the SEC's Public Reference Room:
o For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009, Telephone:1-800-SEC-0330
o Free, from the SEC's Internet website at: http://www.sec.gov
Paine Webber Master Series, Inc.
- - Paine Webber Balanced Fund
Investment Company Act File No. 811-4448
Paine Webber Investment Trust
- - Paine Webber Tactical Allocation Fund
Investment Company Act File No. 811-6292
(C) 1999 PaineWebber Incorporated. All rights reserved. Member SIPC.
- --------------------------------------------------------------------------------
<PAGE>
PaineWebber
===================================================================
BALANCED
FUND
ANNUAL REPORT
AUGUST 31, 1999
<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber Balanced Fund
(Class B) and the S&P 500 Index and the Lehman Brothers Intermediate-Term
Government/Corporate Bond Index from August 31, 1989 through August 31, 1999
[GRAPHIC OMITTED]
Past performance is no guarantee of future performance. The performance of the
other classes will vary from the performance of the class shown because of
differences in sales charges and fees paid by shareholders investing in
different classes.
- --------------------------------------------------------------------------------
The graph depicts the performance of PaineWebber Balanced Fund (Class B) versus
the S&P 500 Index and the Lehman Brothers Intermediate-Term
Government/Corporate Bond Index. It is important to note PaineWebber Balanced
Fund is a professionally managed mutual fund while the Indices are not available
for investment and are unmanaged. The comparison is shown for illustrative
purposes only.
- --------------------------------------------------------------------------------
- ---------------------------------------------------
AVERAGE ANNUAL % TOTAL RETURN, PERIOD ENDED 8/31/99
- ---------------------------------------------------
1 Year 5 Years 10 Years Inception*
Before Deducting Class A** 16.20% 14.23% N/A 11.83%
Maximum Sales Charge
Class B*** 15.28% 13.38% 10.49% 9.76%
Class C+ 15.34% 13.37% N/A 11.09%
Class Y++ 16.42% N/A N/A 3.78%
After Deducting Class A** 10.98% 13.17% N/A 11.20%
Maximum Sales Charge
Class B*** 10.28% 13.14% 10.49% 9.76%
Class C+ 14.34% 13.37% N/A 11.09%
The investment return and the principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
* Inception: since commencement of issuance on July 1, 1991 for Class A,
December 12, 1986 for Class B, July 2, 1992 for Class C shares and March
26, 1998 for Class Y shares.
** Maximum sales charge for Class A shares is 4.5% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
*** Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B shares bear ongoing 12b-1
distribution and service fees.
+ Maximum contingent deferred sales charge for Class C shares is 1% and is
reduced to 0% after one year. Class C shares bear ongoing 12b-1
distribution and service fees.
++ The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored
by PaineWebber and that may invest in PaineWebber mutual funds, as well as
the trustee of the PaineWebber 401(k) Plus Plan. Class Y shares do not
bear initial or contingent deferred sales charges or ongoing distribution
and service fees.
1
<PAGE>
ANNUAL REPORT
October 15, 1999
- --------------------------------------------------------------------------------
PAINEWEBBER
BALANCED FUND
PROFILE
as of August 31, 1999
Investment Goal: high total return with low volatility
Portfolio Managers: Kirk Barneby, Asset Allocator; Dennis McCauley, Fixed Income
Sector; Mark Tincher, Equity Sector; Susan Ryan, Money Market Sector; Mitchell
Hutchins Asset Management Inc.
Commencement: July 1, 1991 (Class A); December 12, 1986 (Class B); July 2, 1992
(Class C); March 26, 1998 (Class Y)
Dividend Payments: semiannually
- --------------------------------------------------------------------------------
Dear Shareholder,
We are pleased to present you with the annual report for the PaineWebber
Balanced Fund (the "Fund") for the fiscal year ended August 31, 1999.
MARKET REVIEW
================================================================================
[GRAPHIC OMITTED] For most of 1998 and the first quarter of 1999 the market was
very narrow, focused on large-capitalization growth companies. This was a highly
unusual situation and we expected conditions to return to normal--i.e., near
parity between growth and value styles. The market did briefly turn around in
the second quarter, but only the deepest of the "deep value" stocks benefited
before investors got concerned about the surge in commodity prices, and
narrowness returned. However, for the 12 months ended August 31, 1999, the S&P
500 Index gained 39.81%.
Despite gains in the broad market, individual stock performance varied widely.
About two thirds of the stocks traded on the New York Stock Exchange have
actually posted losses year to date. The market weakened at the end of the
Fund's fiscal year, as investors became concerned about the possibility of the
Federal Reserve again raising short-term interest rates. Technology and consumer
cyclicals were the strongest sectors; the weakest sectors included healthcare,
utilities and capital goods.
OUTLOOK
================================================================================
[GRAPHIC OMITTED] We expect gross domestic product growth of around 3.80% for
1999, and about 2.90% growth for 2000. Our outlook calls for 2.25% inflation for
calendar year 1999, and about the same or slightly higher for calendar year
2000. We expect the yield on the long bond (30-year Treasury) to stay close to
6.10% for the rest of 1999, and to retreat below 6.00% in 2000. Overseas growth
does not seem strong enough to raise inflationary expectations to a great
degree, but should allow companies to maintain profitability.
PORTFOLIO HIGHLIGHTS
================================================================================
[GRAPHIC OMITTED] The Fund employs a disciplined, model-based approach to
calculate expected returns for U.S. stocks, bonds and cash. Based on an
assessment of key economic variables such as interest rates, economic growth and
inflation, as well as fundamental valuation techniques, the Fund seeks to
determine whether the expected return from stocks is sufficient to
2
<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
offset the additional risk when compared to bonds and "risk-free" cash
investments (U.S. Treasury bills). Fund assets are allocated according to the
model, with a minimum of 25% of net assets in bonds or cash at all times.
- --------------------------------------------------------------------------------
PAINEWEBBER BALANCED FUND
Top Five Equity Sectors*
As of 8/31/99
[The following table was depicted as a bar chart in the printed material.]
Consumer Cyclicals 14.2%
Technology 10.4%
Financial 7.3%
Healthcare 4.7%
Utilities 4.7%
As of 2/28/99
[The following table was depicted as a bar chart in the printed material.]
Consumer Cyclicals 14.4%
Technology 8.2%
Financial 7.7%
Healthcare 5.9%
Utilities 4.3%
- --------------------------------------------------------------------------------
CHARACTERISTICS*
8/31/99 2/28/99
------------------------------------------------------------------
Total Net Assets ($mm) $245.8 $255.9
Number of Securities 164 150
Dividend Yield 2.52% 2.77%
Stocks 55.2% 45.6%
Bonds 32.7% 41.1%
Cash & Cash Equivalents 12.1% 13.3%
------------------------------------------------------------------
In our asset allocation analysis, expectations for stocks improved during the
last six months of the fiscal year, and expectations for bonds deteriorated.
Therefore, the Fund reversed its underweighting in stocks and overweighting in
bonds from the end of the last reporting period. As of fiscal year-end, the Fund
was slightly overweighted in stocks, underweighted in bonds and overweighted in
cash (see table above).
TOP TEN EQUITY HOLDINGS*
As of 8/31/99 As of 2/28/99
------------------------------------------------------------------
Cisco Systems, Inc. 1.7 MCI WorldCom Inc. 1.4
United Technologies Corp. 1.6 United Technologies Corp. 1.2
Tyco International Ltd. 1.6 The Chase Manhattan Corp. 1.1
The Chase Manhattan Corp. 1.5 Dayton Hudson Corp. 1.0
Applied Materials, Inc. 1.4 Cisco Systems, Inc. 0.9
Unisys Corp. 1.3 BP Amoco plc ADR 0.9
Biogen Inc. 1.2 Lucas Varity plc ADR 0.9
Dayton Hudson Corp. 1.2 Tyco International Ltd. 0.9
JDS Uniphase Corp. 1.2 Biogen Inc. 0.9
Microsoft Corp. 1.1 Applied Materials, Inc. 0.8
------------------------------------------------------------------
The Balanced Fund's performance standard over time is a portfolio that is
allocated 60% of the time to stocks, 35% of the time to bonds and 5% of the time
to cash. As of this writing (late September 1999) the models are suggesting, on
a risk-adjusted basis, that both stocks and bonds continue to be attractive
relative to cash. As of this writing, the Fund's equity weighting is at a
neutral position--where we would expect to be on average over time. The Balanced
Fund is now positioned at a 40%
* Weightings represent percentages of portfolio assets as of August 31, 1999,
except where noted otherwise. The Fund's portfolio is actively managed and its
composition will vary over time.
3
<PAGE>
ANNUAL FUND
weighting in fixed income, in contrast to its long run, or expected weighting of
about 35%. On a risk-adjusted basis, the models prefer bonds to cash enough that
we have slightly overweighted our bond position by 5%.
While we are positive on both markets relative to their long-term historical
risk/return profiles, we think bonds are a little more attractive and as a
result, we have a slight overweighting in them. We are neutral on stocks. This
does not mean we think the outlook for stocks is bearish--rather, we believe
that on a risk-adjusted basis the outlook for stocks is consistent with their
longer term or average return to investors. Our ultimate objective in managing
your investments is to help you successfully meet your financial goals. We thank
you for your continued support and welcome any comments or questions you may
have.
For a Quarterly Review on PaineWebber Balanced Fund or another fund in the
PaineWebber Family of Funds, (1) please contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander /s/ Brian M. Storms
MARGO ALEXANDER Brian M. Storms
Chairman and Chief Executive Officer President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
/s/ T. Kirkham Barneby /s/ Dennis L. McCauley
T. KIRKHAM BARNEBY DENNIS L. MCCAULEY
Managing Director and Managing Director and Chief Investment
Chief Investment Officer -- Officer -- Fixed Income
Quantitative Investments Mitchell Hutchins Asset Management Inc.
Mitchell Hutchins Asset Management Inc.
/s/ Mark A. Tincher /s/ SUSAN P. RYAN
MARK A. TINCHER SUSAN P. RYAN
Managing Director and Chief Investment Senior Vice President
Officer -- Equities Mitchell Hutchins Asset Management Inc.
Mitchell Hutchins Asset Management Inc.
* Weightings represent percentages of portfolio assets as of August 31,
1999, except where noted otherwise. The Fund's portfolio is actively
managed and its composition will vary over time.
(1) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses,
and should be read carefully before investing.
This letter is intended to assist shareholders in understanding how the
Fund performed during the fiscal year ended August 31, 1999, and reflects
our views at the time of its writing. Of course, these views may change in
response to changing circumstances. We encourage you to consult your
Financial Advisor regarding your personal investment program.
4
<PAGE>
PAINEWEBBER BALANCED FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
Net Asset Value Total Return(1)
------------------------------------------ ------------------------------------
12 Months 6 months
08/31/99 02/28/99 08/31/98 Ended 08/31/99 Ended 08/31/99
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $11.60 $11.57 $11.27 16.20% 1.09%
- ----------------------------------------------------------------------------------------------------------------
Class B Shares 11.84 11.81 11.48 15.28 0.74
- ----------------------------------------------------------------------------------------------------------------
Class C Shares 11.60 11.58 11.28 15.34 0.72
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class A Shares
Net Asset Value
------------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-12/31/91 $10.09 $11.02 -- $0.2293 11.53%
- ----------------------------------------------------------------------------------------------------------------
1992 11.02 11.24 -- 0.3414 5.18
- ----------------------------------------------------------------------------------------------------------------
1993 11.24 11.94 $0.7771 0.2510 15.63
- ----------------------------------------------------------------------------------------------------------------
1994 11.94 9.32 1.2011 0.2311 (9.88)
- ----------------------------------------------------------------------------------------------------------------
1995 9.32 10.41 0.7468 0.3100 23.13
- ----------------------------------------------------------------------------------------------------------------
1996 10.41 10.61 1.0303 0.2516 14.74
- ----------------------------------------------------------------------------------------------------------------
1997 10.61 11.38 1.5503 0.2205 24.57
- ----------------------------------------------------------------------------------------------------------------
1998 11.38 12.00 1.2252 0.2196 18.95
- ----------------------------------------------------------------------------------------------------------------
01/01/99-08/31/99 12.00 11.60 -- 0.0984 (2.53)
- ----------------------------------------------------------------------------------------------------------------
Totals: $6.5308 $2.1529
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/99: 149.44%
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class B Shares
Net Asset Value
------------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/12/86-12/31/86 $10.00 $9.76 -- -- (2.40)%
- ----------------------------------------------------------------------------------------------------------------
1987 9.76 9.27 $0.1687 $0.4407 1.21
- ----------------------------------------------------------------------------------------------------------------
1988 9.27 9.79 -- 0.5225 11.34
- ----------------------------------------------------------------------------------------------------------------
1989 9.79 10.03 0.1286 0.6768 10.84
- ----------------------------------------------------------------------------------------------------------------
1990 10.03 9.60 0.0021 0.6200 1.95
- ----------------------------------------------------------------------------------------------------------------
1991 9.60 11.01 -- 0.3478 18.52
- ----------------------------------------------------------------------------------------------------------------
1992 11.01 11.28 -- 0.2146 4.46
- ----------------------------------------------------------------------------------------------------------------
1993 11.28 12.02 0.7771 0.1173 14.66
- ----------------------------------------------------------------------------------------------------------------
1994 12.02 9.43 1.2011 0.1189 (10.51)
- ----------------------------------------------------------------------------------------------------------------
1995 9.43 10.57 0.7468 0.2049 22.23
- ----------------------------------------------------------------------------------------------------------------
1996 10.57 10.79 1.0303 0.1632 13.81
- ----------------------------------------------------------------------------------------------------------------
1997 10.79 11.61 1.5503 0.1213 23.63
- ----------------------------------------------------------------------------------------------------------------
1998 11.61 12.26 1.2252 0.1331 18.02
- ----------------------------------------------------------------------------------------------------------------
01/01/99-08/31/99 12.26 11.84 -- 0.0586 (2.96)
- ----------------------------------------------------------------------------------------------------------------
Totals: $6.8302 $3.7397
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/99: 227.20%
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class C Shares
Net Asset Value
------------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-12/31/92 $10.86 $11.25 -- $0.1619 5.08%
- ----------------------------------------------------------------------------------------------------------------
1993 11.25 11.94 $0.7771 0.1728 14.79
- ----------------------------------------------------------------------------------------------------------------
1994 11.94 9.35 1.2011 0.1313 (10.48)
- ----------------------------------------------------------------------------------------------------------------
1995 9.35 10.45 0.7468 0.2188 22.15
- ----------------------------------------------------------------------------------------------------------------
1996 10.45 10.65 1.0303 0.1708 13.86
- ----------------------------------------------------------------------------------------------------------------
1997 10.65 11.42 1.5503 0.1343 23.61
- ----------------------------------------------------------------------------------------------------------------
1998 11.42 12.02 1.2252 0.1496 (18.04)
- ----------------------------------------------------------------------------------------------------------------
01/01/99-08/31/99 12.02 11.60 -- 0.0641 (2.97)
- ----------------------------------------------------------------------------------------------------------------
Totals: $6.5308 $1.2036
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/99: 112.61%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and other distributions at
net asset value on the payable dates and do not include sales charges;
results for each class would be lower if sales charges were included.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
5
<PAGE>
PAINEWEBBER BALANCED FUND
PORTFOLIO OF INVESTMENTS AUGUST 31, 1999
Number of
Shares Value
- ----------------- -----------
COMMON STOCKS -- 59.22%
Airlines -- 0.65%
31,400 Delta Air Lines, Inc. ........................ $ 1,595,513
-----------
Alcohol -- 0.28%
8,900 Anheuser-Busch Companies, Inc. ............... 685,300
-----------
Apparel, Retail -- 1.17%
99,200 TJX Companies, Inc. .......................... 2,864,400
-----------
Apparel, Textiles -- 0.62%
17,800 Tommy Hilfiger Corp.* ........................ 604,088
38,400 Westpoint Stevens Inc. ....................... 921,600
-----------
1,525,688
-----------
Banks -- 2.35%
30,774 Bank of New York Co. Inc. .................... 1,100,171
47,800 The Chase Manhattan Corp. .................... 4,000,262
20,200 Mellon Bank Corp. ............................ 674,175
-----------
5,774,608
-----------
Beverages & Tobacco -- 0.29%
37,800 Pepsi Bottling Group Inc. .................... 715,838
-----------
Cable -- 1.24%
28,800 JDS Uniphase Corp.*(1). ...................... 3,054,600
-----------
Chemicals -- 0.34%
7,400 Dow Chemical Co. ............................. 840,825
-----------
Computer Hardware -- 3.47%
67,300 Cisco Systems, Inc.* ......................... 4,563,781
27,100 Dell Computer Corp.* ......................... 1,322,819
21,200 IBM Corp. .................................... 2,640,725
-----------
8,527,325
-----------
Computer Software -- 3.48%
10,100 BMC Software, Inc.* .......................... 543,506
23,100 Compuware Corp.* ............................. 697,331
32,600 Microsoft Corp.* ............................. 3,017,538
46,000 Sterling Software Inc.* ...................... 925,750
78,600 Unisys Corp.* ................................ 3,379,800
-----------
8,563,925
-----------
Construction -- 0.26%
23,300 Lafarge Corp. ADR ............................ $ 640,750
-----------
Consumer Durables -- 0.64%
25,000 Maytag Corp. ................................. 1,565,625
-----------
Defense/Aerospace -- 0.68%
27,100 Allied-Signal, Inc. .......................... 1,659,875
-----------
Diversified Retail -- 2.69%
55,800 Dayton Hudson Corp. .......................... 3,236,400
23,900 Family Dollar Stores Inc. .................... 470,531
46,100 Federated Department Stores, Inc.* ........... 2,120,600
17,500 Walmart Stores, Inc. ......................... 775,469
-----------
6,603,000
-----------
Drugs & Medicine -- 2.74%
42,700 Biogen Inc.*(1) .............................. 3,277,225
2,100 Elan Corp. PLC, ADR*(1) ...................... 67,331
8,000 Pharmacia & Upjohn, Inc. ADR ................. 418,000
34,600 Schering-Plough Corp. ........................ 1,818,663
17,300 Warner Lambert Co. ........................... 1,146,125
-----------
6,727,344
-----------
Electric Utilities -- 1.59%
17,200 Consolidated Edison Co. of New York Inc.(1) .. 756,800
20,300 Duke Energy Corp. ............................ 1,167,250
47,800 Energy East Corp.* ........................... 1,195,000
34,400 Utilicorp United Inc. ........................ 797,650
-----------
3,916,700
-----------
Energy Reserves & Production -- 1.82%
18,900 Mobil Corp. .................................. 1,934,888
40,900 Royal Dutch Petroleum Co. ADR ................ 2,530,687
-----------
4,465,575
-----------
Financial Services -- 0.54%
18,200 Marsh & McLennan Companies, Inc. ............. 1,325,188
-----------
Food Retail -- 0.79%
83,900 Kroger Co.* .................................. 1,940,187
-----------
6
<PAGE>
PAINEWEBBER BALANCED FUND
Number of
Shares Value
- ----------------- -----------
COMMON STOCKS--(continued)
Forest Products, Paper -- 1.94%
13,400 Champion International Corp. ................. $ 737,000
46,200 Fort James Corp.(1) .......................... 1,489,950
37,200 Georgia-Pacific Corp. ........................ 1,539,150
17,800 Weyerhaeuser Co.(1) .......................... 1,001,250
-----------
4,767,350
-----------
Gas Utility -- 0.38%
15,950 Columbia Gas System Inc. ..................... 942,047
-----------
Household Products -- 0.68%
37,900 Avon Products, Inc. .......................... 1,662,862
-----------
Industrial Parts -- 4.21%
13,100 American Standard Companies Inc.* ............ 537,100
41,200 Ingersoll Rand Co. ........................... 2,621,350
68,300 Mettler Toledo International Inc.* ........... 1,818,487
12,069 SPX Corp.* ................................... 1,022,848
65,600 United Technologies Corp.(1) ................. 4,337,800
-----------
10,337,585
-----------
Industrial Services/Supplies -- 1.83%
14,167 Delphi Automotive Systems Corp. .............. 265,631
41,900 Tyco International Ltd. ...................... 4,244,994
-----------
4,510,625
-----------
Information & Computer Services -- 0.83%
9,100 Computer Sciences Corp.* ..................... 629,606
32,300 Valassis Communications Inc.* ................ 1,413,125
-----------
2,042,731
-----------
Leisure -- 1.07%
17,361 Eastman Kodak Co. ............................ 1,274,948
55,700 Hasbro, Inc. ................................. 1,361,169
-----------
2,636,117
-----------
Life Insurance -- 1.39%
34,600 American General Corp. ....................... 2,456,600
32,600 Protective Life Corp. ........................ 969,850
-----------
3,426,450
-----------
Long Distance & Phone Companies -- 2.79%
18,100 AT&T Corp. ................................... $ 814,500
40,000 BellSouth Corp. .............................. 1,810,000
19,200 GTE Corp. .................................... 1,317,600
38,400 MCI WorldCom, Inc.* .......................... 2,908,800
-----------
6,850,900
-----------
Media -- 0.81%
42,200 Comcast Corp., Class A ....................... 1,376,775
23,100 Infinity Broadcasting Corp. Class A*(1) ...... 625,144
-----------
2,001,919
-----------
Medical Products -- 1.07%
31,038 Boston Scientific Corp.* ..................... 1,053,352
43,800 St. Jude Medical, Inc.* ...................... 1,587,750
-----------
2,641,102
-----------
Medical Providers -- 0.60%
20,300 Wellpoint Health Networks, Inc. Class A* ..... 1,479,363
-----------
Medical - Wholesale Drug Distributors -- 0.67%
63,800 Amerisource Health Corp. Class A* ............ 1,646,837
-----------
Mining & Metals -- 0.96%
17,800 Alcoa, Inc. .................................. 1,149,213
26,500 Martin Marietta Materials Inc. ............... 1,209,062
-----------
2,358,275
-----------
Motor Vehicles -- 1.66%
14,000 Borg Warner Automotive, Inc. ................. 663,250
39,600 Ford Motor Co. ............................... 2,064,150
20,300 General Motors Corp. ......................... 1,342,337
-----------
4,069,737
-----------
Oil Refining -- 1.94%
18,400 Atlantic Richfield Co. ....................... 1,618,050
46,100 Coastal Corp. ................................ 1,996,706
36,800 USX-Marathon Group ........................... 1,145,400
-----------
4,760,156
-----------
7
<PAGE>
PAINEWEBBER BALANCED FUND
Number of
Shares Value
- ----------------- -----------
COMMON STOCKS--(concluded)
Other Insurance -- 2.00%
42,500 ACE Ltd. ..................................... $ 911,094
30,500 Ambac Financial Group Inc. ................... 1,610,781
17,262 American International Group, Inc. ........... 1,599,972
22,200 Travelers Property Casualty Corp. ............ 788,100
-----------
4,909,947
-----------
Publishing -- 0.93%
42,400 Knight Ridder, Inc. .......................... 2,286,950
-----------
Restaurants -- 0.32%
33,300 Brinker International Inc.* .................. 799,200
-----------
Securities & Asset Management -- 1.27%
17,700 AXA Financial Inc. ........................... 1,092,975
23,600 Morgan Stanley Dean Witter & Co. ............. 2,025,175
-----------
3,118,150
-----------
Semiconductor -- 3.35%
51,400 Applied Materials, Inc.* ..................... 3,652,612
22,200 Atmel Corp.* ................................. 872,738
23,600 Intel Corp. .................................. 1,939,625
26,100 Vitesse Semiconductor Corp.* ................. 1,774,800
-----------
8,239,775
-----------
Specialty Retail -- 1.97%
100,800 Office Depot Inc.* ........................... $ 1,052,100
36,950 Staples Inc.* ................................ 803,662
64,700 Williams Sonoma Inc.*(1) ..................... 2,523,300
13,479 Zale Corp.* .................................. 467,553
-----------
4,846,615
-----------
Thrift -- 0.33%
31,200 Greenpoint Financial Corp. ................... 807,300
-----------
Tobacco -- 0.27%
18,000 Philip Morris Companies, Inc. ................ 673,875
-----------
Wireless Telecommunications -- 0.31%
19,200 Century Telephone Enterprises, Inc. .......... 754,800
-----------
Total Common Stocks (cost -- $122,038,182) .................... 145,562,934
-----------
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------------- ---------- -------- ------------
<S> <C> <C> <C> <C>
CORPORATE BONDS -- 14.53%
Bank -- 0.93%
$ 670 Bank One Corp. ............................................. 08/01/06 6.875% $ 656,894
1,700 Providian National Bank .................................... 02/01/04 6.650 1,637,744
------------
2,294,638
------------
Beverages & Entertainment -- 0.46%
1,180 Seagram Joseph E. & Sons Inc. .............................. 12/15/05 6.625 1,125,847
------------
Cable -- 0.32%
800 TCI Communications Inc. .................................... 05/01/03 6.375 786,658
------------
Financial Services -- 3.04%
1,915 Associates Corp. NA ........................................ 11/01/08 6.250 1,777,137
1,500 AT&T Capital Corp. ......................................... 01/16/01 6.875 1,500,542
2,600 Ford Motor Credit Co. ...................................... 01/14/03 to 01/12/09 5.800 to 6.000 2,435,729
1,850 Heller Financial Inc. ...................................... 03/19/04 6.000 1,756,834
------------
7,470,242
------------
Industrial Services/Supplies -- 0.39%
965 Tyco International Group SA ................................ 06/15/01 6.125 956,016
------------
</TABLE>
8
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------------- ---------- -------- ------------
<S> <C> <C> <C> <C>
CORPORATE BONDS -- (concluded)
Insurance -- 1.91%
$ 2,000 American Re Corp. .......................................... 12/15/26 7.450% $ 1,945,424
700 Hartford Financial Services Group Inc. ..................... 11/01/08 6.375 664,052
800 Loews Corp.(1) ............................................. 12/15/06 6.750 756,958
1,350 Lumbermans Mutual Casualty Co. ............................. 07/01/26 9.150 1,324,723
------------
4,691,157
------------
Media -- 0.24%
620 News America Holdings Inc. ................................. 10/17/96 8.250 592,951
------------
Securities & Asset Management -- 3.08%
2,305 Donaldson Lufkin & Jenrette ................................ 04/01/02 5.875 2,247,121
1,315 FMR Corp. .................................................. 06/15/29 7.570 1,260,407
1,350 Lehman Brothers Holdings Inc. .............................. 04/01/04 6.625 1,304,528
1,200 Merrill Lynch & Company Inc. ............................... 02/17/09 6.000 1,081,886
1,775 Morgan Stanley Group Inc. .................................. 01/20/04 5.625 1,679,145
------------
7,573,087
------------
Telecommunications -- 0.87%
2,345 US West Capital Funding Inc. ............................... 07/15/08 6.375 2,149,980
------------
Tobacco -- 1.16%
1,850 Philip Morris Companies Inc. ............................... 07/01/08 to 01/15/27 7.650 to 7.750 1,849,916
1,035 RJ Reynolds Tobacco Holdings Inc. .......................... 05/15/03 7.375 1,010,550
------------
2,860,466
------------
Yankee -- 2.13%
995 Canadian Imperial Bank Commerce ............................ 08/01/00 6.200 994,584
2,000 Household International Netherlands BV ..................... 12/01/03 6.200 1,941,846
1,400 Imperial Tobacco Overseas B V .............................. 04/01/09 7.125 1,310,154
1,000 Sony Corp. ................................................. 03/04/03 6.125 982,417
------------
5,229,001
------------
Total Corporate Bonds (cost -- $37,593,179) ............................... 35,730,043
------------
CONVERTIBLE BONDS -- 0.55%
Specialty Retail -- 0.55%
500 Home Depot Inc. (cost-- $500,000) .......................... 10/01/01 3.250 1,341,250
------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 10.03%
45 Federal Home Loan Mortgage Corporation ..................... 03/18/08 6.220 42,687
4,230 Federal National Mortgage Association ...................... 01/15/09 5.250 3,765,808
2,570 International Bank For Reconstruction & Development ........ 03/17/03 5.625 2,501,769
5,769 U.S. Treasury Bonds(1) ..................................... 08/15/13 to 02/15/29 5.250 to 12.000 6,676,546
11,962 U.S. Treasury Notes(1) ..................................... 07/15/02 to 05/15/09 3.625 to 5.500 11,673,794
------------
Total U.S. Government and Agency Obligations (cost -- $25,694,724) ........ 24,660,604
------------
</TABLE>
9
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------------- ---------- -------- ------------
<S> <C> <C> <C> <C>
MORTGAGE BACKED SECURITIES -- 9.97%
Collateralized Mortgage Obligation -- 1.56%
$ 551 Amresco Commercial Mortgage Funding I Corp., Series
1997-C1, Class A1 .......................................... 06/17/29 6.730% $ 544,176
249 CS First Boston Mortgage Securities Corp., Series 1997-2,
Class A+ ................................................... 06/01/20 7.500 248,459
53 FDIC REMIC, Series 1994-C1, Class 2A2 ...................... 09/25/25 7.850 52,636
238 FDIC REMIC, Series 1996-C1, Class 1A ....................... 05/25/26 6.750 235,864
250 FNMA REMIC, Series 1996-M6, Class E ........................ 09/17/19 7.750 252,720
478 GMAC Commercial Mortgage Security, Series 1996-C1,
Class A2A .................................................. 09/15/03 6.790 477,927
1,400 LB Commercial Conduit Mortgage Trust, Series 1998-C4,
Class A1B .................................................. 10/15/08 6.210 1,298,808
174 Morgan Stanley Capital I Inc., Series 1997-C1, Class A1A ... 02/15/20 6.850 173,352
554 Morgan Stanley Capital I Inc., Series 1997-WF1, Class A1+ .. 10/15/06 6.830 550,960
------------
3,834,902
------------
Federal Home Loan Mortgage Corporation -- 0.69%
1,780 FHLMC 30 Yr TBA ............................................ TBA 6.500 1,685,438
------------
Federal National Mortgage Association -- 6.78%
557 FNMA ....................................................... 09/01/28 6.500 527,747
835 FNMA ....................................................... 01/01/26 to 02/01/26 7.500 831,782
12,780 FNMA 30 Yr TBA ............................................. TBA 6.000 11,745,612
2,720 FNMA 15 Yr TBA ............................................. TBA 6.500 2,641,800
995 FNMA 30 Yr TBA ............................................. TBA 6.500 941,519
------------
16,688,460
------------
Government National Mortgage Association -- 0.94%
2,223 GNMA ....................................................... 11/15/17 8.500 2,307,422
------------
Total Mortgage Backed Securities (cost -- $24,621,094) 24,516,222
------------
SHORT TERM U.S. GOVERNMENT AGENCY OBLIGATIONS -- 12.99%
10,000 Federal Home Loan Bank Consolidated Discount Notes ......... 09/15/99 5.080 9,980,244
16,000 Federal Home Loan Mortgage Discount Notes .................. 09/16/99 4.950 15,967,000
5,000 Federal National Mortgage Association Discount Notes ....... 09/27/99 5.090 4,981,619
1,000 Student Loan Marketing Discount Notes ...................... 09/02/99 4.980 999,862
------------
Total Short Term U.S. Government Agency Obligations (cost-- $31,928,725) .. 31,928,725
------------
Total Investments (cost -- $242,375,904) -- 107.29% ....................... 263,739,778
Liabilities in excess of other assets -- (7.29)% .......................... (17,924,013)
------------
Net Assets -- 100.00% ..................................................... $245,815,765
============
</TABLE>
- ----------
* Non-Income producing security.
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
ADR American Depository Receipt.
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximated principal amount (generally +/- 1.0%) and generally
stated maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
REMIC Real Estate Mortgage Investment Conduit.
(1) Security, or portion thereof, was on loan at August 31, 1999.
See accompanying notes to financial statements
10
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1999
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$242,375,904) .............................................. $263,739,778
Investment of cash collateral for securities loaned (cost--$19,214,874) ............................... 19,214,874
Receivable for investments sold ....................................................................... 896,862
Dividends and interest receivable ..................................................................... 1,349,895
Receivable for fund shares sold ....................................................................... 101,115
Other assets .......................................................................................... 23,549
------------
Total assets .......................................................................................... 285,326,073
------------
Liabilities
Collateral for securities loaned ...................................................................... 19,214,874
Payable for investments purchased ..................................................................... 18,867,864
Payable for fund shares repurchased ................................................................... 628,736
Payable to affiliates ................................................................................. 249,156
Payable to custodian .................................................................................. 370,202
Accrued expenses and other liabilities ................................................................ 179,476
------------
Total liabilities ..................................................................................... 39,510,308
------------
Net Assets
Capital Stock--$0.001 par value ....................................................................... 205,287,556
Undistributed net investment income ................................................................... 1,006,149
Accumulated net realized gains from investment transactions ........................................... 18,158,186
Net unrealized appreciation of investments ............................................................ 21,363,874
------------
Net assets ............................................................................................ $245,815,765
============
Class A:
Net assets ............................................................................................ $196,684,251
------------
Shares outstanding .................................................................................... 16,956,736
------------
Net asset value and redemption value per share ........................................................ $ 11.60
============
Maximum offering price per share (net asset value plus sales charge of 4.50% of offering price) ....... $ 12.15
============
Class B:
Net assets ............................................................................................ $ 28,718,607
------------
Shares outstanding .................................................................................... 2,426,201
------------
Net asset value and offering price per share .......................................................... $11.84
============
Class C:
Net assets ............................................................................................ $ 19,893,631
------------
Shares outstanding .................................................................................... 1,715,018
------------
Net asset value and offering price per share .......................................................... $ 11.60
============
Class Y:
Net assets ............................................................................................ $ 519,276
------------
Shares outstanding .................................................................................... 44,788
------------
Net asset value and offering price per share .......................................................... $ 11.59
============
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1999
<TABLE>
<S> <C>
Investment income:
Interest ....................................................................... $ 6,055,004
Dividends ...................................................................... 1,572,149
------------
7,627,153
------------
Expenses:
Investment advisory and administration ......................................... 1,890,996
Service fees--Class A .......................................................... 505,425
Service and distribution fees--Class B ......................................... 305,401
Service and distribution fees--Class C ......................................... 190,716
Transfer agency and service .................................................... 166,820
Custody and accounting ......................................................... 153,799
Legal and audit ................................................................ 95,725
Reports and notices to shareholders ............................................ 73,300
State registration ............................................................. 47,056
Directors fees and expenses .................................................... 13,500
Other expenses ................................................................. 1,815
------------
3,444,553
Less: Fee waivers and reimbursements from investment advisor ................... (1,469)
------------
Net expenses ................................................................... 3,443,084
------------
Net investment income .......................................................... 4,184,069
------------
Realized and unrealized gains from investment activities:
Net realized gains from:
Investment transactions ...................................................... 16,866,913
Options and futures transactions ............................................. 1,406,413
Net change in unrealized appreciation of:
Investments .................................................................. 13,558,529
Options ...................................................................... 17,487
------------
Net realized and unrealized gains from investment activities ................... 31,849,342
------------
Net increase in net assets resulting from operations ........................... $ 36,033,411
============
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended August 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
From operations:
Net investment income ........................................................... $ 4,184,069 $ 4,003,592
Net realized gains from investment, option and futures transactions ............. 18,273,326 33,245,475
Net change in unrealized appreciation/depreciation of investments and options ... 13,576,016 (29,081,375)
------------- -------------
Net increase in net assets resulting from operations ............................ 36,033,411 8,167,692
------------- -------------
Dividends and distributions to shareholders from:
Net investment income--Class A .................................................. (3,728,464) (3,302,099)
Net investment income--Class B .................................................. (327,440) (237,412)
Net investment income--Class C .................................................. (237,032) (126,665)
Net investment income--Class Y .................................................. (7,148) (803)
Net realized gains from investment transactions--Class A ........................ (19,640,106) (21,634,316)
Net realized gains from investment transactions--Class B ........................ (2,933,076) (2,516,998)
Net realized gains from investment transactions--Class C ........................ (1,816,995) (1,124,576)
Net realized gains from investment transactions--Class Y ........................ (24,554) --
------------- -------------
Total dividends and distributions to shareholders ............................... (28,714,815) (28,942,869)
------------- -------------
From capital stock transactions:
Net proceeds from sale of shares ................................................ 36,103,042 44,392,815
Cost of shares repurchased ...................................................... (47,257,223) (34,290,423)
Proceeds from dividends reinvested .............................................. 26,107,944 26,308,838
------------- -------------
Net increase in net assets from capital stock transactions ...................... 14,953,763 36,411,230
------------- -------------
Net increase in net assets ...................................................... 22,272,359 15,636,053
Net assets:
Beginning of year ............................................................... 223,543,406 207,907,353
------------- -------------
End of year (including undistributed net investment income
of $1,006,149 and $1,143,945, respectively) ................................... $ 245,815,765 $ 223,543,406
============= =============
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Master Series, Inc. ("Master Series") is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end management investment company which currently offers two
series of shares: PaineWebber Balanced Fund (the "Fund") and PaineWebber Money
Market Fund. The financial statements for PaineWebber Money Market Fund are not
included herein.
The Fund currently offers Class A, Class B, Class C and Class Y shares.
Each class represents interests in the same assets of the Fund, and the classes
are identical except for differences in their sales charge structures, ongoing
service and distribution charges and certain transfer agency expenses. In
addition, Class B shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years after issuance.
All classes of shares have equal voting privileges, except that Class A, Class B
and Class C each have exclusive voting rights with respect to their service
and/or distribution plan.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
Valuation of Investments--Securities which 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 valued on
the exchange designated by Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), a wholly owned asset management subsidiary of PaineWebber
Incorporated ("PaineWebber"), and investment adviser, administrator, and
distributor of the Fund, as the primary market. Securities traded in the
over-the-counter ("OTC") market and listed on the Nasdaq Stock Market, Inc.
("Nasdaq") are valued at the last available sale price, or last bid price
available if no sale occurs, on Nasdaq prior to the time of valuation. Where
market quotations are readily available, debt securities are valued thereon,
provided such quotations adequately reflect the fair value of the securities in
the judgment of Mitchell Hutchins. When market quotations are not readily
available, securites are valued based upon appraisals derived from information
concerning those securities or similar securities received from recognized
dealers in those securities. All other securities are valued at fair value as
determined in good faith by, or under the direction of, the Master Series' Board
of Directors. The amortized cost method of valuation is used to value short-term
debt instruments with sixty days or less remaining to maturity, unless the Board
of Directors determines that this does not represent fair value.
Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Dividend income is recorded on the ex-dividend
date. Discounts are accreted and premiums are amortized as adjustments to
interest income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains/losses are allocated proportionately to each class of
shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
Futures Contracts--Upon entering into a financial futures contract, the
Fund is required to pledge to a broker an amount of cash and/or U.S. Government
securities equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation margin,"
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying financial futures contracts. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss until the financial futures contract is closed, at which
time the net gain or loss is reclassified to realized.
Using financial futures contracts involves various market risks. The
maximum amount at risk from the purchase of a futures contract is the contract
value. The Fund primarily uses financial futures contracts for hedging or to
manage the average duration of the Fund's portfolio. However, imperfect
correlations between futures contracts and the portfolio securities being
hedged, or market disruptions, do not normally permit full control of these
risks at all times.
Option Writing--When the Fund writes a call or a put option, an amount
equal to the premium received by the Fund is included in the Fund's Statement of
Assets and Liabilities as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. If an option which the Fund has written either
expires on its stipulated expiration date or the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which the
Fund has written is exercised, the Fund realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from the
sale are increased by the premium originally received. If a put option which a
Fund has written is exercised, the amount of the premium originally received
reduces the cost of the security which the Fund purchases upon exercise of the
option.
Dividends and Distributions--Dividends and distributions to shareholders
are recorded on the ex-dividend date. The amount of dividends and distributions
are determined in accordance with federal income tax regulations, which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
CONCENTRATION OF RISK
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic and political developments
particular to a specific industry, country or region.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
WRITTEN OPTION ACTIVITY
Transactions in options written for the year ended August 31, 1999 were as
follows:
Number of
Options Premiums
--------- ---------
Options outstanding at August 31, 1998 .............. 50 $ 12,982
Options written ..................................... 426 $ 224,507
Options terminated in closing purchase transactions.. (413) $(239,978)
Options expired ..................................... (63) $ 2,489
---- ---------
Options outstanding at August 31, 1999 .............. 0 $ 0
==== =========
INVESTMENT ADVISER AND ADMINISTRATOR
The Board of Directors of Master Series has approved an Investment
Advisory and Administration Contract ("Advisory Contract") with Mitchell
Hutchins, under which Mitchell Hutchins serves as investment adviser and
administrator of the Fund. In accordance with the Advisory Contract, the Fund
pays Mitchell Hutchins an investment advisory and administration fee, which is
accrued daily and paid monthly, in accordance with the following schedule:
Annual
Average Daily Net Assets Rate
------------------------ ------
Up to $500 million ...................................... 0.750%
In excess of $500 million up to $1.0 billion ............ 0.725
In excess of $1.0 billion up to $1.5 billion ............ 0.700
In excess of $1.5 billion up to $2.0 billion ............ 0.675
Over $2.0 billion ....................................... 0.650
At August 31, 1999, the Fund owed Mitchell Hutchins $159,413 in investment
advisory and administration fees. Mitchell Hutchins waived a portion of its
investment advisory and administration fees in connection with the Fund's
investment of cash collateral from security lending in the Mitchell Hutchins
Private Money Market Fund LLC. For the year ended August 31, 1999, Mitchell
Hutchins waived $1,469.
For the year ended August 31, 1999, the Fund paid $14,808 in brokerage
commissions to PaineWebber for transactions executed on behalf of the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
Under separate plans of service and/or distribution pertaining to Class A, Class
B and Class C shares, the Fund pays Mitchell Hutchins monthly service fees at an
annual rate of 0.25% of the average daily net assets of Class A, Class B and
Class C shares and monthly distribution fees at the annual rate of 0.75% of the
average daily net assets of Class B and Class C shares (Class Y shares have no
service or distribution plan). At August 31, 1999, the Fund owed Mitchell
Hutchins $84,754 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by shareholders upon certain redemptions of Class A,
Class B and Class C shares. Mitchell Hutchins has informed the Fund that for the
year ended August 31, 1999, it received $177,736 in sales charges.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SECURITY LENDING
The Fund may lend securities up to 33 1/3% of its total assets to
qualified institutions. The loans are secured at all times by cash or U.S.
government securities in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. The Fund will regain record ownership of loaned
securities to exercise certain beneficial rights; however, the Fund may bear the
risk of delay in recovery of, or even loss of rights in, the securities loaned
should the borrower fail financially. The Fund receives compensation for lending
its securities from interest earned on the cash or U.S. government securities
held as collateral, net of fee rebates paid to the borrower plus reasonable
administrative and custody fees. The Fund's lending agent is PaineWebber, who
received $17,852 as compensation from the Fund for the year ended August 31,
1999. At August 31, 1999, the Fund owed PaineWebber $4,989 in security lending
fees. For the year ended August 31, 1999 the Fund earned $52,381 as compensation
from securities lending transactions net of fees, rebates and expenses.
