<PAGE>
As filed with the Securities and Exchange Commission on December 11, 1995
1933 Act Registration No. 33-33231
1940 Act Registration No. 811-4587
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ [___]
Post-Effective Amendment No._12_ [_X_]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11
(Check appropriate box or boxes.)
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
GREGORY K. TODD, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
Kirkpatrick & Lockhart LLP
1800 M Street, N.W.; South Lobby, 9th Floor
Washington, D.C. 20036-5891
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
___ Immediately upon filing pursuant to Rule 485(b)
___ On ____________________ pursuant to Rule 485(b)
_X_ 60 days after filing pursuant to Rule 485(a)(i)
___ On ____________________ pursuant to Rule 485(a)(i)
___ 75 days after filing pursuant to Rule 485(a)(ii)
___ On ____________________ pursuant to Rule 485(a)(ii)
Registrant has filed a declaration pursuant to Rule 24f-2 under
the Investment Company Act of 1940 and filed the notice required by such
Rule for its most recent fiscal year on May 26, 1995.
<PAGE>
PaineWebber Regional Financial Growth Fund Inc.
Contents of Registration Statement
This registration statement consists of the following papers and
documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Class A, B and C Shares of:
PaineWebber Financial Services Growth Fund Inc.
----------------------------------------------
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PaineWebber Financial Services Growth Fund Inc.
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
<S> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . Prospectus Summary
3. Condensed Financial Information . . . . . . . . . Financial Highlights; Performance Information
4. General Description of Registrant . . . . . . . . Prospectus Summary; Investment Objective and
Policies; General Information
5. Management of the Fund . . . . . . . . . . . . . Management; General Information
6. Capital Stock and Other Securities . . . . . . . Cover Page; Conversion of Class B Shares;
Dividends and Taxes; General Information
7. Purchase of Securities Being Offered . . . . . . Purchases; Exchanges; Valuation of Shares;
Other Services and Information; Management
8. Redemption or Repurchase . . . . . . . . . . . . Redemptions; Other Services and Information
9. Pending Legal Proceedings . . . . . . . . . . . . Not Applicable
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- ------------------------
10. Cover Page . . . . . . . . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . . . . . . . . Table of Contents
12. General Information and History . . . . . . . . . Other Information
13. Investment Objective and Policies . . . . . . . . Investment Policies and Restrictions; Hedging
Strategies; Portfolio Transactions
14. Management of the Fund . . . . . . . . . . . . . Directors and Officers
15. Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . . . . Directors and Officers
16. Investment Advisory and Other Services . . . . . Investment Advisory and Distribution
Arrangements; Other Information
17. Brokerage Allocation . . . . . . . . . . . . . . Portfolio Transactions
18. Capital Stock and Other Securities . . . . . . . Conversion of Class B Shares; Other Information
19. Purchase, Redemption and Pricing of Securities Reduced Sales Charges, Additional Exchange and
Being Offered . . . . . . . . . . . . . . . . . . Redemption Information and Other Services;
Valuation of Shares
20. Tax Status . . . . . . . . . . . . . . . . . . . Taxes
21. Underwriters . . . . . . . . . . . . . . . . . . Distribution Arrangements
22. Calculation of Performance Data . . . . . . . . . Performance Information
23. Financial Statements . . . . . . . . . . . . . . Financial Statements
</TABLE>
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>
This Prospectus concisely sets forth information about the Fund a prospective
investor should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information dated , 1995 (which is
incorporated by reference herein) has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
without charge and further inquiries can be made, by contacting the Fund, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
- ------------------------------------------------------
, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PAINEWEBBER
FINANCIAL SERVICES
GROWTH FUND INC.
1285 Avenue of the Americas
New York, New York 10019
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................ 2
Financial Highlights.......................... 6
Flexible Pricing System....................... 8
Investment Objective and Policies............. 9
Purchases..................................... 14
Exchanges..................................... 18
Redemptions................................... 19
Conversion of Class B Shares.................. 21
Other Services and Information................ 21
Dividends and Taxes........................... 22
Valuation of Shares........................... 23
Management.................................... 24
Performance Information....................... 25
General Information........................... 26
Appendix A.................................... A-1
</TABLE>
- ------------------------------------------------------
A PaineWebber Mutual Fund
A professionally managed mutual fund seeking long-term capital appreciation. The
Fund invests primarily in equity securities of financial services companies.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
------------------------
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed in
this summary.
<TABLE>
<S> <C>
The Fund: PaineWebber Financial Services Growth Fund Inc.
('Fund') is an open-end, diversified management
investment company.
Investment Objective and
Policies: Long-term capital appreciation; invests primarily
in equity securities of financial services
companies.
Total Net Assets: Over $ million at , 1995.
Investment Adviser: Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'), an asset management subsidiary of
PaineWebber Incorporated ('PaineWebber' or 'PW'),
manages over $ billion in assets. See
'Management.'
Purchases: Shares of common stock are available exclusively
through PaineWebber and its correspondent firms
for investors who are clients of PaineWebber or
those firms ('PaineWebber clients') and, for other
investors, through PFPC Inc., the Fund's transfer
agent ('Transfer Agent').
Flexible Pricing System: Investors may select Class A, Class B or Class C
shares, each with a public offering price that
reflects different sales charges and expense
levels. See 'Flexible Pricing System,'
'Purchases,' 'Redemptions' and 'Conversion of
Class B Shares.'
Class A Shares Offered at net asset value plus any applicable
sales charge (maximum is 4.5% of public offering
price).
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Class B Shares Offered at net asset value (a maximum contingent
deferred sales charge of 5% of redemption proceeds
is imposed on certain redemptions made within six
years of date of purchase). Class B shares
automatically convert into Class A shares (which
pay lower ongoing expenses) approximately six
years after purchase.
Class C Shares Offered at net asset value without an initial or
contingent deferred sales charge (a contingent
deferred sales charge of 1% of redemption proceeds
is imposed on most redemptions made within one
year of date of purchase if purchased on or after
November 10, 1995). Class C shares pay higher
ongoing expenses than Class A shares and do not
convert into another Class.
Exchanges: Shares may be exchanged for shares of the
corresponding Class of most PaineWebber mutual
funds.
Redemptions: PaineWebber clients may redeem through
PaineWebber; other shareholders must redeem
through the Transfer Agent.
Dividends: Declared and paid annually; net capital gain also
is distributed annually. See 'Dividends and
Taxes.'
Reinvestment: All dividends and capital gain distributions are
paid in Fund shares of the same Class at net asset
value unless the shareholder has requested cash.
Minimum Purchase: $1,000 for first purchase; $100 for subsequent
purchases.
</TABLE>
<TABLE>
<S> <C> <C>
Other Features:
Class A Shares Automatic investment plan Quantity discounts on
initial sales charge
Systematic withdrawal
plan 365-day reinstatement
privilege
Rights of accumulation
Class B Shares Automatic investment plan Systematic withdrawal
plan
Class C Shares Automatic investment plan Systematic withdrawal
plan
</TABLE>
WHO SHOULD INVEST. The Fund invests primarily in equity securities of
financial services companies, including banks, thrift institutions ('thrifts'),
insurance companies, commercial finance companies, consumer finance companies,
brokerage companies and their holding companies. Accordingly, the Fund is
designed for investors who are seeking capital appreciation potential for a
portion of their assets and who can assume the risks of greater fluctuation of
market value resulting from investment in a portfolio concentrated in the
financial services industries. While the Fund is not intended to provide a
complete or balanced investment program, it can serve as one component of an
investor's long-term program to accumulate assets for retirement, college
tuition or other major goals.
RISK FACTORS. There can be no assurance that the Fund will achieve its
investment objective, and the Fund's net asset value will fluctuate based upon
changes in the value of its portfolio securities. The Fund's concentration in
the financial services industries subjects its shares to greater risk than the
3
<PAGE>
shares of a fund whose portfolio is not so concentrated and, in particular, its
shares will be affected by economic, legislative and regulatory developments
impacting those industries. The Fund's investments in foreign securities and its
use of options and futures contracts also entail special risks.
EXPENSES OF INVESTING IN THE FUND. The following tables are intended to
assist investors in understanding the expenses associated with investing in the
Fund.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares
(as a percentage of public offering
price)..................................... 4.5% None None
Sales charge on reinvested dividends......... None None None
Exchange fee................................. $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as
a percentage of redemption proceeds)....... None(2) 5% 1%(3)
</TABLE>
ANNUAL FUND OPERATING EXPENSES(4)
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management fees.............................. 0.70% 0.70% 0.70%
12b-1 fees (5)............................... 0.25 1.00 1.00
Other expenses............................... 0.50 0.52 0.53
------- ------- -------
Total operating expenses..................... 1.45% 2.22% 2.23%
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
(1) Sales charge and exchange fee waivers are available for all shares and
reduced-sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge generally declines
by 1% annually thereafter, reaching zero after six years. See 'Purchases.'
(2) Purchases of Class A shares of $1 million or more are not subject to an
initial sales charge. If these shares are redeemed within one year of purchase,
a contingent deferred sales charge of 1% will be applied to the redemption.
(3) A contingent deferred sales charge of 1% will be applied to most
redemptions of Class C shares within one year of purchase. See 'Purchases.'
(4) See 'Management' for additional information. All expenses are those
actually incurred for the fiscal year ended March 31, 1995.
4
<PAGE>
(5) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
12b-1 service fees............... 0.25% 0.25% 0.25%
12b-1 distribution fees.......... 0.00 0.75 0.75
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B
and Class C shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares(1)........ $ 59 $ 89 $121 $ 211
Class B Shares:
Assuming a complete
redemption at end of
period(2)(3)........ $ 73 $ 99 $139 $ 218
Assuming no
redemption(3)....... $ 22 $ 69 $119 $ 218
Class C Shares:
Assuming a complete
redemption at end of
period(2)........... $ 33 $ 70 $119 $ 256
Assuming no
redemption.......... $ 23 $ 70 $119 $ 256
</TABLE>
- ------------------
(1) Assumes deduction at the time of purchase of the maximum 4.5% initial
sales charge.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(3) Ten-year figures assume conversion of Class B shares to Class A shares
at end of sixth year.
The Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the assumption
in the Example of a 5% annual return are required by regulations of the
Securities and Exchange Commission ('SEC') applicable to all mutual funds; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of any Class of Fund shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The actual expenses attributable to each Class of Fund shares will depend upon,
among other things, the level of average net assets and the extent to which the
Fund incurs variable expenses, such as transfer agency costs.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one Class A
share, one Class B share and one Class C share of the Fund for each of the
periods shown. This information is supplemented by the financial statements and
accompanying notes appearing in the Fund's Annual Report to Shareholders for the
fiscal year ended March 31, 1995, which are incorporated by reference into the
Statement of Additional Information. The financial statements and notes, as well
as the information in the table appearing below insofar as it relates to the
five years ended March 31, 1995, have been audited by Ernst & Young LLP,
independent auditors, whose report thereon is also included in the Annual Report
to Shareholders. The financial statements and notes and the financial
information on the table below insofar as they relate to the six months ended
September 30, 1995 have been taken from the records of the Fund without
examination by the independent auditors, who do not express an opinion thereon.
Further information about the performance of the Fund is also included in the
Annual Report to Shareholders, which may be obtained without charge. The
information appearing below for periods prior to the year ended March 31, 1991
also have been audited by Ernst & Young LLP, whose reports thereon were
unqualified.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------
FOR THE FOR THE
SIX MONTHS PERIOD MAY 22,
ENDED FOR THE YEARS ENDED MARCH 31, 1986+ TO
SEPTEMBER 30, ---------------------------------------------------------------------- MARCH 31,
1995 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------- ------- ------- ------- ------- ------- ------- ------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 17.11 $ 16.92 $ 19.45 $ 13.36 $ 9.50 $ 8.63 $ 8.31 $ 7.53 $ 9.36 $ 9.25
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income
(loss)......... 0.14 0.25 0.15 0.10 0.15 0.25 0.24 0.25 0.21 0.22
Net realized and
unrealized
gains (losses)
from investment
transactions... 4.43 1.34 (0.76) 6.01 3.92 0.86 0.37 0.77 (1.45) (0.09)
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total income (loss)
from investment
operations........ 4.57 1.59 (0.61) 6.11 4.07 1.11 0.61 1.02 (1.24) 0.11
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DIVIDENDS AND
DISTRIBUTIONS
FROM:
Net investment
income......... -- (0.13) (0.08) (0.02) (0.21) (0.24) (0.29) (0.24) (0.39) --
Net realized
gains on
investments.... -- (1.27) (1.84) -- -- -- -- -- (0.20) --
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions..... -- (1.40) (1.92) (0.02) (0.21) (0.24) (0.29) (0.24) (0.59) --
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Offering costs
charged to
capital........ -- -- -- -- -- -- -- -- -- (0.02)
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period......... $ 21.68 $ 17.11 $ 16.92 $ 19.45 $ 13.36 $ 9.50 $ 8.63 $ 8.31 $ 7.53 $ 9.36
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Return(1)..... 26.71% 10.22% (3.14)% 46.79% 42.23% 13.33% 7.16% 13.76% (13.57)% 1.19%
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's).... $63,989 $49,295 $48,032 $61,645 $44,867 $43,131 $95,081 $90,322 $85,130 $101,155
Ratio of expenses to
average net
assets............ 1.40%* 1.45% 1.44% 1.87% 1.72% 1.67% 1.33% 1.16% 1.04% 1.05%*
Ratio of net
investment income
(loss) to average
net assets........ 1.53%* 1.40% 0.76% 0.60% 1.32% 2.56% 2.60% 3.20% 2.64% 2.82%*
Portfolio turnover
rate.............. 22.00% 14.00% 21.82% 27.97% 30.68% 19.12% 28.99% 55.47% 42.43% 24.74%
</TABLE>
- ------------------------
<TABLE>
<S> <C>
(1) Total 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 for Class A and Class B would be
lower if sales charges were included. Total return information for
periods less than one year have not been annualized.
* Annualized.
+ Commencement of operations.
++ Commencement of offering of shares.
(2) Formerly Class D shares.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C(2)
------------------------------------------------------------ --------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
SIX MONTHS FOR THE YEARS PERIOD JULY 1, SIX MONTHS YEARS ENDED PERIOD JULY 2,
ENDED ENDED MARCH 31, 1991++ TO ENDED MARCH 31, 1992++ TO
SEPTEMBER 30, --------------------------- MARCH 31, SEPTEMBER 30, --------------- MARCH 31,
1995 1995 1994 1993 1992 1995 1995 1994 1993
------------- ------- ------- ------- -------------- ------------- ----- ---- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 16.85 $ 16.71 $ 19.34 $ 13.36 $10.24 $ 16.86 $16.71 $ 19.34 $14.61
------ ------- ------- ------- ----- ----- ------ ----- -----
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income
(loss)......... 0.05 0.11 0.02 (0.01) -- 0.05 0.11 0.01 --
Net realized and
unrealized
gains (losses)
from investment
transactions... 4.37 1.33 (0.75) 5.99 3.18 4.37 1.33 (0.73) 4.77
------ ------- ------- ------- ----- ----- ------ ----- -----
Total income (loss)
from investment
operations........ 4.42 1.44 (0.73) 5.98 3.18 4.42 1.44 (0.72) 4.77
------ ------- ------- ------- ----- ----- ------ ----- -----
LESS DIVIDENDS AND
DISTRIBUTIONS
FROM:
Net investment
income......... -- (0.03) (0.06) -- (0.06) -- (0.02) (0.07) (0.04)
Net realized
gains on
investments.... -- (1.27) (1.84) -- -- -- (1.27) (1.84) --
------ ------- ------- ------- ----- ----- ------ ----- -----
Total dividends and
distributions..... -- (1.30) (1.90) -- (0.06) -- (1.29) (1.91) (0.04)
------ ------- ------- ------- ----- ----- ------ ----- -----
Offering costs
charged to
capital........ -- -- -- -- -- -- -- -- --
------ ------- ------- ------- ----- ----- ------ ----- -----
Net asset value, end
of period......... $ 21.27 $ 16.85 $ 16.71 $ 19.34 $13.36 $ 21.28 $16.86 $ 16.71 $19.34
------ ------- ------- ------- ----- ----- ------ ----- -----
------ ------- ------- ------- ----- ----- ------ ----- -----
Total Return(1)..... 26.23% 9.37% (3.83)% 44.76% 31.16% 26.22% 9.34% (3.76)% 32.66%
------ ------- ------- ------- ----- ----- ------ ----- -----
------ ------- ------- ------- ----- ----- ------ ----- -----
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's).... $25,340 $16,368 $11,517 $10,364 $ 765 $ 6,831 $4,160 $ 4,370 $4,636
Ratio of expenses to
average net
assets............ 2.14%* 2.22% 2.16% 2.45% 2.72%* 2.17%* 2.23% 2.17% 2.36%*
Ratio of net
investment income
(loss) to average
net assets........ 0.76%* 0.67% 0.05% (0.03)% 0.14%* 0.73%* 0.61% 0.03% 0.01%*
Portfolio turnover
rate.............. 22.00% 14.00% 21.82% 27.97% 30.68% 22.00% 14.00% 21.82% 27.97%
</TABLE>
7
<PAGE>
FLEXIBLE PRICING SYSTEM
DIFFERENCES AMONG THE CLASSES
The primary distinctions among the Classes of the Fund's shares lie in
their initial and contingent deferred sales charge structures and in their
ongoing expenses, including asset-based sales charges in the form of
distribution fees. These differences are summarized in the table below. Each
Class has distinct advantages and disadvantages for different investors, and
investors may choose the Class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------- ------------------------- --------------------
<S> <C> <C> <C>
CLASS A Maximum initial Service fee of 0.25% Initial sales charge
sales charge of 4.5% waived or reduced
of the public for certain
offering price purchases
CLASS B Maximum contingent Service fee of 0.25%; Shares convert to
deferred sales distribution fee of 0.75% Class A shares
charge of 5% of approximately six
redemption proceeds; years after issuance
declines to zero
after six years
CLASS C Contingent deferred Service fee of 0.25%; --
sales charge of 1% distribution fee of 0.75%
of redemption
proceeds for first
year
</TABLE>
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES
In deciding which Class of shares to purchase, investors should consider
the cost of sales charges together with the cost of the ongoing annual expenses
described below, as well as any other relevant facts and circumstances.