At August 31, 1999, the Fund had securities on loan having a market value
of $18,296,716. The Fund's custodian held cash having an aggregate value of
$19,214,874 as collateral for portfolio securities loaned which was invested as
follows:
<TABLE>
<CAPTION>
Number of
Shares/Par Value
- ----------- -----------
<S> <C> <C>
5,000,000 Cayman Islands Bank Certificate of Deposit, 5.563% due 09/01/99 ..................... $ 5,000,000
3,084 Janus Investment Money Market Fund .................................................. 3,084
2,337,024 Liquid Assets Portfolio ............................................................. 2,337,024
10,943,839 MH Private Money Market Fund LLC .................................................... 11,865,089
9,677 Prime Portfolio ..................................................................... 9,677
-----------
Total investments of cash collateral for securities loaned (cost--$19,214,874) ...... $19,214,874
===========
</TABLE>
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins in
a $200 million committed credit facility ("Facility") to be utilized for
temporary financing until settlement of sales or purchases of portfolio
securities, the repurchase or redemption of shares of the Fund at the request of
the shareholders and other temporary or emergency purposes. In connection
therewith, the Fund has agreed to pay a commitment fee, pro rata, based on the
relative asset size of the funds in the Facility. Interest is charged to the
fund at rates based on prevailing market rates in effect at the time of
borrowings. For the year ended August 31, 1999, the Fund did not borrow under
the Facility.
TRANSFER AGENCY RELATED SERVICE FEES
PaineWebber provides certain transfer agency related services to the Fund
pursuant to a delegation of authority from PFPC, Inc., the Fund's transfer
agent, and is compensated for these services by PFPC, Inc., not the Fund. For
the year ended August 31, 1999, PaineWebber received approximately 55% of the
total service fees collected by PFPC, Inc.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at August
31, 1999 was substantially the same as the cost of securities for financial
statement purposes.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
At August 31, 1999, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost) ......... $ 29,420,752
Gross depreciation (investments having an excess of cost over value) ......... (8,056,878)
------------
Net unrealized appreciation of investments ................................... $ 21,363,874
============
</TABLE>
For the year ended August 31, 1999, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $546,570,570 and
$554,250,688, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its taxable income and
to comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required. In addition, by distributing during each calendar year
substantially all of its net investment income, capital gains and certain other
amounts, if any, the Fund intends not to be subject to a federal excise tax.
To reflect reclassifications for the Fund arising from permanent
"book/tax" differences for the year ended August 31, 1999, undistributed net
investment income was decreased by $21,781, accumulated net realized gains from
investment transactions were decreased by $2,737,619 and capital stock was
increased by $2,759,400 for redemptions utilized as distributions for federal
income tax purposes.
CAPITAL STOCK
There are 10 billion shares of $0.001 par value common stock authorized
for Master Series, of which 4 billion is allocated to Balanced Fund.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
For the Year Ended Class A Class B Class C Class Y
August 31, 1999: ------------------------ ----------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ----------- --------- ----------- -------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold ............ 1,363,897 $16,172,983 937,633 $11,281,236 688,213 $8,183,147 39,441 $ 465,676
Shares repurchased ..... (2,932,983) (34,741,366) (608,260) (7,358,696) (428,296) (5,003,022) (12,955) (154,139)
Dividends reinvested ... 1,886,980 21,391,988 245,010 2,837,840 162,571 1,846,494 2,785 31,622
Shares converted from
Class B to Class A ... 459,550 5,425,191 (450,660) (5,425,191) -- -- -- --
---------- ----------- --------- ----------- -------- ----------- ------- ----------
Net increase ........... 777,444 $ 8,248,796 123,723 $1,335,189 422,488 $5,026,619 29,271 $ 343,159
========== =========== ========= =========== ======== =========== ======= ==========
<CAPTION>
For the Year Ended Class A Class B Class C Class Y
August 31, 1998: ------------------------ ----------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ----------- --------- ----------- -------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold ............ 1,263,207 $15,579,179 1,298,840 $16,390,056 980,331 $12,228,828 15,473 $ 194,752
Shares repurchased ..... (1,907,300) (23,733,561) (354,528) (4,507,312) (486,939) (6,049,297) (21) (253)
---------- ----------- --------- ----------- -------- ----------- ------- ----------
Dividends reinvested ... 2,052,585 22,750,251 215,129 2,429,905 101,409 1,127,879 65 803
Shares converted from
Class B to Class A ... 661,504 8,252,506 (650,161) (8,252,506) -- -- -- --
---------- ----------- --------- ----------- -------- ----------- ------- ----------
Net increase ........... 2,069,996 $22,848,375 509,280 $6,060,143 594,801 $7,307,410 15,517 $ 195,302
========== =========== ========= =========== ======== =========== ======= ==========
</TABLE>
18
<PAGE>
This Page Intentionally Left Blank.
19
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------------
For the
Six For the For the
For the Years Ended Months Year Year
August 31, Ended Ended Ended
------------------------------------ August 31, February 29, February 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04
-------- -------- -------- -------- -------- --------
Net investment income ....................... 0.22++ 0.23++ 0.23++ 0.12++ 0.27++ 0.26
Net realized and unrealized gains (losses)
from investments, futures and options ..... 1.56++ 0.31++ 2.79++ (0.12)++ 1.84++ (1.07)
-------- -------- -------- -------- -------- --------
Net increase (decrease) from investment
operations ................................ 1.78 0.54 3.02 0.00 2.11 (0.81)
-------- -------- -------- -------- -------- --------
Dividends from net investment income ........ (0.22) (0.22) (0.24) (0.10) (0.31) (0.23)
Distributions from net realized gains
from investment transactions .............. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and distributions to
shareholders .............................. (1.45) (1.77) (0.79) (0.58) (1.06) (1.43)
-------- -------- -------- -------- -------- --------
Net asset value, end of period .............. $ 11.60 $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80
======== ======== ======== ======== ======== ========
Total investment return (1) ................. 16.20% 4.69% 30.67% 0.03% 22.08% (6.02)%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ........... $196,684 $182,362 $176,403 $157,525 $171,609 $174,761
Expenses to average net assets,
net of waivers from adviser (3) ........... 1.22% 1.26% 1.46% 1.34%* 1.29% 1.26%
Net investment income to average net
assets, net of waivers from adviser (3) ... 1.81% 1.88% 2.02% 2.19%* 2.55% 2.41%
Portfolio turnover rate ..................... 234% 190% 188% 103% 188% 107%
</TABLE>
- ----------
* Annualized.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
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 would be lower if sales charges were
included. Total investment return for periods of less than one year has
not been annualized.
(2) Fiscal year changed to August 31.
(3) During the year ended August 31, 1999 Mitchell Hutchins waived a portion
of its advisory and administration fees. The ratios excluding the waiver
would be the same since the fee waiver represents less than 0.005%.
20
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS (continued)
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------------------------
For the
Six For the For the
For the Years Ended Months Year Year
August 31, Ended Ended Ended
------------------------------------ August 31, February 29, February 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90 $ 12.10
-------- -------- -------- -------- -------- --------
Net investment income ....................... 0.13++ 0.14++ 0.14++ 0.08++ 0.19++ 0.44
Net realized and unrealized gains (losses)
from investments, futures and options ..... 1.59++ 0.31++ 2.84++ (0.11)++ 1.86++ (1.32)
-------- -------- -------- -------- -------- --------
Net increase (decrease) from investment
operations ................................ 1.72 0.45 2.98 (0.03) 2.05 (0.88)
-------- -------- -------- -------- -------- --------
Dividends from net investment income ........ (0.13) (0.12) (0.15) (0.07) (0.20) (0.12)
Distributions from net realized gains
from investment transactions .............. (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and distributions to
shareholders .............................. (1.36) (1.67) (0.70) (0.55) (0.95) (1.32)
-------- -------- -------- -------- -------- --------
Net asset value, end of period .............. $ 11.84 $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90
======== ======== ======== ======== ======== ========
Total investment return (1) ................. 15.28% 3.87% 29.70% (0.30)% 21.20% (6.68)%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ........... $ 28,719 $ 26,425 $ 22,768 $ 22,307 $ 26,627 $ 37,104
Expenses to average net assets,
net of waivers from adviser (3) ........... 1.98% 2.03% 2.22% 2.09%* 2.05% 1.98%
Net investment income to average net
assets, net of waivers from adviser (3) ... 1.04% 1.13% 1.27% 1.43%* 1.81% 1.60%
Portfolio turnover rate ..................... 234% 190% 188% 103% 188% 107%
</TABLE>
- ----------
* Annualized.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
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 would be lower if sales charges were
included. Total investment return for periods of less than one year has
not been annualized.
(2) Fiscal year changed to August 31.
(3) During the year ended August 31, 1999 Mitchell Hutchins waived a portion
of its advisory and administration fees. The ratios excluding the waiver
would be the same since the fee waiver represents less than 0.005%.
21
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS (continued)
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class C
------------------------------------------------------------------------------
For the
Six For the For the
For the Years Ended Months Year Year
August 31, Ended Ended Ended
------------------------------------ August 31, February 29, February 28,
1999 1998 1997 1996 (2) 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82 $ 12.03
-------- -------- -------- -------- -------- --------
Net investment income ......................... 0.14++ 0.14++ 0.14++ 0.08++ 0.19++ 0.19
Net realized and unrealized gains (losses)
from investments, futures and options ....... 1.56++ 0.31++ 2.80++ (0.12)++ 1.84++ (1.07)
-------- -------- -------- -------- -------- --------
Net increase (decrease) from investment
operations .................................. 1.70 0.45 2.94 (0.04) 2.03 (0.88)
-------- -------- -------- -------- -------- --------
Dividends from net investment income .......... (0.15) (0.14) (0.16) (0.07) (0.22) (0.13)
Distributions from net realized gains from
investment transactions ..................... (1.23) (1.55) (0.55) (0.48) (0.75) (1.20)
-------- -------- -------- -------- -------- --------
Total dividends and distributions to
shareholders ................................ (1.38) (1.69) (0.71) (0.55) (0.97) (1.33)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................ $ 11.60 $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82
======== ======== ======== ======== ======== ========
Total investment return (1) ................... 15.34% 3.89% 29.70% (0.38)% 21.12% (6.69)%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $ 19,894 $ 14,581 $ 8,736 $ 6,979 $ 7,469 $ 8,525
Expenses to average net assets,
net of waivers from adviser (3) ............. 1.95% 2.00% 2.21% 2.09%* 2.08% 2.01%
Net investment income to average net assets,
net of waivers from adviser (3) ............. 1.08% 1.18% 1.27% 1.44%* 1.77% 1.62%
Portfolio turnover rate ....................... 234% 190% 188% 103% 188% 107%
<CAPTION>
Class Y
-----------------------
For the
For the Period
Year March 26, 1998+
Ended through
August 31, August 31,
1999 1998
-------- --------
<S> <C> <C>
Net asset value, beginning of period .......... $ 11.27 $ 12.55
-------- --------
Net investment income ......................... 0.26++ 0.11++
Net realized and unrealized gains (losses)
from investments, futures and options ....... 1.55++ (1.28)++
-------- --------
Net increase (decrease) from investment
operations .................................. 1.81 (1.17)
-------- --------
Dividends from net investment income .......... (0.26) (0.11)
Distributions from net realized gains from
investment transactions ..................... (1.23) --
-------- --------
Total dividends and distributions to
shareholders ................................ (1.49) (0.11)
-------- --------
Net asset value, end of period ................ $ 11.59 $ 11.27
======== ========
Total investment return (1) ................... 16.42% (9.41)%
======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............. $ 519 $ 175
Expenses to average net assets,
net of waivers from adviser (3) ............. 0.96% 0.89%*
Net investment income to average net assets,
net of waivers from adviser (3) ............. 2.11% 2.48%*
Portfolio turnover rate ....................... 234% 190%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of shares.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
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 or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized.
(2) Fiscal year changed to August 31.
(3) During the year ended August 31, 1999 Mitchell Hutchins waived a portion
of its advisory and administration fees. The ratios excluding the waiver
would be the same since the fee waiver represents less than 0.005%.
22
<PAGE>
PAINEWEBBER BALANCED FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
PaineWebber Balanced Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of PaineWebber Balanced Fund (the
"Fund") at August 31, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
October 25, 1999
23
<PAGE>
PAINEWEBBER BALANCED FUND
TAX INFORMATION (unaudited)
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (August 31,
1999), as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the distributions
paid during the fiscal year by the Fund were taxable and are derived from the
following sources:
<TABLE>
<CAPTION>
Per Share Data: Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net investment income* .................................................. $0.2245 $0.1326 $0.1484 $0.2579
Short-term capital gains* ............................................... 0.2879 0.2879 0.2879 0.2879
Long-term capital gains ................................................. 0.9373 0.9373 0.9373 0.9373
Percentage of ordinary income dividends qualifying for the dividends
received deduction available to corporate shareholders .............. 18.61% 18.61% 18.61% 18.61%
</TABLE>
- ----------
* Taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need
not be reported as taxable income. Some retirement trusts (e.g., corporate,
Keogh and 403(b)(7) plans) may need this information for their annual
information reporting.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1999. The second
notification, which will reflect the amount to be used by calendar year
taxpayers on their federal income tax returns, will be made in conjunction with
Form 1099 DIV and will be mailed in January 2000. Shareholders are advised to
consult their own tax advisers with respect to the tax consequences of their
investment in the Fund.
24
<PAGE>
This Page Intentionally Left Blank.
25
<PAGE>
This Page Intentionally Left Blank.
26
<PAGE>
================================================================================
BOARD OF TRUSTEES
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
Brian M. Storms
PRINCIPAL OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Paul H. Schubert
Vice President and Treasurer
Mark A. Tincher
Vice President
Dennis L. McCauley
Vice President
Susan P. Ryan
Vice President
T. Kirkham Barneby
Vice President
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
New York, New York 10019
This report is not to be used in conjunction with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.
A prospectus containing more complete information for any of the Funds listed on
the back cover can be obtained from a PaineWebber Financial Advisor or
correspondent firm. Read the prospectus carefully before investing.
<PAGE>
PaineWebber offers a family of 28 funds which encompass a diversified range of
investment goals.
BOND FUNDS
o High Income Fund
o Investment Grade Income Fund
o Low Duration U.S. Government Income Fund
o Strategic Income Fund
o U.S. Government Income Fund
TAX-FREE BOND FUNDS
o California Tax-Free Income Fund
o Municipal High Income Fund
o National Tax-Free Income Fund
o New York Tax-Free Income Fund
STOCK FUNDS
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Mid Cap Fund
o Small Cap Fund
o S&P 500 Index Fund
o Strategy Fund
o Tax-Managed Equity Fund
o Utility Income Fund
ASSET ALLOCATION FUNDS
o Balanced Fund
o Tactical Allocation Fund
GLOBAL FUNDS
o Asia Pacific Growth Fund
o Emerging Markets Equity Fund
o Global Equity Fund
o Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
o Aggressive Portfolio
o Moderate Portfolio
o Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(Copyright) 1999 PaineWebber Incorporated
Member SIPC
- --------------------------------------------------------------------------------
PAINEWEBBER
-----------------------------------------
BALANCED
FUND
AUGUST 31, 1999
ANNUAL REPORT
<PAGE>
PAINEWEBBER MASTER SERIES INC.
(ON BEHALF OF PAINEWEBBER BALANCED FUND)
PAINEWEBBER MANAGED INVESTMENTS TRUST
(ON BEHALF OF PAINEWEBBER UTILITY INCOME FUND)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates specifically to the
proposed Reorganization whereby PaineWebber Balanced Fund ("Balanced Fund"), a
portfolio of PaineWebber Master Series, Inc., would acquire all of the assets
of PaineWebber Utility Income Fund ("Utility Income Fund"), a series of
PaineWebber Managed Investments Trust, in exchange solely for shares of Balanced
Fund and the assumption by Balanced Fund of all of Utility Income Fund's
liabilities. This Statement of Additional Information consists of this cover
page, the PRO FORMA financial statements of Balanced Fund (giving effect to the
Reorganization) for the year ended August 31, 1999, and the following described
documents, each of which is incorporated by reference herein and accompanies
this Statement of Additional Information:
(1) The Statement of Additional Information of Balanced Fund, dated
December 10, 1999;
(2) The Annual Report to Shareholders of Balanced Fund for the fiscal year
ended August 31, 1999;
(3) The Semi-Annual Report to Shareholders of Utility Income Fund,
dated September 30, 1999;
(4) The Annual Report to Shareholders of Utility Income Fund for the
fiscal year ended March 31, 1999.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus/Proxy Statement dated ___________,
relating to the proposed Reorganization. A copy of the Prospectus/Proxy
Statement may be obtained without charge by calling toll-free 1-800-647-1568.
This Statement of Additional Information is dated April [__], 2000.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1999 (UNAUDITED)
BALANCED UTILITY INCOME
FUND FUND COMBINED
---------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost - $242,375,904,
$24,437,227, and $266,813,131, respectively)................... $263,739,778 $33,458,395 $297,198,173
Investment of cash collateral for securities loaned (cost
-$19,214,874, $0 and $19,214,874, respectively)............... 19,214,874 0 19,214,874
Receivable for investments sold................................. 896,862 0 896,862
Receivable for fund shares sold................................. 101,115 18,759 119,874
Dividends and interest receivable............................... 1,349,895 68,046 1,417,941
Other assets.................................................... 23,549 67,702 91,251
------------- ------------- -------------
Total assets.................................................... 285,326,073 33,612,902 318,938,975
------------- ------------- -------------
LIABILITIES
Collateral for securities loaned................................ 19,214,874 0 19,214,874
Payable for investments purchased............................... 18,867,864 0 18,867,864
Payable for fund shares repurchased............................. 628,736 119,365 748,101
Payable to affiliates........................................... 249,156 38,097 287,253
Payable to custodian............................................ 370,202 0 370,202
Accrued expenses and other liabilities.......................... 179,476 136,127 315,603
------------- ------------- -------------
Total liabilities............................................... 39,510,308 293,589 39,803,897
------------- ------------- -------------
NET ASSETS
Common Stock/Beneficial interest shares of $0.001 par value
outstanding................................................... 205,287,556 25,352,045 230,639,601
Undistributed net investment income............................ 1,006,149 153,854 1,160,003
Accumulated net realized gains (losses) from investment
transactions.................................................. 18,158,186 -1,207,753 16,950,433
Net unrealized appreciation of investments .................... 21,363,874 9,021,167 30,385,041
------------- ------------- -------------
Net assets applicable to shares outstanding..................... $245,815,765 $33,319,313 $279,135,078
============= ============= =============
CLASS A:
Net assets .................................................... $196,684,251 $16,721,084 $213,405,335
------------- ------------- -------------
Shares outstanding ............................................ 16,956,736 1,196,014 18,398,209
------------- ------------- -------------
Net asset and redemption value per share ...................... $11.60 $13.98 $11.60
------------- ------------- -------------
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price)............................ $12.15 $14.64 $12.15
------------- ------------- -------------
CLASS B:
Net assets .................................................... $28,718,607 $8,770,251 $37,488,858
------------- ------------- -------------
Shares outstanding ............................................ 2,426,201 627,389 3,166,932
------------- ------------- -------------
Net asset value and offering price per share.................... $11.84 $13.98 $11.84
------------- ------------- -------------
CLASS C:
Net assets .................................................... $19,893,631 $7,744,574 $27,638,205
------------- ------------- -------------
Shares outstanding ............................................ 1,715,018 555,264 2,382,654
------------- ------------- -------------
Net asset value and offering price per share .................. $11.60 $13.95 $11.60
------------- ------------- -------------
Page 1
<PAGE>
CLASS Y:
Net assets .................................................... $519,276 $83,404 $602,680
------------- ------------- -------------
Shares outstanding ............................................ 44,788 5,986 51,984
------------- ------------- -------------
Net asset value and offering price per share ................ $11.59 $13.93 $11.59
------------- ------------- -------------
See accompanying notes to pro forma financial statements
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED AUGUST 31, 1999 (UNAUDITED)
UTILITY INCOME
BALANCED FUND FUND ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest............................................ $6,055,004 $347,451 $0 $6,402,455
Dividend............................................ 1,572,149 980,153 0 2,552,302
-----------------------------------------------------------------
7,627,153 1,327,604 0 8,954,757
----------- ----------- ----------- ----------
EXPENSES:
Investment advisory and administration.............. 1,890,996 246,711 17,622(a) 2,155,329
Service fees - Class A ............................. 505,425 24,078 0 529,503
Service and distribution fees - Class B............. 305,401 177,086 0 482,487
Service and distribution fees - Class C............. 190,716 78,670 0 269,386
Transfer agency and service......................... 166,820 36,171 0 202,991
Custody and accounting.............................. 153,799 20,147 0 173,946
Legal and audit..................................... 95,725 42,450 -47,450(b) 90,725
Reports and notices to shareholders................. 73,300 34,055 -25,000(b) 82,355
State registration fees............................. 47,056 51,766 -40,334(b) 58,488
Amortization of organizational expenses............. 0 28,193 -28,193(c) 0
Directors/Trustees' fees............................ 13,500 8,395 -8,395(b) 13,500
Other expenses...................................... 1,815 488 0 2,303
----------- ----------- ----------- ----------
3,444,553 748,210 -131,750 4,061,013
Less: Fee waivers from adviser...................... -1,469 0 -1,469
----------- ----------- ----------
Net Expenses........................................ 3,443,084 748,210 4,059,544
----------- ----------- ----------
Net investment income............................... 4,184,069 579,394 4,895,213
----------- ----------- ----------
Realized and unrealized gains (losses) from investment
transactions:
Net realized gains (losses) from:
Investment transactions, futures and options...... 18,273,326 -975,966 17,297,360
Net change in unrealized appreciation/depreciation of:
Investments, futures and options.................. 13,576,016 2,706,548 16,282,564
----------- ----------- ----------
Net realized and unrealized gains from investment
activities........................................ 31,849,342 1,730,582 33,579,924
----------- ----------- ----------
Net increase in net assets resulting from operations... $36,033,411 $2,309,976 $38,475,137
=========== =========== ==========
</TABLE>
------------
(a) Reflects increase in fees resulting from the higher fee schedule of
Balanced Fund.
(b) Reflects the anticipated savings of the merger.
(c) Reflects write-off of unamortized organizational expenses.
<TABLE>
<CAPTION>
<S> <C>
See accompanying notes to pro forma financial statements
</TABLE>
<PAGE>
<TABLE>
PRO FORMA PORTFOLIO OF INVESTMENTS
<CAPTION>
AUGUST 31, 1999 (UNAUDITED) BALANCED UTILITY
FUND INCOME FUND COMBINED
----------- -------------- -----------
<S> <C> <C> <C>
Combined
Number of
Shares
- -----------
COMMON STOCKS - 63.19%
Airlines - 0.57%
31,400 Delta Air Lines, Inc. $ 1,595,513 0 $ 1,595,513
----------- -------------- -----------
Alcohol - 0.25%
8,900 Anheuser-Busch Companies, Inc. 685,300 0 685,300
----------- -------------- -----------
Apparel, Retail - 1.03%
99,200 TJX Companies, Inc. 2,864,400 0 2,864,400
----------- -------------- -----------
Apparel, Textiles - 0.55%
17,800 Tommy Hilfiger Corp.* 604,088 0 604,088
38,400 Westpoint Stevens Inc. 921,600 0 921,600
----------- -------------- -----------
1,525,688 0 1,525,688
----------- -------------- -----------
Banks - 2.07%
30,774 Bank of New York Co. Inc. 1,100,171 0 1,100,171
47,800 The Chase Manhattan Corp. 4,000,262 0 4,000,262
20,200 Mellon Bank Corp. 674,175 0 674,175
----------- -------------- -----------
5,774,608 0 5,774,608
----------- -------------- -----------
Beverages & Tobacco - 0.26%
37,800 Pepsi Bottling Group Inc. 715,838 0 715,838
----------- -------------- -----------
Cable - 1.09%
28,800 JDS Uniphase Corp.* 3,054,600 0 3,054,600
----------- -------------- -----------
Chemicals - 0.30%
7,400 Dow Chemical Co. 840,825 0 840,825
----------- -------------- -----------
Computer Hardware - 3.05%
67,300 Cisco Systems, Inc.* 4,563,781 0 4,563,781
27,100 Dell Computer Corp.* 1,322,819 0 1,322,819
21,200 IBM Corp. 2,640,725 0 2,640,725
----------- -------------- -----------
8,527,325 0 8,527,325
----------- -------------- -----------
1
<PAGE>
COMBINED
NUMBER OF BALANCED UTILITY
SHARES FUND INCOME FUND COMBINED
- ----------- ----------- -------------- -----------
Computer Software - 3.21%
10,100 BMC Software, Inc.* 543,506 0 543,506
23,100 Compuware Corp.* 697,331 0 697,331
3,000 Covad Communications Group Inc.* 0 $ 138,375 138,375
32,600 Microsoft Corp.* 3,017,538 0 3,017,538
10,000 Northpoint Communications Holding* 0 264,375 264,375
46,000 Sterling Software Inc.* 925,750 0 925,750
78,600 Unisys Corp.* 3,379,800 0 3,379,800
----------- -------------- -----------
8,563,925 402,750 8,966,675
----------- -------------- -----------
Construction - 0.29%
23,300 Lafarge Corp. 640,750 0 640,750
8,364 Reckson Associates Realty Corporation 0 181,917 181,917
----------- -------------- -----------
640,750 181,917 822,667
----------- -------------- -----------
Consumer Durables - 0.56%
25,000 Maytag Corp. 1,565,625 0 1,565,625
----------- -------------- -----------
Defense & Aerospace - 0.59%
27,100 Allied-Signal, Inc. 1,659,875 0 1,659,875
----------- -------------- -----------
Diversified Retail - 2.37%
55,800 Dayton Hudson Corp. 3,236,400 0 3,236,400
23,900 Family Dollar Stores Inc. 470,531 0 470,531
46,100 Federated Department Stores, Inc.* 2,120,600 0 2,120,600
17,500 Wal-Mart Stores, Inc. 775,469 0 775,469
----------- -------------- -----------
6,603,000 0 6,603,000
----------- -------------- -----------
Drugs & Medicine - 2.41%
42,700 Biogen Inc.* 3,277,225 0 3,277,225
2,100 Elan Corp. PLC, ADR* 67,331 0 67,331
8,000 Pharmacia & Upjohn, Inc. ADR 418,000 0 418,000
34,600 Schering-Plough Corp. 1,818,663 0 1,818,663
17,300 Warner Lambert Co. 1,146,125 0 1,146,125
----------- -------------- -----------
6,727,344 0 6,727,344
----------- -------------- -----------
Electric Utilities - 6.87%
20,000 Allegheny Energy Inc. 0 675,000 675,000
15,000 Alliant Corporation 0 434,063 434,063
5,000 Calpine Corp. 0 453,125 453,125
20,000 Central Hudson Gas & Electric Corp. 0 845,000 845,000
14,000 CMS Energy Corp. 0 553,875 553,875
32,200 Consolidated Edison Co. of New York Inc. 756,800 660,000 1,416,800
20,000 Constellation Energy Group, Inc. 0 592,500 592,500
37,500 DPL Inc. 0 710,156 710,156
2
<PAGE>
COMBINED
NUMBER OF BALANCED UTILITY
SHARES FUND INCOME FUND COMBINED
- ----------- ----------- -------------- -----------
20,000 DQE Inc. 0 $ 773,750 $ 773,750
25,300 Duke Energy Corp. $ 1,167,250 287,500 1,454,750
20,000 El Paso Energy Corp. 0 731,250 731,250
77,800 Energy East Corp.* 1,195,000 750,000 1,945,000
20,000 Illinova Corp. 0 637,500 637,500
25,000 New Century Energies, Inc. 0 903,125 903,125
24,000 Nisource Inc. 0 570,000 570,000
17,500 Nstar 0 755,781 755,781
10,000 PECO Energy Co. 0 406,250 406,250
30,000 Public Service Co. of New Mexico 0 564,375 564,375
20,000 Puget Sound Power & Light Co. 0 473,750 473,750
25,000 RGS Energy Group Inc. 0 646,875 646,875
25,000 SCANA Corp. 0 625,000 625,000
25,200 Sierra Pacific Resources New 0 614,250 614,250
20,000 Texas Utilities Co. 0 808,750 808,750
20,000 Unicom Corp. 0 772,500 772,500
34,400 Utilicorp United Inc. 797,650 0 797,650
----------- -------------- -----------
3,916,700 15,244,375 19,161,075
----------- -------------- -----------
Electrical Equipment - 0.09%
9,825 Global Crossing Ltd.* 0 254,222 254,222
----------- -------------- -----------
Entertainment - 0.12%
15,000 Fox Entertainment Group Inc.* 0 345,938 345,938
----------- -------------- -----------
Entertainment and Leisure - 0.01%
900 Time Warner Telecom Inc. 0 24,300 24,300
----------- -------------- -----------
Energy Reserves & Production - 1.60%
18,900 Mobil Corp. 1,934,888 0 1,934,888
40,900 Royal Dutch Petroleum Co. ADR 2,530,687 0 2,530,687
----------- -------------- -----------
4,465,575 0 4,465,575
----------- -------------- -----------
Financial Services - 0.47%
18,200 Marsh & McLennan Companies, Inc. 1,325,188 0 1,325,188
----------- -------------- -----------
Food Retail - 0.70%
83,900 Kroger Co.* 1,940,187 0 1,940,187
----------- -------------- -----------
Forest Products, Paper - 1.71%
13,400 Champion International Corp. 737,000 0 737,000
46,200 Fort James Corp. 1,489,950 0 1,489,950
37,200 Georgia-Pacific Corp. 1,539,150 0 1,539,150
17,800 Weyerhaeuser Co. 1,001,250 0 1,001,250
----------- -------------- -----------
4,767,350 0 4,767,350
----------- -------------- -----------
3
<PAGE>
COMBINED
NUMBER OF BALANCED UTILITY
SHARES FUND INCOME FUND COMBINED
- ----------- ----------- -------------- -----------
Gas Utility - 0.55%
25,950 Columbia Gas Systems Inc. 942,047 590,625 1,532,672
----------- -------------- -----------
Household Products - 0.60%
37,900 Avon Products, Inc. 1,662,862 0 1,662,862
----------- -------------- -----------
Industrial Parts - 3.70%
13,100 American Standard Companies Inc.* 537,100 0 537,100
41,200 Ingersoll Rand Co. 2,621,350 0 2,621,350
68,300 Mettler Toledo International Inc.* 1,818,487 0 1,818,487
12,069 SPX Corp.* 1,022,848 0 1,022,848
65,600 United Technologies Corp. 4,337,800 0 4,337,800
----------- -------------- -----------
10,337,585 0 10,337,585
----------- -------------- -----------
Industrial Services & Supplies - 1.62%
14,167 Delphi Automotive Systems Corp. 265,631 0 265,631
41,900 Tyco International Ltd. 4,244,994 0 4,244,994
----------- -------------- -----------
4,510,625 0 4,510,625
----------- -------------- -----------
Information & Computer Services - 0.73%
9,100 Computer Sciences Corp.* 629,606 0 629,606
32,300 Valassis Communications Inc.* 1,413,125 0 1,413,125
----------- -------------- -----------
2,042,731 0 2,042,731
----------- -------------- -----------
Leisure - 0.94%
17,361 Eastman Kodak Co. 1,274,948 0 1,274,948
55,700 Hasbro, Inc. 1,361,169 0 1,361,169
----------- -------------- -----------
2,636,117 0 2,636,117
----------- -------------- -----------
Life Insurance - 1.23%
34,600 American General Corp. 2,456,600 0 2,456,600
32,600 Protective Life Corp. 969,850 0 969,850
----------- -------------- -----------
3,426,450 0 3,426,450
----------- -------------- -----------
4
<PAGE>
COMBINED
NUMBER OF BALANCED UTILITY
SHARES FUND INCOME FUND COMBINED
- ----------- ----------- -------------- -----------
Long Distance & Phone Companies - 6.22%
10,000 Ameritech Corp. 0 $ 631,250 $ 631,250
28,100 AT&T Corp. $ 814,500 450,000 1,264,500
15,376 Bell Atlantic Corp. 0 941,780 941,780
62,000 BellSouth Corp. 1,810,000 995,500 2,805,500
22,500 Century Telephone Enterprises, Inc. 0 884,531 884,531
6,000 Global Telesystems Group Inc. 0 193,875 193,875
29,200 GTE Corp. 1,317,600 686,250 2,003,850
25,000 ITC Deltacom* 0 659,375 659,375
10,000 Level 3 Communications Inc. 0 597,500 597,500
53,400 MCI WorldCom, Inc.* 2,908,800 1,136,250 4,045,050
13,201 NTL Incorporated 0 1,296,173 1,296,173
27,000 Qwest Communications International Inc. 0 776,250 776,250
10,000 SBC Communications, Inc. 0 480,000 480,000
15,000 U.S. West, Inc. 0 783,750 783,750
----------- -------------- -----------
6,850,900 10,512,484 17,363,384
----------- -------------- -----------
Media - 0.98%
42,200 Comcast Corp., Class A 1,376,775 0 1,376,775
23,100 Infinity Broadcasting Corp. Class A* 625,144 0 625,144
10,000 Univision Communications Inc.* 0 737,500 737,500
----------- -------------- -----------
2,001,919 737,500 2,739,419
----------- -------------- -----------
Medical Products - 0.95%
31,038 Boston Scientific Corp.* 1,053,352 0 1,053,352
43,800 St. Jude Medical, Inc.* 1,587,750 0 1,587,750
----------- -------------- -----------
2,641,102 0 2,641,102
----------- -------------- -----------
Medical Providers - 0.53%
20,300 Wellpoint Health Networks, Inc. Class A* 1,479,363 0 1,479,363
----------- -------------- -----------
Medical-Wholesale Drug Distributors - 0.59%
63,800 Amerisource Health Corp. Class A* 1,646,837 0 1,646,837
----------- -------------- -----------
Mining & Metals - 0.84%
17,800 Alcoa, Inc. 1,149,213 0 1,149,213
26,500 Martin Marietta Materials Inc. 1,209,062 0 1,209,062
----------- -------------- -----------
2,358,275 0 2,358,275
----------- -------------- -----------
Motor Vehicles - 1.46%
14,000 Borg Warner Automotive, Inc. 663,250 0 663,250
39,600 Ford Motor Co. 2,064,150 0 2,064,150
20,300 General Motors Corp. 1,342,337 0 1,342,337
----------- -------------- -----------
4,069,737 0 4,069,737
----------- -------------- -----------
5
<PAGE>
COMBINED
NUMBER OF BALANCED UTILITY
SHARES FUND INCOME FUND COMBINED
- ----------- ----------- -------------- -----------
Oil Refining - 1.97%
18,400 Atlantic Richfield Co. 1,618,050 0 1,618,050
63,100 Coastal Corp. 1,996,706 736,313 2,733,019
36,800 USX-Marathon Group 1,145,400 0 1,145,400
----------- -------------- -----------
4,760,156 736,313 5,496,469
----------- -------------- -----------
Other Insurance - 1.76%
42,500 ACE Ltd. 911,094 0 911,094
30,500 Ambac Financial Group Inc. 1,610,781 0 1,610,781
17,262 American International Group, Inc. 1,599,972 0 1,599,972
22,200 Travelers Property Casualty Corp. 788,100 0 788,100
----------- -------------- -----------
4,909,947 0 4,909,947
----------- -------------- -----------
Publishing - 0.82%
42,400 Knight Ridder, Inc. 2,286,950 0 2,286,950
----------- -------------- -----------
Real Property - 0.23%
18,000 Sun Communities 0 643,500 643,500
----------- -------------- -----------
Restaurants - 0.29%
33,300 Brinker International Inc.* 799,200 0 799,200
----------- -------------- -----------
Securities & Asset Management - 1.12%
17,700 AXA Financial Inc. 1,092,975 0 1,092,975
23,600 Morgan Stanley Dean Witter & Co. 2,025,175 0 2,025,175
----------- -------------- -----------
3,118,150 0 3,118,150
----------- -------------- -----------
Semiconductor - 2.95%
51,400 Applied Materials, Inc.* 3,652,612 0 3,652,612
22,200 Atmel Corp.* 872,738 0 872,738
23,600 Intel Corp. 1,939,625 0 1,939,625
26,100 Vitesse Semiconductor Corp.* 1,774,800 0 1,774,800
----------- -------------- -----------
8,239,775 0 8,239,775
----------- -------------- -----------
6
<PAGE>
COMBINED
NUMBER OF BALANCED UTILITY
SHARES FUND INCOME FUND COMBINED
- ----------- ----------- -------------- -----------
Specialty Retail - 1.74%
100,800 Office Depot Inc.* $ 1,052,100 0 $ 1,052,100
36,950 Staples Inc.* 803,662 0 803,662
64,700 Williams Sonoma Inc.* 2,523,300 0 2,523,300
13,479 Zale Corp.* 467,553 0 467,553
----------- -------------- -----------
4,846,615 0 4,846,615
----------- -------------- -----------
Thrift - 0.29%
31,200 Greenpoint Financial Corp. 807,300 0 807,300
----------- -------------- -----------
Tobacco - 0.24%
18,000 Philip Morris Companies, Inc. 673,875 0 673,875
----------- -------------- -----------
Water - 0.30%
30,000 American Water Works Co. Inc. 0 $ 873,750 873,750
----------- -------------- -----------
Wireless Telecommunications - 0.27%
19,200 Century Telephone Enterprises, Inc. 754,800 0 754,800
----------- -------------- -----------
Total Common Stocks (cost - $122,038,182, $21,504,302 145,562,934 30,547,674 176,110,608
and $143,542,484, respectively)
----------- -------------- -----------
PREFERRED STOCKS - 0.20%
Electric Utilities - 0.20%
14,000 CMS Energy Corp. (cost - $0, $581,000, $581,000, 0 565,250 565,250
respectively)
----------- -------------- -----------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Combined
Principal
Amount Maturity Interest Balanced Utility
(000) Dates Rates Fund Income Fund Combined
- ----------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 13.54%
Banks - 0.82%
670 Bank One Corp. 08/01/06 6.875% 656,894 0 656,894
1,700 Providian National Bank Concord 02/01/04 6.650 1,637,744 0 1,637,744
----------- -------------- -----------
2,294,638 0 2,294,638
----------- -------------- -----------
Beverages & Entertainment - 0.47%
1,370 Seagram Joseph E & Sons Inc. 12/15/05 6.625 1,125,847 181,281 1,307,128
----------- -------------- -----------
Cable - 0.51%
1,350 TCI Communications Inc. 05/01/03 to 03/31/27 6.375 to 9.650 786,658 624,267 1,410,925
----------- -------------- -----------
Electric Utilities - 0.17%
500 TXU Electric Capital V 01/30/37 8.175 0 487,772 487,772
----------- -------------- -----------
Entertainment - 0.07%
200 Time Warner Inc. 01/15/08 7.480 0 199,988 199,988
----------- -------------- -----------
Financial Services - 2.68%
1,915 Associates Corp. NA 11/01/08 6.250 1,777,137 0 1,777,137
1,500 AT&T Capital Corp. 01/16/01 6.875 1,500,542 0 1,500,542
2,600 Ford Motor Credit Co. 01/14/03 to 01/12/09 5.800 to 6.000 2,435,729 0 2,435,729
1,850 Heller Financial Inc. 03/19/04 6.000 1,756,834 0 1,756,834
----------- -------------- -----------
7,470,242 0 7,470,242
----------- -------------- -----------
Industrial Services & Supplies - 0.34%
965 Tyco International Group SA 06/15/01 6.125 956,016 0 956,016
----------- -------------- -----------
Insurance - 1.68%
2,000 American Re Corp. 12/15/26 7.450 1,945,424 0 1,945,424
700 Hartford Financial Services Group Inc. 11/01/08 6.375 664,052 0 664,052
800 Loews Corp. 12/15/06 6.750 756,958 0 756,958
1,350 Lumbermen's Mutual Casualty Co. 07/01/26 9.150 1,324,723 0 1,324,723
----------- -------------- -----------
4,691,157 0 4,691,157
----------- -------------- -----------
Media - 0.42%
1,230 News America Holdings Inc. 12/01/95 to 10/17/96 7.900 to 8.250 592,951 572,163 1,165,114
----------- -------------- -----------
Securities & Asset Management - 2.71%
2,305 Donaldson Lufkin & Jenrette 04/01/02 5.875 2,247,121 0 2,247,121
1,315 FMR Corp. 06/15/29 7.570 1,260,407 0 1,260,407
1,350 Lehman Brothers Holdings Inc. 04/01/04 6.625 1,304,528 0 1,304,528
1,200 Merrill Lynch & Company Inc. 02/17/09 6.000 1,081,886 0 1,081,886
1,775 Morgan Stanley Group Inc. 01/20/04 5.625 1,679,145 0 1,679,145
----------- -------------- -----------
7,573,087 0 7,573,087
----------- -------------- -----------
Telecommunications - 0.77%
2,345 US West Capital Funding Inc. 07/15/08 6.375 2,149,980 0 2,149,980
----------- -------------- -----------
Tobacco - 1.03%
1,850 Philip Morris Companies Inc. 07/01/08 to 01/15/27 7.650 to 7.750 1,849,916 0 $ 1,849,916
1,035 RJ Reynolds Tobacco Holdings Inc. 05/15/03 7.375 1,010,550 0 1,010,550
----------- -------------- -----------
2,860,466 0 2,860,466
----------- -------------- -----------
Yankee - 1.87%
995 Canadian Imperial Bank of Commerce 08/01/00 6.200 994,584 0 994,584
8
<PAGE>
Combined
Principal
Amount Maturity Interest Balanced Utility
(000) Dates Rates Fund Income Fund Combined
- ----------- -------------- ------------- ------------- ------------- -------------
2,000 Household International Netherlands BV 12/01/03 6.200 1,941,846 0 1,941,846
1,400 Imperial Tobacco Overseas B V 04/01/09 7.125 1,310,154 0 1,310,154
1,000 Sony Corp. 03/04/03 6.125 982,417 0 982,417
----------- -------------- -----------
5,229,001 0 5,229,001
----------- -------------- -----------
Total Corporate Bonds (cost - $37,593,179, 35,730,043 $ 2,065,471 37,795,514
$2,071,925 and $39,665,104, respectively)
----------- -------------- -----------
CONVERTIBLE BONDS - 0.48%
Specialty Retail - 0.48%
500 Home Depot Inc. (cost - $500,000, $0 and 10/01/01 3.250 1,341,250 0 1,341,250
$500,000, respectively)
----------- -------------- -----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 8.83%
45 Federal Home Loan Mortgage Corporation 03/18/08 6.220 42,687 0 42,687
4,230 Federal National Mortgage Association 01/15/09 5.250 3,765,808 0 3,765,808
2,570 International Bank For Reconstruction & 03/17/03 5.625 2,501,769 0 2,501,769
Development
5,769 U.S. Treasury Bonds(1) 08/15/13 to 02/15/29 5.250 to 12.000 6,676,546 0 6,676,546
11,962 U.S. Treasury Notes(1) 07/15/02 to 05/15/09 3.625 to 5.500 11,673,794 0 11,673,794
----------- -------------- -----------
Total U.S. Government and Agency Obligations (cost 24,660,604 0 24,660,604
$25,694,724, $0 and $25,694,724, respectively)
----------- -------------- -----------
MORTGAGE BACKED SECURITIES - 8.78%
Collateralized Mortgage Obligations - 1.37%
551 Amresco Commercial Mortgage Funding I Corp., 06/17/29 6.730 544,176 0 544,176
Series 1997-C1, Class A1
249 CS First Boston Mortgage Securities Corp., 06/01/20 7.500 248,459 0 248,459
Series 1997-2, Class A+
53 FDIC REMIC, Series 1994-C1, Class 2A2 09/25/25 7.850 52,636 0 52,636
238 FDIC REMIC, Series 1996-C1, Class 1A 05/25/26 6.750 235,864 0 235,864
250 FNMA REMIC, Series 1996-M6, Class E 09/17/19 7.750 252,720 0 252,720
478 GMAC Commercial Mortgage Security, Series 09/15/03 6.790 477,927 0 477,927
1996-C1, Class A2A
1,400 LB Commercial Conduit Mortgage Trust, 10/15/08 6.210 1,298,808 0 1,298,808
Series 1998-C4, Class A1B
174 Morgan Stanley Capital I Inc., 02/15/20 6.850 173,352 0 173,352
Series 1997-C1, Class A1A
554 Morgan Stanley Capital I Inc., 10/15/06 6.830 550,960 0 550,960
Series 1997-WF1, Cl;ass A1+
----------- -------------- -----------
3,834,902 0 3,834,902
----------- -------------- -----------
Federal Home Loan Mortgage Corporation - 0.60%
1,780 FHLMC 30 Yr TBA TBA 6.500 1,685,438 0 1,685,438
----------- -------------- -----------
Federal National Mortgage Association - 5.98%
557 FNMA 09/01/28 6.500 527,747 0 527,747
835 FNMA 01/01/26 to 02/01/26 7.500 831,782 0 831,782
12,780 FNMA 30 Yr TBA TBA 6.000 11,745,612 0 11,745,612
2,720 FNMA 15 Yr TBA TBA 6.500 2,641,800 0 2,641,800
995 FNMA 30 Yr TBA TBA 6.500 941,519 0 941,519
----------- -------------- -----------
16,688,460 0 16,688,460
----------- -------------- -----------
9
<PAGE>
Combined
Principal
Amount Maturity Interest Balanced Utility
(000) Dates Rates Fund Income Fund Combined
- ----------- -------------- ------------- ------------- ------------- -------------
Government National Mortgage Association - 0.83%
2,223 GNMA 11/15/17 8.500 2,307,422 0 2,307,422
----------- -------------- -----------
Total Mortgage Backed Securities (cost - 24,516,222 0 24,516,222
$24,621,094, $0 and $24,621,094, respectively)
----------- -------------- -----------
SHORT TERM U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.44%
10,000 Federal Home Loan Bank Consolidated Discount 09/15/99 5.080 9,980,244 0 9,980,244
Notes
16,000 Federal Home Loan Mortgage Discount Notes 09/16/99 4.950 15,967,000 0 15,967,000
5,000 Federal National Mortgage Association Discount 09/27/99 5.090 4,981,619 0 4,981,619
Notes
1,000 Student Loan Marketing Association Discount 09/02/99 4.980 999,862 0 999,862
Notes ----------- -------------- -----------
Total Short Term U.S. Government Agency
Obligations (cost - $31,928,725, $0 and 31,928,725 0 31,928,725
$31,928,725, respectively) ----------- -------------- -----------
REPURCHASE AGREEMENT - 0.11%
280 Repurchase Agreement dated 08/31/99 with State
Street Bank & Trust Company, collateralized
by $258,872 U.S. Treasury Notes, 7.875%
due 11/15/04 (value - $285,730); proceeds: 09/01/99 4.250% 0 $ 280,000 $ 280,000
$280,033 (cost - $280,000)
----------- -------------- -----------
Total Investments (cost - $242,375,904, $ 263,739,778 33,458,395 297,198,173
$24,437,227 and $266,813,131 respectively)
- 106.47%
Liabilities in excess of other assets - (6.47%) -17,924,013 -139,082 -18,063,095
----------- -------------- -----------
Net Assets - 100.00% $ 245,815,765 $ 33,319,313 $279,135,078
=========== ============== ===========
</TABLE>
- -----------
* Non-Income producing security.
+ Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers.
ADR American Depositary Receipt.
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximated principal amount (generally +/- 1.0%) and generally
stated maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
REMIC Real Estate Mortgage Investment Conduit.
(1) Security, or portion thereof, was on loan at August 31, 1999.
See accompanying notes to pro forma financial statements.
10
<PAGE>
Notes To Pro Forma Financial Statements (unaudited)
Basis of Presentation:
Subject to the approval of the Plan of Reorganization by the shareholders of
PaineWebber Utility Income Fund ("Utility Income"), PaineWebber Balanced Fund
("Balanced") would acquire the assets of Utility Income in exchange solely for
the assumption by Balanced of Utility Income's assets and liabilities and shares
of Balanced that correspond to the outstanding shares of Utility Income. The
number of shares to be received would be based on the relative net asset value
of Balanced Fund's shares on the effective date of the Plan of Reorganization
and Utility Income will be terminated as soon as practicable thereafter.
The pro forma financial statements reflect the financial position of Balanced
and Utility Income at August 31, 1999 and the combined results of operations of
Balanced and Utility Income for the year ended August 31, 1999.
As a result of the Plan of Reorganization, the investment advisory and
administration agreement fee will increase due to the higher fee schedule of
Balanced. As open-end funds, Balanced and Utility Income currently both pay Rule
12b-1 distribution or service fees. Other fixed expenses will be reduced due to
the elimination of duplicative expenses. In addition, the pro forma statement of
assets and liabilities has not been adjusted as a result of the proposed
transaction because such adjustment would not be material. IT IS ESTIMATED THAT
THE COST OF APPROXIMATELY $195,000 ASSOCIATED WITH THE MERGER WILL BE CHARGED TO
EACH FUND SO THAT EACH FUND BEARS ITS' OWN EXPENSES OF THE REORGANIZATION. These
costs are not included in the pro forma statement of operations since they are
not recurring.
The pro forma financial statements are presented for the information of the
reader and may not necessarily be representative of what the actual combined
financial statements would have been had the Plan of Reorganization occurred
August 31, 1999. The pro forma financial statements should be read in
conjunction with the historical financial statements of the constituent Funds
included in or incorporated by reference in the applicable statement of
additional information.
Significant Accounting Policies:
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles that requires the use of management accruals and
estimates. These unaudited financial statements reflect all adjustments, which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. The following is a summary of significant
accounting policies followed by the Fund.
VALUATION OF INVESTMENTS-Securities which 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 valued on
the exchange designated by Mitchell Hutchins Asset Management Incorporated
("Mitchell Hutchins"), a wholly owned asset management subsidiary of PaineWebber
Incorporated ("PaineWebber") and investment adviser, administrator and
distributor of the Fund, as the primary market. Securities traded in the
over-the-counter ("OTC") market and listed on the Nasdaq Stock Market, Inc.
("Nasdaq") are valued at the last available sale price, or last bid price
available if no sales occur, on Nasdaq prior to the time of valuation. Where
market quotations are readily available, debt securities are valued thereon,
provided such quotations adequately reflect the fair value of the securities in
the judgement of Mitchell Hutchins. When market quotations are not readily
available, securities are valued based upon appraisals derived from information
concerning those securities or similar securities received from recognized
dealers in those securities. All other securities are valued at fair value as
determined in good faith by, or under the direction of, the Board of
Directors/Trustees. The amortized cost method of valuation is used to value
short-term debt instruments with sixty days or less remaining to maturity,
unless the board determines that this does not represent fair value.
<PAGE>
PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
Each of the funds named above is a diversified series of a professionally
managed, open-end management investment company. PaineWebber Balanced Fund is a
series of PaineWebber Master Series, Inc., a Maryland corporation
("Corporation"). PaineWebber Tactical Allocation Fund is a series of PaineWebber
Investment Trust, a Massachusetts business trust ("Trust").
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares.
Portions of each fund's Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information ("SAI"). The Annual
Reports accompany this SAI. You may obtain an additional copy of a fund's Annual
Report by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction with
the funds' current Prospectus, dated December 10, 1999. A copy of the Prospectus
may be obtained by calling any PaineWebber Financial Advisor or correspondent
firm or by calling toll-free 1-800-647-1568. This SAI is dated December 10,
1999.
TABLE OF CONTENTS
PAGE
The Funds and Their Investment
Policies....................................................................2
The Funds' Investments, Related Risks and Limitations..........................4
Strategies Using Derivative Instruments.......................................26
Organization; Board Members and Officers; Principal Holders of Securities.....26
Investment Advisory, Administration and Distribution Arrangements.............33
Portfolio Transactions........................................................39
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services...............................................................47
Conversion of Class B Shares..................................................47
Valuation of Shares...........................................................47
Performance Information.......................................................48
Taxes.........................................................................51
Other Information.............................................................54
Financial Statements..........................................................55
Appendix.....................................................................A-1
<PAGE>
THE FUNDS AND THEIR INVESTMENT POLICIES
Neither fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
BALANCED FUND has an investment objective of high total return with low
volatility. The fund invests primarily in a combination of three asset classes:
stocks (equity securities), bonds (investment grade bonds) and cash (money
market instruments) and maintains a fixed income allocation (including bonds and
cash) of at least 25%.
Balanced 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, U.S. government securities, convertible
securities and money market instruments. The fund may invest in U.S.
dollar-denominated securities of foreign issuers that are traded on recognized
U.S. exchanges or in the U.S. over-the-counter market. The fund may also invest
up to 10% of its assets in bonds and other securities (including convertible
securities) rated below investment grade but rated at least B by Moody's
Investors Service, Inc. ("Moody's") or Standard and Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), comparably rated by another rating agency
or, if unrated, determined by Mitchell Hutchins to be of comparable quality. The
fund's bond investments may include zero coupon bonds and other original issue
discount securities.
The money market instruments in which Balanced 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) having total assets at the time of purchase in excess of $1.5
billion; commercial paper and other short-term corporate obligations; variable
and floating rate securities and repurchase agreements; participation interests
in these money market instruments; and the securities of other investment
companies that invest exclusively in money market instruments. The fund may also
hold cash.
The commercial paper and other short-term corporate obligations purchased
by Balanced Fund will consist only of obligations of U.S. corporations that are
(1) rated at least Prime-2 by Moody's or A-2 by S&P, (2) comparably rated by
another rating agency or (3) unrated and determined by Mitchell Hutchins to be
of comparable quality. These obligations may include variable amount master
demand notes, which are unsecured obligations redeemable upon notice that permit
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements with the issuer of the instrument. Such obligations are
usually unrated by a rating agency.
Balanced Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow from banks or through reverse repurchase
agreements for temporary or emergency purposes, but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
TACTICAL ALLOCATION FUND has an investment objective of total return,
consisting of long-term capital appreciation and current income. The fund seeks
to achieve its objective by using the Tactical Allocation Model, a systematic
investment strategy that allocates its investments between an equity portion
designed to track the performance of the S&P 500 Composite Stock Price Index
("S&P 500 Index") and a fixed income portion that generally will be comprised of
either five-year U.S. Treasury notes or 30-day U.S.
Treasury bills.
Tactical Allocation Fund seeks to achieve total return during all economic
and financial market cycles, with lower volatility than that of the S&P 500
Index. Mitchell Hutchins allocates the fund's assets based on the Tactical
Allocation Model's quantitative assessment of the projected rates of return for
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each asset class. The Model attempts to track the S&P 500 Index in periods of
strongly positive market performance but attempts to take a more defensive
posture by reallocating assets to bonds or cash when the Model signals a
potential bear market, prolonged downtown in stock prices or significant loss in
value.
The basic premise of the Tactical Allocation Model is that investors
accept the risk of owning stocks, measured as volatility of return, because they
expect a return advantage. This expected return advantage of owning stocks is
called the equity risk premium ("ERP"). The Model projects the stock market's
expected ERP based on several factors, including the current price of stocks and
their expected future dividends and the yield-to-maturity of the one-year U.S.
Treasury bill. When the stock market's ERP is high, the Model signals the fund
to invest 100% in stocks. Conversely, when the ERP decreases below certain
threshold levels, the Model signals the fund to reduce its exposure to stocks.
The Model can recommend stock allocations of 100%, 75%, 50%, 25% or 0%.
If the Tactical Allocation Model recommends a stock allocation of less
than 100%, the Model also recommends a fixed income allocation for the remainder
of the fund's assets. The Model will recommend either bonds (five-year U.S.
Treasury notes) or cash (30-day U.S. Treasury bills), but not both. To make this
determination, the Model calculates the risk premium available for the notes.
This bond risk premium ("BRP") is calculated based on the yield-to-maturity of
the five-year U.S. Treasury note and the one-year U.S. Treasury bill.
Tactical Allocation Fund deviates from the recommendations of the Tactical
Allocation Model only to the extent necessary to maintain an amount in cash, not
expected to exceed 2% of its total assets under normal market conditions, to pay
fund operating expenses, dividends and other distributions on its shares and to
meet anticipated redemptions of shares.
In its stock portion, Tactical Allocation Fund attempts to duplicate,
before the deduction of operating expenses, the investment results of the S&P
500 Index. Securities in the S&P 500 Index are selected, and may change from
time to time, based on a statistical analysis of such factors as the issuer's
market capitalization (the S&P 500 Index emphasizes large capitalization
stocks), the security's trading activity and its adequacy as a representative of
stocks in a particular industry section. The fund's investment results for its
stock portion will not be identical to those of the S&P 500 Index. Deviations
from the performance of the S&P 500 Index may result from purchases and
redemptions of fund shares that may occur daily, as well as from expenses borne
by the fund. Instead, the fund attempts to achieve a correlation of at least
0.95 between the performance of the fund's stock portion, before the deduction
of operating expenses, and that of the S&P 500 Index (a correlation of 1.00
would mean that the net asset value of the stock portion increased or decreased
in exactly the same proportion as changes in the S&P 500 Index). The S&P 500
Index can include U.S. dollar-denominated equity securities of foreign issuers,
and the fund invests in those securities to the extent needed to track the
performance of the S&P 500 Index.
For its bond investments, Tactical Allocation Fund seeks to invest in U.S.
Treasury notes having five years remaining until maturity at the beginning of
the then-current calendar year. However, if those instruments are not available
at favorable prices, the fund may invest in U.S. Treasury notes that have either
remaining maturities as close as possible to five years or overall durations
that are as close as possible to the duration of five year U.S. Treasury notes.
Similarly, for its cash investments, the fund seeks to invest in U.S. Treasury
bills with remaining maturities of 30 days. However, if those instruments are
not available at favorable prices, the fund may invest in U.S. Treasury bills
that have either remaining maturities as close as possible to 30 days or overall
durations that are as close as possible to the duration of 30-day U.S. Treasury
bills.
Asset reallocations are made, if required, on the first business day of
each month. In addition to any reallocation of assets directed by the Tactical
Allocation Model, any material amounts resulting from appreciation or receipt of
dividends, other distributions, interest payments and proceeds from securities
maturing in each of the asset classes are reallocated (or "rebalanced") to the
extent practicable to establish the Model's recommended asset mix. Any cash
maintained to pay fund operating expenses, pay dividends and other distributions
and to meet share redemptions is invested on a daily basis. The fund may (but is
not required to) use options and futures and other derivatives to effect all or
part of an asset reallocation by adjusting the fund's exposure to the different
asset classes.
Tactical Allocation Fund may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
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delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow from banks or through reverse repurchase
agreements for temporary or emergency purposes, but not in excess of 20% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the funds' investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or this SAI, the funds have established
no policy limitations on their ability to use the investments or techniques
discussed in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most preferred
stocks and securities that are convertible into them, including common stock
purchase warrants and rights, equity interests in trusts, partnerships, joint
ventures or similar enterprises and depositary receipts. Common stocks, the most
familiar type, represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but is
actually equity that is senior to a company's common stock. Convertible bonds
may include debentures and notes that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. Preferred stock also
may be converted into or exchanged for common stock. Depositary receipts
typically are issued by banks or trust companies and evidence ownership of
underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, the prices of equity securities generally fluctuate more
than other securities and reflect changes in a company's financial condition and
in overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a fund may experience a
substantial or complete loss on an individual equity investment. While this is
possible with bonds, it is less likely.
BONDS are fixed or variable rate debt obligations, including notes,
debentures, money market instruments and similar instruments and securities.
Mortgage- and asset-backed securities are types of bonds, and certain types of
income-producing, non-convertible preferred stocks may be treated as bonds for
investment purposes. Bonds generally are used by corporations and governments to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and normally must repay the amount borrowed on or before
maturity. Many preferred stocks and some bonds are "perpetual" in that they have
no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Duration is a measure of the
expected life of a bond on a present value basis. Credit risk is the risk that
an issuer may be unable or unwilling to pay interest and/or principal on the
bond, or that a market may become less confident as to the issuer's ability or
willingness to do so. Credit risk can be affected by many factors, including
adverse changes in the issuer's own financial condition or in economic
conditions.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P, and other rating
agencies are private services that provide ratings of the credit quality of
bonds and certain other securities. Balanced Fund may use these ratings in
determining whether to buy, sell or hold a security. A description of the
ratings assigned to corporate bonds by Moody's and S&P is included in the
Appendix to this SAI. The process by which Moody's and S&P determine ratings for
mortgage-backed securities includes consideration of the likelihood of the
receipt by security holders of all distributions, the nature of the underlying
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assets, the credit quality of the guarantor, if any, and the structural, legal
and tax aspects associated with these securities. Not even the highest such
ratings represent an assessment of the likelihood that principal prepayments
will be made by obligors on the underlying assets or the degree to which such
prepayments may differ from that originally anticipated, nor do such ratings
address the possibility that investors may suffer a lower than anticipated yield
or that investors in such securities may fail to recoup fully their initial
investment due to prepayments.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a bond's value or its
liquidity and do not guarantee the performance of the issuer. Rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates. There is a risk that rating agencies may downgrade
the rating of a bond. Subsequent to a bond's purchase by a fund, it may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the fund. It should be emphasized that ratings are general and are
not absolute standards of quality. Consequently, bonds with the same maturity,
interest rate and rating may have different market prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins will analyze interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds are dependent on a variety of factors, including
general money market conditions, general conditions in the bond market, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the payment
of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality. Moody's
considers bonds rated Baa (its lowest investment grade rating) to have
speculative characteristics. This means that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated debt
securities. Bonds rated D by S&P are in payment default or such rating is
assigned upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. Bonds rated C by Moody's
are in the lowest rated class and can be regarded as having extremely poor
prospects of attaining any real investment standing. References to rated bonds
in the Prospectus or this SAI include bonds that are not rated by a rating
agency but that Mitchell Hutchins determines to be of comparable quality.
Non-investment grade bonds (commonly known as "junk bonds") are rated Ba
or lower by Moody's, BB or lower by S&P, comparably rated by another rating
agency or, if unrated, determined by Mitchell Hutchins to be of comparable
quality. A fund's investments in non-investment grade bonds entail greater risk
than its investments in higher rated bonds. Non-investment grade bonds, which
are sometimes referred to as "high yield bonds," are considered predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal and may involve significant risk exposure to adverse conditions.
Non-investment grade bonds generally offer a higher current yield than that
available for investment grade issues; however, they involve greater risks, in
that they are especially sensitive to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress that
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured by collateral and will not receive payment until more senior claims
are paid in full.
The market for non-investment grade bonds has expanded rapidly in recent
years, which has been a period of generally expanding growth and lower
inflation. These securities will be susceptible to greater risk when economic
growth slows or reverses and when inflation increases or deflation occurs. In
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the past, many lower rated bonds experienced substantial price declines
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower rated bonds rose
dramatically. However, those higher yields did not reflect the value of the
income stream that holders of such securities expected. Rather, they reflected
the risk that holders of such securities could lose a substantial portion of
their value due to the issuers' financial restructurings or defaults by the
issuers.
There can be no assurance that those declines will not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's ability
to sell such securities at fair value in response to changes in the economy or
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade bonds, especially in a thinly traded market.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S. Treasury
(such as Treasury bills, notes or bonds) and obligations issued or guaranteed as
to principal and interest (but not as to market value) by the U.S. government,
its agencies or its instrumentalities. U.S. government securities include
mortgage-backed securities issued or guaranteed by government agencies or
government-sponsored enterprises. Other U.S. government securities may be backed
by the full faith and credit of the U.S. government or supported primarily or
solely by the creditworthiness of the government-related issuer or, in the case
of mortgage-backed securities, by pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS programs, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
Treasury inflation-protected securities ("TIPS") are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semi-annually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds. Any increase in the principal value of TIPS is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase at that time.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein but include assets such as motor vehicle installment sales
contracts, other installment sales 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.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured by
real property. 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
(also known as the Government National Mortgage Association), Fannie Mae (also
known as the Federal National Mortgage Association), Freddie Mac (also known as
the Federal Home Loan Mortgage Corporation) or other government sponsored
enterprises. Other domestic mortgage-backed securities are sponsored or issued
by private entities, generally originators of and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers and special purposes 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. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
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Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time because the underlying
mortgage loans may be prepaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities may be paid off more slowly than originally expected. Changes in the
rate or "speed" of these prepayments can cause the value of mortgage-backed
securities to fluctuate rapidly.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the fund purchased
the security. Prepayments at a slower rate than expected may lengthen the
effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
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.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest-only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
greater than anticipated principal prepayments, then the total amount of
interest payments allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of his or her initial investment, even if the security is
government issued or guaranteed or is rated AAA or the equivalent. Conversely,
PO classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and the yield to investors will be
reduced if principal payments are slower than expected. Some IOs and POs, as
well as other CMO classes, are structured to have special protections against
the effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances. Inverse floating rate CMO classes also
may be extremely volatile. These classes pay interest at a rate that decreases
when a specified index of market rates increases.
The market for privately issued mortgage-backed securities is smaller and
less liquid than the market for U.S. government mortgage-backed securities.
Foreign mortgage-backed securities markets are substantially smaller than U.S.
markets but have been established in several countries, including Germany,
Denmark, Sweden, Canada and Australia, and may be developed elsewhere. Foreign
mortgage-backed securities generally are structured differently than domestic
mortgage-backed securities, but they normally present substantially similar
investment risks as well as the other risks normally associated with foreign
securities.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
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assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities, can be extremely volatile, and these securities may become illiquid.
Mitchell Hutchins seeks to manage a fund's investments in mortgage-backed
securities so that the volatility of its portfolio, taken as a whole, is
consistent with its investment objective. Management of portfolio duration is an
important part of this. However, computing the duration of mortgage-backed
securities is complex. See, "The Funds' Investments, Related Risks and
Limitations -- Duration." If Mitchell Hutchins does not compute the duration of
mortgage-backed securities correctly, the value of the fund's portfolio may be
either more or less sensitive to changes in market interest rates than intended.
In addition, if market interest rates or other factors that affect the
volatility of securities held by a fund change in ways that Mitchell Hutchins
does not anticipate, the fund's ability to meet its investment objective may be
reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with its investment limitations, Balanced Fund expects to invest in
those new types of mortgage-backed securities that Mitchell Hutchins believe may
assist the fund in achieving its investment objective. Similarly, Balanced 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 certificate holders 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 interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES -- Freddie Mac also facilitates a national
secondary market for conventional residential and U.S. government-insured
mortgage loans through its mortgage purchase and mortgage-backed securities
sales activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). Each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. Freddie Mac generally
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely payment
of both principal and interest. GMCs also represent a pro rata interest in a
pool of mortgages. These instruments, however, pay interest semi-annually and
return principal once a year in guaranteed minimum payments. The Freddie Mac
guarantee is not backed by the full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to 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
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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 "The Funds'
Investments, Related Risks and Limitations -- Mortgage-Backed Securities --
TYPES of CREDIT ENHANCEMENT." These credit enhancements do not protect investors
from changes in market value.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS
- -- CMOs are debt obligations that are collateralized by mortgage loans or
mortgage pass-through securities (collectively, "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 the debt service on the
CMOs or to make scheduled distributions on the multi-class mortgage pass-through
securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier 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.
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.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest rates
- -- I.e., the yield may increase as rates increase and decrease as rates decrease
- -- but may do so more rapidly or to a greater degree. The market value of such
securities generally is more volatile than that of a fixed rate obligation. Such
interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an inverse IO class, on which the holders are
entitled to receive no payments of principal and are entitled to receive
interest at a rate that will vary inversely with a specified index or a multiple
thereof.
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) loss protection. Loss protection
relates to 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. Loss protection 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
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credit obtained by the issuer or sponsor, from third parties, through various
means of structuring the transaction or through a combination of such
approaches. Balanced Fund 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.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES -- The
yield characteristics of mortgage- and asset-backed securities differ from those
of traditiona1 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.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage 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 was 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-related 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. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield.
ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED SECURITIES --
Adjustable rate mortgage ("ARM") securities are mortgage-backed securities
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(sometimes referred to as ARMs) 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. 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. 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. ARMs represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARM loans.
These mortgage loans generally specify that the borrower's mortgage interest
rate may not be adjusted above a specified lifetime maximum rate or, in some
cases, below a minimum lifetime rate. In addition, certain ARM loans specify
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. These mortgage loans also may limit changes in
the maximum amount by which the borrower's monthly payment may adjust for any
single adjustment period. If 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 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 loan. Borrowers under
these mortgage loans experiencing negative amortization may take longer to build
up their equity in the underlying property and may be more likely to default.
ARM loans 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 these mortgage loans could increase because the
availability of fixed 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 ARM loans might decrease. The rate of
prepayments with respect to ARM loans has fluctuated in recent years.
The rates of interest payable on certain ARM loans, and therefore on
certain ARM 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 securities supported by ARM loans 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
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
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.
DURATION. Duration is a measure of the expected life of a debt security on
a present value basis. Duration incorporates the debt security's yield, coupon
interest payments, final maturity and call features into one measures and is one
of the fundamental tools used by Mitchell Hutchins in portfolio selection and
yield curve positioning a fund's investments in debt securities. Duration was
developed as a more precise alternative to the concept "term to maturity."
Traditionally, a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until a debt security provides for a final
payment, taking no account of the pattern of the security's payments prior to
maturity.
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Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable debt security, expected to be made, and weights them by the
present values of the cash to be received at each future point in time. For any
debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a Treasury note with a remaining maturity
of five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.
Duration allows Mitchell Hutchins to make certain predictions as to the
effect that changes in the level of interest rates will have on the value of a
fund's portfolio of debt securities. For example, when the level of interest
rates increases by 1%, a debt security having a positive duration of three years
generally will decrease by approximately 3%. Thus, if Mitchell Hutchins
calculates the duration of a fund's portfolio of bonds as three years, it
normally would expect the portfolio to change in value by approximately 3% for
every 1% change in the level of interest rates. However, various factors, such
as changes in anticipated prepayment rates, qualitative considerations and
market supply and demand, can cause particular securities to respond somewhat
differently to changes in interest rates than indicated in the above example.
Moreover, in the case of mortgage-backed and other complex securities, duration
calculations are estimates and are not precise. This is particularly true during
periods of market volatility. Accordingly, the net asset value of a fund's
portfolio of bonds may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions will lengthen portfolio duration
by approximately the same amount as would holding an equivalent amount of the
underlying securities. Short futures or put options have durations roughly equal
to the negative duration of the securities that underlie these positions, and
have the effect of reducing portfolio duration by approximately the same amount
as would selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
will use more sophisticated analytical techniques that incorporate the economic
life of a security into the determination of its duration and, therefore, its
interest rate exposure.
INVESTING IN FOREIGN SECURITIES. The funds 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 market. Securities of foreign
issuers may not be registered with the Securities and Exchange Commission
("SEC"), and the issuers thereof may not be subject to its reporting
requirements. Accordingly, there may be less publicly available information
concerning foreign issuers of securities held by the funds than is available
concerning U.S. companies. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
The funds may invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank
or trust company evidencing ownership of the underlying securities. They
generally are in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. For purposes of each fund's
investment policies, ADRs generally are deemed to have the same classification
as the underlying securities they represent. Thus, an ADR representing ownership
of common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
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sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
Investment income and gains 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 certain foreign countries, however, may reduce or eliminate the amount of
foreign taxes to which the funds would be subject.
ZERO COUPON AND OTHER OID SECURITIES. Zero coupon securities are
securities on which no periodic interest payments are made but instead are sold
at a deep discount from their face value. The buyer of these securities receives
a rate of return by the gradual appreciation of the security, which results from
the fact that it will be paid at face value on a specified maturity date. There
are many types of zero coupon securities. Some are issued in zero coupon form,
including Treasury bills, notes and bonds that have been stripped of (separated
from) their unmatured interest coupons (unmatured interest payments) and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Others are created by brokerage firms that strip the
coupons from interest-paying bonds and sell the principal and the coupons
separately.
Other securities are sold with original issue discount ("OID") (I.E., the
difference between the issue price and the value at maturity) may provide for
some interest to be paid make prior to maturity. OID securities usually trade at
a discount from their face value.
Zero coupon securities are generally more sensitive to changes in interest
rates than debt obligations of comparable maturities that make current interest
payments. This means that when interest rates fall, the value of zero coupon
securities rises more rapidly than securities paying interest on a current
basis. However, when interest rates rise, their value falls more dramatically.
Other OID securities also are subject to greater fluctuations in market value in
response to changing interest rates than bonds of comparable maturities that
make current distributions of interest in cash.
Federal tax law requires that a fund that holds a zero coupon security or
other OID security include in gross income each year the OID that accrues on the
security for the year, even though the fund receives no interest payment on the
security during the year. These distributions would have to be made from the
fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. A fund would not be able to purchase additional securities with cash
used to make such distributions and its current income and the value of its
shares would ultimately be reduced as a result.
Certain zero coupon securities are U.S. Treasury notes and bonds that have
been stripped of their unmatured interest coupon receipts or interests in such
U.S. Treasury securities or coupons. This technique is frequently used with U.S.
Treasury bonds to create CATS (Certificate of Accrual Treasury Securities),
TIGRs (Treasury Income Growth Receipts) and similar securities.
CONVERTIBLE SECURITIES. A convertible security is a bond, 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 or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock because
they have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
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.
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A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a fund is called for redemption,
the fund will be required to permit the issuer to redeem the security, convert
it into underlying common stock or sell it to a third party.
WARRANTS. Warrants are securities permitting, but not obligating, holders
to subscribe for other securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Balanced
Fund may invest in money market investments for temporary or defensive purposes
or as part of its normal investment program. Such investments include, among
other things, (1) securities issued or guaranteed by the U.S. government or one
of its agencies or instrumentalities, (2) debt obligations of banks, savings and
loan institutions, insurance companies and mortgage bankers, (3) commercial
paper and notes, including those with variable and floating rates of interest,
(4) debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks, and foreign branches of foreign banks, (5) debt obligations issued or
guaranteed by one or more foreign governments or any of their foreign political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (6) bonds issued by foreign issuers, (7) repurchase
agreements and (8) securities of other investment companies that invest
exclusively in money market instruments.
Other than its investments in U. S. Treasury bills as indicated by the
Tactical Allocation Model, Tactical Allocation Fund may invest to a limited
extent in money market instruments for cash management purposes. Its investments
are limited to 1) securities issued or guaranteed by the U.S. government or one
of its agencies or instrumentalities, 2) repurchase agreements and 3) other
investment companies that invest exclusively in money market instruments.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The funds may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act of 1940, as amended ("Investment Company Act"), which at
present restrict investments in registered investment companies to no more than
10% of a fund's total assets. The shares of other investment companies are
subject to the management fees and other expenses of those funds. At the same
time, a fund would continue to pay its own management fees and expenses with
respect to all its investments, including the securities of other investment
companies.
ILLIQUID SECURITIES. The term "illiquid securities" means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which a fund has valued the securities and includes,
among other things, purchased over-the-counter options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins has determined are liquid pursuant to guidelines established
by the board. The assets used as cover for over-the-counter options written by a
fund will be considered illiquid unless the over-the-counter options are sold to
qualified dealers who agree that the fund may repurchase any over-the-counter
options it writes at a maximum price to be calculated by a formula set forth in
the option agreements. The cover for an over-the-counter option written subject
to this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Under current SEC guidelines, interest-only and principal-only classes
of mortgage-backed securities generally are considered illiquid. However,
interest only and principal only 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 board.
A fund may not be able readily to liquidate illiquid securities and may have to
sell other investments if necessary to raise cash to meet its obligations. The
lack of a liquid secondary market for illiquid securities may make it more
difficult for a fund to assign a value to those securities for purposes of
valuing its portfolio and calculating its net asset value.
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Restricted securities are not registered under the Securities Act of 1933,
as amended ("Securities Act"), and may be sold only in privately negotiated or
other exempted transactions or after a Securities Act registration statement has
become effective. Where registration is required, 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 a fund may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a fund might obtain a less
favorable price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the Securities Act. Institutional investors generally will not
seek to sell these instruments to the general public but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A under the Securities Act, which establishes a "safe harbor"
from the registration requirements of that Act for resales of certain securities
to qualified institutional buyers. Such markets include automated systems for
the trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
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 board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (E.G., the time needed to sell the security, how bids are solicited and
the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities in each fund's portfolio and reports periodically on such
decisions to the board.
Mitchell Hutchins also monitors each fund's overall holdings of illiquid
securities. If a fund's holdings of illiquid securities comes to exceed its
limitation on investments in illiquid securities for any reason, such as a
security ceasing to qualify as liquid, changes in relative market values of
portfolio securities or shareholder redemptions, Mitchell Hutchins will consider
what action would be in the best interests of the fund and its shareholders.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
A fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by a fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
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or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. Each fund intends to
enter into repurchase agreements only with counterparties in transactions
believed by Mitchell Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest and are subject to the fund's limitation on borrowings.
While a reverse repurchase agreement is outstanding, a fund will maintain, in a
segregated account with its custodian, cash or liquid securities, marked to
market daily, in an amount at least equal to its obligations under the reverse
repurchase agreement. See "The Funds' Investments, Related Risks and Limitations
- -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may
receive an extension of time to determine whether to enforce the fund's
obligation to repurchase the securities, and the fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E. , for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield. When
issued securities include TBA ("to be assigned") securities. TBA securities,
which are usually mortgage-backed securities, are purchased on a forward
commitment basis with an approximate principal amount and no defined maturity
date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. A fund generally would
not pay for such securities or start earning interest on them until they are
received. However, when a fund undertakes a when-issued or delayed-delivery
obligation, it immediately assumes the risks of ownership, including the risks
of price fluctuation. Failure of the issuer to deliver a security purchased by a
fund on a when-issued or delayed-delivery basis may result in the fund's
incurring or missing an opportunity to make an alternative investment. Depending
on market conditions, a fund's when-issued and delayed-delivery purchase
commitments could cause its net asset value per share to be more volatile,
because such securities may increase the amount by which the fund's total
assets, including the value of when-issued and delayed-delivery securities held
by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect 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 "The Funds' Investments, Related Risks
and Limitations -- Segregated Accounts." A fund may sell the right to acquire
the security prior to delivery if Mitchell Hutchins deems it advantageous to do
so, which may result in a gain or loss to the fund.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. Each fund will retain authority to terminate any of its loans at any
time. Each fund may pay reasonable fees in connection with a loan and may pay
the borrower or placing broker a negotiated portion of the interest earned on
the reinvestment of cash held as collateral. A fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. Each fund will regain record ownership of loaned securities to exercise
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beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the boards governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
SHORT SALES "AGAINST THE BOX." Short sales of securities a fund owns or
has the right to acquire at no added cost through conversion or exchange of
other securities it owns are known as short sales "against the box". To make
delivery to the purchaser in a short sale, the executing broker borrows the
securities being sold short on behalf of a fund, and the fund is obligated to
replace the securities borrowed at a date in the future. When a fund sells
short, it establishes a margin account with the broker effecting the short sale
and deposits collateral with the broker. In addition, the fund maintains, in a
segregated account with its custodian, the securities that could be used to
cover the short sale. Each fund incurs transaction costs, including interest
expense, in connection with opening, maintaining and closing short sales
"against the box."
A fund might make a short sale "against the box" to hedge against market
risks when Mitchell Hutchins believes that the price of a security may decline,
thereby causing a decline in the value of a security owned by the fund or a
security convertible into or exchangeable for a security owned by the fund. In
such case, any loss in the fund's long position after the short sale should be
reduced by a corresponding gain in the short position. Conversely, any gain in
the long position after the short sale should be reduced by a corresponding 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 a fund owns, either directly or indirectly, and in
the case where the fund owns convertible securities, changes in the investment
values or conversion premiums of such securities.
SEGREGATED ACCOUNTS. When a 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, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or swaps.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
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
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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 and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval. If a percentage restriction is adhered to at the time of
an investment or transaction, later changes in percentage resulting from a
change in values of portfolio securities or amount of total assets will not be
considered a violation of any of the following limitations.
Each fund will not:
(1) invest more than 10% of its net assets in illiquid securities.
(2) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
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and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger.
(5) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may use a
variety of financial instruments ("Derivative Instruments"), including certain
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts and swap transactions. A fund may enter into transactions
involving one or more types of Derivative Instruments under which the full value
of its portfolio is at risk. Under normal circumstances, however, each fund's
use of these instruments will place at risk a much smaller portion of its
assets. Balanced Fund may use all of the instruments identified below. Tactical
Allocation Fund is limited to stock index options and futures, futures on U.S.
Treasury notes and bills and options on these permitted futures contracts. The
particular Derivative Instruments that may be used by the funds are described
below.
A fund might not use any Derivative Instruments or derivative strategies,
and there can be no assurance that using any strategy will succeed. If Mitchell
Hutchins is incorrect in its judgment on market values, interest rates or other
economic factors in using a Derivative Instrument or strategy, a fund may have
lower net income and a net loss on the investment.
OPTIONS ON EQUITY AND DEBT SECURITIES. A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to buy the underlying security at the
exercise price.
OPTIONS ON SECURITIES INDICES. A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS. A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of bonds, 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
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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.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. A fund may
use Derivative Instruments to attempt to hedge its portfolio and also to attempt
to enhance income or return or realize gains and to manage the duration of its
bond portfolio. In addition, a fund may use Derivative Instruments to adjust its
exposure to different asset classes or to maintain exposure to stocks or bonds
while maintaining a cash balance for fund management purposes (such as to
provide liquidity to meet anticipated shareholder sales of fund shares and for
fund operating expenses). Tactical Allocation Fund, in particular, may use
Derivative Instruments to reallocate its exposure to different asset classes
when the Tactical Allocation Model's recommends asset allocation mix changes.
The funds also may use Derivative Instruments to facilitate trading and to
reduce transaction costs.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Derivative Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a fund's portfolio. Thus, in a short hedge a fund takes a
position in a Derivative Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, 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, a fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, a fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a fund intends to acquire. Thus, in a long
hedge, a fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, 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, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transaction costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A 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 equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. A fund might enter into a short straddle when
Mitchell Hutchins believes it unlikely that the prices of the securities will be
as volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad stock market
sectors in which a fund has invested or expects to invest. Derivative
Instruments on bonds may be used to hedge either individual securities or broad
fixed income market sectors.
Income strategies using Derivative Instruments may include the writing of
covered options to obtain the related option premiums. Return or gain strategies
may include using Derivative Instruments to increase or decrease a fund's
exposure to different asset classes without buying or selling the underlying
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instruments. A fund also may use derivatives to simulate full investment by the
fund while maintaining a cash balance for fund management purposes (such as to
provide liquidity to meet anticipated shareholder sales of fund shares and for
fund operating expenses).
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins may discover additional opportunities in
connection with Derivative Instruments and with hedging, income, return and gain
strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may use these
opportunities for a fund to the extent that they are consistent with the fund's
investment objective and permitted by its investment limitations and applicable
regulatory authorities. The funds' Prospectus or this SAI will be supplemented
to the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the
ability of Mitchell Hutchins to predict movements of the overall securities or
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. While Mitchell Hutchins is experienced
in the use of Derivative Instruments, there can be no assurance that any
particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(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 that fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, the
fund could suffer a loss. In either such case, the fund would have been in a
better position had it not hedged at all.
(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(I.E., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions 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 Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
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COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative 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 or futures contracts or (2) cash or liquid securities with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each fund will comply with SEC guidelines
regarding cover for such transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. A fund may also use options
to attempt to enhance return or realize gains by increasing or reducing its
exposure to an asset class without purchasing or selling the underlying
securities. Writing covered put or call options can enable a fund to enhance
income by reason of the premiums paid by the purchasers of such options. Writing
covered call options serves as a limited short hedge, because declines in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the affected fund will be obligated to sell the
security at less than its market value. Writing covered put options serves as a
limited long hedge, because increases in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security depreciates to a price lower than the exercise price of
the put option, it can be expected that the put option will be exercised and the
fund will be obligated to purchase the security at more than its market value.
The securities or other assets used as cover for over-the-counter options
written by a fund would be considered illiquid to the extent described under
"The Funds' Investments, Related Risks and Limitations -- Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contract to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. Options that
expire unexercised have no value.
A fund may effectively terminate its right or obligation 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 a fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The funds may purchase and write both exchange-traded and over-the-counter
options. Currently, many options on equity securities (stocks) are
exchange-traded. Exchange markets for options on bonds exist but are relatively
new, and these instruments are primarily traded on the over-the-counter market.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. In
contrast, over-the-counter options are contracts between a fund and its
counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the fund
as well as the loss of any expected benefit of the transaction.
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The funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The funds intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
over-the-counter options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. Although the
funds will enter into over-the-counter options only with counterparties that are
expected to be capable of entering into closing transactions with the funds,
there is no assurance that a fund will in fact be able to close out an
over-the-counter option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a fund might be unable to close out
an over-the-counter 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 put or call
option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund may purchase and write put and call options on indices in much the
same manner as the more traditional options discussed above, except the index
options may serve as a hedge against overall fluctuations in a securities market
(or market sector) rather than anticipated increases or decreases in the value
of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. Each fund's use of options is governed
by the following guidelines, which can be changed by its board without
shareholder vote:
(1) A fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums on
all other options held by the fund, does not exceed 5% of its total assets.
(2) The aggregate value of securities underlying put options written by
a fund, determined as of the date the put options are written, will not exceed
50% of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities and stock or bond indices and options on futures contracts) purchased
by a fund that are held at any time will not exceed 20% of its net assets.
FUTURES. The funds may purchase and sell securities index futures
contracts or interest rate futures contracts. A fund may purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices. In addition, a fund
may purchase or sell futures contracts or purchase options thereon to increase
or reduce its exposure to an asset class without purchasing or selling the
underlying securities, either as a hedge or to enhance return or realize gains.