SALES CHARGES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.5% of the public offering price. Because of this initial
sales charge, not all of a Class A shareholder's purchase price is invested in
the Fund. Class B shares are sold with no initial sales charge, but a contingent
deferred sales charge of up to 5% of the redemption proceeds applies to
redemptions made within six years of purchase. Class C shareholders pay no
initial sales charges, although a contingent deferred sales charge of 1% applies
to most redemptions made within one year after purchase. Thus, the entire amount
of a Class B or Class C shareholder's purchase price is immediately invested in
the Fund.
WAIVERS AND REDUCTIONS OF CLASS A SALES CHARGES. Class A share purchases
over $50,000 and Class A share purchases made under the Fund's reduced sales
charge plan may be made at a reduced sales charge. In considering the combined
cost of sales charges and ongoing annual expenses, investors should take into
account any reduced sales charges on Class A shares for which they may be
eligible.
The entire initial sales charge on Class A shares is waived for certain
eligible investors. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class C shares, investors eligible for complete waivers
should purchase Class A shares.
8
<PAGE>
ONGOING ANNUAL EXPENSES. All three Classes of Fund shares pay an annual
12b-1 service fee of 0.25% of average daily net assets. Class B and Class C
shares pay an annual 12b-1 distribution fee of 0.75% of average daily net
assets. Annual 12b-1 distribution fees are a form of asset-based sales charge.
An investor should consider both ongoing annual expenses and initial or
contingent deferred sales charges in estimating the costs of investing in the
respective Classes of Fund shares over various time periods.
For example, assuming a constant net asset value, the cumulative
distribution fees on the Fund's Class B or Class C shares and the 4.5% maximum
initial sales charge on the Fund's Class A shares would all be approximately
equal if the shares were held for six years. Because Class B shares convert to
Class A shares (which do not bear the expense of ongoing distribution fees)
approximately six years after purchase, an investor expecting to hold Fund
shares for longer than six years would generally pay lower cumulative expenses
by purchasing Class A or Class B shares than by purchasing Class C shares. An
investor expecting to hold Fund shares for less than six years would generally
pay lower cumulative expenses by purchasing Class C shares than by purchasing
Class A shares and, due to the contingent deferred sales charges that would
become payable on redemption of Class B shares, such an investor would generally
pay lower cumulative expenses by purchasing Class C shares than Class B shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net asset
value of Fund shares, which will affect the actual amount of expenses paid.
Expenses borne by Classes may differ slightly because of the allocation of other
Class-specific expenses. The 'Example of Effect of Fund Expenses' under
'Prospectus Summary' shows the cumulative expenses an investor would pay over
time on a hypothetical investment in each Class of Fund shares, assuming an
annual return of 5%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of
compensation for selling one particular Class of Fund shares rather than
another. Investors should understand that distribution fees and initial and
contingent deferred sales charges all are intended to compensate Mitchell
Hutchins for distribution services.
See 'Purchases,' 'Redemptions' and 'Management' for a more complete
description of the initial and contingent deferred sales charges, service fees
and distribution fees for the three Classes of shares. See also 'Conversion of
Class B Shares,' 'Dividends and Taxes,' 'Valuation of Shares' and 'General
Information' for other differences among the three Classes.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide long-term capital
appreciation. The Fund seeks to achieve this objective by investing, under
normal circumstances, at least 65% of its total assets in equity securities
(such as common stocks and securities convertible into common stock) of
financial services companies including banks, thrifts, insurance companies,
brokerage companies, investment management companies, commercial finance
companies and consumer finance companies and their holding companies. The Fund
invests in the equity securities of institutions that, in the opinion of
Mitchell Hutchins, represent strong fundamental investment value. In selecting
securities for investment, Mitchell
9
<PAGE>
Hutchins considers all those factors it believes will affect the potential for
capital appreciation, including the issuer's current and anticipated revenues,
earnings, cash flow and assets, as well as general market conditions in the
financial services industries. The Fund will invest in the equity securities of
banks and thrifts and their holding companies only if those banks and thrifts
have deposits that are insured by the Federal Deposit Insurance Corporation
('FDIC'). Neither the Fund's shares nor the value of its portfolio securities
are insured by the FDIC.
Except with respect to companies engaged in 'securities related
businesses,' a company will be deemed eligible for investment by the Fund if at
least 50% of either its revenues or earnings were derived from financial
services activities or at least 50% of its assets are devoted to these
activities, based on the company's most recent fiscal year for which information
is available. Companies engaged in securities related businesses are those that
derive more than 15% of their gross revenues from securities brokerage or
investment management activities; these companies are considered financial
services companies for purposes of the Fund's concentration policy. SEC
regulations limit the Fund's investment in the equity securities of any company
engaged in securities related businesses to not more than 5% of the Fund's total
assets.
The Fund may invest up to 35% of its total assets in equity securities of
issuers outside the financial services industries judged by Mitchell Hutchins to
have potential for capital growth, and in debt securities, non-convertible
preferred stocks, warrants and money market instruments. The Fund will invest in
securities other than equity securities when, in the opinion of Mitchell
Hutchins, their potential for capital appreciation is equal to or greater than
that of equity securities or when such holdings might reduce the volatility of
the Fund's portfolio. Subject to this 35% limitation, the Fund also may hold
cash or invest in money market instruments pending investment in other
securities or for liquidity purposes.
There can be no assurance that the Fund will achieve its investment
objective. The Fund's net asset value fluctuates based upon changes in the value
of its portfolio securities.
SPECIAL CONSIDERATIONS AND RISKS RELATING TO THE FINANCIAL SERVICES
INDUSTRIES. Examples of companies in the financial services field include
commercial banks, savings and loan associations, brokerage companies, insurance
companies, real estate and leasing companies, and companies that span across
these segments. Under SEC regulations, the fund may not invest more than 5% of
its total assets in the equity securities of any company that derives more than
15% of its revenues from brokerage or investment management activities. Because
the Fund's investments are concentrated in the financial services industries,
its shares are subject to greater risk than the shares of a fund whose portfolio
is not so concentrated and, in particular, will be affected by economic,
legislative and regulatory developments impacting these industries.
Financial services companies are subject to extensive governmental
regulation which may limit both the amounts and types of loans and other
financial commitments they can make, and the interest rates and fees they can
charge. Profitability is largely dependent on the availability and cost of
capital funds, and can fluctuate significantly when interest rates change.
Credit losses resulting from financial difficulties of borrowers can negatively
impact the industry. Insurance companies may be subject to severe price
competition. Legislation is currently being considered which would reduce the
separation between commercial and investment banking businesses. If enacted this
could significantly impact the industry and the fund.
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<PAGE>
Financial services companies and their holding companies are subject to
extensive federal regulation and the need for regulatory approvals may have a
material effect on companies in these industries.
SPECIALIZED RISK FACTORS OF FOREIGN SECURITIES. The Fund may invest up to
20% of its total assets in securities of foreign issuers. These investments may
involve special risks arising from political, economic and social developments
abroad, as well as those that may result from the differences between the
regulations to which U.S. and foreign issuers and markets are subject. These
risks may include expropriation, confiscatory taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of Fund assets and
political or social instability or diplomatic developments. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Securities of many foreign companies may be less liquid and their prices more
volatile than securities of comparable U.S. companies.
While the Fund generally invests only in securities that are traded on
recognized exchanges or in over-the-counter ('OTC') markets, from time to time
foreign securities may be difficult to liquidate rapidly without significantly
depressing the price of such securities. There may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. companies. Foreign securities trading practices,
including those involving securities settlement where the Fund's assets may be
released prior to receipt of payment, may expose the Fund to increased risk in
the event of a failed trade or the insolvency of a foreign broker-dealer.
Transactions in foreign securities may be subject to less efficient settlement
practices. Legal remedies for defaults and disputes may have to be pursued in
foreign courts, whose procedures may differ substantially from those of U.S.
courts.
Because foreign securities ordinarily are denominated in currencies other
than the U.S. dollar (as are some securities of U.S. issuers), changes in
foreign currency exchange rates will affect the Fund's net asset value, the
value of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and capital gain, if any, to be distributed
to shareholders by the Fund. If the value of a foreign currency rises against
the U.S. dollar, the value of the Fund's assets denominated in that currency
will increase; correspondingly, if the value of a foreign currency declines
against the U.S. dollar, the value of the Fund's assets denominated in that
currency will decrease. The exchange rates between the U.S. dollar and other
currencies are determined by supply and demand in the currency exchange markets,
international balances of payments, speculation and other economic and political
conditions. In addition, some foreign currency values may be volatile and there
is the possibility of governmental intervention in the currency markets. Any of
these factors could adversely affect the Fund.
DEBT SECURITIES. The debt securities in which the Fund may invest include
securities that are issued or guaranteed by the U.S. government, its agencies or
instrumentalities and non-convertible investment grade corporate debt
securities. Investment grade debt securities are those rated in the top four
rating categories by Standard & Poor's, a division of the McGraw Hill Companies,
Inc., ('S&P') or Moody's Investors Service, Inc. ('Moody's'), comparably rated
by another nationally recognized statistical rating organization ('NRSRO') or,
if unrated, determined by Mitchell Hutchins to be of comparable quality.
Securities rated BBB by S&P, Baa by Moody's or comparably rated by another
11
<PAGE>
NRSRO are investment grade, although Moody's considers securities rated Baa to
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for such securities
to make principal and interest payments than is the case for higher grade debt
securities. See the Statement of Additional Information for further information
regarding Moody's and S&P's ratings.
The market value of debt securities generally varies inversely with
interest rate changes. Ratings of debt securities represent the NRSRO's opinions
regarding their quality, are not a guarantee of quality and may be reduced after
the Fund has acquired the security. Mitchell Hutchins will consider such an
event in determining whether the Fund should continue to hold the security, but
the Fund is not required to dispose of it. However, in the event that, due to a
downgrade of one or more debt securities, an amount in excess of 5% of the
Fund's net assets is held in securities rated below investment grade and
comparable unrated securities, Mitchell Hutchins will engage in an orderly
disposition of these securities to the extent necessary to ensure that the
Fund's holdings of these securities do not exceed 5% of its net assets. Credit
ratings attempt to evaluate the safety of principal and interest payments and do
not reflect an assessment of the volatility of the security's market value or
the liquidity of an investment in the security. Also, NRSROs may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than the rating
indicates.
HEDGING STRATEGIES. The Fund may attempt to reduce the overall risk of its
investments (hedge) by using options (both exchange-traded and OTC) and futures
contracts. The Fund's ability to use these instruments may be limited by market
conditions, regulatory limits and tax considerations. The Appendix to this
Prospectus describes the hedging instruments that the Fund may use. The
Statement of Additional Information contains further information on these
strategies.
The Fund may buy and write (sell) foreign currency futures contracts, stock
index futures contracts and interest rate futures contracts and buy put and call
options or write covered call options on such futures contracts, securities,
foreign currencies and stock indices. Because the Fund intends to use options
and futures for hedging purposes, the Fund may enter into options and futures
that hedge the full value of its portfolio, although, under normal
circumstances, a much smaller portion of the Fund's portfolio will be at risk
under such hedging instruments.
The Fund might not employ any of the strategies described above, and there
can be no assurance that any strategy used will succeed. If Mitchell Hutchins
incorrectly forecasts interest rates, market values or other economic factors in
utilizing a strategy for the Fund, the Fund would be in a better position if it
had not hedged at all. The use of these strategies involves certain special
risks, including (1) the fact that skills needed to use hedging instruments are
different from those needed to select the Fund's securities, (2) possible
imperfect correlation, or even no correlation, between price movements of
hedging instruments and price movements of the instruments being hedged, (3) the
fact that, while hedging strategies can reduce the risk of loss, they can also
reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments and (4) the possible inability
of the Fund to purchase or sell a portfolio security at a time that otherwise
would be favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain 'cover' or to segregate securities in connection with hedging
transactions and
12
<PAGE>
the possible inability of the Fund to close out or to liquidate its hedged
position.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objective and regulatory and federal tax
considerations.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in
illiquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws (other than
'Rule 144A' securities Mitchell Hutchins has determined to be liquid under
procedures approved by the Fund's board of directors). Rule 144A establishes a
'safe harbor' from registration requirements of the Securities Act of 1933
('1933 Act') for resale of certain securities to qualified institutional buyers.
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable values for restricted securities
and the ability to liquidate an investment to satisfy share redemption orders.
An insufficient number of qualified institutional buyers interested in
purchasing Rule 144A-eligible restricted securities held by the Fund, however,
could affect adversely the marketability of such portfolio securities and the
Fund might be unable to dispose of such securities promptly or at favorable
prices.
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 10%
of the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified. Lending
securities enables the Fund to earn additional income, but could result in a
loss or delay in recovering the Fund's portfolio securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase debt
securities on a 'when-issued' basis or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but the Fund generally
would not pay for such securities or start earning interest on them until they
are delivered. However, when the Fund purchases securities on a when-issued or
delayed delivery basis, it immediately assumes the risks of ownership, including
the risk of price fluctuation. Failure by a counter party to deliver a security
purchased on a when-issued or delayed delivery basis may result in a loss or
missed opportunity to make an alternative investment. Depending on market
conditions, the Fund's when-issued and delayed delivery purchase commitments
could cause its net asset value per share to be more volatile, because such
securities may increase the amount by which the Fund's total assets, including
the value of when-issued and delayed delivery securities held by the Fund,
exceed its net assets.
OTHER INFORMATION. When Mitchell Hutchins believes unusual circumstances
warrant a defensive posture, the Fund temporarily may commit all or any portion
of its assets to cash or money market instruments, including repurchase
agreements. The Fund also may engage in short sales of securities 'against the
box' to defer realization of gains or losses for tax or other purposes. The Fund
may borrow money for temporary or emergency purposes, but not in excess of 10%
of its total assets and may engage in reverse repurchase agreements, but not in
excess of 5% of its total assets.
Over the past 69 years, the total return of equity investments, as measured
by the Standard & Poor's 500 Composite Stock Price Index ('S&P 500'), has
exceeded the inflation rate, as measured by the Consumer Price Index, as well as
total return on long-term U.S. Treasury bonds, long-term corporate bonds and
short-term U.S. Treasury bills. However, year-to-year
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<PAGE>
fluctuations in each of these indices and instruments have been significant, and
total return for the S&P 500 for some periods has been negative. Furthermore,
there can be no assurance that this trend will continue.
The Fund's investment objective of long-term capital appreciation, as well
as its policy of investing, under normal circumstances, at least 65% of its
total assets in equity securities of financial services companies may not be
changed without the approval of its shareholders. Certain other investment
limitations, as described in the Statement of Additional Information, are
fundamental policies and also may not be changed without shareholder approval.
All other investment policies may be changed by the Fund's board of directors
without shareholder approval.
PURCHASES
GENERAL. Class A shares are sold to investors subject to an initial sales
charge. Class B shares are sold without an initial sales charge but are subject
to higher ongoing expenses than Class A shares and a contingent deferred sales
charge payable upon certain redemptions. Class B shares automatically convert to
Class A shares approximately six years after issuance. Class C shares are sold
without an initial sales charge but are subject to higher ongoing expenses than
Class A shares and a contingent deferred sales charge of 1% payable on most
redemptions made within one year of purchase. Class C shares do not convert into
another Class. See 'Flexible Pricing System' and 'Conversion of Class B Shares.'
Shares of the Fund are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the Transfer
Agent. Investors may contact a local PaineWebber office to open an account. The
minimum initial investment is $1,000, and the minimum for additional purchases
is $100. These minimums may be waived or reduced for investments by employees of
PaineWebber or its affiliates, certain pension plans and retirement accounts and
participants in the Fund's automatic investment plan. Purchase orders will be
priced at the net asset value per share next determined (see 'Valuation of
Shares') after the order is received by PaineWebber's New York City offices or
by the Transfer Agent, plus any applicable sales charge for Class A shares. The
Fund and Mitchell Hutchins reserve the right to reject any purchase order and to
suspend the offering of Fund shares for a period of time.
When placing purchase orders, investors should specify whether the order is
for Class A, Class B or Class C shares. All share purchase orders that fail to
specify a Class will automatically be invested in Class A shares.
PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due on
the third Business Day after the order is received at PaineWebber's New York
City offices. A 'Business Day' is any day, Monday through Friday, on which the
New York Stock Exchange, Inc. ('NYSE') is open for business.
PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber
clients may purchase shares of the Fund through the Transfer Agent. Shares of
the Fund may be purchased, and an account with the Fund established, by
completing and signing the purchase
14
<PAGE>
application at the end of this Prospectus and mailing it, together with a check
to cover the purchase, to the Transfer Agent: PFPC Inc., Attn: PaineWebber
Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899. Subsequent investments
need not be accompanied by an application.