Futures strategies also can be used to manage the average duration of a
fund's bond portfolio. If Mitchell Hutchins wishes to shorten the average
duration of a fund's bond portfolio, the fund may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the fund's bond
portfolio, the fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
A fund may also write put options on futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.
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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, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a 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.
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 each fund's obligations to or from a futures
broker. When a fund purchases an option on a futures contract, the premium paid
plus transaction costs is all that is at risk. In contrast, when a fund
purchases or sells a futures contract or writes a call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If a fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The funds intend 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 related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a 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.
24
<PAGE>
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. Each fund's use of
futures and related options is governed by the following guidelines, which can
be changed by its board without shareholder vote:
(1) The aggregate initial margin and premiums on futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), excluding the amount by which options are "in-the-money,"
may not exceed 5% of a fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a fund will not exceed 5% of its total assets.
SWAP TRANSACTIONS. Balanced Fund may enter into swap transactions, which
include swaps, caps, floors and collars relating to interest rates, securities
or other instruments. Interest rate swaps involve an agreement between two
parties to exchange payments that are based, for example, on variable and fixed
rates of interest and that are calculated on the basis of a specified amount of
principal (the "notional principal amount") for a specified period of time.
Interest rate cap and floor transactions involve an agreement between two
parties in which the first party agrees to make payments to the counterparty
when a designated market interest rate goes above (in the case of a cap) or
below (in the case of a floor) a designated level on predetermined dates or
during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated ceiling level or goes below
a designated floor level on predetermined dates or during a specified time
period. Equity swaps or other swaps relating to securities or other instruments
are also similar, but they are based on changes in the value of the underlying
securities or instruments. For example, an equity swap might involve an exchange
of the value of a particular security or securities index in a certain notional
amount for the value of another security or index or for the value of interest
on that notional amount at a specified fixed or variable rate.
Balanced Fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its bond portfolio or
to protect against any increase in the price of securities it anticipates
purchasing at a later date. The fund may use interest rate swaps, caps, floors
and collars as a hedge on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. Interest rate
swap transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.
Balanced Fund will usually enter into swaps on a net basis, I.E., the two
payment streams are netted out, with the fund receiving or paying, as the case
may be, only the net amount of the two payments. Since segregated accounts will
be established with respect to such transactions, Mitchell Hutchins believes
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the fund's borrowing restrictions. The net amount
of the excess, if any, of the fund's obligations over its entitlements with
respect to each swap will be accrued on a daily basis, and appropriate fund
assets having an aggregate net asset value at least equal to the accrued excess
will be maintained in a segregated account as described above in "The Funds'
Investments, Related Risks and Restrictions -- Segregated Accounts." The fund
also will establish and maintain such segregated accounts with respect to its
total obligations under any swaps that are not entered into on a net basis.
Balanced Fund will enter into interest rate swap transactions only with
banks and recognized securities dealers or their respective affiliates believed
by Mitchell Hutchins to present minimal credit risk in accordance with
guidelines established by the fund's board. If there is a default by the other
party to such a transaction, the fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
25
<PAGE>
ORGANIZATION; BOARD MEMBERS AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The Corporation was organized on October 29, 1985, as a Maryland
corporation. The Corporation has two operating series and has authority to issue
10 billion shares of common stock of separate series, par value $0.001 per share
(four billion shares are designated as shares of Balanced Fund). The Trust was
formed on March 28, 1991, as a business trust under the laws of the Commonwealth
of Massachusetts and has two operating series. The Trust is authorized to issue
an unlimited number of shares of beneficial interest, par value of $0.001 per
share.
The Trust and the Corporation are each governed by a board of trustees or
directors, which oversees its operations. The trustees or directors ("board
members") and executive officers of the Trust and the Corporation, their ages,
business addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER
--------------------- TRUST/CORPORATION DIRECTORSHIPS
----------------- -------------
<S> <C> <C>
Margo N. Alexander*+; 52 Trustee/Director Mrs. Alexander is chairman
and President (since March 1999), chief
executive officer and a director
of Mitchell Hutchins (since
January 1995) and an executive
vice president and a director of
PaineWebber (since March 1984).
Mrs. Alexander is president and a
director or trustee of 32
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Richard Q. Armstrong;64 Trustee/Director Mr. Armstrong is chairman and
One Old Church Road R.Q.A. Enterprises principal of
Unit #6 R.Q.A. Enterprises (management
Greenwich, CT 06830 consulting (since April 1991 and
principal firm) occupation since
March 1995). Mr. Armstrong was
chairman of the board, chief
executive officer and co-owner of
Adirondack Beverages (producer
and distributor of soft drinks
and sparkling/still waters)
(October 1993-March 1995). He was
a partner of The New England
Consulting Group (management
consulting firm) (December
1992-September 1993). He was
managing director of LVMH U.S.
Corporation (U.S. subsidiary of
the French luxury goods
conglomerate, Louis Vuitton Moet
Hennessey Corporation)
(1987-1991) and chairman of its
wine and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a
director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
26
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER
--------------------- TRUST/CORPORATION DIRECTORSHIPS
----------------- -------------
<S> <C> <C>
E. Garrett Bewkes, Trustee/Director Mr. Bewkes is a director of
Jr.**+; 73 and Chairman of Paine Webber Group Inc. ("PW
the Board of Group") (holding company of
Trustees/Directors PaineWebber and Mitchell
Hutchins). Prior to December
1995, he was a consultant to PW
Group. Prior to 1988, he was
chairman of the board, president
and chief executive officer of
American Bakeries Company. Mr.
Bewkes is a director of
Interstate Bakeries Corporation.
Mr. Bewkes is a director or
trustee of 35 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Richard R. Burt; 52 Trustee/Director Mr. Burt is chairman of IEP
1275 Pennsylvania Ave., Advisors, Inc. (international
N.W. investments and consulting firm)
Washington, DC 20004 (since March 1994) and a partner
of McKinsey & Company
(management consulting firm)
(since 1991). He is also a
director of
Archer-Daniels-Midland Co.
(agricultural commod-ities),
Hollinger International Co.
(publishing) and Homestake
Mining Corp. (gold mining),vice
chairman (since July 1999) of
Anchor Gaming (provides
technology to gaming and
wagering industry) and chairman
(since April 1996) of Weirton
Steel Corp. (makes and finishes
steel products). He was the
chief negotiator in the
Strategic Arms Reduction Talks
with the former Soviet Union
(1989-1991) and the U.S.
Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is a director or
trustee of 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Mary C. Farrell**+; 50 Trustee/Director 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 appears as a
regular panelist on Wall $treet
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
director or trustee of 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
27
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER
--------------------- TRUST/CORPORATION DIRECTORSHIPS
----------------- -------------
<S> <C> <C>
Meyer Feldberg; 57 Trustee/Director Mr. Feldberg is Dean and
Columbia University Professor of Management of the
101 Uris Hall Graduate School of Business,
New York, NY 10027 Columbia University. Prior to
1989, he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of Primedia,
Inc. (publishing), Federated
Department Stores, Inc.
(operator of department stores)
and Revlon, Inc. (cosmetics).
Dean Feldberg is a director or
trustee of 34 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
George W. Gowen; 70 Trustee/Director Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, NY 10017 Bartholow & Miller. Prior to May
1994, he was a partner in the law
firm of Fryer, Ross & Gowen. Mr.
Gowen is a director or trustee of
34 investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Frederic V. Malek; 62 Trustee/Director Mr. Malek is chairman of Thayer
1455 Pennsylvania Ave., Capital Partners (merchant bank)
N.W. and chairman of Thayer Hotel
Suite 350 Investors II and Lodging
Washington, DC 20004 Opportunities Fund (hotel
investing partnerships). From
January 1992 to November 1992,
he was campaign manager of
Bush-Quayle `92. From 1990 to
1992, he was vice chairman and,
from 1989 to 1990, he was
president of Northwest Airlines
Inc. and NWA Inc. (holding
company of Northwest Airlines
Inc.). Prior to 1989, he was
employed by the Marriott
Corporation (hotels,
restaurants, airline catering
and contract feeding), where he
most recently was an executive
vice president and president of
Marriott Hotels and Resorts. Mr.
Malek is also a director of
Aegis Communications, Inc.
(tele-services), American
Management Systems, Inc.
(management consulting and
computer related services),
Automatic Data Processing, Inc.
(computing), CB Richard Ellis,
Inc. (real estate services), FPL
Group, Inc. (electric services),
Global Vacation Group (packaged
vacations), HCR/Manor Care, Inc.
(health care) and Northwest
Airlines Inc. Mr. Malek is a
director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
28
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER
--------------------- TRUST/CORPORATION DIRECTORSHIPS
----------------- -------------
<S> <C> <C>
Carl W. Schafer; 63 Trustee/Director Mr. Schafer is president of the
66 Witherspoon Street, Atlantic Foundation (charitable
#1100 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He is a director of
Labor Ready, Inc. (temporary
employment), Roadway Express,
Inc. (trucking), The Guardian
Group of Mutual Funds, the
Harding, Loevner Funds, EII
Realty Trust (investment
company), Evans Systems, Inc.
(motor fuels, convenience store
and diversified company),
Electronic Clearing House, Inc.
(financial transactions
processing), Frontier Oil
Corporation and Nutraceutix,
Inc. (bio-technology company).
Prior to January 1993, he was
chairman of the Investment
Advisory Committee of the Howard
Hughes Medical Institute. Mr.
Schafer is a director or trustee
of 31 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Brian M. Storms*+; 45 Trustee/Director Mr. Storms is president and
chief operating officer of
Mitchell Hutchins (since March
1999). Prior to joining
Mitchell Hutchins, he was
president of Prudential
Investments (1996-1999). Prior
to joining Prudential, he was a
managing director at Fidelity
Investments. Mr. Storms is a
director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing
director and chief investment
officer--quantitative
investments of Mitchell
Hutchins. Mr. Barneby is a
vice president of seven
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and
Assistant Treasurer a manager of the mutual fund
finance department of Mitchell
Hutchins. Prior to September
1997, he was an audit manager in
the financial services practice
of Ernst & Young LLP. Mr. Lee is
a vice president and assistant
treasurer of 32 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
29
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER
--------------------- TRUST/CORPORATION DIRECTORSHIPS
----------------- -------------
<S> <C> <C>
Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice
Assistant Treasurer president and a senior manager
of the mutual fund finance
department of Mitchell Hutchins.
From August 1996 through March
1999, he was the manager of the
mutual fund internal control
group of Salomon Smith Barney.
Prior to August 1996, he was an
associate and assistant treasurer
for BlackRock Financial
Management L.P. Mr. Mahoney is a
vice president and assistant
treasurer of 32 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Dennis McCauley*; 53 Vice President Mr. McCauley is a managing
(Corporation only) director and chief investment
officer--fixed income of Mitchell
Hutchins. Prior to December
1994, he was director of fixed
income investments of IBM
Corporation. Mr. McCauley is a
vice president of 22 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president
Assistant Treasurer and a manager of the mutual fund
finance department of Mitchell
Hutchins. Ms. Moran is a vice
president and assistant
treasurer of 32 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Dianne E. O'Donnell**; 47 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general
counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice
president and secretary of 31
investment companies and a vice
president and assistant
secretary of one investment
company for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Emil Polito*; 39 Vice President Mr. Polito is a senior vice
president and director of
operations and control for
Mitchell Hutchins. Mr. Polito is
a vice president of 32
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Susan P. Ryan*; 39 Vice President Ms. Ryan is a senior vice
(Corporation only) president and portfolio manager
of Mitchell Hutchins and has
been with Mitchell Hutchins
since 1982. Ms. Ryan is a vice
president of five investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
30
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH BUSINESS EXPERIENCE; OTHER
--------------------- TRUST/CORPORATION DIRECTORSHIPS
----------------- -------------
<S> <C> <C>
Victoria E. Schonfeld**; Vice President Ms. Schonfeld is a managing
49 director and general counsel of
Mitchell Hutchins (since May
1994) and a senior vice president
of PaineWebber (since July 1995).
Ms. Schonfeld is a vice president
of 31 investment companies and a
vice president and secretary of
one investment company for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Paul H. Schubert**; 36 Vice President and Mr. Schubert is a senior vice
Treasurer president and director of the
mutual fund finance department
of Mitchell Hutchins. Mr.
Schubert is a vice president and
treasurer of 32 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Nirmal Singh*; 43 Vice President Mr. Singh is a senior vice
(Corporation only) president and a portfolio
manager of Mitchell Hutchins.
Mr. Singh is a vice president of
four investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Barney A. Taglialatela**; Vice President and Mr. Taglialatela is a vice
38 Assistant Treasurer president and a manager of the
mutual fund finance department
of Mitchell Hutchins. Prior to
February 1995, he was a manager
of the mutual fund finance
division of Kidder Peabody Asset
Management, Inc. Mr.
Taglialatela is a vice president
and assistant treasurer of 32
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Mark A. Tincher*; 44 Vice President Mr. Tincher is a managing
director and chief investment
officer--equities of Mitchell
Hutchins. Prior to March 1995,
he was a vice president and
directed the U.S. funds
management and equity research
areas of Chase Manhattan Private
Bank. Mr. Tincher is a vice
president of 13 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice
Assistant Secretary president 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 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
</TABLE>
31
<PAGE>
- -------------
* The business address of this person is 51 West 52nd Street, New York, New
York 10019-6114.
** The business address of this person is 1285 Avenue of the Americas, New York,
New York 10019.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr . Storms are "interested
persons" of each fund as defined in the Investment Company Act by virtue of
their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
The Corporation and the Trust each pays board members who are not
"interested persons" of the Corporation/Trust ("disinterested trustees")
$1,500 annually for Balanced Fund or Tactical Allocation Fund, as applicable,
an additional $1,000 for the Corporation's or Trust's second series and up to
$150 per series for each board meeting and each separate meeting of a board
committee. The Corporation and the Trust thus each pays an independent board
member $2,500 annually plus any additional annual amounts due for board or
committee meetings. Each chairman of the audit and contract review committees
of individual funds within the PaineWebber fund complex receives additional
compensation, aggregating $15,000 annually from the relevant funds. All board
members are reimbursed for any expenses incurred in attending meetings.
Because Mitchell Hutchins and PaineWebber perform substantially all of the
services necessary for the operation of the Trust, the Corporation and each
fund, the Trust and the Corporation require no employees. No officer, director
or employee of Mitchell Hutchins or PaineWebber presently receives any
compensation from the Trust or the Corporation for acting as a board member or
officer. Board members and officers own in the aggregate less than 1% of the
outstanding shares of any class of each fund.
The table below includes certain information relating to the compensation
of the current board members who held office with the Trust or the Corporation
during the funds' fiscal years ended August 31, 1999, and the compensation of
those board members from all PaineWebber funds during the 1998 calendar year.
COMPENSATION TABLE+
TOTAL
COMPENSATION
AGGREGATE AGGREGATE FROM THE
COMPENSATION COMPENSATION CORPORATION/TRUST
FROM THE FROM THE AND THE FUND
NAME OF PERSON, POSITION CORPORATION(1) TRUST(1) COMPLEX (2)
------------------------ ------------- ------- -----------
Richard Q. Armstrong,
Trustee/Director $4,120 $4,120 $101,372
Richard R. Burt, ........
4,120 4,060 101,372
Trustee/Director.........
Meyer Feldberg,
4,120 5,424 116,222
Trustee/Director.........
George W. Gowen,
Trustee/Director......... 4,945 4,120 108,272
Frederic V. Malek,
Trustee/Director......... 4,120 4,120 101,372
Carl W. Schafer,
Trustee/Director......... 4,120 4,120 101,372
- --------------------
+ Only independent board members are compensated by the PaineWebber
funds and identified above; board members who are "interested
persons," as defined by the Investment Company Act, do not receive
compensation from the funds.
32
<PAGE>
(1) Represents total fees paid by the Corporation and the Trust to each
board member indicated for the fiscal year ended August 31, 1999.
These fees are allocated in part to the funds and in part to the
other series of the Corporation or Trust.
(2) Represents total compensation paid to each board member during the
calendar year ended December 31, 1998; no fund within the fund
complex has a bonus, pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
As of November 30, 1999, the funds' records showed no shareholders as
owning 5% or more of any class of a fund's shares.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator of each fund pursuant to a
separate contract (each an "Advisory Contract") with the Corporation and the
Trust. Under the Advisory Contracts, the funds pay Mitchell Hutchins an annual
fee, computed daily and paid monthly, as set forth below:
BALANCED FUND
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ----
Up to $500 million.......................................... 0.750%
In excess of $500 million up to $1.0 billion................ 0.725
In excess of $1.0 billion up to $1.5 billion................ 0.700
In excess of $1.5 billion up to $2.0 billion................ 0.675
Over $2.0 billion........................................... 0.650
TACTICAL ALLOCATION FUND
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ----
Up to $250 million.......................................... 0.500%
Over $250 million........................................... 0.450
During the fiscal years indicated, Mitchell Hutchins earned (or accrued)
advisory and administration fees in the amounts set forth below:
FISCAL YEARS ENDED AUGUST 31,
1999 1998 1997
---- ---- ----
Balanced Fund ................ $1,890,996 $1,709,264 $1,465,166
Tactical Allocation Fund...... 9,214,743 4,895,190 1,756,146
Under the terms of the applicable Advisory Contract, each fund bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust or Corporation not readily identifiable
as belonging to a specific series are allocated among series by or under the
33
<PAGE>
direction of the board in such manner as the board deems fair and equitable.
Expenses borne by each fund include the following: (1) the cost (including
brokerage commissions, if any) of securities purchased or sold by the fund and
any losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members who are not interested persons of the Trust/Corporation
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 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 fund; (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of a fund's outstanding
voting securities, on 60 days' written notice to Mitchell Hutchins or by
Mitchell Hutchins on 60 days' written notice to a fund.
Prior to August 1, 1997, pursuant to a service agreement, PaineWebber
provided certain services to Balanced Fund not otherwise provided by the fund's
transfer agent, PFPC Inc. ("PFPC"). Pursuant to this agreement, Balanced Fund
paid fees in the amount of $54,420 to PaineWebber during the period September 1,
1996 to August 1, 1997. No such service agreement was in effect with respect to
Tactical Allocation Fund. Subsequent to August 1, 1997, PFPC (not the funds)
pays PaineWebber for certain transfer agency related services relating to both
funds that PFPC has delegated to PaineWebber.
SECURITIES LENDING. During the fiscal year ended August 31, 1999 and
August 31, 1998, the funds paid (or accrued) the following fees to PaineWebber
for its services as securities lending agent:
FISCAL YEARS ENDED AUGUST 31,
1999 1998
---- ----
Balanced Fund $17,852 $28,144
Tactical Allocation Fund $176,811 $134,065
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NET ASSETS. The following table shows the approximate net assets as of
October 31, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser. An investment company
may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
Domestic (excluding Money Market).................. $7,873.9
Global............................................. 4,651.4
Equity/Balanced.................................... 7,822.0
Fixed Income (excluding Money Market).............. 3,233.7
Taxable Fixed Income........................ 4,703.3
Tax-Free Fixed Income........................ 1,469.6
Money Market Funds................................. 36,069.2
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber funds and other Mitchell
Hutchins advisory accounts by all Mitchell Hutchins' directors, officers and
employees, establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each fund under separate distribution contracts with
each fund (collectively, "Distribution Contracts"). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable fund. Shares of each fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the funds
(collectively, "Exclusive Dealer Agreements"), PaineWebber and its correspondent
firms sell each fund's shares. Mitchell Hutchins is located at 51 West 52nd
Street, New York, New York 10019-6114 and PaineWebber is located at 1285 Avenue
of the Americas, New York, New York 10019.
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of each fund adopted by the Trust or the Corporation in the
manner prescribed under Rule 12b-1 under the Investment Company Act (each,
respectively, a "Class A Plan," "Class B Plan" and "Class C Plan," and,
collectively, "Plans"), 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 and 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 B shares. There is no distribution plan with respect to the funds' Class Y
shares, and the funds pay no service or distribution fees with respect to their
Class Y shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B and
C shares primarily to pay PaineWebber for shareholder servicing, currently at
the annual rate of 0.25% of the aggregate investment amounts maintained in each
fund by PaineWebber clients. PaineWebber then compensates its Financial Advisors
for shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:
o Offset the commissions it pays to PaineWebber for selling each
fund's Class B and Class C shares, respectively.
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o 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 Financial Advisors when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the funds or investors at the time
Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge paid
when Class A shares are bought and of the contingent deferred sales charge paid
upon sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related Distribution Contracts for Class A, Class B and
Class C shares specify that each fund must pay service and distribution fees to
Mitchell Hutchins for its service- and distribution-related 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
each fund reviews the Plans and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment thereto
is approved, by the applicable board, including those board members who are not
"interested persons" of their respective funds 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 board members who are not "interested persons" of a fund shall be
committed to the discretion of the board members who are not "interested
persons" of the respective fund.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of a
fund's shares to such class based on the ratio of sales of shares of such class
to the sales of all three classes of shares. The fees paid by one class of a
fund's shares will not be used to subsidize the sale of any other class of fund
shares.
The funds paid (or accrued) the following service and/or distribution fees
to Mitchell Hutchins under the Class A, Class B and Class C Plans during the
fiscal year ended August 31, 1999:
TACTICAL ALLOCATION
BALANCED FUND FUND
------------- ----
Class A.................... $ 505,425 $ 1,365,214
Class B.................... 305,401 7,645,352
Class C.................... 190,716 6,022,973
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Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each fund during the fiscal year
ended August 31, 1999:
TACTICAL ALLOCATION
BALANCED FUND FUND
------------- ----
CLASS A
Marketing and advertising.......... $232,019 $1,466,338
Amortization of commissions........ 0 0
Printing of prospectuses and SAIs.. 2,410 17,072
Branch network costs allocated and
interest expense................... 563,791 831,595
Service fees paid to PaineWebber
Financial Advisors 196,647 526,906
CLASS B
Marketing and advertising.......... $34,986 $2,055,505
Amortization of commissions........ 109,390 2,798,288
Printing of prospectuses and SAIs.. 364 23,928
Branch network costs allocated and
interest expense 100,438 1,592,568
Service fees paid to PaineWebber
Financial Advisors 29,401 737,560
CLASS C
Marketing and advertising.......... $22,495 $1,621,777
Amortization of commissions........ 55,130 1,742,839
Printing of prospectuses and SAIs.. 226 18,880
Branch network costs allocated and
interest expense................... 53,715 935,065
Service fees paid to PaineWebber
Financial Advisors 18,376 580,946
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the funds' 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 funds' shares, including the PaineWebber retail branch system.
In approving each fund's overall Flexible PricingSM system of
distribution, the applicable board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, each board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber Financial Advisors and correspondent firms, resulting
in greater growth of the fund than might otherwise be the case, (3) the
advantages to the shareholders of economies of scale resulting from growth in
the fund's assets and potential continued growth, (4) the services provided to
the fund and its shareholders by Mitchell Hutchins, (5) the services provided by
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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, each board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber Financial Advisors and correspondent firms to receive
sales commissions when Class B shares are sold and continuing service fees
thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the Financial Advisors
and correspondent firms, resulting in greater growth of the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges, was conditioned upon its expectation of being compensated under the
Class B Plan.
In approving the Class C Plan, each board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber Financial Advisors and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the Financial Advisors and
correspondent firms, resulting in greater growth to the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption after one year
following purchase was conditioned upon its expectation of being compensated
under the Class C Plan.
With respect to each Plan, the boards 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 boards 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 each fund, which
fees would increase if the Plan were successful and the fund attained and
maintained significant asset levels.
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Under the Distribution Contracts for Class A shares, for the fiscal years
set forth below, Mitchell Hutchins earned the following approximate amounts of
sales charges and retained the following approximate amounts, net of concessions
to PaineWebber as exclusive dealer.
FISCAL YEARS ENDED AUGUST 31,
-----------------------------
1999 1998 1997
---- ---- ----
BALANCED FUND
Earned...................... $ . 91,158 $. 368,103 $. 61,774
Retained.................... 8,956 16,048 2,215
TACTICAL ALLOCATION FUND
Earned...................... $.4,648,952 $.3,764,774 $.2,887,643
Retained.................... 245,303 243,663 182,132
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
August 31, 1999:
TACTICAL ALLOCATION
BALANCED FUND FUND
------------- ------------------
Class A..................... $.......0 $.......0
Class B..................... 79,720 2,216,429
Class C.................... 6,858 232,272
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of the funds' portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for a fund, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While Mitchell Hutchins generally seeks
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The funds may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker. During the fiscal years
indicated, the funds paid the brokerage commissions set forth below:
FISCAL YEARS ENDED AUGUST 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Balanced Fund....................... $367,133 $290,954 $249,609
Tactical Allocation Fund............ 363,697 440,215 211,116
The funds have no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. Each board has adopted procedures in conformity with Rule
17e-1 under the Investment Company Act to ensure that all brokerage commissions
paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the funds
on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
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paid only in accordance with applicable SEC regulations. For the fiscal years
indicated, the funds paid brokerage commissions to PaineWebber as follows:
FISCAL YEARS ENDED AUGUST 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Balanced Fund....................... $14,808 $1,038 $15,564
Tactical Allocation Fund............ 3,571 5,496 2,422
During the fiscal year ended August 31, 1999, the brokerage commissions
paid by Balanced Fund to PaineWebber represented 4.03% of the total commissions
paid by the fund and 3.30% of the aggregate dollar amount of transactions
involving brokerage commission payments. During the same period, the brokerage
commissions paid by Tactical Allocation Fund to PaineWebber represented 0.98% of
the total commissions paid by the fund and 1.09% of the aggregate dollar amount
of transactions involving brokerage commission payments.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
funds' procedures in selecting FCMs to execute their transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and its
affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
In selecting brokers, Mitchell Hutchins will consider the full range and
quality of a broker's services. Consistent with the interests of the funds and
subject to the review of each board, Mitchell Hutchins may cause a fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins with brokerage or research services. The funds may pay those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that the commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to that fund and its other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
For Balanced Fund's fiscal year ended August 31, 1999, Mitchell Hutchins
directed $78,679,767 in portfolio transactions to brokers chosen because they
provided research services, for which Balanced Fund paid $100,667 in
commissions. For Tactical Allocation Fund's fiscal year ended August 31, 1999,
Mitchell Hutchins directed no transactions to brokers chosen because they
provided research services.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions, it
will not purchase securities at a higher price or sell securities at a lower
price than would otherwise be paid if no weight was attributed to the services
provided by the executing dealer. Mitchell Hutchins may engage in agency
transactions in over-the-counter equity and debt securities in return for
research and execution services. These transactions are entered into only
pursuant to procedures that are designed to ensure that the transaction
(including commissions) is at least as favorable as it would have been if
effected directly with a market-maker that did not provide research or execution
services.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which the funds effect securities transactions may be used
by Mitchell Hutchins in advising other funds or accounts and, conversely,
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research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that it advises may be used in advising
the funds.
Investment decisions for a 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 accounts. In those cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated between that fund and the other account(s) as to
amount according to a formula deemed equitable to the fund and the other
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as a fund is concerned, or upon
its ability to complete its entire order, in other cases it is believed that
simultaneous transactions and the ability to participate in volume transactions
will benefit the fund.
The funds will not purchase securities that are offered in underwritings
in which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by each board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the funds.
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
The funds' portfolio turnover rates for the fiscal years shown were:
FISCAL YEARS ENDED AUGUST 31,
-----------------------------------------
1999 1998
---- ----
Balanced Fund................. 234% 190%
Tactical Allocation Fund...... 6% 33%
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell Hutchins
may make payments out of its own resources to PaineWebber and to the
variable annuity's sponsor, adviser or distributor in a total amount
not to exceed l% of the amount invested;
o Acquire shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of shares at net
asset value to that program. For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its
own resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to implement a rebalancing
feature of such an investment program, the minimum subsequent
investment requirement is also waived;
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o Acquire shares in connection with a reorganization pursuant to which a
fund acquires substantially all of the assets and liabilities of
another fund in exchange solely for shares of the acquiring fund; or
o Acquire shares in connection with the disposition of proceeds from the
sale of shares of Managed High Yield Plus Fund Inc. that were acquired
during that fund's initial public offering of shares and that meet
certain other conditions described in its prospectus.
In addition, reduced sales charges on Class A shares are available through
the combined purchase plan or through rights of accumulation described below.
Class A share purchases of $1 million or more are not subject to an initial
sales charge; however, if a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, is imposed. This contingent deferred sales charge is waived if you are
eligible to invest in certain offshore investment pools offered by PaineWebber,
your shares are sold before March 31, 2000 and the proceeds are used to purchase
interests in one or more of these pools (see below).
COMBINED PURCHASE PRIVILEGE--- CLASS A SHARES. Investors and eligible
groups of related fund investors may combine purchases of Class A shares of the
funds with concurrent purchases of Class A shares of any other PaineWebber
mutual fund and thus take advantage of the reduced sales charges indicated in
the table of sales charges for Class A shares in the Prospectus. The sales
charge payable on the purchase of Class A shares of the funds and Class A shares
of such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her individual retirement account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or the
individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed related to
that other employer); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The registered
investment adviser must communicate at least quarterly through a newsletter or
investment update establishing a relationship with all of the accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
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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.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have redeemed
Class A shares of a fund may reinstate their account without a sales charge by
notifying the transfer agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised, although a loss arising out of a
redemption might not be deductible under certain circumstances. See "Taxes"
below.
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.
NON-RESIDENT ALIEN WAIVER OF CONTINGENT DEFERRED SALES CHARGE FOR CLASS A,
B AND C SHARES. Until March 31, 2000, investors who are non-resident aliens will
be able to sell their fund shares without incurring a contingent deferred sales
charge, if they use the sales proceeds to immediately purchase shares of certain
offshore investment pools available through PaineWebber. The fund will waive the
contingent deferred sales charge that would otherwise apply to a sale of Class
A, Class B or Class C shares of a fund. Fund shareholders who want to take
advantage of this waiver should review the offering documents of the offshore
investment pools for further information, including investment minimums, and
fees and expenses. Shares of the offshore investment pools are available only in
those jurisdictions where the sale is authorized and are not available to any
U.S. person, including any citizen or resident of the United States, U.S.
partnership or U.S. trust, and are not available to residents of certain other
countries. For more information on how to take advantage of the deferred sales
charge waiver, investors should contact their PaineWebber Financial Advisors.
PURCHASES OF CLASS Y SHARES THROUGH THE PACESM MULTI ADVISOR PROGRAM. An
investor who participates in the PACESM Multi Advisor Program is eligible to
purchase Class Y shares. The PACESM Multi Advisor Program is an advisory program
sponsored by PaineWebber that provides comprehensive investment services,
including investor profiling, a personalized asset allocation strategy using an
appropriate combination of funds, and a quarterly investment performance review.
Participation in the PACESM Multi Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee. Please
contact your PaineWebber Financial Advisor or PaineWebber's correspondent firms
for more information concerning mutual funds that are available through the
PACESM Multi Advisor Program.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONESM PROGRAM.
Investors who purchase shares through the PaineWebber InsightOneSM Program are
eligible to purchase Class A shares without a sales load. The PaineWebber
InsightOneSM Program offers a nondiscretionary brokerage account to PaineWebber
clients for an asset-based fee at an annual rate of up to 1.50% of the assets in
the account. Account holders may purchase or sell certain investment products
without paying commissions on other markups/markdowns.
PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(K) PLUS
PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds that are
included as investment options under the Plan to implement the investment
choices of individual participants with respect to their Plan contributions.
Individual Plan participants should consult the Summary Plan Description and
other plan material of the PW 401(k) Plus Plan (collectively, "Plan Documents")
for a description of the procedures and limitations applicable to making and
changing investment choices. Copies of the Plan Documents are available from the
43
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Benefits Connection, 100 Halfday Road, Lincolnshire, IL 60069 or by calling
1-888-Pwebber (1-888-793-2237). As described in the Plan Documents, the price at
which Class Y shares are bought and sold by the trustee of PW 401(k) Plus Plan
might be more or less than the price per share at the time the participants made
their investment choices.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or 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 that 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 these securities into cash. Each fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a 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.
SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form" in accordance with the policies of those service organizations. A
fund will be deemed to have received these purchase and redemption orders when a
service organization or its agent accepts them. Like all customer orders, these
orders will be priced based on the fund's net asset value next computed after
receipt of the order by the service organizations or their agents. Service
organizations may include retirement plan service providers who aggregate
purchase and redemption instructions received from numerous retirement plans or
plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment plan
with a minimum initial investment of $1,000 through which a fund will deduct $50
or more on a monthly, quarterly, semi-annual or annual basis from the investor's
bank account to invest directly in the fund. Participation in the automatic
investment plan enables an investor to use the technique of "dollar cost
averaging." When an investor invests the same dollar amount each month under the
plan, the investor will purchase more shares when a fund's net asset value per
share is low and fewer shares when the net asset value per share is high. Using
this technique, an investor's average purchase price per share over any given
period will be lower than if the investor purchased a fixed number of shares on
a monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.
SYSTEMATIC WITHDRAWAL PLAN. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber mutual fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
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<PAGE>
o Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $100,
$200, $300 and $400, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to a
contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. Instructions to
participate in the plan, change the withdrawal amount or terminate participation
in the plan will not be effective until five days after written instructions
with signatures guaranteed are received by PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available through
PaineWebber in which purchases of PaineWebber mutual funds and other investments
may be made. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.
TRANSFER OF ACCOUNTS. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICEMARK);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
45
<PAGE>
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity and
Gold MasterCard(R) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities
held in the account;
o comprehensive year-end summary statements that provide information
on account activity for use in tax planning and tax return
preparation;
o automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds - RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New Jersey Municipal Money Fund
and RMA New York Municipal Money Fund. AN INVESTMENT IN A MONEY
MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH A
MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN A
MONEY MARKET FUND;
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
o Gold MasterCard, with or without a line of credit, which provides
RMA accountholders with direct access to their accounts and can be
used with automatic teller machines worldwide. Purchases on the Gold
MasterCard are debited to the RMA account once monthly, permitting
accountholders to remain invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and
more detailed personal assistance during business hours from the RMA
Service Center;
o unlimited electronic funds transfers and bill payment service for an
additional fee;
46
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o expanded account protection for the net equity securities balance in
the event of the liquidation of PaineWebber. This protection does
not apply to shares of funds that are held at PFPC and not through
PaineWebber; and
o automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a fund will automatically convert to Class A shares of
that fund, based on the relative net asset values per share of the two classes,
as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (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 shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The conversion feature is subject to the continuing availability of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential dividends" under
the Internal Revenue Code and that the conversion of shares does not constitute
a taxable event. If the conversion feature ceased to be available, the Class B
shares would not be converted and would continue to be subject to the higher
ongoing expenses of the Class B shares beyond six years from the date of
purchase. Mitchell Hutchins has no reason to believe that this condition will
not continue to be met.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities and other assets are valued based upon market quotations when
those quotations are readily available unless, in Mitchell Hutchins' judgment,
those quotations do not adequately reflect the fair value of the security.
Securities that are listed on exchanges normally are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are generally valued on the exchange considered by
Mitchell Hutchins as the primary market. Securities traded in the
over-the-counter market and listed on the Nasdaq Stock Market ("Nasdaq")
normally are valued at the last available sale price on Nasdaq prior to
valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation (other than short-term investments that mature in
60 days or less, which are valued as described further below). Securities and
assets for which market quotations are not readily available may be valued based
upon appraisals received from a pricing service using a computerized matrix
system or based upon appraisals derived from information concerning the security
or similar securities received from recognized dealers in those securities. All
other securities and assets are valued at fair value as determined in good faith
47
<PAGE>
by or under the direction of the applicable board. It should be recognized that
judgment often plays a greater role in valuing thinly traded securities,
including many lower rated bonds, than is the case with respect to securities
for which a broader range of dealer quotations and last-sale information is
available. The amortized cost method of valuation generally is used to value
debt obligations with 60 days or less remaining until maturity, unless the
applicable board determines that this does not represent fair value.
PERFORMANCE INFORMATION
The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge is deducted from the initial $1,000 payment and, for
Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
The funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following tables show performance information for each class of the
funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average annual return.
48
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BALANCED FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
(INCEPTION DATE) (7/1/91) (12/12/86) (7/2/92) (3/26/98)
-------- ---------- -------- ---------
Year ended August 31, 1999:
Standardized Return*...... 10.98% 10.28% 14.34% 16.42%
Non-Standardized Return... 16.20% 15.28% 15.34% 16.42%
Five Years ended August 31, 1999:
Standardized Return*...... 13.17% 13.14% 13.37% N/A
Non-Standardized Return*.. 14.23% 13.38% 13.37% N/A
Ten Years ended August 31, 1999:
Standardized Return....... N/A 10.49% N/A N/A
Non-Standardized Return... N/A 10.49% N/A N/A
Inception to August 31, 1999:
Standardized Return*...... 11.20% 9.76% 11.09% 3.78%
Non-Standardized Return... 11.83% 9.76% 11.09% 3.78%
TACTICAL ALLOCATION FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
(INCEPTION DATE) (5/10/93) (1/30/96) (7/22/92) (5/10/93)
--------- --------- --------- ---------
Year ended August 31, 1999:
Standardized Return*..... 32.41% 32.61% 36.58% 39.03%
Non-Standardized Return... 38.65% 37.61% 37.58% 39.03%
Five Years ended August 31, 1999
Standardized Return*...... 22.42% N/A 22.63% 23.90%
Non-Standardized Return... 23.56% N/A 22.63% 23.90%
Inception to August 31, 1999:
Standardized Return*...... 19.09% 22.65% 18.09% 20.29%
Non-Standardized Return... 19.97% 22.98% 18.09% 20.29%
- --------------
* 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.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, the performance information is the same for both standardized
return and non-standardized return for the periods indicated.
OTHER INFORMATION. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper") CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), with the
performance of recognized stock, bond and other indices, including the Standard
& Poor's 500 Composite Stock Price Index ("S&P 500"), the Dow Jones Industrial
Average, the International Finance Corporation Global Total Return Index, the
Nasdaq Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the
Lehman Bond Index, the Morgan Stanley Capital International Perspective Indices,
the Morgan Stanley Capital International Energy Sources Index, the Standard &
Poor's Oil Composite Index, the Morgan Stanley Capital International World
Index, the Lehman Brothers 20+ Year Treasury Bond Index, the Lehman Brothers
Government/Corporate Bond Index, other similar Lehman Brothers indices or
components thereof, the Salomon Smith Barney Non-U.S. World Government Bond
Index, and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The funds 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 THE WALL STREET JOURNAL, MONEY MAGAZINE, SMART MONEY, MUTUAL FUNDS,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES,
49
<PAGE>
THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons
in Performance Advertisements may be in graphic form.
The funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a fund investment are reinvested in
additional fund shares, any future income or capital appreciation of a 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 a fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The funds may also compare their 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 funds'
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the funds are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The debt securities
held by the funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in any
fund involves greater risks than an investment in either a money market fund or
a CD.
The funds may also compare their performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.
<TABLE>
IBBOTSON CHART PLOT POINTS
Chart showing performance of S&P 500, long-term U.S. government bonds,
Treasury Bills and inflation from 1925 through 1998
<CAPTION>
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
50
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YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
</TABLE>
Source: STOCKS, BONDS, BILLS AND INFLATION 1998 YEARBOOKTM, Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not represent
any fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. Year-to-year fluctuations in certain markets have
been significant and negative returns have been experienced in certain markets
51
<PAGE>
from time to time. Stocks are measured by the S&P 500, an unmanaged weighted
index comprising 500 widely held common stocks and varying in composition.
Unlike investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
Over time, although subject to greater risks and higher volatility, stocks
have outperformed all other investments by a wide margin, offering a solid hedge
against inflation. From January 1, 1926 to December 31, 1998, stocks beat all
other traditional asset classes. A $10,000 investment in the S&P 500 grew to
$23,495,420, significantly more than any other investment.
TAXES
BACKUP WITHHOLDING. 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 or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of fund
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of either 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 RULE FOR CLASS A SHAREHOLDERS. A special tax rule applies when a
shareholder sells or exchanges Class A shares of a fund within 90 days of
purchase and subsequently acquires Class A shares of the same fund or another
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount would increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or loss
as a result of a conversion of Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To continue to qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code, 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. For 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 or futures) derived
with respect to its business of investing in securities ("Income Requirement");
(2) at the close of each quarter of the fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities that are
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer. If a fund failed to qualify for
treatment as a RIC for any taxable year, (a) it would be taxed as an ordinary
corporation on its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (b) the shareholders would treat
all those distributions, including distributions of net capital gain (the excess
of net long-term capital gain over net short-term capital loss), as dividends
52
<PAGE>
(that is, ordinary income) to the extent of the fund's earnings and profits. In
addition, the fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
OTHER INFORMATION. Dividends and other distributions declared by a fund in
December of any year and payable to shareholders of record on a date in that
month will be deemed to have been paid by the fund and received by the
shareholders on December 31 if the distributions are paid by the fund during the
following January.
A portion of the dividends (whether paid in cash or in additional shares)
from each fund's investment company taxable income may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion for a
fund may not exceed the aggregate dividends received by the fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax.
If fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received thereon. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or capital gain distribution, the shareholder will pay full price for
the shares and receive some portion of the price back as a taxable distribution.
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 the calendar 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 that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain from disposition of that stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.
If Balanced Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(which it may have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax) even if the QEF does not distribute those
earnings and gain to the fund. In most instances it will be very difficult, if
not impossible, to make this election because of certain of its requirements.
Balanced Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years under the election (and under regulations proposed in 1992
that provided a similar election with respect to the stock of certain PFICs).
The fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.
The use of hedging strategies involving Derivative Instruments, such as
writing (selling) and purchasing options and futures contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses a fund realizes in connection
therewith. Gains from options and futures derived by a fund with respect to its
53
<PAGE>
business of investing in securities will qualify as permissible income under the
Income Requirement.
Certain futures contracts in which a fund may invest may be subject to
section 1256 of the Internal Revenue Code ("section 1256 contracts"). Any
section 1256 contracts a fund holds at the end of each taxable year generally
must be "marked-to-market" (that is, treated as having been sold at that time
for their fair market value) for federal income tax purposes, with the result
that unrealized gains or losses will be treated as though they were realized.
Sixty percent of any net gain or loss recognized on these deemed sales, and 60%
of any net realized gain or loss from any actual sales of section 1256
contracts, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that a fund must distribute to satisfy the Distribution
Requirement (I.E., with respect to the portion treated as short-term capital
gain), which will be taxable to its shareholders as ordinary income, and to
increase the net capital gain a fund recognizes, without in either case
increasing the cash available to the fund. A fund may elect not to have the
foregoing rules apply to any "mixed straddle" (that is, a straddle, clearly
identified by the fund in accordance with the regulations, at least one (but not
all) of the positions of which are section 1256 contracts), although doing so
may have the effect of increasing the relative proportion of net short-term
capital gain (taxable as ordinary income) and thus increasing the amount of
dividends that must be distributed.