INITIAL SALES CHARGE--CLASS A SHARES. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales charge,
which will vary with the size of the purchase as shown in the following table:
INITIAL SALES CHARGE SCHEDULE--CLASS A SHARES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF DISCOUNT TO SELECTED
---------------------------------- DEALERS AS A
OFFERING NET AMOUNT INVESTED PERCENTAGE OF
AMOUNT OF PURCHASE PRICE (NET ASSET VALUE) OFFERING PRICE
- ---------------------- ----------- --------------------- --------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.50 3.63 3.25
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00
</TABLE>
- ------------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources. Most redemptions within one year of purchase of shares purchased at
net asset value will be subject to a contingent deferred sales charge of 1%. See
'Contingent Deferred Sales Charge--Class A Shares.'
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for Fund shares, than those shown above. To the
extent PaineWebber or any dealer receives 90% or more of the sales charge, it
may be deemed an 'underwriter' under the 1933 Act.
REDUCED SALES CHARGE PLANS--CLASS A SHARES. If an investor or eligible
group of related Fund investors purchases Class A shares of the Fund
concurrently with Class A shares of other PaineWebber mutual funds, the
purchases may be combined to take advantage of the reduced sales charge
applicable to larger purchases. In addition, the right of accumulation permits a
Fund investor or eligible group of related Fund investors to pay the lower sales
charge applicable to larger purchases by basing the sales charge on the dollar
amount of Class A shares currently being purchased, plus the net asset value of
the investor's or group's total existing Class A shareholdings in other
PaineWebber mutual funds.
An 'eligible group of related Fund investors' includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ('IRA'), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to Minors
Act/Uniform Transfers to Minors Act accounts created by the individual or
eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes an employer or
group of related employers and one or more qualified retirement plans of such
employer or employers. For more information, an investor should consult the
Statement of Additional Information or contact a PaineWebber investment
executive or correspondent firm or the Transfer Agent.
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<PAGE>
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares of the Fund are
available without a sales charge through exchanges for Class A shares of most
other PaineWebber mutual funds. See 'Exchanges.' In addition, Class A shares may
be purchased without a sales charge, and exchanges of any Class of shares made
without the $5.00 exchange fee, by employees, directors and officers of
PaineWebber or its affiliates, directors or trustees and officers of any
PaineWebber mutual funds, their spouses, parents and children and advisory
clients of Mitchell Hutchins. Class A shares may also be purchased without a
sales charge by employee benefit plans qualified under section 401 or 403(b) of
the Internal Revenue Code (the 'Code'), including salary reduction plans
qualified under section 401(k) of the Code, subject to minimum requirements
established by Mitchell Hutchins with respect to number of employees or amount
of purchase. Currently, the employers establishing the plan must have 100 or
more eligible employees or the amount invested or to be invested during the
subsequent 13-month period in the Fund or any other PaineWebber mutual fund must
total at least $1 million. If investments by an employee benefit plan without a
sales charge are made through a dealer, including PaineWebber, who has executed
a dealer agreement with Mitchell Hutchins, Mitchell Hutchins may make a payment,
out of its own resources, to the dealer in an amount not to exceed 1.0% of the
amount invested.
Class A shares also may be purchased without a sales charge if the purchase
is made through a PaineWebber investment executive who formerly was employed as
a broker with another firm registered as a broker-dealer with the SEC, provided
(1) the purchaser was the investment executive's client at the competing
brokerage firm, (2) within 90 days of the purchase of Class A shares the
purchaser redeemed shares of one or more mutual funds for which that competing
firm or its affiliates was principal underwriter, provided the purchaser either
paid a sales charge to invest in those funds, paid a contingent deferred sales
charge upon redemption or held shares of those funds for the period required not
to pay the otherwise applicable contingent deferred sales charge and (3) the
total amount of shares of all PaineWebber mutual funds purchased under this
sales charge waiver does not exceed the amount of the purchaser's redemption
proceeds from the competing firm's funds. To take advantage of this waiver, an
investor must provide satisfactory evidence that all the above-noted conditions
are met. Qualifying investors should contact their PaineWebber investment
executives for more information.
Certificate holders of unit investment trusts ('UITs') sponsored by
PaineWebber may acquire Class A shares of the Fund without regard to minimum
investment requirements and without sales charges by electing to have dividends
and other distributions from their UIT investment automatically invested in
Class A shares.
Class A shares of the Fund may be acquired without a sales charge if issued
by the Fund in connection with a reorganization pursuant to which the Fund
acquires substantially all of the assets and liabilities of another investment
company in exchange solely for shares of the Fund.
CONTINGENT DEFERRED SALES CHARGE-- CLASS A SHARES. Class A shares
purchased without an initial sales charge due to the sales charge waiver for
purchases of $1 million or more and held less than one year are subject to a
contingent deferred sales charge upon most redemption equal to 1.0% of the lower
of (a) the net asset value of the shares at the time of purchase or (b) the net
asset value of the shares at the time of redemption. The holding period of Class
A shares acquired through an exchange
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<PAGE>
with another PaineWebber mutual fund is calculated from the date the Class A
shares of the other PaineWebber mutual fund were initially purchased without a
sales charge and Class A shares will be considered to represent, as applicable,
dividend and capital gain reinvestments in such other funds. Redemption order
will be determined as described for Class B shares of the Fund (see 'Contingent
Deferred Sales Charge--Class B Shares'). Class A shares held one year or longer
and Class A shares acquired through reinvestment of dividends or capital gains
distributions are not subject to this contingent deferred sales charge. The
contingent deferred sales charge is waived for exchanges, as described below,
and for most redemptions in connection with the systematic withdrawal plan. THIS
CONTINGENT DEFERRED SALES CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS A SHARES
PURCHASED PRIOR TO NOVEMBER 10, 1995. For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or increase
the loss, as the case may be, realized on the redemption. The amount of any
contingent deferred sales charge will be paid to Mitchell Hutchins.
CONTINGENT DEFERRED SALES CHARGE-- CLASS B SHARES. The public offering
price of the Class B shares is the next determined net asset value, and no
initial sales charge is imposed. A contingent deferred sales charge, however, is
imposed upon certain redemptions of Class B shares.
The maximum contingent deferred sales charge for Class B shares equals 5%
of the lower of (a) the net asset value of the shares at the time of purchase or
(b) the net asset value of the shares at the time of redemption. Class B shares
held six years or longer and Class B shares acquired through reinvestment of
dividends or capital gains distributions are not subject to the contingent
deferred sales charge. The following table shows the contingent deferred sales
charge percentages charged in each year following purchase:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED SALES
CHARGE AS A
REDEMPTION PERCENTAGE OF NET
DURING ASSET VALUE
- ----------------------------------- -----------------
<S> <C>
1st Year Since Purchase............ 5%
2nd Year Since Purchase............ 4
3rd Year Since Purchase............ 3
4th Year Since Purchase............ 2
5th Year Since Purchase............ 2
6th Year Since Purchase............ 1
7th Year Since Purchase............ None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of Class B shares
representing the reinvestment of dividends and capital gain distributions and
then of other shares held by the shareholder for the longest period of time. The
holding period of Class B shares acquired through an exchange with another
PaineWebber mutual fund will be calculated from the date that the Class B shares
were initially acquired in one of the other PaineWebber funds, and Class B
shares being redeemed will be considered to represent, as applicable, dividend
and capital gain distribution reinvestments in such other funds. This will
result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case may
be, realized on redemption. The amount of any contingent deferred sales charge
will be paid to Mitchell Hutchins.
SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge
will be waived for exchanges, as described below, and for most redemptions in
connection with the Fund's systematic withdrawal plan. In addition, the
contingent deferred sales charge will be waived for a total or partial
redemption made
17
<PAGE>
within one year of the death of the shareholder. The contingent deferred sales
charge waiver is available where the decedent is either the sole shareholder or
owns the shares with his or her spouse as a joint tenant with right of
survivorship. This waiver applies only to redemption of shares held at the time
of death. The contingent deferred sales charge will also be waived in connection
with a lump-sum or other distribution in the case of an IRA, self-employed
individual retirement plan (so-called 'Keogh Plan') or a custodial account under
Section 403(b) of the Internal Revenue Code following attainment of age 59 1/2;
a total or partial redemption resulting from any distribution following
retirement in the case of a tax-qualified retirement plan; and a redemption
resulting from a tax-free return of an excess contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation (by PaineWebber in the case of shareholders who are PaineWebber
clients or by the Transfer Agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C
shares of the Fund is the next determined net asset value. No initial sales
charge is imposed.
CONTINGENT DEFERRED SALES CHARGE-- CLASS C SHARES. Class C shares held
less than one year will be subject to a contingent deferred sales charge on
redemptions in an amount equal to 1.0% of the lower of (a) the net asset value
of the shares at the time of purchase or (b) the net asset value of the shares
at the time of redemption. The holding period of Class C shares acquired through
an exchange with another PaineWebber mutual fund is calculated from the date the
Class C shares of the other PaineWebber mutual fund were initially purchased
without a sales charge and Class C shares will be considered to represent, as
applicable, dividend and capital gain reinvestments in such other funds.