Offsetting positions in any actively traded security, option or futures
contract entered into or held by a fund may constitute a "straddle" for federal
income tax purposes. Straddles are subject to certain rules that may affect the
amount, character and timing of a fund's gains and losses with respect to
positions of the straddle by requiring, among other things, that (1) loss
realized on disposition of one position of a straddle be deferred to the extent
of any unrealized gain in an offsetting position until the latter position is
disposed of, (2) the fund's holding period in certain straddle positions not
begin until the straddle is terminated (possibly resulting in gain being treated
as short-term rather than long-term capital gain) and (3) losses recognized with
respect to certain straddle positions, that otherwise would constitute
short-term capital losses, be treated as long-term capital losses. Applicable
regulations also provide certain "wash sale" rules, which apply to transactions
where a position is sold at a loss and a new offsetting position is acquired
within a prescribed period, and "short sale" rules applicable to straddles.
Different elections are available to the funds, which may mitigate the effects
of the straddle rules, particularly with respect to mixed straddles.
When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by a fund is exercised, the fund will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.
If a fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option or futures contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or a futures contract entered into by
a fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially identical
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
54
<PAGE>
If a fund acquires zero coupon or other securities issued with original
issue discount ("OID") and/or Treasury inflation-protected securities ("TIPS"),
on which principal is adjusted based on changes in the Consumer Price Index, it
must include in its gross income the OID that accrues on those securities and
the amount of any principal increases on TIPS during the taxable year, even if
it receives no corresponding payment on them during the year. Similar treatment
applies with respect to securities purchased at a discount from their face value
("market discount"). Because a fund annually must distribute substantially all
of its investment company taxable income, including any accrued OID, market
discount and other non-cash income, to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax, it 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 would have to be made from the fund's
cash assets or from the proceeds of sales of portfolio securities, if necessary.
The fund might realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain.
The foregoing is only a general summary of some of the important federal
tax considerations generally affecting the funds and their shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the funds' activities, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes applicable to the funds and to
dividends and other distributions therefrom.
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
of Tactical Allocation Fund could, under certain circumstances, be held
personally liable for the obligations of the fund or the Trust. However, the
Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust or the fund and requires that notice of such disclaimer
be given in each contract, instrument, certificate or undertaking made or issued
by the board members or by any officers or officer by or on behalf of the Trust
or the fund, the board members or any of them in connection with the Trust. The
Declaration of Trust provides for indemnification from the fund's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the fund itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. The board members intend
to conduct the fund's operations in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the fund.
CLASSES OF SHARES. A share of each class of a fund represents an identical
interest in that fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege, if any. The different sales charges and other
expenses applicable to the different classes of shares of the funds will affect
the performance of those classes. Each share of a fund is entitled to
participate equally in dividends, other distributions and the proceeds of any
liquidation of that fund. However, due to the differing expenses of the classes,
dividends and liquidation proceeds on Class A, B, C and Y shares will differ.
VOTING RIGHTS. Shareholders of 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 Trust or the Corporation may elect all its board members. The
shares of a fund will be voted together, 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 Rule 12b-1 Plan as it relates to the class. The shares of each
series of the Trust or Corporation will be voted separately, except when an
aggregate vote of all the series is required by law.
The funds do not hold annual meetings. Shareholders of record of no less
than two-thirds of the outstanding shares of the Trust or Corporation may remove
a board member through a declaration in writing or by vote cast in person or by
55
<PAGE>
proxy at a meeting called for that purpose. A meeting will be called to vote on
the removal of a board member at the written request of holders of 10% of the
outstanding shares of the Trust or Corporation.
CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the transfer agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
PRIOR NAMES. Prior to August 1995, Balanced Fund was named "PaineWebber
Asset Allocation Fund." Prior to November 1, 1995, Tactical Allocation Fund was
named "Mitchell Hutchins/Kidder, Peabody Asset Allocation Fund" and prior to
February 13, 1995, it was named "Kidder, Peabody Asset Allocation Fund." Prior
to November 10, 1995, Tactical Allocation Fund's Class C shares were called
"Class B" shares and Balanced Fund's Class C shares were called "Class D"
shares.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund.
PFPC Inc., a subsidiary of PNC Bank, N.A, serves as each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809
COMBINED PROSPECTUS. Although each fund is offering only its own shares,
it is possible that a fund might become liable for a misstatement in the
Prospectus about the other fund. The board of each fund has considered this
factor in approving the use of a single, combined Prospectus.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. PricewaterhouseCoopers 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.
FINANCIAL STATEMENTS
Each fund's Annual Report to Shareholders for its last fiscal year ended
August 31, 1999 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors or independent
accountants appearing therein are incorporated herein by this reference.
56
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APPENDIX
RATINGS INFORMATION
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 payment and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well; Ba. Bonds
which are rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class; B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small; Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest; Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings; C. Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing certainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
A-1
<PAGE>
the obligation., Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are not being continued; D. An obligation rated D is in payment
default. The D rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on a obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF PaineWebber
ADDITIONAL INFORMATION. THE FUNDS AND Balanced Fund
THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION
ARE NOT AN OFFER TO SELL SHARES OF THE
FUNDS IN ANY JURISDICTION WHERE THE PaineWebber
FUNDS OR THEIR DISTRIBUTOR MAY NOT Tactical Allocation Fund
LAWFULLY SELL THOSE SHARES.
------------
------------------------------------------
Statement of Additional Information
December 10, 1999
------------------------------------------
PAINEWEBBER
(C)1999 PaineWebber Incorporated. All rights reserved.
Member SIPC.
<PAGE>
ANNUAL
REPORT
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PERFORMANCE AT A GLANCE
Comparison of the change of a $10,000 investment in PaineWebber
Financial Services Growth Fund Inc.(A) and the S&P 500 Index, for the
10-year period ended 3/31/99
[THE FOLLOWING DATA WAS REPRESENTED BY A LINE GRAPH]
PaineWebber Financial
Services Growth Fund Inc. S&P 500 Index
------------------------- -------------
3/31/89 9,552 10,000
10,310 10,881
9/30/89 11,870 12,044
10,772 12,291
3/31/90 10,238 11,921
10,421 12,670
9/30/90 8,464 10,930
9,444 11,908
3/31/91 11,607 13,635
12,626 13,602
9/30/91 14,401 14,329
15,617 15,528
3/31/92 16,625 15,137
17,957 15,424
9/30/92 18,567 15,910
21,658 16,709
3/31/93 24,238 17,438
23,372 17,521
9/30/93 25,112 17,973
23,893 18,390
3/31/94 23,477 17,693
25,225 17,768
9/30/94 25,170 18,635
23,713 18,631
3/31/95 25,876 20,444
28,795 22,392
9/30/95 32,788 24,170
34,969 25,625
3/31/96 35,972 27,001
37,009 28,211
9/30/96 40,494 29,082
45,095 31,505
3/31/97 46,302 32,352
53,936 37,995
9/30/97 60,364 40,840
65,478 42,013
3/31/98 70,341 47,869
70,529 49,458
9/30/98 59,358 44,552
66,993 54,033
3/31/99 64,848 56,724
Past performance is no guarantee of future performance.
The performance of the other classes will vary from the performance of the class
shown because of differences in sales charges and fees paid by shareholders
investing in different classes.
The graph depicts the performance of PaineWebber Financial Services Growth Fund
Inc.(A) versus the S&P 500 Index. It is important to note PaineWebber Financial
Services Growth Fund Inc. is a professionally managed mutual fund while the
Index is not available for investment and is unmanaged. The comparison is shown
for illustrative purposes only.
AVERAGE ANNUAL TOTAL RETURN, PERIODS ENDED 3/31/99
<TABLE>
<CAPTION>
1 Year 5 Years 10
Years Life/0/
<S> <C> <C> <C>
<C> <C>
Class A/*/ -7.81% 22.53%
21.11% 16.00%
Before Deducting Class B/**/ -8.51% 21.61%
N/A 22.80%
Maximum Sales Charge Class C/+/ -8.50% 21.59%
N/A 19.84%
Class Y/++/ -7.57% N/A
N/A -6.59%
Class A/*/ -11.95% 21.41%
20.56% 15.59%
After Deducting Class B/**/ -13.01% 21.42%
N/A 22.80%
Maximum Sales Charge Class C/+/ -9.40% 21.59%
N/A 19.84%
</TABLE>
/0/ Life: since commencement of issuance on May 22, 1986 for Class A shares,
July 1,1991 for Class B shares, July 2, 1992 for Class C shares and March
30, 1998 for Class Y shares.
/*/ Maximum sales charge for Class A shares is 4.5% of the public offering
price. Class A Shares bear ongoing 12b-1 service fees.
/**/ Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B Shares bear ongoing 12b-1
distribution and service fees.
/+/ Maximum contingent deferred sales charge for Class C shares is 1% and is
reduced to 0% after one year. Class C Shares bear ongoing 12b-1
distribution and service fees.
/++/ The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and that may invest in PaineWebber mutual funds. Class Y shares
do not bear initial or contingent deferred sales charges or ongoing
distribution and service fees.
The investment return and the principal value of an investment in the Fund will
fluctuate,so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
1
<PAGE>
ANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
PERFORMANCE AT A GLANCE
Comparison of the change of a $10,000 investment in PaineWebber
Utility
Income Fund (A), the S&P 500 Index, and the S&P Utility Index, for the
10-year period ended 3/31/99
[THE FOLLOWING DATA WAS REPRESENTED BY A LINE GRAPH]
PaineWebber Utility
Income Fund (A) S&P 500 Index S&P Utility Index
-------------------- -------------- -----------------
7/2/93 9,551 10,000 10,000
9/30/93 9,857 10,258 10,700
9,484 10,496 10,090
3/31/94 8,789 10,098 9,257
8,444 10,141 9,255
9/30/94 8,541 10,635 9,298
8,563 10,633 9,289
3/31/95 9,052 11,668 9,930
9,652 12,780 10,668
9/30/95 10,193 13,795 11,865
11,030 14,625 13,110
3/31/96 10,719 15,410 12,486
11,022 16,101 13,116
9/30/96 10,910 16,598 12,674
11,901 17,981 13,519
3/31/97 11,558 18,465 13,063
12,499 21,685 13,830
9/30/97 13,537 23,309 14,494
14,966 23,978 16,851
3/31/98 16,083 27,321 17,798
15,695 28,228 18,013
9/30/98 15,922 25,427 18,847
16,892 30,838 19,339
3/31/99 16,283 32,374 17,529
Past performance is no guarantee of future performance. The performance of the
other classes will vary from the performance of the class shown because of
differences in sales charges and fees paid by shareholders investing in
different classes.
The graph depicts the performance of PaineWebber Utility Income Fund (A) versus
the S&P 500 Index and the S&P Utility Index. It is important to note PaineWebber
Utility Income Fund is a professionally managed mutual fund while the Indices
are not available for investment and are unmanaged. The comparison is shown for
illustrative purposes only.
AVERAGE ANNUAL TOTAL RETURN, PERIODS ENDED 3/31/99
<TABLE>
<CAPTION>
1 Year 5 Years
Life(0)
<S> <C> <C> <C>
<C>
Class A(*) 1.24% 13.13%
9.72%
Before Deducting Class B(**) 0.49% 12.26%
8.90%
Maximum Sales Charge Class C(+) 0.44% 12.24%
8.89%
Class Y(++) N/A N/A
10.14%
Class A(*) -3.31% 12.08%
8.85%
After Deducting Class B(**) -4.45% 12.01%
8.79%
Maximum Sales Charge Class C(+) -0.55% 12.24%
8.89%
</TABLE>
(0) Life: since commencement of issuance on July 2, 1993 for Class A, Class
B
and Class C shares, and September 10, 1998 for Class Y shares.
(*) Maximum sales charge for Class A shares is 4.5% of the public offering
price. Class A Shares bear ongoing 12b-1 service fees.
(**) Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B Shares bear ongoing 12b-1
distribution and service fees.
(+) Maximum contingent deferred sales charge for Class C shares is 1% and is
reduced to 0% after one year. Class C Shares bear ongoing 12b-1
distribution and service fees.
(++) The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and that may invest in PaineWebber mutual funds. Class Y shares
do not bear initial or contingent deferred sales charges or ongoing
distribution and service fees.
The investment return and the principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
2
<PAGE>
ANNUAL
REPORT
May 20, 1999
Dear Shareholder,
We are pleased to present you with the annual report for the PaineWebber
Financial Services Growth Fund Inc. and the PaineWebber Utility Income Fund for
the fiscal year ended March 31, 1999.
MARKET REVIEW
[GRAPHIC] Russia's currency crisis in August 1998 brought the stock market down
sharply as investors around the world fled stocks and sought the safety of U.S.
Treasury securities. Fears about exposure to over-leveraged hedge funds and to
emerging markets led to a sell-off in financial services stocks. Stock prices
rebounded in the second half of the fiscal year, but endured considerable
volatility along the way.
During the last quarter of the fiscal year, three general trends dominated
the stock market: (1) a small number of stocks accounted for most of the gains
in the S&P 500 Index and in the Dow Jones Industrial Average; (2) value stocks
(as measured by the Russell 1000 Value Index) significantly lagged growth stocks
(as measured by the Russell 1000 Growth Index); and (3) large capitalization
stocks outperformed small and mid cap stocks. As measured by the S&P 500 Index
(the "Index"), the stock market gained 18.49% for the fiscal year ended March
31, 1999.
PAINEWEBBER FINANCIAL SERVICES
GROWTH FUND INC.
PERFORMANCE --
The Fund's total return consists of the change in net asset value with
dividends reinvested. For the fiscal year ended March 31, 1999, without
deducting sales charges, Class A shares lost 7.81%, Class B shares lost 8.51%,
Class C shares lost 8.50% and Class Y shares lost 7.57%.
The Fund's total return may be lower for shareowners who purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares lost 11.95%, Class B shares lost 13.01% and Class
C shares lost 9.40%. Class Y shares are not subject to sales charges.
PORTFOLIO HIGHLIGHTS --
During the first half of the fiscal year the Fund benefited from its
underweightings in companies with large global exposure, such as multinational
banks. During the second half of the fiscal year, Fund performance suffered when
financial services stocks lagged the Index. Companies in all
3
<PAGE>
ANNUAL REPORT
PAINEWEBBER
FINANCIAL SERVICES
GROWTH FUND INC.
FUND PROFILE
o Goal:
Long-term capital
appreciation
o Portfolio Managers:
Mark Tincher-Chief
Investment Officer-Equities
and Andrew Dinnhaupt, Mitchell
Hutchins Asset Management Inc.
o Total Net Assets:
$483.8 million as of March 31, 1999
o Dividend Payments:
Annually
PAINEWEBBER
FINANCIAL
SERVICES
GROWTH FUND INC.
Asset Allocation(*)
Banks 30.0%
Insurance 27.9%
Financial Services 18.4%
Cash Equivalents 11.1%
Thrift Institutions 6.4%
Business Services 3.1%
Real Property 2.9%
Rights and Warrants 0.2%
sectors of the financial services industry were hit hard for missing earnings
estimates or lowering their growth rate forecasts. For the fiscal year ended
March 31, 1999, the financial services sector as measured by the S&P Financial
Index gained 6.56%. As in the broader market, the largest companies contributed
most of the sector's gains.
New purchases in the Fund generally helped its performance during the
latter half of the fiscal year. We focused the Fund's purchases on the specialty
finance group, where we felt that valuations were attractive and risks were
overstated. Continuing economic growth, diminishing unemployment and low
inflation stimulated consumer spending, which in turn boosted the earnings of
specialty finance firms such as credit card issuers. The Fund bought Providian
Corp. (2.3%*) and Capital One Financial Corp. (2.7%) at what we believe to be
attractive prices. Although both stocks had suffered when the bond markets
became volatile in the latter part of the fiscal year, our research indicated
that the stock prices had discounted too deeply the risks to the companies'
earnings.
Our focus on specialty services extended to the insurance sector, where
the
Fund emphasized life insurance companies such as Nationwide Financial Services
Inc. (2.0%) and Hartford Financial Services Group, Inc. (2.0%). Both companies
reported good sales momentum during the fiscal year.
GOING FORWARD --
Even if economic growth in the remainder of 1999 turns out to be a little slower
than expected, we do not think it will impact the financial services sector more
than any other sector of the market. We continue to believe that long-term
consolidation in the financial services sector will be a positive for investors.
We think aging baby boomers in the U.S. and abroad will demand more savings and
investment products and set the stage for continued growth in financial
services.
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
Top Ten Stocks(*)
- -------------------------------------------------------------
Capital One Financial Corp. 2.7%
American International Group Inc. 2.5
Providian Corp. 2.3
Associates First Capital Corp. 2.2
Ambac Financial Group Inc. 2.0
Hartford Financial Services Group, Inc. 2.0
Nationwide Financial Services Inc. 2.0
Zions BanCorp 2.0
Travelers Property Casualty Corp. 1.9
Bank One Corp. 1.8
- -------------------------------------------------------------
(*) Weightings represent percentages of portfolio assets as of March 31, 1999.
The Fund's portfolio is actively managed and its composition will vary
over
time.
4
<PAGE>
ANNUAL
REPORT
We like globally oriented insurance companies, whose stock prices have
shown signs of stabilizing; larger, better-capitalized firms that are able to
diversify into different channels of distribution, information, customer service
or products; and larger money-center banks.
We believe that the Fund holds companies with strong fundamentals and
attractive valuations. We will stick to our investment discipline and not chase
the latest fad. We firmly believe that the value in our holdings will be
recognized over the long term.
PAINE WEBBER UTILITY INCOME FUND
[GRAPHIC] PERFORMANCE --
The Fund's total return consists of the change in net asset value with
dividends reinvested. For the fiscal year ended March 31, 1999, without
deducting sales charges, Class A shares gained 1.24%, Class B shares gained
0.49% and Class C shares gained 0.44%. For the same period, the Fund's
benchmark, the S&P Utility Index, lost 1.51%. Class Y shares gained 10.14% for
the 6 1/2-month period ended March 31, 1999.
The Fund's total return may be lower for shareowners who purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares lost 3.31%, Class B shares lost 4.45% and Class C
shares lost 0.55%. Class Y shares are not subject to sales charges.
PORTFOLIO HIGHLIGHTS --
During the third quarter of the Fund's fiscal year we profitably sold
several of the Fund's holdings of appreciated electric utility stocks. In the
last quarter of the fiscal year, rising interest rates caused electric utility
stock prices to fall. (Electric utilities are particularly sensitive to interest
rate increases because they depend heavily on borrowing to finance their
operations.) This correction in the electric utility group gave us the
opportunity to research and eventually purchase some undervalued stocks such as
Duke Energy Corp. (0.7%), Unicom Corp. (1.0%) and New Century Energies Inc.
(1.3%).(*)
The Fund held positions in several real estate investment trusts (REITs) at
fiscal year-end. REIT prices declined throughout 1998. By early 1999 their low
valuations and high dividend yields made them attractive again.
We are looking at ways to increase the Fund's overall dividend yield and at
the same time add more growth potential. To achieve these goals we seek to
balance the Fund's holdings between those with potential for income generation
and those with potential for capital gains.
We regard electric utility and real estate stocks as potentially
stabilizing Fund holdings that may provide high dividend income. These stocks
now look attractive-with estimated earnings
PAINEWEBBER UTILITY
INCOME FUND
FUND PROFILE
o Goal:
Current Income and
capital appreciation
o Portfolio Manager:
Mark Tincher-Chief
Investment Officer-Equities,
Christopher Solmssen,
Julieanna Berry and Jim Keegan,
Mitchell Hutchins Asset
Management Inc.
o Total net Assets:
$34.5 million as of
March 31, 1999
o Dividend Payments:
Quarterly
PAINE WEBBER
UTILITY INCOME
FUND
Asset Allocation(*)
[THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART]
Stocks 72.5%
Bonds 18.7%
Cash & Cash Equivalents 8.8%
(*) Weightings represent percentages of portfolio assets as of March 31, 1999.
The Fund's portfolio is actively managed and its composition will vary
over
time.
5
<PAGE>
ANNUAL REPORT
PAINEWEBBER
UTILITY INCOME
FUND
Top Five Stock Sectors(*)
Utilities 75.0%
Consumer Cyclical 8.8%
Financial Services 2.4%
Capital Goods 1.6%
Energy 1.6%
PAINEWEBBER
UTILITY INCOME
FUND
Top Five Stocks(*)
MCI WorldCom Inc. 2.9%
Century Telephone Enterprises, Inc. 2.8%
PECO Energy Co. 2.7%
Qwest Communications International Inc. 2.6%
Cilcorp Inc. 2.4%
growth of 5-8% and projected dividend yields of 4-8%, we believe they offer
significant total return potential.
To give the Fund greater upside potential we have added more fast-growing
telecommunications stocks. As e-commerce develops, we see strong growth
potential for the companies that provide the cables and wires over which that
commerce travels. The Fund owns AT&T Corp. (0.9%), MCI WorldCom Inc. (2.9%) and
a variety of regional bell operating companies. We believe these companies are
well positioned to benefit from the growing demand for data transmission,
international calling and Internet access.
The Fund also owns emerging carriers such as Global Crossing Ltd. (1.5%),
Qwest Communications International Inc. (2.6%) and Level 3 Communications Inc.
(1.9%). In addition, it holds Covad Communications Group Inc. (0.2%), one of
three companies in the United States that sell digital subscriber line (DSL)
service, a new technology that increases the bandwidth capacity of existing
copper lines. Since DSL avoids the cost of laying fiberoptic cable or new
wires,
we think it will gain a significant share of the market for high-speed
Internet
access.
GOING FORWARD --
We are analyzing a number of prospective investments related to our focus
on electric utilities and telecommunications, and expect to increase the Fund's
positions in both sectors. As market conditions permit, we intend to continue
paring the Fund's holdings of slower-growth, low-yielding stocks.
Consolidation is still a major factor in both the power and
telecommunications industries, and represents potential added value for some of
the Fund's holdings. We believe telecommunications will benefit the most, and we
look for global consolidations in that sector over the next few years.
OUTLOOK
[GRAPHIC] Our 1999 expectations are for economic growth (real gross domestic
product) of about 3.5%, inflation below 2% and corporate earnings growth of
5-7%. In our view, market valuations fully reflect this positive, broad economic
picture.
Our outlook is cautious over the near term. We are concerned that in this
highly priced market long bond yields above 5.60% may lead to a correction. We
remain cautious about Latin America--Brazil's currency has stabilized but it
must still cope with recession.
Also, we are cautious about Europe's prospects because of the conflict in
Kosovo. In this environment, stock picking will be key to outperformance.
(*) Weightings represent percentages of portfolio assets as of March 31, 1999.
The Fund's portfolio is actively managed and its composition will vary over
time.
6
<PAGE>
ANNUAL
REPORT
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support
and welcome any comments or questions you may have.
For a Quarterly Review on PaineWebber Financial Services Growth Fund Inc.,
PaineWebber Utility Income Fund or another fund in the PaineWebber Family of
Funds,(1) please contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander
Margo Alexander
Chairman and Chief Executive Officer
Mitchell Hutchins Asset Management Inc.
/s/ Brian M. Storms
Brian M. Storms
President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc.
/s/ Mark A. Tincher
Mark A. Tincher
Managing Director and Chief Investment Officer -
Equities
Portfolio Manager, PaineWebber Financial Services
Growth Fund and PaineWebber Utility Income Fund
/s/ Andrew B. Dinnhaupt
Andrew B. Dinnhaupt
Vice President
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, PaineWebber Financial Services
Growth Fund
/s/ Christopher T. Solmssen
Christopher T. Solmssen
Vice President
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, PaineWebber Utility Income Fund
/s/ Julieanna M. Berry
Julieanna M. Berry
First Vice President
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, PaineWebber Utility Income Fund
/s/ James F. Keegan
James F. Keegan
Senior Vice President
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, PaineWebber Utility Income Fund
(1) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses,
and
should be read carefully before investing.
This letter is intended to assist shareholders in understanding how the
Funds performed during the fiscal year ended March 31, 1999, and reflects
our views at the time of its writing. Of course, these views may change
in
response to changing circumstances. We encourage you to consult your
Financial Advisor regarding your personal investment program.
7
<PAGE>
[This Page Intentionally Blank]
8
<PAGE>
PaineWebber Financial Services Growth Fund Inc.
Performance Results
(unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return/1/
--------------------------------
- -----------------------------
12 Months 6 Months
03/31/99 09/30/98 03/31/98 Ended 03/31/99 Ended
03/31/99
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $30.24 $28.32 $33.56 (7.81)% 9.25%
- ---------------------------------------------------------------------------------
Class B Shares 29.35 27.42 32.62 (8.51) 8.84
- ---------------------------------------------------------------------------------
Class C Shares 29.28 27.37 32.56 (8.50) 8.85
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid
Return/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/22/86-12/31/86 $9.25 $8.31 -- --
(10.16)%
- ---------------------------------------------------------------------------------
1987 8.31 6.88 $0.2265 $0.3703 (11.05)
- ---------------------------------------------------------------------------------
1988 6.88 7.70 -- 0.2375 15.38
- ---------------------------------------------------------------------------------
1989 7.70 9.08 -- 0.2900 21.71
- ---------------------------------------------------------------------------------
1990 9.08 7.73 -- 0.2410 (12.33)
- ---------------------------------------------------------------------------------
1991 7.73 12.55 -- 0.2070 65.37
- ---------------------------------------------------------------------------------
1992 12.55 17.38 -- 0.0237 38.68
- ---------------------------------------------------------------------------------
1993 17.38 17.22 1.8425 0.0820 10.32
- ---------------------------------------------------------------------------------
1994 17.22 15.68 1.2660 0.1345 (0.75)
- ---------------------------------------------------------------------------------
1995 15.68 20.57 2.2099 0.2942 47.46
- ---------------------------------------------------------------------------------
1996 20.57 22.80 3.3870 0.2300 28.96
- ---------------------------------------------------------------------------------
1997 22.80 31.24 1.5895 0.2068 45.20
- ---------------------------------------------------------------------------------
1998 31.24 31.24 0.4139 0.2780 2.31
- ---------------------------------------------------------------------------------
01/01/99-03/31/99 31.24 30.24 -- -- (3.20)
- ---------------------------------------------------------------------------------
Totals: $10.9353 $2.5950
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 03/31/99: 575.55%
- ---------------------------------------------------------------------------------
Performance Summary Class B Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid
Return/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-12/31/91 $10.24 $12.56 -- $0.0640 23.30%
- ---------------------------------------------------------------------------------
1992 12.56 17.31 -- -- 37.82
- ---------------------------------------------------------------------------------
1993 17.31 17.04 $1.8425 0.0571 9.57
- ---------------------------------------------------------------------------------
1994 17.04 15.47 1.2660 0.0344 (1.53)
- ---------------------------------------------------------------------------------
1995 15.47 20.21 2.2099 0.1766 46.36
- ---------------------------------------------------------------------------------
1996 20.21 22.32 3.3870 0.0592 28.00
- ---------------------------------------------------------------------------------
1997 22.32 30.42 1.5895 0.0884 44.10
- ---------------------------------------------------------------------------------
1998 30.42 30.38 0.4139 0.0755 1.55
- ---------------------------------------------------------------------------------
01/01/99-03/31/99 30.38 29.35 -- -- (3.39)
- ---------------------------------------------------------------------------------
Totals: $10.7088 $0.5552
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 03/31/99: 391.89%
- ---------------------------------------------------------------------------------
</TABLE>
/1/Figures assume reinvestment of all dividends and capital gain distributions
at net asset value on the payable dates and do not include sales charges;
results for each class would be lower if sales charges were included. Total
return for periods of less than one year has not been annualized.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
9
<PAGE>
PaineWebber Financial Services Growth Fund Inc.
Performance Results
(unaudited) (concluded)
Performance Summary Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return/1/
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-12/31/92 $14.61 $17.32 -- $0.0359 18.80%
- ---------------------------------------------------------------------
1993 17.32 17.03 $1.8425 0.0691 9.52
- ---------------------------------------------------------------------
1994 17.03 15.48 1.2660 0.0209 (1.50)
- ---------------------------------------------------------------------
1995 15.48 20.21 2.2099 0.1819 46.30
- ---------------------------------------------------------------------
1996 20.21 22.29 3.3870 0.0861 27.99
- ---------------------------------------------------------------------
1997 22.29 30.37 1.5895 0.0938 44.09
- ---------------------------------------------------------------------
1998 30.37 30.31 0.4139 0.0944 1.55
- ---------------------------------------------------------------------
01/01/99-03/31/99 30.31 29.28 -- -- (3.40)
- ---------------------------------------------------------------------
Totals: $10.7088 $0.5821
- ---------------------------------------------------------------------
Cumulative Total Return as of 03/31/99: 239.24%
- ---------------------------------------------------------------------
</TABLE>
/1/Figures assume reinvestment of all dividends and capital gain distributions
at net asset value on the payable dates and do not include sales charges;
results would be lower if sales charges were included. Total return for
periods of less than one year has not been annualized.
Note: The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and may invest in PaineWebber mutual funds. For the year ended March
31, 1999 and since inception, March 30, 1998 through March 31, 1999, Class Y
shares have a total return of (7.57)% and (6.62)%, respectively. Class Y shares
do not have initial or contingent deferred sales charges or ongoing distribution
and service fees.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
10
<PAGE>
PaineWebber Utility Income Fund
Performance Results
(unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return/1/
--------------------------------
- -----------------------------
12 Months 6 Months
03/31/99 09/30/98 03/31/98 Ended 03/31/99 Ended
03/31/99
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $13.60 $13.43 $13.79 1.24% 2.27%
- ---------------------------------------------------------------------------------
Class B Shares 13.60 13.43 13.79 0.49 1.89
- ---------------------------------------------------------------------------------
Class C Shares 13.58 13.41 13.78 0.44 1.89
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid
Return/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/93-12/31/93 $10.00 $9.70 -- $0.2340
(0.70)%
- ---------------------------------------------------------------------------------
1994 9.70 8.28 -- 0.4829 (9.71)
- ---------------------------------------------------------------------------------
1995 8.28 10.14 -- 0.4662 28.82
- ---------------------------------------------------------------------------------
1996 10.14 10.56 -- 0.3530 7.90
- ---------------------------------------------------------------------------------
1997 10.56 12.90 -- 0.3299 25.75
- ---------------------------------------------------------------------------------
1998 12.90 14.17 -- 0.3709 12.87
- ---------------------------------------------------------------------------------
01/01/99-03/31/99 14.17 13.60 -- 0.0597 (3.60)
- ---------------------------------------------------------------------------------
Totals: $0.0000 $2.2966
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 03/31/99: 70.48%
- ---------------------------------------------------------------------------------
Performance Summary Class B Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid
Return/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/93-12/31/93 $10.00 $9.70 -- $0.2010
(1.02)%
- ---------------------------------------------------------------------------------
1994 9.70 8.28 -- 0.4169 (10.40)
- ---------------------------------------------------------------------------------
1995 8.28 10.14 -- 0.3980 27.87
- ---------------------------------------------------------------------------------
1996 10.14 10.56 -- 0.2756 7.06
- ---------------------------------------------------------------------------------
1997 10.56 12.90 -- 0.2427 24.78
- ---------------------------------------------------------------------------------
1998 12.90 14.17 -- 0.2689 12.03
- ---------------------------------------------------------------------------------
01/01/99-03/31/99 14.17 13.60 -- 0.0335 (3.79)
- ---------------------------------------------------------------------------------
Totals: $0.0000 $1.8366
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 03/31/99: 63.30%
- ---------------------------------------------------------------------------------
Performance Summary Class C Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid
Return/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/93-12/31/93 $10.00 $9.70 -- $0.2020
(1.01)%
- ---------------------------------------------------------------------------------
1994 9.70 8.28 -- 0.4158 (10.41)
- ---------------------------------------------------------------------------------
1995 8.28 10.14 -- 0.3970 27.86
- ---------------------------------------------------------------------------------
1996 10.14 10.56 -- 0.2766 7.07
- ---------------------------------------------------------------------------------
1997 10.56 12.89 -- 0.2459 24.72
- ---------------------------------------------------------------------------------
1998 12.89 14.15 -- 0.2728 12.00
- ---------------------------------------------------------------------------------
01/01/99-03/31/99 14.15 13.58 -- 0.0345 (3.79)
- ---------------------------------------------------------------------------------
Totals: $0.0000 $1.8446
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 03/31/99: 63.17%
- ---------------------------------------------------------------------------------
</TABLE>
/1/Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates and do not include sale charges; results
would be lower if sales charges were included.
Note: The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and may invest in PaineWebber mutual funds. For the period September
10, 1998 (commencement of issuance) through March 31, 1999, Class Y shares had a
total return of 10.14%. Class Y shares do not have initial or contingent
deferred sales charges or ongoing distribution and service fees. The data above
represents past performance of the Fund's shares, which is no guarantee of
future results. The principal value of an investment in the Fund will fluctuate,
so that an investor's shares, when redeemed, may be worth more or less than
their original cost.
11
<PAGE>
PaineWebber Financial Services Growth Fund Inc.
Portfolio of Investments March 31,
1999
<TABLE>
<CAPTION>
Number of
Shares Value
---------
- -----------
<C> <S> <C>
Common Stocks -- 93.96%
Banks -- 31.71%
155,000 Bank of New York Co., Inc. ............................ $
5,570,312
169,000 Bank One Corp..........................................
9,305,562
80,000 BB & T Corp. (1).......................................
2,895,000
130,000 CCB Financial Corp. ...................................
7,028,125
120,000 Comerica, Inc. ........................................
7,492,500
84,000 Commerce Bancorp, Inc. ................................
3,465,000
150,000 Community First Bankshares Incorporated ...............
3,000,000
125,000 Cullen Frost Bankers Inc. .............................
5,992,187
110,000 Fifth Third Bancorp....................................
7,253,125
140,000 First American Corp. of Tennessee......................
5,162,500
105,000 First Security Corp. ..................................
2,027,813
167,375 HUBCO Inc. ............................................
5,617,523
17,000 M & T Bank Corp........................................
8,143,000
82,500 Marshall and Ilsley Corp. .............................
4,573,594
125,000 Mellon Bank Corp. .....................................
8,796,875
75,000 Northern Trust Corp. (1)...............................
6,660,937
99,974 Old Kent Financial Corp. ..............................
4,223,902
125,000 Prosperity Bancshares Incorporated.....................
1,531,250
75,000 Seacoast Banking Corp. of Florida......................
2,006,250
125,000 Summit Bancorp, Inc. ..................................
4,875,000
155,000 Texas Regional Bankshares Inc. ........................
4,185,000
150,000 Unionbancal Corp. .....................................
5,109,375
200,000 US Bancorp, Inc. ......................................
6,812,500
50,000 Wachovia Corp. ........................................
4,059,375
130,000 Wells Fargo and Co.....................................
4,558,125
110,000 West Coast Bancorp Oregon..............................
2,055,625
250,000 Westamerica Bancorporation.............................
7,906,250
55,000 Wilmington Trust Corp. ................................
3,141,875
150,000 Zions Bancorporation...................................
9,975,000
- -----------
153,423,580
- -----------
Business Services -- 3.31%
125,000 Deluxe Corp............................................
3,640,625
160,000 First Data Corp........................................
6,840,000
180,000 Sterling Commerce Inc.*(1).............................
5,535,000
- -----------
16,015,625
- -----------
Financial Services -- 19.49%
30,000 American Express Co. ..................................
3,525,000
250,000 Associates First Capital Corp. (1).....................
11,250,000
90,000 Capital One Financial Corp. ...........................
13,590,000
300,000 CIT Group, Inc. .......................................
9,168,750
225,000 Conning Corp. .........................................
3,360,937
140,000 Countrywide Credit Industries, Inc. ...................
5,250,000
120,000 Equitable Companies Incorporated ......................
8,400,000
150,000 Federal Home Loan Mortgage Corp. ......................
8,568,750
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares Value
---------
- ------------
<C> <S> <C>
Financial Services (continued)
160,000 Finova Group Inc. (1)................................. $
8,300,000
110,000 Household International, Inc. ........................
5,018,750
55,000 Lehman Brothers Holdings, Inc. .......................
3,286,250
30,000 Morgan Stanley, Dean Witter & Co. ....................
2,998,125
105,000 Providian Corp. ......................................
11,550,000
- ------------
94,266,562
- ------------
Insurance -- 29.59%
270,000 ACE Ltd. .............................................
8,420,625
100,000 AFLAC Incorporated....................................
5,443,750
190,000 Ambac Financial Group Inc. ...........................
10,260,000
62,500 American General Corp. (1)............................
4,406,250
104,125 American International Group Inc. ....................
12,560,078
135,000 AON Corp. ............................................
8,538,750
300,000 Enhance Financial Services Group Inc..................
6,825,000
100,000 Fremont General Corp. ................................
1,906,250
180,000 Hartford Financial Services Group, Inc................
10,226,250
70,000 Hartford Life Inc.....................................
3,850,000
100,000 MBIA, Inc. ...........................................
5,800,000
165,000 Mutual Risk Management Ltd. (1).......................
6,311,250
240,000 Nationwide Financial Services Inc.....................
10,080,000
240,000 Protective Life Corp. ................................
9,090,000
187,500 Reinsurance Group of America, Inc. (1)................
7,980,469
170,000 Reliastar Financial Corp. ............................
7,246,250
253,500 Scottish Annuity & Life...............................
2,471,625
120,000 Torchmark, Inc........................................
3,795,000
275,000 Travelers Property Casualty Corp......................
9,831,250
170,000 UNUM Corp. ...........................................
8,085,625
- ------------
143,128,422
- ------------
Real Property -- 3.06%
160,000 Cabot Industrial Trust................................
3,020,000
125,000 Carramerica Realty Corp. .............................
2,757,813
125,000 Manufactured Home Communities Inc. ...................
3,000,000
156,000 New Plan Excel Realty Trust Inc. (1)..................
2,993,250
175,000 Westfield America Inc. ...............................
3,051,563
- ------------
14,822,626
- ------------
Thrift Institutions -- 6.80%
264,500 Charter One Financial Inc. ...........................
7,633,305
35,000 Commercial Federal Corporation........................
814,601
345,000 Dime Bancorp, Inc.....................................
7,999,687
184,300 Golden State Bancorp Inc.*(1).........................
4,100,675
200,000 Greenpoint Financial Corp. ...........................
6,950,000
150,000 PBOC Holdings Inc. ...................................
1,350,000
</TABLE>
12
<PAGE>
PaineWebber Financial Services Growth Fund Inc.
See accompanying notes to financial statements
<TABLE>
<CAPTION>
Number of
Shares Value
---------
- ------------
<C> <S> <C>
Common Stocks (concluded)
Thrift Institutions (concluded)
150,000 Queens County Bancorp Inc. ........................... $
4,050,000
- ------------
32,898,268
- ------------
Total Common Stocks (cost -- $381,317,667).......................
454,555,083
- ------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Rights and
Warrants Value
----------
- --------
<C> <S> <C>
Rights and Warrants -- 0.16%
20,000 Coast Federal Litigation Contingent Payment Rights......
$118,750
135,000 Golden State Bancorp Inc. Litigation Tracking Warrants..
653,906
- --------
Total Rights and Warrants (cost -- $770,102)........................
772,656
- --------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
--------- -------- --------
<C> <S> <C> <C> <C>
U.S. Government Obligation -- 4.12%
$20,000 United States Treasury Bills
(cost -- $19,962,356)........... 04/15/99 4.840%@ 19,962,356
------------
Repurchase Agreements -- 7.68%
17,146 Repurchase Agreement dated
03/31/99 with Salomon Smith Bar- ney, Inc., collateralized by
$16,845,000 U.S. Treasury Notes, 6.250% due 08/31/02 (value--
$17,497,744); proceeds;
$17,148,334..................... 04/01/99 4.900 17,146,000
20,000 Repurchase Agreement dated 03/31/99 with SG Cowen Corp.,
collateralized by $19,066,000 U.S. Treasury Notes, 6.500% due
08/15/05 (value--$20,400,620);
proceeds; $20,002,722........... 04/01/99 4.900 20,000,000
------------
Total Repurchase Agreements (cost --
$37,146,000).............................. 37,146,000
------------
Total Investments (cost -- $439,196,125) --
105.92%................................... 512,436,095
Liabilities in excess of other assets --
(5.92)%...................................
(28,649,131)
------------
Net Assets (100.00%)........................ $483,786,964
============
</TABLE>
- ---------
*Non-income producing security
(1)Security, or portion thereof, was on loan at March 31, 1999.
@Yield to maturity at date of purchase
13
<PAGE>
PaineWebber Utility Income Fund
Portfolio of Investments March 31,
1999
<TABLE>
<CAPTION>
Number of
Shares Value
---------
- -----------
<C> <S> <C>
Common Stocks -- 79.79%
Electric Utilities -- 36.02%
12,500 Allegheny Energy Inc................................... $
368,750
17,500 BEC Energy.............................................
643,125
20,000 Baltimore Gas & Electric Co............................
507,500
14,000 CMS Energy Corp........................................
560,875
15,000 Cilcorp Inc............................................
900,937
37,500 DPL Inc................................................
618,750
20,000 DQE Inc................................................
767,500
5,000 Duke Energy Corp.......................................
273,125
20,000 El Paso Energy Corp....................................
653,750
15,000 Energy East Corp.......................................
788,437
15,000 First Energy Corp......................................
419,063
11,500 FPL Group, Inc.........................................
612,375
15,000 Illinova Corp..........................................
317,813
15,000 Interstate Energy Corp.................................
397,500
15,000 New Century Energies Inc...............................
510,938
24,000 NIPSCO Industries Inc..................................
648,000
22,500 PECO Energy Co.........................................
1,040,625
30,000 Public Service Co. of New Mexico.......................
510,000
20,000 Puget Sound Power & Light Co...........................
461,250
21,000 SCANA Corp.............................................
455,438
17,500 Sierra Pacific Resources...............................
615,781
10,000 Unicom Corp............................................
365,625
- -----------
12,437,157
- -----------
Electrical Equipment -- 1.61%
12,000 Global Crossing Ltd.*(1)...............................
555,000
- -----------
Financial Services -- 0.41%
9,300 Medallion Financial Corp...............................
140,081
- -----------
Gas Utility -- 6.48%
30,000 AGL Resources Inc......................................
526,875
17,000 Coastal Corp...........................................
561,000
10,000 Columbia Energy Group..................................
522,500
17,500 NICOR Inc..............................................
628,906
- -----------
2,239,281
- -----------
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares Value
---------
- -----------
<C> <S> <C>
Long Distance & Phone Companies -- 25.23%
8,000 Ameritech Corp......................................... $
463,000
4,500 AT&T Corp..............................................
359,156
15,376 Bell Atlantic Corp.....................................
794,747
22,000 BellSouth Corp.........................................
881,375
15,000 Century Telephone Enterprises, Inc.....................
1,053,750
1,000 Covad Communications Group, Inc.*......................
65,750
10,000 GTE Corp...............................................
605,000
20,000 ITC Deltacom*..........................................
436,250
10,000 Level 3 Communications Inc.*...........................
728,125
12,463 MCI WorldCom Inc.*.....................................
1,103,754
13,500 Qwest Communications International Inc.*...............
973,266
9,000 SBC Communications Inc.................................
424,125
15,000 US West, Inc...........................................
825,938
- -----------
8,714,236
- -----------
Media -- 1.45%
10,000 Univision Communications Inc.*.........................
500,000
- -----------
Real Property -- 6.07%
33,000 New Plan Excel Realty Trust Inc........................
633,187
10,000 Storage USA Inc........................................
283,750
18,000 Sun Communities........................................
571,500
10,000 Vornado Realty Trust...................................
345,000
15,000 Westfield America Inc..................................
261,563
- -----------
2,095,000
- -----------
Water -- 2.52%
30,000 American Water Works Co. Inc...........................
871,875
- -----------
Total Common Stocks (cost -- $19,216,874).........................
27,552,630
- -----------
</TABLE>
14
<PAGE>
PaineWebber Utility Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Date Rates
Value
--------- -------------------- --------------
- -----------
<C> <S> <C> <C> <C>
Corporate Bonds -- 6.47%
Beverages & Tobacco -- 0.55%
$190 Seagram (Joseph) & Sons,
Inc..................... 12/15/05 6.625% $
189,452
- -----------
Cable -- 1.99%
550 TCI Communications,
Inc..................... 03/31/27 9.650
686,178
- -----------
Electric Utilities -- 1.42%
500 Texas Utilities Electric
Capital................. 01/30/37 8.175
491,419
- -----------
Entertainment -- 0.63%
200 Time Warner Inc......... 01/15/08 7.480
215,703
- -----------
Publishing -- 1.88%
610 News America Holdings
Inc..................... 12/01/95 to 10/17/96 7.900 to 8.250
650,405
- -----------
Total Corporate Bonds (cost --
$2,071,924).......................
2,233,157
- -----------
Convertible Bond -- 3.15%
Cable -- 3.15%
500 International Cabletel
Inc.+ (cost --
$500,000).............. 06/15/08 7.000
1,088,125
- -----------
U.S. Government Obligation -- 8.67%
3,000 United States Treasury
Bills (cost --
$2,994,354)............ 04/15/99 4.840@
2,994,354
- -----------
Repurchase Agreements -- 11.90%
1,500 Repurchase Agreement
dated 03/31/99 with Deutsche Bank, collateralized by $1,500,000 U.S.
Treasury Notes, 6.000% due 08/15/00 (value-- $1,530,000); proceeds:
$1,500,204............. 04/01/99 4.900
1,500,000
1,500 Repurchase Agreement
dated 03/31/99 with
Salomon Smith Barney,
Inc., collateralized by
$1,590,000 U.S.
Treasury Bills, due
01/06/00 (value--
$1,535,145); proceeds:
$1,500,204............. 04/01/99 4.900
1,500,000
1,110 Repurchase Agreement
dated 03/31/99 with
State Street Bank &
Trust Co.,
collateralized by
$775,000 U.S. Treasury
Bonds, 12.000% due
08/15/13 (value--
$1,138,352); proceeds:
$1,100,150............. 04/01/99 4.870
1,110,000
- -----------
Total Repurchase Agreements
(cost -- $4,110,000)...............
4,110,000
- -----------
Total Investments (cost --
$28,893,152) -- 109.98%...........
37,978,266
Liabilities in excess of other as-
sets -- (9.98)%....................
(3,446,215)
- -----------
Net Assets -- 100.00%..............
$34,532,051
===========
</TABLE>
- ---------
*Non-Income producing security.
+ Security exempt from registration under 144A of the Securities Act of 1933.
This security may be resold in transactions exempt from registration, normally
to qualified institutional buyers.
(1) Security, or portion thereof, was on loan at March 31, 1999. @ Yield to
maturity at date of purchase.
See accompanying notes to financial statements
15
<PAGE>
PaineWebber
Statement of Assets and Liabilities March 31,
1999
<TABLE>
<CAPTION>
Financial Utility
Services Income
Growth Fund Fund
------------ -----------
<S> <C> <C>
Assets
Investments in securities, at value (cost--
$402,050,125 and $24,783,152, respectively)......... $475,290,095 $33,868,266
Repurchase agreements (cost--$37,146,000 and
$4,110,000 respectively)............................ 37,146,000 4,110,000
Investments of cash collateral received for
securities loaned at value (cost--$42,014,500 and
$0, respectively)................................... 42,014,500 --
Cash................................................. 2,752,680 27,352
Dividends and interest receivable.................... 820,533 120,838
Receivable for fund shares sold...................... 772,980 29,125
Receivable for investments sold...................... 366,352 --
Other assets......................................... 75,812 58,249
------------ -----------
Total assets......................................... 559,238,952 38,213,830
------------ -----------
Liabilities
Collateral for securities loaned..................... 42,014,500 --
Payable for investments purchased.................... 30,818,892 3,487,918
Payable for fund shares repurchased.................. 1,903,050 20,775
Payable to affiliates................................ 574,953 46,060
Accrued expenses and other liabilities............... 140,593 127,026
------------ -----------
Total liabilities.................................... 75,451,988 3,681,779
------------ -----------
Net Assets
Capital Stock/Beneficial Interest shares of $0.001
par value outstanding............................... 400,649,451 27,609,875
Accumulated net investment income.................... 1,100,359 36,132
Accumulated net realized gains (losses) from
investment transactions............................. 8,797,184
(2,199,070)
Net unrealized appreciation of investments........... 73,239,970 9,085,114
------------ -----------
Net assets........................................... $483,786,964 $34,532,051
============ ===========
Class A:
Net assets........................................... $204,433,019 $ 7,307,608
------------ -----------
Shares outstanding................................... 6,760,980 537,404
------------ -----------
Net asset value and redemption value per share....... $30.24 $13.60
====== ======
Maximum offering price per share (net asset value
plus sales charge of 4.50% of offering price)....... $31.66 $14.24
====== ======
Class B:
Net assets........................................... $195,392,336 $19,484,175
------------ -----------
Shares outstanding................................... 6,657,721 1,432,421
------------ -----------
Net asset value and offering price per share......... $29.35 $13.60
====== ======
Class C:
Net assets........................................... $ 78,669,581 $ 7,700,362
------------ -----------
Shares outstanding................................... 2,686,595 566,900
------------ -----------
Net asset value and offering price per share......... $29.28 $13.58
====== ======
Class Y:
Net assets........................................... $ 5,292,028 $ 39,906
------------ -----------
Shares outstanding................................... 175,085 2,946
------------ -----------
Net asset value, offering price and redemption value
per share........................................... $30.23 $13.55
====== ======
</TABLE>
See accompanying notes to financial statements
16
<PAGE>
PaineWebber
Statement of Operations For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
Financial Utility
Services Income
Growth Fund Fund
------------ -----------
<S> <C> <C>
<C>
Investment income:
Dividends ..................................... $ 8,420,897 $ 1,192,048
Interest....................................... 2,874,371 386,032
------------ -----------
11,295,268 1,578,080
------------ -----------
Expenses:
Investment advisory and administration......... 3,553,490 245,628
Service fees -- Class A........................ 534,765 18,972
Service and distribution fees -- Class B....... 2,106,616 198,885
Service and distribution fees -- Class C....... 798,910 75,985
Transfer agency and service.................... 384,320 34,635
Custody and accounting......................... 324,585 23,213
Federal and state registration fees............ 192,444 54,908
Reports and notices to shareholders............ 86,540 21,571
Legal and audit................................ 77,050 71,616
Directors/Trustees' fees....................... 10,500 10,500
Other expenses................................. 73,158 10,122
------------ -----------
8,142,378 766,035
------------ -----------
Net investment income.......................... 3,152,890 812,045
------------ -----------
Realized and unrealized gains (losses) from investment transactions:
Net realized gains from investment
transactions.................................. 10,373,374 1,659,180
Net change in unrealized appreciation of
investments................................... (60,166,139) (2,311,090)
------------ -----------
Net realized and unrealized losses from
investments................................... (49,792,765) (651,910)
------------ -----------
Net increase (decrease) in net assets resulting
from operations............................... $(46,639,875) $ 160,135
============ ===========
</TABLE>
See accompanying notes to financial statements
17
<PAGE>
PaineWebber Financial Services Growth Fund Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended
March 31,
- ---------------------------
1999 1998
------------
- -------------
<S> <C> <C>
From operations:
Net investment income............................. $ 3,152,890 $
1,940,220
Net realized gains from investment transactions... 10,373,374
14,829,192
Net change in unrealized appreciation/depreciation
of investments................................... (60,166,139)
91,444,229
------------
- -------------
Net increase (decrease) in net assets resulting
from operations.................................. (46,639,875)
108,213,641
------------
- -------------
Dividends and distributions to shareholders from:
Net investment income--Class A.................... (1,912,147)
(1,011,267)
Net investment income--Class B.................... (548,684)
(359,882)
Net investment income--Class C.................... (265,951)
(124,042)
Net investment income--Class Y.................... (48,437) --
Net realized gains from investment transactions--
Class A.......................................... (2,846,899)
(7,772,773)
Net realized gains from investment transactions--
Class B.......................................... (3,007,950)
(6,470,964)
Net realized gains from investment transactions--
Class C.......................................... (1,166,071)
(2,101,970)
Net realized gains from investment transactions--
Class Y.......................................... (54,597) --
------------
- -------------
Total dividends and distributions to shareholders. (9,850,736)
(17,840,898)
------------
- -------------
From capital stock transactions:
Net proceeds from the sale of shares.............. 424,377,598
400,986,234
Cost of shares repurchased........................ (365,190,187)
(174,767,137)
Proceeds from dividends reinvested................ 8,988,686
15,912,449
------------
- -------------
Net increase in net assets from capital stock
transactions..................................... 68,176,097
242,131,546
------------
- -------------
Net increase in net assets........................ 11,685,486
332,504,289
Net Assets:
Beginning of year................................. 472,101,478
139,597,189
------------
- -------------
End of year (including undistributed net
investment income of
$1,100,359 and $886,107, respectively)........... $483,786,964 $
472,101,478
============
=============
</TABLE>
See accompanying notes to financial statements
18
<PAGE>
PaineWebber Utility Income Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended
March 31,
-------------------------
1999 1998
----------- ------------
<S> <C> <C>
From operations:
Net investment income............................... $ 812,045 $ 701,190
Net realized gains from investment transactions..... 1,659,180 1,915,598
Net change in unrealized appreciation/depreciation
of investments..................................... (2,311,090) 8,396,302
----------- ------------
Net increase in net assets resulting from
operations......................................... 160,135 11,013,090
----------- ------------
Dividends to shareholders from:
Net investment income--Class A...................... (201,569)
(191,756)
Net investment income--Class B...................... (375,035)
(438,848)
Net investment income--Class C...................... (148,781)
(159,880)
Net Investment income--Class Y...................... (492) --
----------- ------------
Total dividends to shareholders..................... (725,877)
(790,484)
----------- ------------
From beneficial interest transactions:
Net proceeds from the sale of shares................ 5,043,771 15,590,114
Cost of shares repurchased.......................... (7,642,154)
(23,344,027)
Proceeds from dividends reinvested.................. 541,936 667,446
----------- ------------
Net decrease in net assets from beneficial interest
transactions....................................... (2,056,447)
(7,086,467)
----------- ------------
Net increase (decrease) in net assets............... (2,622,189) 3,136,139
Net Assets:
Beginning of year................................... 37,154,240 34,018,101
----------- ------------
End of year (including undistributed net investment
income of $36,132 at March 31, 1999)............... $34,532,051 $ 37,154,240
=========== ============
</TABLE>
See accompanying notes to financial statements
19
<PAGE>
Notes to Financial Statements
Organization and Significant Accounting Policies
PaineWebber Financial Services Growth Fund Inc. ("Financial Services Growth
Fund") and PaineWebber Utility Income Fund ("Utility Income Fund")
(collectively, the "Funds") are registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as diversified
open-end management investment companies. Financial Services Growth Fund was
incorporated in the state of Maryland on February 13, 1986 and Utility Income
Fund is a series of PaineWebber Managed Investments Trust (collectively, the
"Trusts") which was organized under Massachusetts law by a Declaration of Trust
dated August 9, 1991 and November 21, 1986, respectively. Organizational costs
have been deferred and amortized using the straight line method over a period
not to exceed 60 months from the date the Funds commenced operations.
Each Fund currently offers Class A, Class B, Class C and Class Y shares. Each
class represents interests in the same assets of the applicable Fund, and the
classes are identical except for differences in their sales charge structures,
ongoing service and distribution charges and certain transfer agency expenses.
In addition, Class B shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years after issuance.
All classes of shares have equal voting privileges except that each class has
exclusive voting rights with respect to its service and/or distribution plan, if
any.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies:
Valuation of Investments--Securities which are listed on stock exchanges are
valued at the last sales price on the day the securities are being valued or,
lacking any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated as the primary market by Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated ("PaineWebber") and investment adviser,
administrator and distributor of the Funds. Securities traded in the
over-the-counter ("OTC") market and listed on the Nasdaq Stock Market, Inc.
("Nasdaq") are valued at the last available sales price, or last bid price
available if no sale occurs on Nasdaq prior to the time of valuation. Where
market quotations are readily available, debt securities are valued thereon,
provided such quotations adequately reflect the fair values of the securities in
the judgment of Mitch- ell Hutchins. When market quotations are not readily
available, securities are valued based upon appraisals derived from information
concerning those securities or similar securities received from recognized
dealers in those securities. The amortized cost method of valuation is used to
value short-term debt instruments with sixty days or less remaining to maturity.
Securities for which market quotations are not readily available including
restricted securities subject to limitations as to their sale are valued at fair
value as determined in good faith by, or under the direction of, the
Fund's/Trusts' Board of Directors/Trustees.
Repurchase Agreements--Each Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to ensure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, each Fund has the right to liquidate
the collateral and apply
20
<PAGE>
Notes to Financial Statements
the proceeds in satisfaction of the obligation. Under certain circumstances, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings. Each Fund occasionally participates in joint repurchase agreement
transactions
with other funds managed by Mitchell Hutchins.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Dividend income is recorded on the ex-dividend
date. Discounts are accreted and premiums are amortized as adjustments to
interest income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of dividend-
eligible shares, as appropriate) of each class at the beginning of the day
(after adjusting for current capital share activity of the respective classes).
Class-specific expenses are charged directly to the applicable class of shares.
Dividends and Distributions--Dividends and distributions to shareholders are
recorded on the ex- dividend date. The amount of dividends and distributions is
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification.
Concentration of Risk
Financial Services Growth Fund invests primarily in equity securities of
financial services companies and Utility Income Fund invests primarily in
securities of utility companies. Economic, legislative and regulatory
developments impacting those industries may affect the market value of each
Fund's investments. In addition, each Fund's ability to invest in U.S.
dollar-denominated foreign equity securities and ability to use options and
futures contracts also entail special risks.
Investment Adviser and Administrator
Each Fund has an Investment Advisory and Administration Contract ("Advisory
Contract") with Mitchell Hutchins, under which Mitchell Hutchins serves as
investment adviser and administrator of the Funds. In accordance with the
Advisory Contracts, Financial Services Growth Fund and Utility Income Fund pay
Mitchell Hutchins an investment advisory and administration fee, which is
accrued daily and paid monthly, at the annual rate of 0.70% of each Fund's
average daily net assets. At March 31, 1999, Financial Services Growth Fund and
Utility Income Fund owed Mitchell Hutchins $292,521 and $20,830, respectively,
in investment advisory and administration fees.
For the year ended March 31, 1999, Financial Services Growth Fund and the
Utility Income Fund paid $66,432 and $0, respectively, in brokerage commissions
to PaineWebber for transactions executed on behalf of the Funds.
21
<PAGE>
Notes to Financial Statements
Distribution Plans
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under separate
plans of service and/or distribution pertaining to Class A, Class B and Class C
shares, the Funds pay Mitchell Hutchins monthly service fees at an annual rate
of 0.25% of the average daily net assets of Class A, Class B and Class C shares
and monthly distribution fees at the annual rate of 0.75% of the average daily
net assets of Class B and Class C shares. At March 31, 1999, Financial Services
Growth Fund and Utility Income Fund owed Mitchell Hutchins $281,699 and $24,978,
respectively, in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
by shareholders upon the purchase of Class A shares and the contingent deferred
sales charges paid by shareholders upon certain redemptions of Class A, Class
B
and Class C shares. Mitchell Hutchins has informed each Fund that for the year
ended March 31, 1999, it earned $2,677,286 and $22,513, in sales charges for the
Financial Services Growth Fund and Utility Income Fund, respectively.
Security Lending
Each Fund may lend securities up to 33 1/3% of its total assets to qualified
institutions. The loans are secured at all times by cash or U.S. government
securities in an amount at least equal to the market value of the securities
loaned, plus accrued interest, determined on a daily basis and adjusted
accordingly. Each Fund will regain record ownership of loaned securities to
exercise certain beneficial rights, however, each Fund may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower fail financially. Each Fund receives compensation, which is
included in interest income, for lending its securities from interest earned on
the cash or U.S. government securities held as collateral, net of fee rebates
paid to the borrower plus reasonable administrative and custody fees. For the
year ended March 31, 1999, Financial Services Growth Fund and Utility Income
Fund earned $41,864 and $8,606, respectively, for lending securities. Each
Fund's lending agent is PaineWebber, which received compensation from the Funds
for the year ended March 31, 1999 as follows:
<TABLE>
<S> <C>
Financial Services Growth Fund............ $14,067
Utility Income Fund....................... $ 2,868
</TABLE>
At March 31, 1999, Financial Services Growth Fund and the Utility Income Fund
owed PaineWebber $733 and $252, respectively, in compensation as security
lending agent.
22
<PAGE>
Notes to Financial Statements
As of March 31, 1999, the Financial Services Growth Fund's custodian held cash
and/or cash equivalents having an aggregate value of $42,014,500 as collateral
for portfolio securities loaned having a market value of $40,196,444. The cash
collateral was invested in a time deposit and money market funds:
<TABLE>
<CAPTION>
Number of
Shares/
Principal
Amount Market
(000) Value
---------
- -----------
<C> <S> <C>
Dresdner Bank AG, Cayman Island Time Deposit, 5.063%,
$25,000 due 04/01/99..........................................
$25,000,000
1,118 Janus Investment Money Market Fund....................
1,117,698
15,897 MH Money Market Fund LLC..............................
15,896,802
- -----------
Total investments of cash collateral received for securities
loaned (cost -- $42,014,500)....................................
$42,014,500
===========
</TABLE>
As of March 31, 1999, the Utility Income Fund held the following securities as
non-cash collateral for portfolio securities loaned having a market value of
$499,500:
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
Market
(000) Date Rate Value
--------- -------- --------
- --------
<C> <S> <C> <C> <C>
$580 U.S. Treasury Note....................... 08/15/03 5.750%
$591,194
</TABLE>
Bank Line of Credit
Each Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be utilized for temporary
financing until the settlement of sale or purchase of portfolio securities, the
repurchase or redemption of shares of each Fund at the request of the
shareholders and other temporary or emergency purposes. In connection therewith,
each Fund has agreed to pay a commitment fee, pro rata, based on the relative
asset size of the Funds in the Facility. Interest is charged to each Fund at
rates based on prevailing market rates in effect at the time of borrowings. For
the year ended March 31, 1999, the Funds did not borrow under the Facility.
Transfer Agency Service Fees
PaineWebber provides certain transfer agency related services to each Fund
pursuant to a delegation of authority from PFPC, Inc., the Fund's transfer
agent, and is compensated for these services by PFPC, Inc., not the Funds. For
the year ended March 31, 1999, PaineWebber received from PFPC, Inc., not the
Funds, approximately 53% and 49% of the total transfer agency service fees
collected by PFPC, Inc. from Financial Services Growth Fund and Utility Income
Fund, respectively.
Investments in Securities
For federal income tax purposes, the cost of securities owned at March 31, 1999
was substantially the same as the cost of securities for financial statement
purposes.
23
<PAGE>
Notes to Financial Statements
At March 31, 1999, the components of net unrealized appreciation of investments
were as follows:
<TABLE>
<CAPTION>
Financial
Services Utility
Growth Income
Fund Fund
------------ ----------
<S> <C> <C>
Gross appreciation (investments having an excess of
value over cost).................................... $ 84,226,303 $9,731,231
Gross depreciation (investments having an excess of
cost over value).................................... (10,986,333)
(646,117)
------------ ----------
Net unrealized appreciation of investments........... $ 73,239,970 $9,085,114
============ ==========
</TABLE>
For the year ended March 31, 1999, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<CAPTION>
Financial
Services Utility
Growth Income
Fund Fund
------------
- -----------
<S> <C> <C>
Purchases.............................................. $352,424,857 $
6,814,388
Sales.................................................. $266,718,233
$11,525,495
</TABLE>
Federal Tax Status
Each Fund intend to distribute substantially all of their taxable income and to
comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required. In addition, by distributing during each calendar year
substantially all of their net investment income, capital gains and certain
other amounts, if any, the Funds intend not to be subject to a federal excise
tax.
To reflect reclassifications for the Financial Services Growth Fund arising
from permanent "book/tax" differences for the year ended March 31, 1999,
undistributed net investment income was decreased by $163,419, accumulated net
realized gains from investment transactions were increased by $53,103 and
capital stock was increased by $110,316.
To reflect reclassifications for the Utility Income Fund arising from permanent
"book/tax" differences for the year ended March 31, 1999, accumulated net
investment income was decreased by $28,237 and beneficial interest increased by
$28,237.
At March 31, 1999, Utility Income Fund had a net capital loss carryforward of
$2,185,162 which will expire by March 31, 2004. To the extent such losses are
used, as provided in the regulations, to offset future net realized capital
gains, it is probable these gains will not be distributed.
24
<PAGE>
Notes to Financial Statements
Capital Stock/Beneficial Interest
There are 300 million shares of $0.001 par value common stock authorized for
the Financial Services Growth Fund. Transactions in common stock were as
follows:
<TABLE>
<CAPTION>
Class A Class
B Class C Class Y
------------------------- ------------------------
- ------------------------ --------------------
Shares Amount Shares Amount
Shares Amount Shares Amount
---------- ------------- ---------- ------------
- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
Financial Services Growth Fund
For the Year Ended
March 31, 1999
Shares sold..... 7,542,064 $ 234,602,858 3,209,931 $ 99,463,482
2,728,837 $ 83,914,734 202,297 $6,396,524
Shares
repurchased.... (7,526,690) (231,874,337) (2,387,230) (70,678,092)
(2,048,835) (61,701,102) (30,708) (936,656)
Shares converted
from Class B to
Class A........ 351,974 11,009,415 (362,660) (11,009,415)
- -- -- -- --
Dividends
reinvested..... 141,796 4,241,108 112,654 3,277,100
47,112 1,367,649 3,442 102,829
---------- ------------- ---------- ------------
- ---------- ------------ -------- ----------
Net increase.... 509,144 $ 17,979,044 572,695 $ 21,053,075
727,114 $ 23,581,281 175,031 $5,562,697
========== ============= ========== ============
========== ============ ======== ==========
For the Year
Ended March 31, 1998
Shares sold..... 5,407,560 $ 158,699,017 5,117,213 $148,855,573
3,254,668 $ 93,429,844 54 $1,800
Shares
repurchased.... (3,295,366) (96,214,614) (827,002) (23,973,587)
(1,909,873) (54,578,936) - -
Shares converted
from Class B to
Class A........ 230,973 6,872,851 (237,222) (6,872,851)
- - - - -
Dividends
reinvested..... 249,050 7,491,415 213,881 6,266,712
73,652 2,154,322 - -
---------- ------------- ---------- ------------
- ---------- ------------ -------- ----------
Net increase.... 2,592,217 $ 76,848,669 4,266,870 $124,275,847
1,418,447 $ 41,005,230 54 $1,800
========== ============= ========== ============
========== ============ ======== ==========
There is an unlimited amount of $0.001 par value shares of beneficial
interest
authorized for the Utility Income Fund. Transactions in shares of beneficial
interest were as follows:
<CAPTION>
Class A Class
B Class C Class Y
------------------------- ------------------------
- ------------------------ --------------------
Shares Amount Shares Amount
Shares Amount Shares Amount
---------- ------------- ---------- ------------
- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
Utility Income
Fund
For the Year
Ended March 31,
1999
Shares sold..... 18,839 $ 254,264 153,918 $ 2,071,525
198,842 $ 2,678,220 2,964 $ 39,762
Shares
repurchased.... (112,877) (1,521,717) (254,192) (3,414,583)
(201,958) (2,705,118) (53) (736)
Shares converted
from Class B to
Class A........ 50,414 680,729 (50,459) (680,729)
- -- -- -- --
Dividends
reinvested..... 11,343 154,177 20,004 271,487
8,546 115,780 35 492
---------- ------------- ---------- ------------
- ---------- ------------ -------- ----------
Net increase
(decrease)..... (32,281) $ (432,547) (130,729) $ (1,752,300)
5,430 $ 88,882 2,946 $ 39,518
========== ============= ========== ============
========== ============ ======== ==========
For the Year
Ended March 31,
1998
Shares sold..... 98,175 $ 1,159,314 124,629 $ 1,530,954
1,084,440 $ 12,899,846
Shares
repurchased.... (198,661) (2,252,444) (594,162) (6,745,575)
(1,211,968) (14,346,008)
Shares converted
from Class B to
Class A........ 63,785 757,256 (63,778) (757,256)
- -- --
Dividends
reinvested..... 14,319 167,830 31,301 364,143
11,616 135,473
---------- ------------- ---------- ------------
- ---------- ------------
Net decrease.... (22,382) $ (168,044) (502,010) $ (5,607,734)
(115,912) $ (1,310,689)
========== ============= ========== ============
========== ============
</TABLE>
25
<PAGE>
PaineWebber Financial Services Growth Fund Inc.
Financial Highlights
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class A
- ---------------------------------------------------
For the Years Ended March 31,
----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
<C>
Net asset value, beginning
of period................. $33.56 $23.41 $21.16 $17.11 $16.92
-------- -------- ------- ------- -------
Net investment income...... 0.33@ 0.20 0.18 0.30 0.25
Net realized and unrealized
gains (losses) from
investments............... (2.96)@ 11.75 5.69 6.25 1.34
-------- -------- ------- ------- -------
Net increase (decrease)
from investment
operations................ (2.63) 11.95 5.87 6.55 1.59
-------- -------- ------- ------- -------
Dividends from net
investment income......... (0.28) (0.21) (0.23) (0.29) (0.13)
Distributions from net
realized gains from
investment transactions... (0.41) (1.59) (3.39) (2.21) (1.27)
-------- -------- ------- ------- -------
Total dividends and
distributions............. (0.69) (1.80) (3.62) (2.50) (1.40)
-------- -------- ------- ------- -------
Net asset value, end of
period.................... $30.24 $33.56 $23.41 $21.16 $17.11
======== ======== ======= ======= =======
Total investment return
(1)....................... (7.81)% 51.92% 28.72% 39.02% 10.22%
======== ======== ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period
(000's)................... $204,433 $209,818 $85,661 $64,003 $49,295
Expenses to average net
assets.................... 1.17% 1.17% 1.52% 1.37% 1.45%
Net investment income to
average net assets........ 1.07% 1.12% 0.90% 1.50% 1.40%
Portfolio turnover rate.... 59% 23% 40% 53% 14%
</TABLE>
- ---------
* Annualized.
+ Commencement of issuance of 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
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 or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
less than one year has not been annualized.
@ Calculated using the average monthly shares outstanding for the year.
26
<PAGE>
<TABLE>
<CAPTION>
Class B Class
C Class Y
- --- ----------------------------------------------
- ------------------------------------------ --------------------------------
For the Years Ended March 31, For the Years Ended
March 31, For the Year For the Period
- --- ----------------------------------------------
- ------------------------------------------ Ended March 30, 1998+
1999 1998 1997 1996 1995 1999 1998
1997 1996 1995 March 31, 1999 to March 31, 1998
- --- -------- -------- ------- ------- ------- ------- -------
- ------- ------ ------ -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
$32.62 $22.87 $20.75 $16.85 $16.71 $ 32.56 $22.84
$20.75 $16.86 $16.71 $33.56 $33.22
-------- -------- ------- ------- ------- ------- -------
- ------- ------ ------ ------ ------
0.09@ 0.09 0.04 0.13 0.11 0.08@ 0.12
0.06 0.12 0.11 0.34@ 0.00
(2.87)@ 11.34 5.53 6.16 1.33 (2.86)@ 11.28
5.51 6.16 1.33 (2.89)@ 0.34
-------- -------- ------- ------- ------- ------- -------
- ------- ------ ------ ------ ------
(2.78) 11.43 5.57 6.29 1.44 (2.78) 11.40
5.57 6.28 1.44 (2.55) 0.34
-------- -------- ------- ------- ------- ------- -------
- ------- ------ ------ ------ ------
(0.08) (0.09) (0.06) (0.18) (0.03) (0.09) (0.09)
(0.09) (0.18) (0.02) (0.37) --
(0.41) (1.59) (3.39) (2.21) (1.27) (0.41) (1.59)
(3.39) (2.21) (1.27) (0.41) --
-------- -------- ------- ------- ------- ------- -------
- ------- ------ ------ ------ ------
(0.49) (1.68) (3.45) (2.39) (1.30) (0.50) (1.68)
(3.48) (2.39) (1.29) (0.78) --
-------- -------- ------- ------- ------- ------- -------
- ------- ------ ------ ------ ------
$29.35 $32.62 $22.87 $20.75 $16.85 $ 29.28 $32.56
$22.84 $20.75 $16.86 $30.23 $33.56
======== ======== ======= ======= ======= ======= =======
======= ====== ====== ====== ======
(8.51)% 50.80% 27.74% 37.97% 9.37% (8.50)% 50.76%
27.74% 37.92% 9.34% (7.57)% 1.02%
======== ======== ======= ======= ======= ======= =======
======= ====== ====== ====== ======
$195,392 $198,473 $41,579 $28,147 $16,368 $78,670 $63,809
$12,357 $6,989 $4,160 $5,292 $2
1.94% 1.92% 2.27% 2.12% 2.22% 1.94% 1.92%
2.28% 2.14% 2.23% 0.90% 0.80%*
0.29% 0.37% 0.15% 0.74% 0.67% 0.27% 0.36%
0.15% 0.72% 0.61% 1.22% 0.00%*
59% 23% 40% 53% 14% 59% 23%
40% 53% 14% 59% 23%
</TABLE>
27
<PAGE>
PaineWebber Utility Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class A
- -----------------------------------------------------
For the For the For the
Years Ended Four Months Years Ended
March 31, Ended November 30,
---------------------- March 31,
- -----------------
1999 1998 1997 1996 1995 1994
------ ------ ------ ----------- -------
- -------
<S> <C> <C> <C> <C> <C>
<C> <C>
Net asset value,
beginning of period.... $13.79 $10.20 $ 9.76 $ 9.77 $ 8.31 $
9.66
------ ------ ------ ------ -------
- -------
Net investment income... 0.39 0.33 0.34 0.15 0.47
0.48
Net realized and
unrealized gains
(losses) from
investments............ (0.22) 3.61 0.41 -- 1.44
(1.31)
------ ------ ------ ------ -------
- -------
Net increase (decrease)
from investment
operations............. 0.17 3.94 0.75 0.15 1.91
(0.83)
------ ------ ------ ------ -------
- -------
Dividends from net
investment income...... (0.36) (0.35) (0.31) (0.16) (0.45)
(0.52)
------ ------ ------ ------ -------
- -------
Net asset value, end of
period................. $13.60 $13.79 $10.20 $ 9.76 $ 9.77 $
8.31
====== ====== ====== ====== =======
=======
Total investment return
(1).................... 1.24% 39.15% 7.83% 1.46% 23.64%
(8.76)%
====== ====== ====== ====== =======
=======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $7,308 $7,856 $6,039 $9,416 $10,750
$12,532
Expenses to average net
assets, net of waivers
from adviser........... 1.59% 1.92% 1.93% 1.09%* 1.49%
1.58%
Expenses to average net
assets, before waivers
from adviser........... 1.59% 1.92% 2.00% 1.44%* 1.49%
1.58%
Net investment income to
average net assets, net
of waivers from
adviser................ 2.90% 2.77% 3.27% 4.26%* 5.13%
5.49%
Net investment income to
average net assets,
before waivers from
adviser................ 2.90% 2.77% 3.20% 3.91%* 5.13%
5.49%
Portfolio turnover rate. 21% 10% 41% 21% 30%
92%
</TABLE>
- ---------
* Annualized.
+ Commencement of issuance of 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
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 or program fees; results would be lower if sales
changes or program fees were included. Total investment return for periods
of less than one year has not been annualized.
28
<PAGE>
<TABLE>
<CAPTION>
Class B
Class C Class Y
- -------------------------------------------------------
- ---------------------------------------------------- --------------
For the For the For the Years For
the For the For the Years
Years Ended Four Months Ended Years
Ended Four Months Ended For the Period
March 31, Ended November 30, March
31, Ended November 30, September 10,
- ------------------------- March 31, ----------------
- ---------------------- March 31, ---------------- 1998+ to
1999 1998 1997 1996 1995 1994 1999 1998
1997 1996 1995 1994 March 31, 1999
- ------- ------- ------- ----------- ------- ------- ------ ------
- ------ ----------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
$13.79 $10.20 $ 9.75 $ 9.77 $ 8.31 $ 9.65 $13.78 $10.20 $
9.75 $ 9.77 $ 8.31 $ 9.65 $12.55
- ------ ------- ------- ------- ------- ------- ------ ------
- ------ ------- ------- ------- ------
0.29 0.25 0.26 0.12 0.40 0.42 0.28 0.23
0.25 0.12 0.40 0.42 0.24
(0.23) 3.60 0.42 (0.01) 1.45 (1.31) (0.22) 3.61
0.43 (0.01) 1.45 (1.31) 1.03
- ------ ------- ------- ------- ------- ------- ------ ------
- ------ ------- ------- ------- ------
0.06 3.85 0.68 0.11 1.85 (0.89) 0.06 3.84
0.68 0.11 1.85 (0.89) 1.27
- ------ ------- ------- ------- ------- ------- ------ ------
- ------ ------- ------- ------- ------
(0.25) (0.26) (0.23) (0.13) (0.39) (0.45) (0.26) (0.26)
(0.23) (0.13) (0.39) (0.45) (0.27)
- ------ ------- ------- ------- ------- ------- ------ ------
- ------ ------- ------- ------- ------
$13.60 $13.79 $10.20 $ 9.75 $ 9.77 $ 8.31 $13.58 $13.78
$10.20 $ 9.75 $ 9.77 $ 8.31 $13.55
====== ======= ======= ======= ======= ======= ====== ======
====== ======= ======= ======= ======
0.49% 38.13% 7.05% 1.10% 22.73% (9.35)% 0.44% 38.09%
7.06% 1.10% 22.71% (9.36)% 10.14%
====== ======= ======= ======= ======= ======= ====== ======
====== ======= ======= ======= ======
$19,484 $21,562 $21,071 $34,765 $37,554 $37,156 $7,700 $7,736
$6,909 $11,072 $12,222 $13,922 $40
2.35% 2.68% 2.69% 1.85%* 2.23% 2.33% 2.35% 2.68%
2.70% 1.85%* 2.24% 2.32% 1.25%*
2.35% 2.68% 2.76% 2.20%* 2.23% 2.33% 2.35% 2.68%
2.76% 2.20%* 2.24% 2.32% 1.25%*
2.16% 2.05% 2.51% 3.51%* 4.37% 4.72% 2.13% 1.99%
2.51% 3.50%* 4.37% 4.69% 2.57%*
2.16% 2.05% 2.44% 3.16%* 4.37% 4.72% 2.13% 1.99%
2.44% 3.15%* 4.37% 4.69% 2.57%*
21% 10% 41% 21% 30% 92% 21% 10%
41% 21% 30% 92% 21%
</TABLE>
29
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER UTILITY INCOME FUND
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Boards of Trustees/Directors and Shareholders
We have audited the accompanying statement of assets and liabilities, including
the portfolios of investments, of PaineWebber Financial Services Growth Fund,
Inc., and PaineWebber Utility Income Fund as of March 31, 1999, and the related
statement of operations for the year then ended and the statements of changes in
net assets for each of the two years in the period then ended and the financial
highlights for each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned at March 31, 1999, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
PaineWebber Financial Services Growth Fund, Inc. and PaineWebber Utility Income
Fund at March 31, 1999, the results of their operations for the year then ended
and the changes in their net assets for each of the two years in the period then
ended and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
New York, New York
May 14, 1999
30
<PAGE>
PaineWebber Financial Services Growth Fund Inc. PaineWebber Utility Income
Fund
Tax Information (unaudited)
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of each Fund's fiscal year end (March 31,
1999) as to federal tax status of distributions received by shareholders during
such fiscal year. Accordingly, we are advising you that the following
distributions paid during the fiscal year by the Funds were derived from the
following sources:
<TABLE>
<CAPTION>
Financial
Services Utility
Growth Income
Per Share Data: Fund Fund
- --------------- --------- -------
<S> <C> <C>
Net investment income*
Class A................................................... $0.2780 $0.3578
Class B................................................... 0.0755 0.2547
Class C................................................... 0.0944 0.2577
Class Y................................................... 0.3672 0.2735
Short-term capital gains*................................. 0.0290 --
Long-term capital gains................................... 0.3849 --
Percentage of ordinary income dividends qualifying for the
dividends received deduction available to corporate
shareholders............................................. 93.49%
100.00%
</TABLE>
*Taxable as ordinary income
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be
reported as taxable income. Some retirement trusts (e.g., corporate, Keogh and
403(b)(7) plans) may need this information for their annual information
reporting.
Since each Fund's fiscal year is not the calendar year, another notification
will be sent with respect to calendar year 1999. Such notifications, which will
reflect the amount to be used by calendar year taxpayers on their federal income
tax returns, will be made in conjunction with Form 1099 DIV and will be mailed
in January 2000. Shareholders are advised to consult their own tax advisers with
respect to the tax consequences of their investment in each of the Funds.
31
<PAGE>
[This Page Intentionally Blank]
32
<PAGE>
[This Page Intentionally Blank]
33
<PAGE>
[This Page Intentionally Blank]
34
<PAGE>
ANNUAL
REPORT
DIRECTORS / TRUSTEES
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
Brian M. Storms
PRINCIPAL OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Paul H. Schubert
Vice President and Treasurer
Julieanna M. Berry
Vice President
James F. Keegan
Vice President
Mark A. Tincher
Vice President
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
This report is not to be used in connection with the offering of shares of the
Funds unless accompanied or preceded by an effective prospectus.
A prospectus containing more complete information for any of the Funds listed on
the back cover can be obtained from a PaineWebber Financial Advisor or
correspondent firm. Read the prospectus carefully before investing.
<PAGE>
====
PaineWebber offers a family of 27 funds which encompass a diversified range of
investment goals.
BOND FUNDS
* High Income Fund
* Investment Grade Income Fund
* Low Duration U.S. Government Income Fund
* Strategic Income Fund
* U.S. Government Income Fund
TAX-FREE BOND FUNDS
* California Tax-Free Income Fund
* Municipal High Income Fund
* National Tax-Free Income Fund
* New York Tax-Free Income Fund
STOCK FUNDS
* Financial Services Growth Fund * Growth Fund * Growth and Income Fund * Mid
Cap Fund * Small Cap Fund * S&P 500 Index Fund * Tax-Managed Equity Fund *
Utility Income Fund
ASSET ALLOCATION FUNDS
* Balanced Fund
* Tactical Allocation Fund
GLOBAL FUNDS
* Asia Pacific Growth Fund
* Emerging Markets Equity Fund
* Global Equity Fund
* Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
* Aggressive Portfolio
* Moderate Portfolio
* Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(C)1999 PaineWebber Incorporated
Member SIPC
PaineWebber
==========================
FINANCIAL
SERVICES
GROWTH FUND INC.
UTILITY
INCOME FUND
ANNUAL REPORT
MARCH 31, 1999
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
Dear Shareholder,
We are pleased to present you with the semiannual report for the
PaineWebber Financial Services Growth Fund Inc. and the PaineWebber Utility
Income Fund for the six-month period ended September 30, 1999.
MARKET REVIEW
================================================================================
[GRAPHIC OMITTED]
For most of 1998 and the first quarter of 1999 the market was very narrow,
its gains concentrated in a small number of large-capitalization growth
companies. Mid- to small-cap stocks generally posted losses. This was a highly
unusual situation. We expected conditions to return to normal--i.e., less of a
performance discrepancy between growth and value styles, and between the largest
companies and the rest of the market. Value did briefly return to favor in the
second quarter, but only the most deeply undervalued of the value stocks
benefited before investors got concerned about the surge in commodity prices,
and narrowness returned. For the 12 months ended September 30, 1999, the S&P 500
Index gained 27.79%.
Despite gains in the broad market, individual stock performance varied
widely. About two thirds of the stocks traded on the New York Stock Exchange
have actually posted losses year-to-date. The market weakened at the end of the
Funds' fiscal year, as investors became concerned about the possibility of the
Federal Reserve again raising short-term interest rates. Technology and consumer
cyclicals were the strongest sectors; the weakest sectors included healthcare,
utilities and capital goods.
OUTLOOK
We expect gross domestic product growth of around 3.80% for 1999, and
about 2.90% growth for 2000. Our outlook calls for 2.25% inflation for calendar
year 1999, and about the same or slightly higher for calendar year 2000. We
expect the yield on the long bond (30-year Treasury) to stay close to 6.10% for
the rest of 1999, and to retreat below 6.00% in 2000. Overseas growth does not
seem strong enough to raise inflationary expectations to a great degree, but
should allow companies to maintain profitability.
- --------------------------------------------------------------------------------
1
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
PAINEWEBBER FINANCIAL SERVICES
GROWTH FUND INC.
================================================================================
PERFORMANCE--TOTAL % RETURNS FOR SIX MONTHS ENDED 9/30/99
Before Sales After Maximum S&P 500 S&P Financial
Charges Sales Charges Index Index
- --------------------------------------------------------------------------------
Class A Shares -13.99 -17.85 0.37 -10.98
Class B Shares -14.31 -18.59 0.37 -10.98
Class C Shares -14.31 -15.17 0.37 -10.98
Class Y Shares -13.86 -13.86 0.37 -10.98
- --------------------------------------------------------------------------------
The Fund's total return consists of the change in net asset value with any
dividends reinvested. For shareowners who purchased or redeemed Fund shares
during the period, the Fund's total return may be lower because of applicable
sales charges. Class Y shares are not subject to sales charges.