Redemption order will be determined as described for Class B shares of the Fund
(see 'Contingent Deferred Sales Charge--Class B Shares'). Redemptions of Class C
shares of a fund acquired through an exchange and held less than one year will
be subject to the same contingent deferred sales charge that would have been
imposed on Class C shares of the PaineWebber mutual fund originally purchased
that were subsequently exchanged into Class C shares of the Fund. Class C shares
held one year or longer and Class C shares acquired through reinvestment of
dividends or capital gains distributions are not subject to this contingent
deferred sales charge. The contingent deferred sales charge is waived for
exchanges, as described below, and for most redemptions in connection with the
systematic withdrawal plan. THIS CONTINGENT DEFERRED SALES CHARGE DOES NOT APPLY
TO REDEMPTIONS OF CLASS C SHARES PURCHASED PRIOR TO NOVEMBER 10, 1995. For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, realized on the
redemption. The amount of any contingent deferred sales charge will be paid to
Mitchell Hutchins.
EXCHANGES
Shares of the Fund may be exchanged for shares of the corresponding Class
of other PaineWebber mutual funds or may be acquired through an exchange of
shares of the corresponding Class of those funds. No initial sales charge is
imposed on the shares being acquired, and no contingent deferred sales charge is
imposed on the shares being disposed of, through an exchange. However,
contingent deferred sales charges may apply to redemptions of Class B shares
acquired through an exchange. A $5.00 exchange fee is charged for each exchange,
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and exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
The other PaineWebber mutual funds with which Fund shares may be exchanged
include:
PAINEWEBBER INCOME FUNDS
o GLOBAL INCOME FUND
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
PAINEWEBBER TAX-FREE INCOME 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
PAINEWEBBER GROWTH FUNDS
o CAPITAL APPRECIATION FUND
o EMERGING MARKETS EQUITY FUND
o GLOBAL EQUITY FUND
o GROWTH FUND
o SMALL CAP GROWTH FUND
o SMALL CAP VALUE FUND
PAINEWEBBER GROWTH AND INCOME FUNDS
o BALANCED FUND
o GROWTH AND INCOME FUND
o TACTICAL ALLOCATION FUND
o UTILITY INCOME FUND
PAINEWEBBER MONEY MARKET FUND
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms unless the shares to be exchanged
are held in certificate form. Shareholders who are not PaineWebber clients or
who hold their shares in certificate form must place exchange orders in writing
with the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, Delaware 19899. All exchanges will be effected based on the
relative net asset values per share next determined after the exchange order is
received at PaineWebber's New York City offices or by the Transfer Agent. See
'Valuation of Shares.' Fund shares purchased through PaineWebber or its
correspondent firms may be exchanged only after the settlement date has passed
and payment for such shares has been made.
OTHER EXCHANGE INFORMATION. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is available only in those jurisdictions where
the sale of the PaineWebber mutual fund shares to be acquired may be legally
made. Before making any exchange, shareholders should contact their PaineWebber
investment executives or correspondent firms or the Transfer Agent to obtain
more information and prospectuses of PaineWebber mutual funds to be acquired
through the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value (subject to any
applicable contingent deferred sales charge) and redemption proceeds will be
paid after receipt of a redemption request as described below. PaineWebber
clients
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may redeem non-certificated shares through PaineWebber or its correspondent
firms; all other shareholders must redeem through the Transfer Agent. If a
redeeming shareholder owns shares of more than one Class, the shares will be
redeemed in the following order unless the shareholder specifically requests
otherwise: Class A shares, then Class C shares, and finally Class B shares.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. Within three Business Days after
receipt of the request, repurchase proceeds (less any applicable contingent
deferred sales charge) will be paid by check or credited to the shareholder's
brokerage account at the election of the shareholder. PaineWebber investment
executives and correspondent firms are responsible for promptly forwarding
redemption requests to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor any redemption request, in
which case PaineWebber promptly will forward the request to the Transfer Agent
for treatment as described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients or who wish to redeem certificated shares must redeem their
shares through the Transfer Agent by mail; other shareholders also may redeem
Fund shares through the Transfer Agent. Shareholders should mail redemption
requests directly to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual
Funds, P.O. Box 8950, Wilmington, Delaware 19899. A redemption request will be
executed at the net asset value next computed after it is received in 'good
order' and redemption proceeds will be paid within seven days of receipt of the
request. 'Good order' means that the request must be accompanied by the
following: (1) a letter of instruction or a stock assignment specifying the
number of shares or amount of investment to be redeemed (or that all shares
credited to a Fund account be redeemed), signed by all registered owners of the
shares in the exact names in which they are registered, (2) a guarantee of the
signature of each registered owner by an eligible institution acceptable to the
Transfer Agent and in accordance with SEC rules, such as a commercial bank,
trust company or member of a recognized stock exchange, (3) other supporting
legal documents for estates, trusts, guardianships, custodianships, partnerships
and corporations and (4) duly endorsed share certificates, if any. Shareholders
are responsible for ensuring that a request for redemption is received in 'good
order.'
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder who holds
non-certificated Fund shares may have redemption proceeds of $1 million or more
wired to the shareholder's PaineWebber brokerage account or a commercial bank
account designated by the shareholder. Questions about this option, or
redemption requirements generally, should be referred to the shareholder's
PaineWebber investment executive or correspondent firm, or to the Transfer Agent
if the shares are not held in a PaineWebber brokerage account. If a shareholder
requests redemption of shares which were purchased recently, the Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, the Fund reserves the right to redeem all Fund shares in
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any shareholder account of less than $500 net asset value. If the Fund elects to
do so, it will notify the shareholder and provide the shareholder the
opportunity to increase the amount invested to $500 or more within 60 days of
the notice. The Fund will not redeem accounts that fall below $500 solely as a
result of a reduction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund
account without a sales charge up to the dollar amount redeemed by purchasing
Class A shares within 365 days of the redemption. To take advantage of this
reinstatement privilege, shareholders must notify their PaineWebber investment
executive or correspondent firm at the time the privilege is exercised.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A shares
approximately six years after the date of issuance, together with a pro rata
portion of all Class B shares representing dividends and other distributions
paid in additional Class B shares. The Class B shares so converted will no
longer be subject to the higher expenses borne by Class B shares. The conversion
will be effected at the relative net asset values per share of the two Classes
on the first Business Day of the month in which the sixth anniversary of the
issuance of the Class B shares occurs. If a shareholder effects one or more
exchanges among Class B shares of the PaineWebber mutual funds during the
six-year period, the holding periods for the shares so exchanged will be counted
toward the six-year period. See 'Valuation of Shares.'
OTHER SERVICES AND INFORMATION
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll-free at 1-800-647-1568.
AUTOMATIC INVESTMENT PLAN. Shareholders may purchase Fund shares through an
automatic investment plan, under which an amount specified by the shareholder of
$50 or more each month will be sent to the Transfer Agent from the shareholder's
bank for investment in the Fund. In addition to providing a convenient and
disciplined manner of investing, participation in the automatic investment plan
enables the investor to use the technique of 'dollar cost averaging.' When under
the plan a shareholder invests the same dollar amount each month, the
shareholder will purchase more shares when the Fund's net asset value per share
is low and fewer shares when the net asset value per share is high. Using this
technique, a shareholder's average purchase price per share over any given
period will be lower than if the shareholder purchased a fixed number of shares
on a monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, since the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of low price levels.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own non-certificated Class A
or Class C shares with a value of $5,000 or more or Class B shares with a value
of $20,000 or more may have PaineWebber redeem a portion of their shares
monthly, quarterly or semi-annually under the systematic withdrawal plan.
Shareholders who participate in the systematic withdrawal plan must elect to
have all dividends reinvested in additional shares of the same Class. The
minimum amount for all withdrawals of Class A or Class C shares is $100, and
minimum monthly, quarterly and semi-annual withdrawal amounts for Class B
shares are $200, $400 and
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$600, respectively. Quarterly withdrawals are made in March, June, September and
December, and semi-annual withdrawals are made in June and December. Provided
that the shareholder does not withdraw an amount exceeding 12% (in the first
year after purchase for Class A and Class C shares, annually for Class B shares)
of his or her 'Initial Account Balance,' a term that means the value of the Fund
account at the time the shareholder elects to participate in the systematic
withdrawal plan, no contingent deferred sales charge is imposed on such
withdrawals. A shareholder's participation in the systematic withdrawal plan
will terminate automatically if the Initial Account Balance (plus the net asset
value on the date of purchase of Fund shares acquired after the election to
participate in the systematic withdrawal plan), less aggregate redemptions made
other than pursuant to the systematic withdrawal plan, is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders.
Shareholders who receive dividends or other distributions in cash may not
participate in the systematic withdrawal plan. Purchases of additional Fund
shares concurrent with withdrawals are ordinarily disadvantageous to
shareholders because of tax liabilities and, for Class A shares, sales charges.
INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Fund may be purchased through
IRAs available through the Fund. In addition, a Self-Directed IRA is available
through PaineWebber. Under the Self-Directed IRA, investments may be made in the
Fund as well as in other investments available through PaineWebber. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.
TRANSFER OF ACCOUNTS. If a shareholder holding Fund shares in a
PaineWebber brokerage account transfers his brokerage account to another firm,
the Fund shares normally will be transferred to an account with the Transfer
Agent. However, if the other firm has entered into a selected dealer agreement
with Mitchell Hutchins relating to the Fund, the shareholder may be able to hold
Fund shares in an account with the other firm.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund pays an annual dividend from its net investment income
and net short-term capital gain, if any. The Fund also distributes substantially
all of its net capital gain (the excess of net long-term capital gain over net
short-term capital loss) and any net gains from foreign currency transactions
with the regular annual dividend. The Fund may make additional distributions if
necessary to avoid a 4% excise tax on certain undistributed income and capital
gain. Dividends and other distributions on all Classes of Fund shares are
calculated at the same time and in the same manner. Dividends on Class B and
Class C shares of the Fund are expected to be lower than those on its Class A
shares because of the higher expenses resulting from distribution fees borne by
the Class B and Class C shares. Dividends on each Class also might be affected
differently by the allocation of other Class-specific expenses. See 'Valuation
of Shares.'
Dividends and capital gain distributions on Fund shares are paid in
additional Fund shares of the same Class at net asset value unless the
shareholder has requested cash payments. Shareholders who wish to receive
dividends and/or other distributions in cash, either mailed to the shareholder
by check or credited to the shareholder's PaineWebber account, should contact
their PaineWebber investment executives or correspondent firms or complete the
appropriate section of the application form.
TAXES. The Fund intends to continue to qualify for treatment as a
regulated investment company under the Internal Revenue Code so
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that it will be relieved of federal income tax on that part of its investment
company taxable income (consisting generally of net investment income and net
short-term capital gain) and net capital gain that is distributed to its
shareholders.
Dividends from the Fund's investment company taxable income (whether in
cash or in additional shares) generally are taxable to its shareholders as
ordinary income. Distributions of the Fund's net capital gain (whether in cash
or in additional shares) are taxable to its shareholders as long-term capital
gain, regardless of how long they have held their Fund shares. Shareholders not
subject to tax on their income generally will not be required to pay taxes on
amounts distributed to them.
The Fund notifies its shareholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed paid)
that year and of any portion of those dividends that qualifies for the corporate
dividends-received deduction.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions for shareholders who otherwise are
subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the redemption proceeds are more
or less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any initial sales charge paid on Class A shares). An exchange
of Fund shares for shares of another PaineWebber mutual fund generally will
have similar tax consequences. However, special tax rules apply when a
shareholder (1) disposes of Class A shares through a redemption or exchange
within 90 days of purchase and (2) subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or exchange privilege. In these cases, any gain on the
disposition of the original Class A shares would be increased, or loss
decreased, by the amount of the sales charge paid when the shares were
acquired, and that amount will increase the basis of the PaineWebber mutual
fund shares subsequently acquired. In addition, if Fund shares are purchased
within 30 days before or after redeeming other Fund shares (regardless of
Class) at a loss, all or a portion of that loss will not be deductible and will
increase the basis of the newly purchased shares.
No gain or loss will be recognized to a shareholder as a result of a
conversion of Class B shares into Class A shares.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be other
federal, state or local tax considerations applicable to a particular investor.
Prospective shareholders are therefore urged to consult their tax advisers.
VALUATION OF SHARES
The net asset value of the Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the NYSE
(currently 4:00 p.m., Eastern time) each Business Day. Net asset value per share
is determined by dividing the value of the securities held by the Fund plus any
cash or other assets minus all liabilities by the total number of Fund shares
outstanding.
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The Fund values its assets based on their current market value when market
quotations are readily available. If such value cannot be established, assets
are valued at fair value as determined in good faith by or under the direction
of the Fund's board of directors. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board of directors determines that this does not represent
fair value.
MANAGEMENT
The Fund's board of directors, as part of its overall management
responsibility, oversees various organizations responsible for the Fund's
day-to-day management. Mitchell Hutchins, the Fund's investment adviser and
administrator, makes and implements all investment decisions and supervises all
aspects of the Fund's operations. Mitchell Hutchins receives a monthly fee for
these services at the annual rate of 0.70% of the Fund's average daily net
assets. Brokerage transactions for the Fund may be conducted through PaineWebber
or its affiliates in accordance with procedures adopted by the Fund's board of
directors.
The Fund also pays PaineWebber an annual fee of $4.00 per active
shareholder account held at PaineWebber for certain services not provided by the
Transfer Agent. The Fund incurs other expenses and, for the fiscal year ended
March 31, 1995, total expenses for the Fund's Class A shares, Class B shares and
Class C shares, stated as a percentage of average net assets, were 1.45%, 2.22%
and 2.23%, respectively.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New
York 10019. It is a wholly owned subsidiary of PaineWebber, which is in turn
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. As of October 31, 1995, Mitchell Hutchins was adviser or
subadviser of 38 investment companies with 75 separate portfolios and aggregate
assets of approximately $29 billion.
Karen L. Finkel is primarily responsible for the day-to-day portfolio
management of the Fund. Mrs. Finkel is a vice president of the Fund and a first
vice president of Mitchell Hutchins. She has held her Fund responsibilities
since January 1988 and has been employed by Mitchell Hutchins as a portfolio
manager for the last five years.
Other members of Mitchell Hutchins' domestic equity and domestic fixed
income investments groups provide input on market outlook, interest rate
forecasts, investment research and other considerations pertaining to the Fund's
investments.
Mitchell Hutchins investment personnel may engage in securities
transactions for their own accounts pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins is the distributor of Fund
shares and has appointed PaineWebber as the exclusive dealer for the sale of
Fund shares. Under separate plans of distribution pertaining to the Class A
shares, Class B shares and Class C shares ('Class A Plan,' 'Class B Plan' and
'Class C Plan,' collectively, 'Plans'), the Fund pays Mitchell Hutchins monthly
service fees at the annual rate of 0.25% of the average daily net assets of each
Class of shares and monthly distribution fees at the annual rate of 0.75% of the
average daily net assets of the Class B and Class C shares.
Under all three Plans, Mitchell Hutchins uses the service fees primarily to
pay PaineWebber for shareholder servicing, currently at the annual rate of 0.25%
of the aggregate
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investment amounts maintained in the Fund by PaineWebber clients. PaineWebber
passes on a portion of these fees to its investment executives to compensate
them for shareholder servicing that they perform and retains the remainder to
offset its own expenses in servicing and maintaining shareholder accounts. These
expenses may include costs of the PaineWebber branch office in which the
investment executive is based, such as rent, communications equipment, employee
salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class
C Plans to offset the commissions it pays to PaineWebber for selling Class B
and Class C shares. PaineWebber passes on to its investment executives a
portion of these commissions and retains the remainder to offset its expenses
in selling Class B and Class C shares. These expenses may include the branch
office costs noted above. In addition, Mitchell Hutchins uses the distribution
fees under the Class B and Class C Plans to offset the Fund's marketing costs
attributable to such Classes, such as preparation of sales literature,
advertising and printing and distributing prospectuses and other shareholder
materials to prospective investors. Mitchell Hutchins also may use the
distribution fees to pay additional compensation to PaineWebber and other costs
allocated to Mitchell Hutchins' and PaineWebber's distribution activities,
including employee salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives at
the time of sale of Class C shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class C shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class C shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid
upon the purchase of Class A shares and the contingent deferred sales charges
paid upon certain redemptions of shares, and may use these proceeds for any of
the distribution expenses described above. See 'Purchases.'
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ('Distribution Contracts') obligate
the Fund to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. Thus, even if Mitchell Hutchins' expenses exceed
its service or distribution fees, the Fund will not be obligated to pay more
than those fees and, if Mitchell Hutchins' expenses are less than such fees, it
will retain its full fees and realize a profit. The Fund will pay the service
and distribution fees to Mitchell Hutchins until either the applicable Plan or
Distribution Contract is terminated or not renewed. In that event, Mitchell
Hutchins' expenses in excess of service and distribution fees received or
accrued through the termination date will be Mitchell Hutchins' sole
responsibility and not obligations of the Fund. In their annual consideration of
the continuation of the Plans, the Fund's directors will review the Plan and
Mitchell Hutchins' corresponding expenses for each Class separately from the
Plans and corresponding expenses for the other two Classes.
PERFORMANCE INFORMATION
The Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may be
higher or lower than standardized return. Standardized return
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for the Class A shares reflects deduction of the Fund's maximum initial sales
charge at the time of purchase, and standardized return for the Class B and
Class C shares reflects deduction of the applicable contingent deferred sales
charge imposed on a redemption of the shares held for the period. One-, five-
and ten-year periods will be shown, unless the Class has been in existence for a
shorter period. Total return calculations assume reinvestment of dividends and
other distributions.
The Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were included.
The Fund will include performance data for all three Classes of Fund shares
in any advertisements or promotional materials including Fund performance data.