- --------------------------------------------------------------------------------
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PROFILE
as of September 30, 1999
Investment Goal:
Long-term capital appreciation
Portfolio Managers:
Andrew Dinnhaupt and Mark Tincher--Chief Investment Officer--Equities,
Mitchell Hutchins Asset Management Inc.
Commencement:
Class A shares, May 22, 1986; Class B shares, July 1, 1991; Class C shares, July
2, 1992; Class Y shares, March 30, 1998
Dividend Payments:
Annually
- --------------------------------------------------------------------------------
PERFORMANCE
During the six-month period, rising interest rates, earnings
disappointments and fears of Y2K problems battered the financial services
sector. The sector, as measured by the S&P Financial Index, lost 10.98% for the
six months ended September 30, 1999. The broad market, as measured by the S&P
500 Index, gained 0.37% for the period. Like the broad market, gains in the
financial sector were limited to a small number of large-capitalization stocks.
Mid- to small-capitalization stocks generally sustained losses.
The Fund has trailed the S&P 500 Index since 1998, and trailed it during
the reporting period (see performance table above). We attribute the Fund's
underperformance to several factors arising from market conditions and our
management style.
Management Style Issues
Smaller-cap orientation--small-cap stocks significantly underperformed
large caps for the three years ended September 30, 1999. The Fund's
overweighting in small caps and underweighting in large-cap banks during the
first part of the year have hurt performance. We increased the Fund's exposure
to large-cap banks and also increased its median market capitalization to $13.5
billion as of September 30, 1999.
Lack of exposure to brokerage stocks--unlike many of its competitors, the
Fund was not invested in brokerage stocks during their rally (October
1998-February 1999). As a result, the Fund's performance significantly lagged
that of its competitors. We began to add select brokerage stocks to the
portfolio in February 1999. Although the Fund's performance benefited somewhat,
the gain did not bring the Fund into line with competitors.
Sector Performance Issues
Earnings disappointments--Bank One's August 24 announcement of an earnings
shortfall in its First USA unit weighed heavily on the banking sector and on
credit card companies. Investors reacted to this company-specific event by
punishing bank stocks generally. Even though the Fund had sold its position in
Bank One before the announcement, its other bank positions suffered.
- --------------------------------------------------------------------------------
2
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
Narrow breadth in stock market performance. Financial services
underperformed the broader market as money flowed into the larger-cap growth
companies and technology companies, in particular.
Fear of rising interest rates, which put pressure on the financial
services sector and pushed the S&P Financial Index down 15% from its early July
highs. Despite the market's concerns, we do not believe the Federal Reserve will
embark on a series of interest rate hikes.
PORTFOLIO HIGHLIGHTS
[GRAPHIC OMITTED]
The Fund's weightings in banks increased from 30.0% to 35.1% by the end of
the period, as we positioned the Fund to benefit from the improving earnings
prospects of the large commercial banks and the preference of investors for
large cap, high liquidity stocks. During the period, we also decreased exposure
to general financial services companies, such as credit card issuers, and
increased exposure to brokerages and asset managers.
PaineWebber Financial Services Growth Fund Inc.--Sector Allocation*
As of 9/30/99 % As of 3/31/99 %
- --------------------------------------------------------------------------------
Banks 35.1 Banks 30.0
Insurance 25.9 Insurance 27.9
Financial Services 15.7 Financial Services 18.4
Cash & Cash Equivalents 8.0 Cash & Cash Equivalents 11.1
Thrift Institutions 6.5 Thrift Institutions 6.4
Brokerage & Asset Management 5.3 Business Services 3.1
Business Services 3.5 Real Estate 2.9
Rights and Warrants 0.2
- --------------------------------------------------------------------------------
Total 100.0 Total 100.0
The Fund's banking and credit card holdings mainly consist of Chase
Manhattan Bank, Bank of New York, Mellon Bank and Capital One, companies whose
earnings outlook we believe to be realistic. We are still seeking investment
opportunities within the brokerage industry.
* Weightings represent percentages of portfolio assets, as of September 30,
1999, unless noted otherwise. The Fund's portfolio is actively managed and
its composition will vary over time.
- --------------------------------------------------------------------------------
3
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
PaineWebber Financial Services Growth Fund Inc.--Top Ten Holdings*
<TABLE>
<CAPTION>
As of 9/30/99 % As of 3/31/99 %
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
American International Group, Inc. 3.6 Capital One Financial Corp. 2.7
Axa Financial Inc. 3.5 American International Group, Inc. 2.5
Bank of New York Co. Inc. 3.2 Providian Corp. 2.3
Ambac Financial Group Inc. 3.0 Associates First Capital Corp. 2.2
Nationwide Financial Services Inc. 2.9 Ambac Financial Group Inc. 2.0
Firstar Corp. 2.9 Hartford Financial Services Group, Inc. 2.0
Associates First Capital Corp. 2.9 Nationwide Financial Services Inc. 2.0
Travelers Property Casualty Corp. 2.7 Zions BanCorp 2.0
UnionBanCal Corp. 2.6 Travelers Property Casualty Corp. 1.9
Federal Home Loan Mortgage Corp. 2.6 Bank One Corp. 1.8
- -------------------------------------------------------------------------------------------
Total 29.9 Total 21.4
</TABLE>
LEAD PORTFOLIO MANAGER
Andrew Dinnhaupt has co-managed PaineWebber Financial Services Growth Fund
Inc. since October 1998. After Karen Finkel, the former portfolio manager,
relocated to London in April 1999, Chief Investment Officer of Equities Mark
Tincher and Mr. Dinnhaupt co-managed the Fund during a transition period of
several months. Mr. Dinnhaupt has now taken the reins as lead portfolio manager,
with support from a team of research analysts. Mr. Tincher will continue to
serve as a portfolio manager for the Fund.
Mr. Dinnhaupt joined Mitchell Hutchins in 1996 as an equity research
analyst. Before that he was a research analyst at Summit Bank, where he covered
the financial services, transportation and aerospace industries. Mr. Dinnhaupt
also was responsible for managing $50 million in equity and fixed income
securities for individuals, retirement accounts, trusts, profit sharing and
401(k) accounts. Mr. Dinnhaupt holds a BS in Economics/Finance from the
University of Scranton and an MBA in Finance from Seton Hall University. He is a
Chartered Financial Analyst.
GOING FORWARD
We believe the financial services sector is poised for a rebound. The
sector's fundamentals (interest rates and earnings trends) currently appear
positive. In our view, earnings estimates for the remainder of 1999 and 2000
seem attainable. Additionally, trends that could make financials very attractive
remain in place: deregulation has taken a significant step with passage of
legislation to rescind the Glass-Steagall Act, and demand for financial products
and services continues to rise as the baby-boomer generation ages.
* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
- --------------------------------------------------------------------------------
4
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
The Fund's portfolio consists of companies that we believe have strong
fundamentals and attractive valuations. We continue to believe that a broadening
of market performance coupled with a rebound in more value-oriented stocks will
occur, and that the value of the Fund's holdings will be recognized over the
long term.
PaineWebber Financial Services Growth Fund Inc.--Characteristics*
9/30/99 3/31/99
- --------------------------------------------------------------------------------
Total Net Assets ($mm) $321.3 $483.8
Dividend Yield 1.58% 1.58%
Number of Securities 57 82
Stocks 92.0% 88.9%
Cash & Cash Equivalents 8.0% 11.1%
- --------------------------------------------------------------------------------
* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
- --------------------------------------------------------------------------------
5
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
PAINEWEBBER UTILITY INCOME FUND
================================================================================
PERFORMANCE--TOTAL % RETURNS FOR SIX MONTHS ENDED 9/30/99
Before Sales After Maximum S&P Utility
Charges Sales Charges Index
- --------------------------------------------------------------------------------
Class A Shares 0.97 -3.57 6.26
Class B Shares 0.51 -4.49 6.26
Class C Shares 0.56 -0.44 6.26
Class Y Shares 1.04 1.04 6.26
- --------------------------------------------------------------------------------
The Fund's total return consists of the change in net asset value with any
dividends reinvested. For shareowners who purchased or redeemed Fund shares
during the period, the Fund's total return may be lower because of applicable
sales charges. Class Y shares are not subject to sales charges.
- --------------------------------------------------------------------------------
PAINEWEBBER UTILITY INCOME FUND
PROFILE
as of September 30, 1999
Investment Goal:
Current income and capital appreciation
Portfolio Managers:
equity component-- Mark Tincher, Chief Investment Officer of Equities, and
Christopher Solmssen; fixed income Component--Julieanna Berry and Jim Keegan,
Mitchell Hutchins Asset Management Inc.
Commencement:
Class A, B and C shares, July 2, 1993; Class Y shares, September 10, 1998
Dividend Payments:
Quarterly
- --------------------------------------------------------------------------------
HIGHLIGHTS
[GRAPHIC OMITTED]
Fund performance lagged the benchmark for the six months ended September
30, 1999 (see table above). The Fund's investment style hurt performance during
the period. The Fund seeks to achieve current income and capital appreciation by
balancing high yielding, electric utility stocks with faster growing, lower
dividend paying stocks such as telecommunications companies, gas utilities,
independent power producers and non-utility companies.
To achieve the goal of current income, we generally seek to maintain a
dividend yield above the Fund's peer group average. To maintain an above average
dividend yield, we allocate about 40% of the portfolio to the electric utility
sector. Investors sold electric utility stocks during the period, acting on
fears of higher interest rates and uncertainty about consolidation. The
resulting underperformance of the electric utilities reduced Fund performance.
Fund performance also was hurt by lagging performance among the
telecommunications stocks, which comprised the Fund's second largest exposure
(36.5%).
On the other hand, the downturn gave us an opportunity to purchase some of
our favorite telecom stocks at attractive prices. We consider telecommunications
one of the most compelling long-term growth stories in the market today. We are
seeking to decrease the Fund's exposure to electric utilities and increase its
exposure to telecommunications. During the period we added to the Fund's
position in MCI WorldCom (3.4%), Global Telesystems Group (0.7%) and AT&T
(2.0%).*
- --------------------------------------------------------------------------------
6
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
PaineWebber Utility Income Fund--Top Ten Equity Holdings*
<TABLE>
<CAPTION>
As of 9/30/99 % As of 3/31/99 %
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
NTL Inc. 4.0 MCI WorldCom Inc. 2.9
MCI WorldCom Inc. 3.4 Century Telephone Enterprises, Inc. 2.8
Bell Atlantic Corp. 3.2 PECO Energy Co. 2.7
BellSouth Corp. 3.1 Qwest Communications Intn'l. Inc. 2.6
CMS Energy Corp. 3.1 Cilcorp Inc. 2.4
Century Telephone Enterprises, Inc. 2.9 BellSouth Corp. 2.3
American Water Works Co. Inc. 2.7 American Water Works Co. Inc. 2.3
US West, Inc. 2.7 US West, Inc. 2.2
New Century Energies Inc. 2.6 Bell Atlantic Corp. 2.1
Univision Communications Inc. 2.5 Energy East Corp. 2.1
- ---------------------------------------------------------------------------------------
Total 30.2 Total 24.4
</TABLE>
New purchases included Sprint Corp. Fon Group (1.7%); Calpine Corp (1.3%),
an independent power producer with attractive growth prospects; Martin Marietta
Materials Inc. (0.6%) and Fox Entertainment Group Inc. (1.0%) represented two
non-utility companies with histories of stable, long-term growth. Other
purchases during the period included CMS Energy Corp. convertible shares (3.1%),
added for their combination of high dividend payout and strong earnings
prospects. The Fund may invest up to 35% of its total assets in equities outside
the utilities industries.
We trimmed the Fund's position in PECO Energy Co. (1.2%) and sold out of
Public Service New Mexico because it no longer fit with our investment themes.
Finally, we sold Consolidated Edison because we did not believe the earnings
potential was great enough to justify the stock's low yield.
PaineWebber Utility Income Fund--Top Five Sectors*
As of 9/30/99 % As of 3/31/99 %
- --------------------------------------------------------------------------------
Utilities 74.9 Utilities 75.0
Energy 7.3 Consumer Cyclical 8.8
Technology 5.1 Financial Services 2.4
Consumer Cyclical 1.1 Capital Goods 1.6
Basic Materials 0.8 Energy 1.6
- --------------------------------------------------------------------------------
Total 89.2 Total 89.4
* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
- --------------------------------------------------------------------------------
7
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
GOING FORWARD
Y2K has moved to the forefront of utility issues, particularly the
question of plant safety and disruption of the electric grid. The nuclear
utilities--where the greatest safety concerns arise--have taken the lead in
reaching Y2K compliance. All the utilities have developed protocols for
overriding their computers and operating their plants manually, as well as
contingency plans for "must-run" facilities to stabilize the power grid. In
addition, many utilities are asking big industrial customers to shut down for 24
hours at year-end. We believe the industry is well prepared for Y2K and do not
anticipate major problems or service disruptions. As the shadows of Y2K recede,
we expect the utility sector to return to favor.
PaineWebber Utility Income Fund--Characteristics*
9/30/99 3/31/99
- --------------------------------------------------------------------------------
Total Net Assets ($mm) $31.8 $34.5
Dividend Yield 3.02% 3.47%
Number of Securities 53 55
Stocks 94.2% 72.5%
Bonds 5.4% 8.8%
Cash & Cash Equivalents 0.4% 18.7%
- --------------------------------------------------------------------------------
Unlike gas utilities, which are federally regulated, electric utilities
are regulated on a state-by-state basis. Deregulation thus has proceeded
according to each state's perceived best interests, with the most populous
states deregulating quickly and the least populous states moving slowly. The
significance of this for investors is that, in states that have deregulated, the
benefits of deregulation are already priced into the stocks when issued; in
states that have not deregulated, the potential benefits of deregulation are
highly speculative.
The utility sector is evolving, and the definition of a utility company is
changing. Traditional definitions such as water, electric and gas companies are
expanding to include important new areas of growth such as telecommunications,
cable and independent power producers. We are taking a flexible approach to the
sector, and expect the Fund's composition to evolve as the utility sector
expands to encompass more diverse businesses.
* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
- --------------------------------------------------------------------------------
8
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. SEMIANNUAL REPORT
PAINEWEBBER UTILITY INCOME FUND
================================================================================
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support
and welcome any comments or questions you may have. For a Quarterly Review on
PaineWebber Financial Services Growth Fund Inc., PaineWebber Utility Income Fund
or another fund in the PaineWebber Family of Funds,(1) please contact your
Financial Advisor.
Sincerely,
/s/ Margo Alexander /s/ Brian M. Storms
MARGO ALEXANDER BRIAN M. STORMS
Chairman and Chief Executive Officer President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
/s/ Mark A. Tincher /s/ Andrew B. Dinnhaupt
MARK A. TINCHER ANDREW B. DINNHAUPT
Managing Director and Chief Investment Vice President
Officer--Equities Portfolio Manager, Mitchell Hutchins Asset Management Inc.
PaineWebber Financial Services Lead Portfolio Manager, PaineWebber
Growth Fund Inc. and Financial Services Growth Fund Inc.
PaineWebber Utility Income Fund
/s/ Christopher T. Solmssen /s/ Julieanna M. Berry
CHRISTOPHER T. SOLMSSEN JULIEANNA M. BERRY
Vice President First Vice President
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
Portfolio Manager, PaineWebber Portfolio Manager, PaineWebber
Utility Income Fund Utility Income Fund
/s/ James F. Keegan
JAMES F. KEEGAN
Senior Vice President
Mitchell Hutchins Asset Management Inc.
Portfolio Manager, PaineWebber
Utility Income Fund
This letter is intended to assist shareholders in understanding how the Funds
performed during the six-month period ended September 30, 1999, and reflects our
views at the time of its writing. Of course, these views may change in response
to changing circumstances. We encourage you to consult your Financial Advisor
regarding your personal investment program.
(1) Mutual funds are sold by prospectus only. The prospectuses for the Funds
contain more complete information regarding risks, charges and expenses,
and should be read carefully before investing.
- --------------------------------------------------------------------------------
9
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Total Return(1)
Net Asset Value ---------------------------------
----------------------------------------- 12 Months 6 Months
09/30/99 03/31/99 09/30/98 Ended 09/30/99 Ended 09/30/99
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $26.01 $30.24 $28.32 (6.03)% (13.99)%
- -------------------------------------------------------------------------------------------------------------
Class B Shares 25.15 29.35 27.42 (6.74) (14.31)
- -------------------------------------------------------------------------------------------------------------
Class C Shares 25.09 29.28 27.37 (6.73) (14.31)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class A Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid Return(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/22/86-12/31/86 $ 9.25 $ 8.31 -- -- (10.16)%
- -------------------------------------------------------------------------------------------------------------
1987 8.31 6.88 $0.2265 $0.3703 (11.05)
- -------------------------------------------------------------------------------------------------------------
1988 6.88 7.70 -- 0.2375 15.38
- -------------------------------------------------------------------------------------------------------------
1989 7.70 9.08 -- 0.2900 21.71
- -------------------------------------------------------------------------------------------------------------
1990 9.08 7.73 -- 0.2410 (12.33)
- -------------------------------------------------------------------------------------------------------------
1991 7.73 12.55 -- 0.2070 65.37
- -------------------------------------------------------------------------------------------------------------
1992 12.55 17.38 -- 0.0237 38.68
- -------------------------------------------------------------------------------------------------------------
1993 17.38 17.22 1.8425 0.0820 10.32
- -------------------------------------------------------------------------------------------------------------
1994 17.22 15.68 1.2660 0.1345 (0.75)
- -------------------------------------------------------------------------------------------------------------
1995 15.68 20.57 2.2099 0.2942 47.46
- -------------------------------------------------------------------------------------------------------------
1996 20.57 22.80 3.3870 0.2300 28.96
- -------------------------------------------------------------------------------------------------------------
1997 22.80 31.24 1.5895 0.2068 45.20
- -------------------------------------------------------------------------------------------------------------
1998 31.24 31.24 0.4139 0.2780 2.31
- -------------------------------------------------------------------------------------------------------------
01/01/99-09/30/99 31.24 26.01 -- -- (16.74)
- -------------------------------------------------------------------------------------------------------------
Totals: $10.9353 $2.5950
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 09/30/99: 481.05%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class B Shares
<TABLE>
<CAPTION>
Net Asset Value
--------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid Return(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-12/31/91 $10.24 $12.56 -- $0.0640 23.30%
- -------------------------------------------------------------------------------------------------------------
1992 12.56 17.31 -- -- 37.82
- -------------------------------------------------------------------------------------------------------------
1993 17.31 17.04 $1.8425 0.0571 9.57
- -------------------------------------------------------------------------------------------------------------
1994 17.04 15.47 1.2660 0.0344 (1.53)
- -------------------------------------------------------------------------------------------------------------
1995 15.47 20.21 2.2099 0.1766 46.36
- -------------------------------------------------------------------------------------------------------------
1996 20.21 22.32 3.3870 0.0592 28.00
- -------------------------------------------------------------------------------------------------------------
1997 22.32 30.42 1.5895 0.0884 44.10
- -------------------------------------------------------------------------------------------------------------
1998 30.42 30.38 0.4139 0.0755 1.55
- -------------------------------------------------------------------------------------------------------------
01/01/99-09/30/99 30.38 25.15 -- -- (17.22)
- -------------------------------------------------------------------------------------------------------------
Totals: $10.7088 $0.5552
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 09/30/99: 323.08%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable dates and do not include
sales charges; results for each class would be lower if sales charges were
included. Total investment return for periods of less than one year has
not been annualized.
The data above represents past performance of the Fund's shares, which is
no guarantee of future results. The principal value of an investment in
the Fund will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
10
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PERFORMANCE RESULTS (unaudited) (concluded)
Performance Summary Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
--------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid Return(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/92-12/31/92 $14.61 $17.32 -- $0.0359 18.80%
- -------------------------------------------------------------------------------------------------------------
1993 17.32 17.03 $1.8425 0.0691 9.52
- -------------------------------------------------------------------------------------------------------------
1994 17.03 15.48 1.2660 0.0209 (1.50)
- -------------------------------------------------------------------------------------------------------------
1995 15.48 20.21 2.2099 0.1819 46.30
- -------------------------------------------------------------------------------------------------------------
1996 20.21 22.29 3.3870 0.0861 27.99
- -------------------------------------------------------------------------------------------------------------
1997 22.29 30.37 1.5895 0.0938 44.09
- -------------------------------------------------------------------------------------------------------------
1998 30.37 30.31 0.4139 0.0944 1.55
- -------------------------------------------------------------------------------------------------------------
01/01/99-09/30/99 30.31 25.09 -- -- (17.22)
- -------------------------------------------------------------------------------------------------------------
Totals: $10.7088 $0.5821
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 09/30/99: 190.69%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN(1)
<TABLE>
<CAPTION>
% Return Without Deducting % Return After Deducting
Maximum Sales Charge Maximum Sales Charge
-------------------------------------- --------------------------------
Class A* B** C*** A* B** C***
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve Months Ended 09/30/99 (6.03)% (6.74)% (6.73)% (10.25)% (11.32)% (7.64)%
- -------------------------------------------------------------------------------------------------------------
Five Years Ended 09/30/99 17.25 16.37 16.36 16.18 16.16 16.36
- -------------------------------------------------------------------------------------------------------------
Ten Years Ended 09/30/99 16.73 N/A N/A 16.20 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Commencement of Operations
Through 09/30/99+ 14.07 19.09 15.85 13.67 19.09 15.85
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and other distributions at
net asset value on the payable dates and do not include sales charges;
results would be lower if sales charges were included.
* Maximum sales charge for Class A shares is 4.5% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after 6 years. Class B shares bear ongoing 12b-1
distribution and service fees.
*** Maximum contingent deferred sales charge for Class C shares is 1% and is
reduced to 0% after 1 year. Class C shares bear ongoing 12b-1 distribution
and service fees.
+ Commencement of issuance dates are May 22, 1986, July 1, 1991 and July 2,
1992 for Class A, Class B and Class C shares, respectively.
Note: The fund offers Class Y shares to a limited group of elegible
investors, including participants in certain investment programs that are
sponsored by PaineWebber and may invest in PaineWebber mutual funds. For
the six months ended September 30, 1999 and since inception, March 30,
1998 through September 30,1999, Class Y shares have a total return of
(13.86)% and (19.56)%, respectively. Class Y shares do not have initial or
contingent deferred sales charges or ongoing distribution and service
fees.
The data above represent past performance of the Fund's shares, which is
no guarantee of future results. The principal value of an investment in
the Fund will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
11
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Total Return(1)
Net Asset Value --------------------------------
------------------------------------ 12 Months 6 Months
09/30/99 03/31/99 09/30/98 Ended 09/30/99 Ended 09/30/99
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $13.58 $13.60 $13.43 3.26% 0.97%
- -------------------------------------------------------------------------------------------------------------
Class B Shares 13.60 13.60 13.43 2.41 0.51
- -------------------------------------------------------------------------------------------------------------
Class C Shares 13.56 13.58 13.41 2.46 0.56
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class A Shares
<TABLE>
<CAPTION>
Net Asset Value
--------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid Return(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/93-12/31/93 $10.00 $ 9.70 -- $0.2340 (0.70)%
- -------------------------------------------------------------------------------------------------------------
1994 9.70 8.28 -- 0.4829 (9.71)
- -------------------------------------------------------------------------------------------------------------
1995 8.28 10.14 -- 0.4662 28.82
- -------------------------------------------------------------------------------------------------------------
1996 10.14 10.56 -- 0.3530 7.90
- -------------------------------------------------------------------------------------------------------------
1997 10.56 12.90 -- 0.3299 25.75
- -------------------------------------------------------------------------------------------------------------
1998 12.90 14.17 -- 0.3709 12.87
- -------------------------------------------------------------------------------------------------------------
01/01/99-09/30/99 14.17 13.58 -- 0.2144 (2.67)
- -------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $2.4513
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 09/30/99: 72.13%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class B Shares
<TABLE>
<CAPTION>
Net Asset Value
--------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid Return(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/93-12/31/93 $10.00 $ 9.70 -- $0.2010 (1.02)%
- -------------------------------------------------------------------------------------------------------------
1994 9.70 8.28 -- 0.4169 (10.40)
- -------------------------------------------------------------------------------------------------------------
1995 8.28 10.14 -- 0.3980 27.87
- -------------------------------------------------------------------------------------------------------------
1996 10.14 10.56 -- 0.2756 7.06
- -------------------------------------------------------------------------------------------------------------
1997 10.56 12.90 -- 0.2427 24.78
- -------------------------------------------------------------------------------------------------------------
1998 12.90 14.17 -- 0.2689 12.03
- -------------------------------------------------------------------------------------------------------------
01/01/99-09/30/99 14.17 13.60 -- 0.1039 (3.30)
- -------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $1.9070
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 09/30/99: 64.35%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid Return(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/93-09/30/99 $10.00 $ 9.70 -- $0.2020 (1.01)%
- -------------------------------------------------------------------------------------------------------------
1994 9.70 8.28 -- 0.4158 (10.41)
- -------------------------------------------------------------------------------------------------------------
1995 8.28 10.14 -- 0.3970 27.86
- -------------------------------------------------------------------------------------------------------------
1996 10.14 10.56 -- 0.2766 7.07
- -------------------------------------------------------------------------------------------------------------
1997 10.56 12.89 -- 0.2459 24.72
- -------------------------------------------------------------------------------------------------------------
1998 12.89 14.15 -- 0.2728 12.00
- -------------------------------------------------------------------------------------------------------------
01/01/99-09/30/99 14.15 13.56 -- 0.1325 (3.25)
- -------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $1.9426
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 09/30/99: 64.08%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and capital gain
distributions at net asset value on the payable dates and do not include
sales charges; results for each class would be lower if sales charges were
included. Total investment return for periods of less than one year has
not been annualized.
Note: The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored
by PaineWebber and may invest in PaineWebber mutual funds. For the six
months ended September 30, 1999 and since inception, September 10, 1998
through September 30, 1999, Class Y shares have a total return of 1.04%,
and 11.28%, respectively. Class Y shares do not have initial or contingent
deferred sales charges or ongoing distribution and service fees.
The data above represents past performance of the Fund's shares, which is
no guarantee of future results. The principal value of an investment in
the Fund will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
12
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
PERFORMANCE RESULTS (unaudited) (concluded)
AVERAGE ANNUAL TOTAL RETURN(1)
<TABLE>
<CAPTION>
% Return Without Deducting % Return After Deducting
Maximum Sales Charge Maximum Sales Charge
-------------------------------------- -----------------------------
Class A* B** C*** A* B** C***
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve Months Ended 09/30/99 3.26% 2.41% 2.46% (1.37)% (2.59)% 1.46%
- -------------------------------------------------------------------------------------------------------------
Five Years Ended 09/30/99 13.99 13.14 13.13 12.94 12.98 13.13
- -------------------------------------------------------------------------------------------------------------
Commencement of Operations
Through 09/30/99+ 9.08 8.27 8.24 8.28 8.27 8.24
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and other distributions at
net asset value on the payable dates and do not include sales charges;
results would be lower if sales charges were included
* Maximum sales charge for Class A shares is 4.5% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after 6 years. Class B shares bear ongoing 12b-1
distribution and service fees.
*** Maximum contingent deferred sales charge for Class C shares is 1% and is
reduced to 0% after 1 year. Class C shares bear ongoing 12b-1 distribution
and service fees.
+ Commencement of issuance date is July 2, 1993 for Class A, Class B and
Class C shares.
The data above represents past performance of the Fund's shares, which is
no guarantee of future results. The principal value of an investment in
the Fund will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
13
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (unaudited)
Number of
Shares Value
- ---------------- ------------
COMMON STOCKS--90.36%
Banks--34.40%
300,000 Bank of New York Co. Inc. ............... $ 10,031,250
60,000 CCB Financial Corp. ..................... 2,497,500
82,500 Comerica, Inc.(1) ....................... 4,176,562
84,000 Commerce Bancorp, Inc. .................. 3,486,000
250,000 Cullen Frost Bankers Inc. ............... 6,250,000
146,500 Financial Institutions Incorporated ..... 1,895,343
105,000 First Security Corp. .................... 2,497,031
355,470 Firstar Corp. ........................... 9,108,919
17,000 M&T Bank Corp.* ......................... 7,803,000
82,500 Marshall and Ilsley Corp.(1) ............ 4,707,656
200,000 Mellon Bank Corp. ....................... 6,750,000
60,000 Northern Trust Corp.(1) ................. 5,010,000
125,000 Prosperity Bancshares Incorporated ...... 1,882,813
180,000 Sterling Bancshares Incorporated ........ 2,058,750
95,000 Summit Bancorp, Inc. .................... 3,081,563
140,000 Texas Regional Bankshares Inc. .......... 3,465,000
110,000 The Chase Manhattan Corp. ............... 8,291,250
230,000 UnionBanCal Corp. ....................... 8,337,500
180,000 Wells Fargo and Co. ..................... 7,132,500
125,000 Westamerica BanCorp. .................... 3,781,250
150,000 Zions BanCorp. .......................... 8,268,750
------------
110,512,637
------------
Business Services--3.42%
155,000 Deluxe Corp. ............................ 5,270,000
130,000 First Data Corp.(1) ..................... 5,703,750
------------
10,973,750
------------
Financial Services--20.67%
50,000 American Express Co. .................... 6,731,250
250,000 Associates First Capital Corp. .......... 9,000,000
200,000 Axa Financial Inc. ...................... 11,162,500
210,000 Capital One Financial Corp. ............. 8,190,000
50,000 Citigroup, Inc. ......................... 2,200,000
40,000 Compucredit Corporation ................. 742,500
180,000 Conning Corp. ........................... 2,070,000
2,100 Digital Insight Corporation ............. 31,500
160,000 Federal Home Loan Mortgage Corp. ........ 8,320,000
100,000 Lehman Brothers Holdings, Inc. .......... 5,831,250
80,000 Merrill Lynch & Co., Inc. ............... 5,375,000
40,000 Morgan Stanley, Dean Witter & Co. ....... 3,567,500
40,000 Providian Corp. ......................... 3,167,500
------------
66,389,000
------------
Insurance--25.47%
200,000 Ambac Financial Group Inc. .............. 9,475,000
62,500 American General Corp. .................. 3,949,219
130,156 American International Group, Inc. ...... 11,315,437
215,000 Enhance Financial Services Group Inc. ... 3,802,813
100,000 Hartford Financial Services Group, Inc. . 4,087,500
160,000 Hartford Life Inc. ...................... 7,880,000
70,000 Marsh & McLennan Cos., Inc. ............. 4,795,000
200,000 Mutual Risk Management Ltd.(1) .......... 2,450,000
260,000 Nationwide Financial Services Inc. ...... 9,197,500
250,000 Protective Life Corp. ................... 7,250,000
190,277 Reinsurance Group of America, Inc. ...... 4,887,740
130,000 Reliastar Financial Corp.(1) ............ 4,322,500
285,000 Travelers Property Casualty Corp. ....... 8,407,500
------------
81,820,209
------------
Thrift Institutions--6.41%
214,725 Charter One Financial Inc.(1) ........... 4,965,516
300,000 Dime Bancorp Inc. ....................... 5,250,000
94,300 Golden State Bancorp Inc.* .............. 1,691,506
250,000 Greenpoint Financial Corp.(1) ........... 6,640,625
70,000 Washington Mutual, Inc. ................. 2,047,500
------------
20,595,147
------------
Total Common Stocks (cost--$274,480,814).................. 290,290,743
------------
14
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- ---------------- ------------ ------------ ------------
<S> <C> <C> <C>
SHORT TERM U.S. GOVERNMENT AGENCY OBLIGATIONS--1.56%
$ 5,000 Federal Home Loan Mortgage Corp. Discount Notes (cost--$4,995,692) .. 10/07/99 5.17%@ $ 4,995,692
------------
REPURCHASE AGREEMENTS--6.31%
10,285 Repurchase Agreement dated 09/30/99 with SG Cowen Corp.,
collateralized by $9,015,000 U.S. Treasury Notes, 13.125%
due 05/15/01 (value--$10,486,699); proceeds; $10,286,514 ............ 10/01/99 5.300 10,285,000
10,000 Repurchase Agreement dated 09/30/99 with SG Warburg,
collateralized by $7,432,000 U.S. Treasury Notes, 12.750%
due 11/15/10 (value--$10,200,420); proceeds; $10,001,472 ............ 10/01/99 5.300 10,000,000
------------
Total Repurchase Agreements (cost--$20,285,000) ...................................... 20,285,000
------------
Total Investments (cost--$299,761,506)--98.23% ....................................... 315,571,435
Other assets in excess of liabilities--1.77% ......................................... 5,685,164
------------
Net Assets--100.00% .................................................................. $321,256,599
============
</TABLE>
- ----------
* Non-income producing security.
(1) Security, or portion thereof, was on loan at September 30, 1999.
@ Interest rate reflects yield to maturity at date of purchase.
See accompanying notes to financial statements
15
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1999 (unaudited)
Number of
Shares Value
- ---------------- -----------
COMMON STOCKS--94.44%
Construction--0.63%
5,000 Martin Marietta Materials, Inc. ........... $ 199,687
-----------
Electric Utilities--40.66%
20,000 Allegheny Energy Inc. ..................... 636,250
15,000 Alliant Corp. ............................. 415,313
5,000 Calpine Corp.* ............................ 425,313
20,000 Central Hudson Gas & Electric Corp. ....... 787,500
28,000 CMS Energy Corp. .......................... 987,000
20,000 Constellation Energy Group, Inc. .......... 562,500
37,500 DPL Inc. .................................. 660,937
20,000 DQE Inc. .................................. 782,500
5,000 Duke Energy Corp. ......................... 275,625
30,000 Energy East Corp. ......................... 712,500
20,000 Illinova Corp. ............................ 561,250
25,000 New Century Energies Inc. ................. 835,937
24,000 Nisource Inc. ............................. 531,000
17,500 NSTAR ..................................... 678,125
10,000 PECO Energy Co. ........................... 375,000
20,000 Puget Sound Power & Light Co. ............. 448,750
25,000 RGS Energy Group Inc. ..................... 612,500
25,000 SCANA Corp. ............................... 604,687
25,200 Sierra Pacific Resources .................. 560,700
20,000 Texas Utilities Co. ....................... 746,250
20,000 Unicom Corp. .............................. 738,750
-----------
12,938,387
-----------
Gas Utility--6.43%
17,000 Coastal Corp. ............................. 695,937
10,000 Columbia Energy Group ..................... 553,750
20,000 El Paso Energy Corp. ...................... 796,250
-----------
2,045,937
-----------
Long Distance & Phone Companies--38.00%
10,000 Ameritech Corp. ........................... 671,875
15,000 AT&T Corp. ................................ 652,500
15,376 Bell Atlantic Corp. ....................... 1,034,997
22,000 BellSouth Corp. ........................... 990,000
22,500 Century Telephone Enterprises, Inc. ....... 914,062
3,000 Covad Communications Group, Inc.* ......... 130,781
9,825 Global Crossing Ltd.* ..................... 260,363
11,000 Global Telesystems Group Inc. ............. 216,906
10,000 GTE Corp. ................................. 768,750
25,000 ITC Deltacom* ............................. 687,500
10,000 Level 3 Communications Inc.* .............. 522,188
15,000 MCI WorldCom Inc.* ........................ 1,078,125
10,000 Northpoint Communications Holding* ........ 185,000
13,201 NTL Inc.* ................................. 1,268,534
27,000 Qwest Communications International Inc.* .. 798,188
10,000 SBC Communications Inc. ................... 510,625
10,000 Sprint Corp. .............................. 542,500
15,000 US West, Inc. ............................. 855,937
-----------
12,088,831
-----------
Media--3.55%
15,000 Fox Entertainment Group Inc.* ............. 316,875
10,000 Univision Communications Inc.* ............ 813,750
-----------
1,130,625
-----------
Real Property--2.44%
8,364 Reckson Associates Realty Corp. ........... 182,963
18,000 Sun Communities ........................... 595,125
-----------
778,088
-----------
Water--2.73%
30,000 American Water Works Co. Inc. ............. 868,125
-----------
Total Common Stocks (cost--$21,837,283) .................... 30,049,680
-----------
16
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- -------------- ------------- ------------- -----------
<S> <C> <C> <C>
CORPORATE BONDS--5.38%
Beverages & Tobacco--0.57%
$ 190 Seagram (Joseph) & Sons, Inc. ............................... 12/15/05 6.625% $ 181,695
-----------
Cable--1.97%
550 TCI Communications, Inc. .................................... 03/31/27 9.650 625,998
-----------
Electric Utilities--1.04%
350 Texas Utilities Electric Capital ............................ 01/30/37 8.175 332,192
-----------
Publishing--1.80%
610 News America Holdings Inc. .................................. 12/01/95 to 10/17/96 7.900 to 8.250 571,244
-----------
Total Corporate Bonds (cost--$1,700,072) ..................................... 1,711,129
-----------
REPURCHASE AGREEMENT--0.49%
155 Repurchase Agreement dated 09/30/99 with State Street
Bank & Trust Co., collateralized by $154,455 U.S.
Treasury Notes, 6.375% due 08/15/02 (value--$158,123);
proceeds: $155,018 (cost--$155,000) ......................... 10/01/99 4.250 155,000
-----------
Total Investments (cost--$23,692,355)--100.31% ............................... 31,915,809
Liabilities in excess of other assets--(0.31)% ............................... (98,121)
-----------
Net Assets--100.00% .......................................................... $31,817,688
===========
</TABLE>
- ----------
* Non-Income producing security.
See accompanying notes to financial statements
17
<PAGE>
PAINEWEBBER
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Financial Utility
Services Income
Growth Fund Fund
------------ ------------
<S> <C> <C>
Assets
Investments in securities, at value (cost--$299,761,506
and $23,692,355, respectively) .......................................... $315,571,435 $ 31,915,809
Investments of cash collateral received for securities loaned
at value (cost--$17,652,700 and $0, respectively) ....................... 17,652,700 --
Cash ...................................................................... 643 4,022
Receivable for investments sold ........................................... 8,197,003 --
Dividends and interest receivable ......................................... 436,732 112,641
Receivable for fund shares sold ........................................... 72,507 1,505
Other assets .............................................................. 34,497 33,209
------------ ------------
Total assets .............................................................. 341,965,517 32,067,186
------------ ------------
Liabilities
Collateral for securities loaned .......................................... 17,652,700 --
Payable for investments purchased ......................................... 1,133,325 --
Payable for fund shares repurchased ....................................... 1,428,214 113,352
Payable to affiliates ..................................................... 383,627 35,161
Accrued expenses and other liabilities .................................... 111,052 100,985
------------ ------------
Total liabilities ......................................................... 20,708,918 249,498
------------ ------------
Net Assets
Capital Stock/Beneficial Interest shares of $0.001 par value outstanding .. 292,933,092 24,795,413
Accumulated net investment income ......................................... 1,045,438 29,128
Accumulated net realized gains (losses) from investment transactions ...... 11,468,140 (1,230,307)
Net unrealized apppreciation of investments ............................... 15,809,929 8,223,454
------------ ------------
Net assets ................................................................ $321,256,599 $ 31,817,688
============ ============
Class A:
Net assets ................................................................ $145,932,020 $ 16,915,955
------------ ------------
Shares outstanding ........................................................ 5,609,909 1,245,704
------------ ------------
Net asset value and redemption value per share ............................ $ 26.01 $ 13.58
============ ============
Maximum offering price per share (net asset value plus sales charge
of 4.50% of offering price) ............................................. $ 27.24 $ 14.22
============ ============
Class B:
Net assets ................................................................ $123,321,954 $ 7,511,083
------------ ------------
Shares outstanding ........................................................ 4,903,436 552,126
------------ ------------
Net asset value and offering price per share .............................. $ 25.15 $ 13.60
============ ============
Class C:
Net assets ................................................................ $ 48,874,893 $ 7,303,333
------------ ------------
Shares outstanding ........................................................ 1,947,659 538,397
------------ ------------
Net asset value and offering price per share .............................. $ 25.09 $ 13.56
============ ============
Class Y:
Net assets ................................................................ $ 3,127,732 $ 87,317
------------ ------------
Shares outstanding ........................................................ 120,104 6,454
------------ ------------
Net asset value, offering price and redemption value per share ............ $ 26.04 $ 13.53
============ ============
</TABLE>
See accompanying notes to financial statements
18
<PAGE>
PAINEWEBBER
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Financial Utility
Services Income
Growth Fund Fund
------------ ------------
<S> <C> <C>
Investment income:
Dividends .............................................................. $ 2,874,586 $ 498,547
Interest ............................................................... 539,016 133,742
------------ ------------
3,413,602 632,289
------------ ------------
Expenses:
Investment advisory and administration ................................. 1,506,849 122,922
Service fees--Class A .................................................. 234,044 16,651
Service and distribution fees--Class B ................................. 853,525 68,209
Service and distribution fees--Class C ................................. 338,230 40,484
Transfer agency and service ............................................ 175,500 16,889
Custody and accounting ................................................. 154,159 11,787
Federal and state registration fees .................................... 80,863 23,558
Reports and notices to shareholders .................................... 37,868 12,472
Legal and audit ........................................................ 31,830 37,841
Directors/Trustees' fees ............................................... 5,250 5,250
Other expenses ......................................................... 53,069 4,758
------------ ------------
3,471,187 360,821
Less: Fee waiver from adviser .......................................... (2,664) --
------------ ------------
Net expenses ........................................................... 3,468,523 360,821
------------ ------------
Net investment income (loss) ........................................... (54,921) 271,468
------------ ------------
Realized and unrealized gains (losses) from investment transactions:
Net realized gains from investment transactions ........................ 2,670,956 968,763
Net change in unrealized appreciation/depreciation of investments ...... (57,430,041) (861,660)
------------ ------------
Net realized and unrealized gains (losses) from investments ............ (54,759,085) 107,103
------------ ------------
Net increase (decrease) in net assets resulting from operations ........ $(54,814,006) $ 378,571
============ ============
</TABLE>
See accompanying notes to financial statements
19
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
September 30, 1999 Ended
(unaudited) March 31,1999
------------- -------------
<S> <C> <C>
From operations:
Net investment income (loss) ............................................ $ (54,921) $ 3,152,890
Net realized gains from investment transactions ......................... 2,670,956 10,373,374
Net change in unrealized appreciation/depreciation of investments ....... (57,430,041) (60,166,139)
------------- -------------
Net decrease in net assets resulting from operations .................... (54,814,006) (46,639,875)
------------- -------------
Dividends and distributions to shareholders from:
Net investment income--Class A .......................................... -- (1,912,147)
Net investment income--Class B .......................................... -- (548,684)
Net investment income--Class C .......................................... -- (265,951)
Net investment income--Class Y .......................................... -- (48,437)
Net realized gains from investment transactions--Class A ................ -- (2,846,899)
Net realized gains from investment transactions--Class B ................ -- (3,007,950)
Net realized gains from investment transactions--Class C ................ -- (1,166,071)
Net realized gains from investment transactions--Class Y ................ -- (54,597)
------------- -------------
Total dividends and distributions to shareholders ....................... -- (9,850,736)
------------- -------------
From capital stock transactions:
Net proceeds from the sale of shares .................................... 115,924,514 424,377,598
Cost of shares repurchased .............................................. (223,640,873) (365,190,187)
Proceeds from dividends reinvested ...................................... -- 8,988,686
------------- -------------
Net increase (decrease) in net assets from capital stock transactions ... (107,716,359) 68,176,097
------------- -------------
Net increase (decrease) in net assets ................................... (162,530,365) 11,685,486
Net assets:
Beginning of period ..................................................... 483,786,964 472,101,478
------------- -------------
End of period (including undistributed net investment income
of $1,045,438 and $1,100,359, respectively) ........................... $ 321,256,599 $ 483,786,964
============= =============
</TABLE>
See accompanying notes to financial statements
20
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
September 30, 1999 Ended
(unaudited) March 31, 1999
------------ --------------
<S> <C> <C>
From operations:
Net investment income ............................................... $ 271,468 $ 812,045
Net realized gains from investment transactions ..................... 968,763 1,659,180
Net change in unrealized appreciation/depreciation of investments ... (861,660) (2,311,090)
------------ ------------
Net increase in net assets resulting from operations ................ 378,571 160,135
------------ ------------
Dividends to shareholders from:
Net investment income--Class A ...................................... (172,168) (201,569)
Net investment income--Class B ...................................... (49,476) (375,035)
Net investment income--Class C ...................................... (55,985) (148,781)
Net investment income--Class Y ...................................... (843) (492)
------------ ------------
Total dividends to shareholders ..................................... (278,472) (725,877)
------------ ------------
From beneficial interest transactions:
Net proceeds from the sale of shares ................................ 5,456,999 5,043,771
Cost of shares repurchased .......................................... (8,476,913) (7,642,154)
Proceeds from dividends reinvested .................................. 205,452 541,936
------------ ------------
Net decrease in net assets from beneficial interest transactions .... (2,814,462) (2,056,447)
------------ ------------
Net decrease in net assets .......................................... (2,714,363) (2,622,189)
Net assets:
Beginning of period ................................................. 34,532,051 37,154,240
------------ ------------
End of period (including undistributed net investment income of
$29,128 and $36,132, respectively) ................................ $ 31,817,688 $ 34,532,051
============ ============
</TABLE>
See accompanying notes to financial statements
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Financial Services Growth Fund Inc. ("Financial Services
Growth Fund") and PaineWebber Utility Income Fund ("Utility Income Fund")
(collectively, the "Funds") are registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as diversified
open-end management investment companies. Financial Services Growth Fund was
incorporated in the state of Maryland on February 13, 1986 and Utility Income
Fund is a series of PaineWebber Managed Investment Trust (collectively, the
"Trusts") which was organized under Massachusetts law by a Declaration of Trust
dated August 9, 1991 and November 21, 1986, respectively.
Each Fund currently offers Class A, Class B, Class C and Class Y shares.
Each class represents interests in the same assets of the applicable Fund, and
the classes are identical except for differences in their sales charge
structures, ongoing service and distribution charges and certain transfer agency
expenses. In addition, Class B shares and all corresponding reinvested dividend
shares automatically convert to Class A shares approximately six years after
issuance. All classes of shares have equal voting privileges except that each
class has exclusive voting rights with respect to its service and/or
distribution plan, if any.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
Valuation of Investments--The Funds calculate net asset values based on
the current market value for its portfolio's securities. The Funds normally
obtain market values for its securities from independent pricing sources.
Independent pricing sources may use reported last sale prices, current market
quotations or valuations from computerized "matrix" systems that derive values
based on comparable securities. Securities traded in the over-the-counter
("OTC") market and listed on The Nasdaq Stock Market, Inc. ("Nasdaq") normally
are valued at the last sale price on Nasdaq prior to valuation. Other OTC
securities are valued at the last bid price available prior to valuation.
Securities which are listed on U.S. and foreign stock exchanges normally are
valued at the last sale price on the day the securities are valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated as the primary market by Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated ("PaineWebber"), and investment adviser
and administrator of the Funds. If a market value is not available from an
independent pricing source for a particular security, that security is valued at
fair value as determined in good faith by or under the direction of the
Fund's/Trusts' Board of Directors/Trustees. The amortized cost method of
valuation, which approximates market value, generally is used to value
short-term debt instruments with sixty days or less remaining to maturity,
unless each Fund's/Trust's board determines that this does not represent fair
value.
Repurchase Agreements--Each Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, each Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. Each Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
on an accrual basis. Dividend income is recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized as adjustments to interest
income and the identified cost of investment.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains/losses are allocated proportionately to each class of
shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
Dividends and Distributions--Dividends and distributions to shareholders
are recorded on the ex-dividend date. The amount of dividends and distributions
is determined in accordance with federal income tax regulations, which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
CONCENTRATION OF RISK
Financial Services Growth Fund invests primarily in equity securities of
financial services companies and Utility Income Fund invests primarily in
securities of utility companies. Economic, legislative and regulatory
developments impacting those industries may affect the market value of each
Fund's investments. In addition, each Fund's ability to invest in U.S.
dollar-denominated foreign equity securities and ability to use options and
futures contracts also entail special risks.
INVESTMENT ADVISER AND ADMINISTRATOR
Each Fund has an Investment Advisory and Administration Contract
("Advisory Contract") with Mitchel Hutchins, under which Mitchell Hutchins
serves as investment adviser and administrator of the Funds. In accordance with
the Advisory Contracts, Financial Services Growth Fund and Utility Income Fund
pay Mitchell Hutchins an investment advisory and administration fee, which is
accrued daily and paid monthly, at the annual rate of 0.70% of each Fund's
average daily net assets. At September 30, 1999, Financial Services Growth Fund
and Utility Income Fund owed Mitchell Hutchins $198,147 and $18,750,
respectively, in investment advisory and administration fees. Mitchell Hutchins
waived a portion of its investment advisory and administration fees in
connection with the Financial Services Growth Fund's and Utility Income Fund's
investment of cash collateral from security lending in the Mitchell Hutchins
Private Money Market Fund LLC. For the six months ended September 30, 1999,
Mitchell Hutchins waived $2,664 and $0, respectively.
For the six months ended September 30, 1999, Financial Services Growth
Fund and the Utility Income Fund paid $18,690 and $0, respectively, in brokerage
commissions to PaineWebber for transactions executed on behalf of the Funds.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of each Fund's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
Under separate plans of service and/or distribution pertaining to Class A, Class
B and Class C shares, the Funds pay Mitchell Hutchins monthly service fees at an
annual rate of 0.25% of the average daily net assets of Class A, Class B and
Class C shares and monthly distribution fees at the annual rate of 0.75% of the
average daily net assets of Class B and Class C shares. At September 30, 1999,
Financial Services Growth Fund and Utility Income Fund owed Mitchell Hutchins
$184,803 and $16,099, respectively, in service and distribution fees.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by shareholders upon certain redemptions of Class A,
Class B and Class C shares. Mitchell Hutchins has informed each Fund that for
the six months ended September 30, 1999, it earned $973,256 and $13,250, in
sales charges for the Financial Services Growth Fund and Utility Income Fund,
respectively.
SECURITY LENDING
Each Fund may lend securities up to 33 1/3% of its total assets to
qualified institutions. The loans are secured at all times by cash or U.S.
government securities in an amount at least equal to the market value of the
securities loaned, plus accrued interest, determined on a daily basis and
adjusted accordingly. Each Fund will regain record ownership of loaned
securities to exercise certain beneficial rights, however, each Fund may bear
the risk of delay in recovery of, or even loss of rights in, the securities
loaned should the borrower fail financially. Each Fund receives compensation,
which is included in interest income, for lending its securities from interest
earned on the cash or U.S. government securities held as collateral, net of fee
rebates paid to the borrower plus reasonable administrative and custody fees.
For the six months ended September 30, 1999, Financial Services Growth Fund and
Utility Income Fund earned $24,993 and $9,475, respectively, for lending
securities. Financial Services Growth and the Utility Income Fund lending agent
is PaineWebber, which received compensation from the Funds for the six months
ended September 30, 1999 of $8,481 and $3,158, respectively.
At September 30, 1999, Financial Services Growth Fund and the Utility
Income Fund owed Painewebber $677 and $312, respectively, in compensation as
security lending agent.
As of September 30, 1999, the Financial Services Growth Fund's custodian
held cash and/or cash equivalents having an aggregate value of $17,652,700 as
collateral for portfolio securities loaned having a market value of $16,917,206.
The cash collateral was invested in the following time deposit and money market
funds:
<TABLE>
<CAPTION>
Number
of Shares/
Principal Market
Amount Value
- ----------- ------------
<S> <C> <C>
$ 5,000,000 Gillette Company, Commercial Paper, 5.550%, due 10/01/99 .................. $ 5,000,000
7,327,166 Liquid Assets Money Market Portfolio ...................................... 7,327,166
4,883,294 Mitchell Hutchins Private Money Market Fund LLC ........................... 4,883,294
442,240 Prime Portfolio Money Market .............................................. 442,240
------------
Total investments of cash collateral received for securities loaned (cost--$17,652,700) .. $ 17,652,700
============
</TABLE>
BANK LINE OF CREDIT
Each Fund may participate with other funds managed by Mitchell Hutchins in
a $200 million committed credit facility ("Facility") to be utilized for
temporary financing until the settlement of sale or purchase of portfolio
securities, the repurchase or redemption of shares of each Fund at the request
of the shareholders and other temporary or emergency purposes. In connection
therewith, each Fund has agreed to pay a commitment fee, pro rata, based on the
relative asset size of the Funds in the Facility. Interest is charged to each
Fund at rates based on prevailing market rates in effect at the time of
borrowings. For the six months ended September 30, 1999, the Funds did not
borrow under the Facility.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
TRANSFER AGENCY SERVICE FEES
PaineWebber provides certain transfer agency related services to each Fund
pursuant to a delegation of authority from PFPC, Inc., the Fund's transfer
agent, and is compensated for these services by PFPC, Inc., not the Funds. For
the six months ended September 30, 1999, PaineWebber received from PFPC, Inc.,
not the Funds, approximately 52% and 48% of the total transfer agency services
fees collected by PFPC, Inc. from Financial Services Growth Fund and Utility
Income Fund, respectively.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at September
30, 1999 was substantially the same as the cost of securities for financial
statement purposes.
At September 30, 1999, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<CAPTION>
Financial
Services Utility
Growth Income
Fund Fund
------------ -----------
<S> <C> <C>
Gross appreciation (investment having an excess of value over cost) ......... $ 34,348,864 $ 9,100,605
Gross depreciation (investment having an excess of cost over value) ......... (18,538,935) (877,151)
------------ -----------
Net unrealized appreciation of investments .................................. $ 15,809,929 $ 8,223,454
============ ===========
</TABLE>
For the six months ended September 30, 1999, total aggregate purchases and
sales of portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<CAPTION>
Financial
Services Utility
Growth Income
Fund Fund
------------ -----------
<S> <C> <C>
Purchases ................................................................... $174,307,198 $9,243,928
Sales ....................................................................... $284,585,238 $8,464,134
</TABLE>
FEDERAL TAX STATUS
Each Fund intends to distribute substantially all of their taxable income
and to comply with the other requirements of the Internal Revenue Code
applicable to regulated investment companies. Accordingly, no provision for
federal income taxes is required. In addition, by distributing during each
calendar year substantially all of their net investment income, capital gains
and certain other amounts, if any, the Funds intend not to be subject to a
federal excise tax.
At March 31, 1999, Utility Income Fund had a net capital loss carryforward
of $2,185,162 which will expire by March 31, 2004. To the extent such losses are
used, as provided in the regulations, to offset future net realized capital
gains, it is probable these gains will not be distributed.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
CAPITAL STOCK/BENEFICIAL INTEREST
There are 300 million shares of $0.001 par value common stock authorized
for the Financial Services Growth Fund. Transactions in common stock were as
follows:
<TABLE>
<CAPTION>
Class A Class B
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial Services Growth Fund
For the Six Months Ended September 30, 1999:
Shares sold ...................................... 3,004,719 $ 91,389,517 242,394 $ 7,109,682
Shares repurchased ............................... (4,386,224) (132,640,629) (1,758,918) (50,492,394)
Shares converted from Class B to Class A ......... 230,434 6,981,892 (237,761) (6,981,892)
Dividends reinvest ............................... -- -- -- --
------------- ------------- ------------- -------------
Net decrease ..................................... (1,151,071) $ (34,269,220) (1,754,285) $ (50,364,604)
============= ============= ============= =============
<CAPTION>
Class C Class Y
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial Services Growth Fund
For the Six Months Ended September 30, 1999:
Shares sold ...................................... 560,565 $ 16,427,541 33,050 $ 997,774
Shares repurchased ............................... (1,299,501) (37,896,076) (88,031) (2,611,774)
Shares converted from Class B to Class A ......... -- -- -- --
Dividends reinvest ............................... -- -- -- --
------------- ------------- ------------- -------------
Net decrease ..................................... (738,936) $ (21,468,535) (54,981) $ (1,614,000)
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999:
Shares sold ...................................... 7,542,064 $ 234,602,858 3,209,931 $ 99,463,482
Shares repurchased ............................... (7,526,690) (231,874,337) (2,387,230) (70,678,092)
Shares converted from Class B to Class A ......... 351,974 11,009,415 (362,660) (11,009,415)
Dividends reinvested ............................. 141,796 4,241,108 112,654 3,277,100
------------- ------------- ------------- -------------
Net increase ..................................... 509,144 $ 17,979,044 572,695 $ 21,053,075
============= ============= ============= =============
<CAPTION>
Class C Class Y
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999:
Shares sold ...................................... 2,728,837 $ 83,914,734 202,297 $ 6,396,524
Shares repurchased ............................... (2,048,835) (61,701,102) (30,708) (936,656)
Shares converted from Class B to Class A ......... -- -- -- --
Dividends reinvested ............................. 47,112 1,367,649 3,508 102,829
------------- ------------- ------------- -------------
Net increase ..................................... 727,114 $ 23,581,281 175,031 $ 5,562,697
============= ============= ============= =============
</TABLE>
There is an unlimited amount of $0.001 par value shares of beneficial
interest authorized for the Utility Income Fund. Transactions in shares of
beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Class B
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Utility Income Fund
For the Six Months Ended September 30, 1999:
Shares sold ...................................... 10,490 $ 152,907 36,953 $ 536,532
Shares repurchased ............................... (111,262) (1,603,701) (119,650) (1,713,527)
Shares converted from Class B to Class A ......... 799,885 11,607,486 (800,106) (11,607,486)
Dividends reinvest ............................... 9,187 127,266 2,508 35,059
------------- ------------- ------------- -------------
Net increase (decrease) .......................... 708,300 $ 10,283,958 (880,295) $ (12,749,422)
============= ============= ============= =============
<CAPTION>
Class C Class Y
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Utility Income Fund
For the Six Months Ended September 30, 1999:
Shares sold ...................................... 324,570 $ 4,711,733 3,921 $ 55,827
Shares repurchased ............................... (356,118) (5,152,969) (474) (6,716)
Shares converted from Class B to Class A ......... -- -- -- --
Dividends reinvest ............................... 3,045 42,284 61 843
------------- ------------- ------------- -------------
Net increase (decrease) .......................... (28,503) $ (398,952) 3,508 $ 49,954
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999:
Shares sold ...................................... 18,839 $ 254,264 153,918 $ 2,071,525
Shares repurchased ............................... (112,877) (1,521,717) (254,192) (3,414,583)
Shares converted from Class B to Class A ......... 50,414 680,729 (50,459) (680,729)
Dividends reinvested ............................. 11,343 154,177 20,004 271,487
------------- ------------- ------------- -------------
Net increase (decrease) .......................... (32,281) $ (432,547) (130,729) $ (1,752,300)
============= ============= ============= =============
<CAPTION>
Class C Class Y
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999:
Shares sold ...................................... 198,842 $ 2,678,220 2,964 $ 39,762
Shares repurchased ............................... (201,958) (2,705,118) (53) (736)
Shares converted from Class B to Class A ......... -- -- -- --
Dividends reinvested ............................. 8,546 115,780 35 492
------------- ------------- ------------- -------------
Net increase (decrease) .......................... 5,430 $ 88,882 2,946 $ 39,518
============= ============= ============= =============
</TABLE>
26
<PAGE>
[This page intentionally left blank.]
27
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------
For the Six
Months Ended
September 30, For the Years Ended March 31,
1999 --------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 30.24 $ 33.56 $ 23.41 $ 21.16 $ 17.11 $ 16.92
-------- -------- -------- -------- -------- --------
Net investment income (loss) ................... 0.11 0.33@ 0.20 0.18 0.30 0.25
Net realized and unrealized gains (losses)
from investments .......................... (4.34) (2.96)@ 11.75 5.69 6.25 1.34
-------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations ..................... (4.23) (2.63) 11.95 5.87 6.55 1.59
-------- -------- -------- -------- -------- --------
Dividends from net investment income ........... -- (0.28) (0.21) (0.23) (0.29) (0.13)
Distributions from net realized gains
from investment transactions .............. -- (0.41) (1.59) (3.39) (2.21) (1.27)
-------- -------- -------- -------- -------- --------
Total dividends and distributions .............. 0.00 (0.69) (1.80) (3.62) (2.50) (1.40)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 26.01 $ 30.24 $ 33.56 $ 23.41 $ 21.16 $ 17.11
======== ======== ======== ======== ======== ========
Total investment return (1) .................... (13.99)% (7.81)% 51.92% 28.72% 39.02% 10.22%
======== ======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (000's) .............. $145,932 $204,433 $209,818 $ 85,661 $ 64,003 $ 49,295
Expenses to average net assets,
net of waivers from adviser (2) ................ 1.18%* 1.17% 1.17% 1.52% 1.37% 1.45%
Net investment income to average net assets,
net of waivers from adviser (2) ................ 0.40%* 1.07% 1.12% 0.90% 1.50% 1.40%
Portfolio turnover rate ........................ 44% 59% 23% 40% 53% 14%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of 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 other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results would be lower if sales charges were
included. Total investment return for periods of less than one year has
not been annualized.
(2) During the six months ended September 30, 1999 Mitchell Hutchins waived a
portion of its advisory and administration fees. The ratios excluding the
waiver are the same since the fee waiver represents less than 0.005%.
@ Calculated using the average monthly shares outstanding for the year.
28
<PAGE>
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------------
For the Six
Months Ended
September 30, For the Years Ended March 31,
1999 --------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 29.35 $ 32.62 $ 22.87 $ 20.75 $ 16.85 $ 16.71
-------- -------- -------- -------- -------- --------
Net investment income (loss) ................... (0.07) 0.09@ 0.09 0.04 0.13 0.11
Net realized and unrealized gains (losses)
from investments .......................... (4.13) (2.87)@ 11.34 5.53 6.16 1.33
-------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations ..................... (4.20) (2.78) 11.43 5.57 6.29 1.44
-------- -------- -------- -------- -------- --------
Dividends from net investment income ........... -- (0.08) (0.09) (0.06) (0.18) (0.03)
Distributions from net realized gains
from investment transactions .............. -- (0.41) (1.59) (3.39) (2.21) (1.27)
-------- -------- -------- -------- -------- --------
Total dividends and distributions .............. 0.00 (0.49) (1.68) (3.45) (2.39) (1.30)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 25.15 $ 29.35 $ 32.62 $ 22.87 $ 20.75 $ 16.85
======== ======== ======== ======== ======== ========
Total investment return (1) .................... (14.31)% (8.51)% 50.80% 27.74% 37.97% 9.37%
======== ======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (000's) .............. $123,322 $195,392 $198,473 $ 41,579 $ 28,147 $ 16,368
Expenses to average net assets,
net of waivers from adviser (2) ................ 1.96%* 1.94% 1.92% 2.27% 2.12% 2.22%
Net investment income to average net assets,
net of waivers from adviser (2) ................ (0.38)%* 0.29% 0.37% 0.15% 0.74% 0.67%
Portfolio turnover rate ........................ 44% 59% 23% 40% 53% 14%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of 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 other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results would be lower if sales charges were
included. Total investment return for periods of less than one year has
not been annualized.
(2) During the six months ended September 30, 1999 Mitchell Hutchins waived a
portion of its advisory and administration fees. The ratios excluding the
waiver are the same since the fee waiver represents less than 0.005%.
@ Calculated using the average monthly shares outstanding for the year.
29
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
FINANCIAL HIGHLIGHTS (concluded)
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------------------------
For the Six
Months Ended
September 30, For the Years Ended March 31,
1999 --------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 29.28 $ 32.56 $ 22.84 $ 20.75 $ 16.86 $ 16.71
-------- -------- -------- -------- -------- --------
Net investment income (loss) ................... (0.08) 0.08@ 0.12 0.06 0.12 0.11
Net realized and unrealized gains (losses)
from investments .......................... (4.11) (2.86)@ 11.28 5.51 6.16 1.33
-------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations ..................... (4.19) (2.78) 11.40 5.57 6.28 1.44
-------- -------- -------- -------- -------- --------
Dividends from net investment income ........... -- (0.09) (0.09) (0.09) (0.18) (0.02)
Distributions from net realized gains
from investment transactions .............. -- (0.41) (1.59) (3.39) (2.21) (1.27)
-------- -------- -------- -------- -------- --------
Total dividends and distributions .............. 0.00 (0.50) (1.68) (3.48) (2.39) (1.29)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 25.09 $ 29.28 $ 32.56 $ 22.84 $ 20.75 $ 16.86
======== ======== ======== ======== ======== ========
Total investment return (1) .................... (14.31)% (8.50)% 50.76% 27.74% 37.92% 9.34%
======== ======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (000's) .............. $ 48,875 $ 78,670 $ 63,809 $ 12,357 $ 6,989 $ 4,160
Expenses to average net assets,
net of waivers from adviser (2) ................ 1.95%* 1.94% 1.92% 2.28% 2.14% 2.23%
Net investment income to average net assets,
net of waivers from adviser (2) ................ (0.37)%* 0.27% 0.36% 0.15% 0.72% 0.61%
Portfolio turnover rate ........................ 44% 59% 23% 40% 53% 14%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of 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 other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized.
(2) During the six months ended September 30, 1999 Mitchell Hutchins waived a
portion of its advisory and administration fees. The ratios excluding the
waiver are the same since the fee waiver represents less than 0.005%.
@ Calculated using the average monthly shares outstanding for the year.
30
<PAGE>
<TABLE>
<CAPTION>
Class Y
---------------------------------------------------
For the Six
Months Ended For the For the
September 30, Year Ended Period Ended
1999 March 31, March 30, 1998+
(unaudited) 1999 to March 31, 1998
------------ ---------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period ........... $ 30.23 $ 33.56 $ 33.22
-------- -------- --------
Net investment income (loss) ................... 0.10 0.34@ 0.00
Net realized and unrealized gains (losses)
from investments .......................... (4.29) (2.89)@ 0.34
-------- -------- --------
Net increase (decrease) from
investment operations ..................... (4.19) (2.55) 0.34
-------- -------- --------
Dividends from net investment income ........... -- (0.37) --
Distributions from net realized gains
from investment transactions .............. -- (0.41) --
-------- -------- --------
Total dividends and distributions .............. 0.00 (0.78) 0.00
-------- -------- --------
Net asset value, end of period ................. $ 26.04 $ 30.23 $ 33.56
======== ======== ========
Total investment return (1) .................... (13.86)% (7.57)% 1.02%
======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (000's) .............. $ 3,128 $ 5,292 $ 2
Expenses to average net assets,
net of waivers from adviser (2) ................ 0.89%* 0.90% 0.80%*
Net investment income to average net assets,
net of waivers from adviser (2) ................ 0.69%* 1.22% 0.00%*
Portfolio turnover rate ........................ 44% 59% 23%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of 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 other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized.
(2) During the six months ended September 30, 1999 Mitchell Hutchins waived a
portion of its advisory and administration fees. The ratios excluding the
waiver are the same since the fee waiver represents less than 0.005%.
@ Calculated using the average monthly shares outstanding for the year.
31
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------------------
For the
For the Six For the Four Months For the
Months Ended Years Ended Ended Years Ended
September 30, March 31, March 31, November 30,
1999 -------------------------------- --------- --------------------
(unaudited) 1999 1998 1997 1996 1995 1994
------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 13.60 $ 13.79 $ 10.20 $ 9.76 $ 9.77 $ 8.31 $ 9.66
-------- -------- -------- -------- -------- -------- --------
Net investment income ....................... 0.16@ 0.39 0.33 0.34 0.15 0.47 0.48
Net realized and unrealized gains (losses)
from investments ....................... (0.02)@ (0.22) 3.61 0.41 -- 1.44 (1.31)
-------- -------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations .................. 0.14 0.17 3.94 0.75 0.15 1.91 (0.83)
-------- -------- -------- -------- -------- -------- --------
Dividends from net investment income ........ (0.16) (0.36) (0.35) (0.31) (0.16) (0.45) (0.52)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period .............. $ 13.58 $ 13.60 $ 13.79 $ 10.20 $ 9.76 $ 9.77 $ 8.31
======== ======== ======== ======== ======== ======== ========
Total investment return (1) ................. 0.97% 1.24% 39.15% 7.83% 1.46% 23.64% (8.76)%
======== ======== ======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period (000's) ........... $ 16,916 $ 7,308 $ 7,856 $ 6,039 $ 9,416 $ 10,750 $ 12,532
Expenses to average net assets, net of
waivers from adviser ................... 1.56%* 1.59% 1.92% 1.93% 1.09%* 1.49% 1.58%
Expenses to average net assets, before
waivers from adviser ................... 1.56%* 1.59% 1.92% 2.00% 1.44%* 1.49% 1.58%
Net investment income to average net assets,
net of waivers from adviser ............ 2.05%* 2.90% 2.77% 3.27% 4.26%* 5.13% 5.49%
Net investment income to average net assets,
before waivers from adviser ............ 2.05%* 2.90% 2.77% 3.20% 3.91%* 5.13% 5.49%
Portfolio turnover rate ..................... 25% 21% 10% 41% 21% 30% 92%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of shares.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
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 or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized.
32
<PAGE>
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------------------------
For the
For the Six For the Four Months For the
Months Ended Years Ended Ended Years Ended
September 30, March 31, March 31, November 30,
1999 -------------------------------- -------- --------------------
(unaudited) 1999 1998 1997 1996 1995 1994
------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 13.60 $ 13.79 $ 10.20 $ 9.75 $ 9.77 $ 8.31 $ 9.65
-------- -------- -------- -------- -------- -------- --------
Net investment income ....................... 0.08@ 0.29 0.25 0.26 0.12 0.40 0.42
Net realized and unrealized gains (losses)
from investments ....................... (0.01)@ (0.23) 3.60 0.42 (0.01) 1.45 (1.31)
-------- -------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations .................. 0.07 0.06 3.85 0.68 0.11 1.85 (0.89)
-------- -------- -------- -------- -------- -------- --------
Dividends from net investment income ........ (0.07) (0.25) (0.26) (0.23) (0.13) (0.39) (0.45)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period .............. $ 13.60 $ 13.60 $ 13.79 $ 10.20 $ 9.75 $ 9.77 $ 8.31
======== ======== ======== ======== ======== ======== ========
Total investment return (1) ................. 0.51% 0.49% 38.13% 7.05% 1.10% 22.73% (9.35)%
======== ======== ======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period (000's) ........... $ 7,511 $ 19,484 $ 21,562 $ 21,071 $ 34,765 $ 37,554 $ 37,156
Expenses to average net assets, net of
waivers from adviser ................... 2.38%* 2.35% 2.68% 2.69% 1.85%* 2.23% 2.33%
Expenses to average net assets, before
waivers from adviser ................... 2.38%* 2.35% 2.68% 2.76% 2.20%* 2.23% 2.33%
Net investment income to average net assets,
net of waivers from adviser ............ 1.23%* 2.16% 2.05% 2.51% 3.51%* 4.37% 4.72%
Net investment income to average net assets,
before waivers from adviser ............ 1.23%* 2.16% 2.05% 2.44% 3.16%* 4.37% 4.72%
Portfolio turnover rate ..................... 25% 21% 10% 41% 21% 30% 92%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of shares.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
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 or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized.
33
<PAGE>
PAINEWEBBER UTILITY INCOME FUND
FINANCIAL HIGHLIGHTS (concluded)
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class C
------------------------------------------------------------------------------------
For the
For the Six For the Four Months For the
Months Ended Years Ended Ended Years Ended
September 30, March 31, March 31, November 30,
1999 -------------------------------- --------- --------------------
(unaudited) 1999 1998 1997 1996 1995 1994
------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 13.58 $ 13.78 $ 10.20 $ 9.75 $ 9.77 $ 8.31 $ 9.65
-------- -------- -------- -------- -------- -------- --------
Net investment income ....................... 0.09@ 0.28 0.23 0.25 0.12 0.40 0.42
Net realized and unrealized gains (losses)
from investments ....................... (0.01)@ (0.22) 3.61 0.43 (0.01) 1.45 (1.31)
-------- -------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations .................. 0.08 0.06 3.84 0.68 0.11 1.85 (0.89)
-------- -------- -------- -------- -------- -------- --------
Dividends from net investment income ........ (0.10) (0.26) (0.26) (0.23) (0.13) (0.39) (0.45)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period .............. $ 13.56 $ 13.58 $ 13.78 $ 10.20 $ 9.75 $ 9.77 $ 8.31
======== ======== ======== ======== ======== ======== ========
Total investment return (1) ................. 0.56% 0.44% 38.09% 7.06% 1.10% 22.71% (9.36)%
======== ======== ======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period (000's) ........... $ 7,303 $ 7,700 $ 7,736 $ 6,909 $ 11,072 $ 12,222 $ 13,922
Expenses to average net assets, net of
waivers from adviser ................... 2.34%* 2.35% 2.68% 2.70% 1.85%* 2.24% 2.32%
Expenses to average net assets, before
waivers from adviser ................... 2.34%* 2.35% 2.68% 2.76% 2.20%* 2.24% 2.32%
Net investment income to average net assets,
net of waivers from adviser ............ 1.25%* 2.13% 1.99% 2.51% 3.50%* 4.37% 4.69%
Net investment income to average net assets,
before waivers from adviser ............ 1.25%* 2.13% 1.99% 2.44% 3.15%* 4.37% 4.69%
Portfolio turnover rate ..................... 25% 21% 10% 41% 21% 30% 92%
<CAPTION>
Class Y
------------------------------
For the Six For the Period
Months Ended September 10
September 30, 1998+ to
1999 March 31,
(unaudited) 1999
------------- --------------
<S> <C> <C>
Net asset value, beginning of period ......... $ 13.55 $ 12.55
-------- --------
Net investment income ........................ 0.15@ 0.24
Net realized and unrealized gains (losses)
from investments ........................ (0.01)@ 1.03
-------- --------
Net increase (decrease) from
investment operations ................... 0.14 1.27
-------- --------
Dividends from net investment income ......... (0.16) (0.27)
-------- --------
Net asset value, end of period ............... $ 13.53 $ 13.55
======== ========
Total investment return (1) .................. 1.04% 10.14%
======== ========
Ratios/Supplemental data:
Net assets, end of period (000's) ............ $ 87 $ 40
Expenses to average net assets, net of
waivers from adviser .................... 1.49%* 1.25%*
Expenses to average net assets, before
waivers from adviser .................... 1.49%* 1.25%*
Net investment income to average net assets,
net of waivers from adviser ............. 2.36%* 2.57%*
Net investment income to average net assets,
before waivers from adviser ............. 2.36%* 2.57%*
Portfolio turnover rate ...................... 25% 21%
</TABLE>
- ----------
* Annualized.
+ Commencement of issuance of shares.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
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 or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized.
34
<PAGE>
================================================================================
DIRECTORS/TRUSTEES
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
Brian M. Storms
PRINCIPAL OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Paul H. Schubert
Vice President and Treasurer
Julieanna M. Berry
Vice President
James F. Keegan
Vice President
Mark A. Tincher
Vice President
INVESTMENT ADVISOR, ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
New York, New York 10019
This report is not to be used in connection with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.
The financial information included herein is taken from the records of the Funds
without examination by independent auditors who do not express an opinion
thereon.
A prospectus containing more complete information for any of the Funds listed on
the back cover can be obtained from a PaineWebber Financial Advisor or
corresponding firm. Read the prospectus carefully before investing.
<PAGE>
PaineWebber offers a family of 28 funds which encompass a diversified range of
investment goals.
BOND FUNDS
o High Income Fund
o Investment Grade Income Fund
o Low Duration U.S. Government Income Fund
o Strategic Income Fund
o U.S. Government Income Fund
TAX-FREE BOND FUNDS
o California Tax-Free Income Fund
o Municipal High Income Fund
o National Tax-Free Income Fund
o New York Tax-Free Income Fund
STOCK FUNDS
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Mid Cap Fund
o Small Cap Fund
o S&P 500 Index Fund
o Strategy Fund
o Tax-Managed Equity Fund
o Utility Income Fund
ASSET ALLOCATION FUNDS
o Balanced Fund
o Tactical Allocation Fund
GLOBAL FUNDS
o Asia Pacific Growth Fund
o Emerging Markets Equity Fund
o Global Equity Fund
o Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
o Aggressive Portfolio
o Moderate Portfolio
o Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(Copyright) 1999 PaineWebber Incorporated
Member SIPC
All rights reserved.
[GRAPHIC OMITTED] PaineWebber
========================================================
FINANCIAL
SERVICES
GROWTH FUND INC.
UTILITY
INCOME FUND
SEMIANNUAL REPORT
SEPTEMBER 30, 1999
<PAGE>
PART C. OTHER INFORMATION
--------------------------
ITEM 15. INDEMNIFICATION.
----------------
Article Eleventh of the 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 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 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 within formation
furnished by Mitchell Hutchins to the Registrant for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the 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").
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,
<PAGE>
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 16. EXHIBITS.
---------
(1) Restated Articles of Incorporation 1/
(2) Restated By-Laws 1/
(3) Not applicable
(4) A copy of the form of the Plan of Reorganization and Termination is
included in the Proxy Statement/Prospectus as Appendix A thereto, and is
incorporated by reference
(5) Instruments defining the rights of holders of the registrant's common
stock 2/
(6) Investment Advisory and Administration Contract 1/
(7) (a) Distribution Contract with respect to Class A shares 1/
(b) Distribution Contract with respect to Class B shares 1/
(c) Distribution Contract with respect to Class C shares 3/
(d) Distribution Contract with respect to Class Y shares 3/
(e) Exclusive Dealer Agreement with respect to Class A shares 1/
(f) Exclusive Dealer Agreement with respect to Class B shares 1/
(g) Exclusive Dealer Agreement with respect to Class C shares 3/
(h) Exclusive Dealer Agreement with respect to Class Y shares 3/
(8) Bonus, profit sharing of pension plans - none
(9) Custodian Agreement 1/
(10) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
Shares 4/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares 4/
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares 4/
(11) Opinion and Consent of counsel (filed herewith)
<PAGE>
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with PaineWebber Utility Income Fund (to be
filed)
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with PaineWebber Balanced Fund (to be filed)
(13) Transfer Agency Agreement 1/
(14) (a) Consent of PriceWaterhouseCoopers LLP (filed herewith)
(b) Consent of Ernst & Young LLP (filed herewith)
(15) Financial statements omitted from prospectus - none
(16) Power of Attorney (included on the signature page of this registration
statement)
(17) (a) Letter of investment intent 1/
(b) Plan pursuant to Rule 18f-3 5/
- -----------------------------
1/ Incorporated by reference from Post-Effective Amendment No. 34 to the
registration statement, SEC File No. 33-2524, file June 29, 1998.
2/ Incorporated by reference from Articles Sixth, Seventh, Eighth, Eleventh
and Twelfth of the Registrant's Restated Articles of Incorporation and
from Articles II, VIII, X, XI and XII of the Registrant's Restated
By-laws.
3/ Incorporated by reference from Post-Effective Amendment No. 28 to the
registration statement, SEC File No. 33-2524, filed July 1, 1996.
4/ Incorporated by reference from Post-Effective Amendment No. 35 to the
registration statement, SEC File No. 33-2524, filed November 23, 1998.
5/ Incorporated by reference from Post-Effective Amendment No. 30 to the
registration statement, SEC File. No. 33-2524, filed September 20,1996.
Item 17. Undertaking
(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of the prospectus which is a
part of this Registration Statement by any person or party who is deemed
to be an underwriter with the meaning of Rule 145(c) of the Securities Act
of 1933, the re-offering prospectus will contain the information called
for by the applicable registration form for re-offering by persons who may
be deemed underwriters, in addition to the information called for the
other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is
effective, and that , in determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
Registration Statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial
bona fide offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed on behalf by the registrant in the City of New York
and State of New York, on the 10th day of March, 2000.
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 registration
statement has been signed below by the following persons in the capacities
and on the dates indicated. The undersigned hereby severally constitute and
appoint Dianne E. O'Donnell, Keith A. Weller, Arthur J. Brown, Elinor W.
Gammon and Robert A Wittie, and each of them singly, our true and lawful
attorneys, with full power to sign for each of us, and in each of our names
and in the capacities indicated below, any and all amendments to this
registration statement of PaineWebber Master Series, Inc., and all
instruments necessary or desirable in connection therewith, filed with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by said attorneys to any and all amendments
to said registration statement.
Siganture Title Date
- --------- ----- ----
/s/ Margo N. Alexander President and Director March 10, 2000
- --------------------------- (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Director and Chairman March 10, 2000
- --------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Richard Q. Armstrong Director March 10, 2000
- ---------------------------
Richard Q. Armstrong
/s/ Richard R. Burt Director March 10, 2000
- ---------------------------
Richard R. Burt
/s/ Mary C. Farrell Director March 10, 2000
- ---------------------------
Mary C. Farrell
/s/ Meyer Feldberg Director March 10, 2000
- ---------------------------
Meyer Feldberg
/s/ George W. Gowen Director March 10, 2000
- ---------------------------
George W. Gowen
/s/ Frederic V. Malek Director March 10, 2000
- ---------------------------
Frederic V. Malek
/s/ Carl W. Schafer Director March 10, 2000
- ---------------------------
Carl W. Schafer
/s/ Brian M. Storms Director March 10, 2000
- ---------------------------
Brian M. Storms
/s/ Paul H. Schubert Vice President and Treasurer March 10, 2000
- --------------------------- (Chief Financial and Accounting
Paul H. Schubert Officer)
<PAGE>
PAINEWEBBER MASTER SERIES, INC.
EXHIBIT INDEX
-------------
(4) A copy of the form of Agreement and Plan of Reorganization and Termination
is attached as Appendix A to the Prospectus contained in the Registration
Statement
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the legality
of securities being registered (filed herewith)
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with PaineWebber Utility Income Fund
(to be filed)
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with PaineWebber Balanced Fund (to be filed)
(14) (a) Consent of PriceWaterhouseCoopers LLP (filed herewith)
(b) Consent of Ernst & Young LLP (filed herewith)
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
SECOND FLOOR
WASHINGTON, DC 20036-1800
TELEPHONE: (202) 778-9000
FACSIMILE (202) 778-9100
www.kl.com
EXHIBIT 11
ELINOR W. GAMMON
(202) 778-9090
[email protected]
March 15, 2000
PaineWebber Master Series, Inc.
51 West 52nd Street
New York, New York 10019-6114
Ladies and Gentlemen:
You have requested our opinion, as counsel to PaineWebber Balanced Fund
("Acquiring Fund"), a series of PaineWebber Master Series, Inc. ("Master
Series"), a Maryland corporation, as to certain matters regarding the issuance
of shares of common stock of Balanced Fund ("Shares") by Master Series in
connection with the reorganization of PaineWebber Utility Income Fund ("Acquired
Fund"), a series of PaineWebber Managed Investments Trust ("Trust"), a
Massachusetts business trust, into Acquiring Fund, as provided for in the
Agreement and Plan of Reorganization and Termination between Master Series,
acting on behalf of Acquiring Fund, and the Trust, acting on behalf of Acquired
Fund ("Plan"). The Plan provides for Acquired Fund to transfer all of its assets
to Acquiring Fund in exchange solely for the issuance of Shares and Acquiring
Fund's assumption of the liabilities of Acquired Fund. In connection with the
Plan, Master Series is about to file a registration statement on Form N-14
("Registration Statement") for the purpose of registering under the Securities
Act of 1933, as amended ("1933 Act"), the Shares to be issued pursuant to the
Plan.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of Master Series' Restatement of Articles of Incorporation and
By-Laws, dated May 13, 1998, the Plan, minutes of meetings of Master Series'
board of directors, and such other documents relating to its organization and
operation and the issuance of the Shares as we have deemed relevant to our
opinion, as set forth herein. Our opinion is limited to the laws and facts in
existence on the date hereof, and it is further limited to the laws (other than
the conflict of law rules) of the State of Maryland that in our experience are
normally applicable to the issuance of shares of common stock by corporations
and to the 1933 Act, the Investment Company Act of 1940, as amended ("1940 Act")
and the rules and regulations of the United States Securities and Exchange
Commission ("SEC") thereunder.
<PAGE>
PaineWebber Master Series, Inc.
March 15, 2000
Page 2
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by Master Series; and that, when issued and sold
in accordance with the terms contemplated by Master Series' Registration
Statement, including receipt by Master Series of full payment for the Shares and
compliance with the 1933 Act, the 1940 Act, and applicable state laws regulating
the distribution of securities, the Shares will have been legally issued, fully
paid, and non-assessable.
We hereby consent to this opinion accompanying the Registration
Statement when it is filed with the SEC and to the reference to our firm in the
Registration Statement.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Elinor W. Gammon
--------------------
Elinor W. Gammon
EXHIBIT 14(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Proxy Statement and
Prospectus and the Statement of Additional Information constituting parts of
this registration statement on Form N-14 (the "N-14 Registration Statement") of
our report dated October 25, 1999 relating to the August 31, 1999 financial
statements and financial highlights of PaineWebber Balanced Fund appearing in
the August 31, 1999 Annual Report to Shareholders of PaineWebber Balanced Fund
(the "Fund"), which is also incorporated by reference in the N-14 Registration
Statement. We also consent to the references to us under the headings "Other
Service Providers", "Financial Highlights" and "Experts" in such Proxy Statement
and Prospectus. We also consent to the references to us under the headings
"Financial Highlights" and "Other Information - Auditors" in the Fund's N-1A
Registration Statement dated December 9, 1999, which is incorporated by
reference into the N-14 Registration Statement.
PricewaterhouseCoopers LLP /s/PricewaterhouseCoopers LLP
1177 Avenue of the Americas -----------------------------
New York, New York 10036 PRICEWATERHOUSECOOPERS LLP
March 13, 2000
EXHIBIT 14(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Other Service
Providers" and "Experts" in the Combined Proxy Statement and Prospectus and to
the incorporation by reference of our report on PaineWebber Utility Income Fund
dated May 14, 1999, in this Registration Statement on Form N-14 of PaineWebber
Managed Investment Trust.
/s/ Ernst & Young LLP
------------------
ERNST & YOUNG LLP
New York, New York
March 10, 2000