Total return information reflects past performance and does not necessarily
indicate future results. Investment return and principal values will fluctuate,
and proceeds upon redemption may be more or less than a shareholder's cost.
GENERAL INFORMATION
ORGANIZATION. PaineWebber Financial Services Growth Fund Inc. is registered
with the SEC as an open-end management investment company and was incorporated
in Maryland on February 13, 1986. The Fund has authority to issue 300 million
shares of common stock of separate series, par value $.001 per share.
The shares of common stock of the Fund are divided into three Classes,
designated Class A shares, Class B shares and Class C shares. Each Class
represents interests in the same assets of the Fund. The Classes differ as
follows: (1) each Class of shares has exclusive voting rights on matters
pertaining to its respective plans of distribution, (2) Class A shares are
subject to an initial sales charge, (3) Class B shares bear ongoing distribution
fees, are subject to a contingent deferred sales charge upon certain redemptions
and will automatically convert to Class A shares approximately six years after
issuance, (4) Class C shares are not subject to an initial sales charge, but are
subject to a contingent deferred sales charge if redeemed within one year of
purchase, bear ongoing distribution fees and do not convert into another Class
and (5) each Class may bear differing amounts of certain Class-specific
expenses. The Fund's board of directors does not anticipate that there will be
any conflicts between the interests of the holders of each Class of Fund shares.
On an ongoing basis, the board of directors will consider whether any such
conflict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be
no meetings of shareholders to elect directors unless fewer than a majority of
the directors holding office have been elected by shareholders. Shareholders of
record holding at least two-thirds of the outstanding shares of the Fund may
remove a director by votes cast in person or by proxy at a meeting called for
that purpose. The directors are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any director when so
requested in writing by the shareholders of record holding at least 10% of the
Fund's outstanding shares. Each share of the Fund has equal voting rights,
except as noted above. Each share of the Fund is entitled to participate equally
in dividends and other distributions and the proceeds of any liquidation except
that, due to the differing expenses borne by the three Classes, dividends and
liquidation
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proceeds of Class B and Class C shares are likely to be lower than for the Class
A shares.
To avoid additional operating costs and for investor convenience, the Fund
no longer issues share certificates. Ownership of Fund shares is recorded on a
stock register by the Transfer Agent and shareholders have the same rights of
ownership with respect to such shares as if certificates had been issued.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, Massachusetts 02171, is custodian of the Fund's
assets. PFPC Inc., a subsidiary of PNC Bank, National Association, whose
principal business address is 400 Bellevue Parkway, Wilmington, Delaware 19809,
is the Fund's transfer and dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of
purchases and redemptions of Fund shares. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Fund.
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APPENDIX A
The Fund may use the hedging instruments described below:
OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right to
sell the underlying security or currency at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
OPTIONS ON STOCK INDEXES--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values of
those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.
STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the other
party agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contracts.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currencies, 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 currencies, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
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Application Form
The PaineWebber
Mutual Funds / / / /-/ / / / / / / / / /-/ / / /
PaineWebber Account No.
- --------------------------------------------------------------------------------
INSTRUCTIONS DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED
THROUGH PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT
EXECUTIVE (OR YOUR LOCAL PAINEWEBBER OFFICE TO OPEN AN ACCOUNT).
FOR ASSISTANCE IN COMPLETING THIS FORM CONTACT PFPC INC. AT
1-800-647-1568.
Return this completed form to:
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19899
PLEASE PRINT ATTN: PaineWebber Mutual Funds
- --------------------------------------------------------------------------------
/1/ INITIAL INVESTMENT ($1,000 MINIMUM)
ENCLOSED IS A CHECK FOR $________ (payable to PaineWebber Financial
Services Growth Fund Inc.) to purchase Class A / / Class B / / or
Class C / / shares.
(Check one; if no Class is specified Class A shares will be purchased)
/2/ ACCOUNT REGISTRATION
Not valid without signature and Soc. Sec. or Tax ID # on accompanying
Form W-9
--As joint tenants, use Lines 1 and 2
--As custodian for a minor, use Lines 1 and 3
--in the name of a corporation, trust or other organization or any
fiduciary capacity, use Line 4
1. Individual ______________ ____________________________ _____/___/_____
First Name Last Name MI Soc. Sec. No.
2. Joint Tenancy ___________ ____________________________ _____/___/_____
First Name Last Name MI Soc. Sec. No.
("Joint Tenants with Rights of Survivorship" unless
otherwise specified)
3. Gifts to Minors ______________________________________ _____/___/_____
Minor's Name Soc. Sec. No.
Under the ____________________ Uniform Gifts / Uniform Transfers
State of Residence to Minors Act / to Minors Act
of Minor
4. Other Registrations __________________________________ _______________
Name Tax Ident. No.
5. If Trust, Date of Trust Instrument: ___________________________________
/3/ ADDRESS
___________________________________________ U.S. Citizen / / Yes / / No*
Street
___________________________________________ _____________________________
City State Zip Code *Country of Citizenship
/4/ DISTRIBUTION OPTIONS See Prospectus
Please select one of the following:
/ / Reinvest both dividends and capital gain distributions in additional
shares
/ / Pay dividends to my address above; reinvest capital gain distributions
/ / Pay both dividends and capital gain distributions in cash to my
address above
/ / Reinvest dividends and pay capital gain distributions in cash to my
address above
NOTE: If a selection is not made, both dividends and capital gain
distributions will be paid in additional shares of the
the same Class.
<PAGE>
/5/ SPECIAL OPTIONS (For More Information--Check Appropriate Box)
/ / Prototype IRA Application / / Automatic Investment Plan
/ / Systematic Withdrawal Plan
/6/ RIGHTS OF ACCUMULATION--CLASS A SHARES See Prospectus
Indicate here any other account(s) in the group of funds that would
qualify for the cumulative quantity discount as outlined in the
Prospectus.
_______________________ ________________ _______________________________
Fund Name Account No. Registered Owner
_______________________ ________________ _______________________________
Fund Name Account No. Registered Owner
_______________________ ________________ _______________________________
Fund Name Account No. Registered Owner
/7/ PLEASE INDICATE BELOW IF YOU ARE AFFILIATED WITH PAINEWEBBER
"Affiliated" persons are defined as officers, directors/trustees and
employees of the PaineWebber funds, PaineWebber or its affiliates, and
their parents, spouses and children.
__________________________________________________________________________
Nature of Relationship
/8/ SIGNATURE(S) AND TAX CERTIFICATION
I warrant that I have full authority and am of legal age to purchase
shares of the Fund and have received and read a current Prospectus of the
Fund and agree to its terms. The Fund and its Transfer Agent will not be
liable for acting upon instructions or inquiries believed genuine. Under
penalties of perjury, I certify that (1) my taxpayer identification number
provided in this application is correct and (2) I am not subject to backup
withholding because (i) I have not been notified that I am subject to
backup withholding as a result of failure to report interest or dividends
or (ii) the IRS has notified me that I am no longer subject to backup
withholding (strike out clause (2) if incorrect).
___________________________ _____________________________ ______________
Individual (or Custodian) Joint Registrant (if any) Date
___________________________ _____________________________ ______________
Corporate Officer, Partner, Title Date
Trustee, etc.
/9/ INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed by Investment
Executive Only)
______________________________________________ __________________________
Broker No./Name Branch Wire Code
______________________________________________ (____)____________________
Branch Address Telephone
/10/ CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Correspondent Firm
Only)
______________________________ __________________________________________
Name Address
______________________________
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE OR
CORRESPONDENT FIRM OR TO: PFPC INC., P.O. BOX 8950, WILMINGTON, DELAWARE
19899.
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Shares of the Fund can be exchanged for shares of the following PaineWebber
Mutual Funds:
PAINEWEBBER INCOME FUNDS
o Global Income Fund
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
PAINEWEBBER TAX-FREE INCOME 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
PAINEWEBBER GROWTH FUNDS
o Capital Appreciation Fund
o Emerging Markets Equity Fund
o Global Equity Fund
o Growth Fund
o Small Cap Growth Fund
o Small Cap Value Fund
PAINEWEBBER GROWTH AND INCOME FUNDS
o Balanced Fund
o Growth and Income Fund
o Tactical Allocation Fund
o Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
------------------------
A prospectus containing more complete information for any of the above funds,
including charges and expenses,
can be obtained from a PaineWebber investment executive or correspondent firm.
Read the prospectus carefully before investing.
(Copyright) 1995 PaineWebber Incorporated
Recycled
Paper
PAINEWEBBER
FINANCIAL SERVICES
GROWTH FUND INC.
- ------------------------------------------------------
/ / LONG-TERM CAPITAL APPRECIATION
/ / PROFESSIONAL MANAGEMENT
/ / PORTFOLIO DIVERSIFICATION
/ / DIVIDEND AND CAPITAL GAIN REINVESTMENT
/ / FLEXIBLE PRICING(ServiceMark)
/ / LOW MINIMUM INVESTMENT
/ / AUTOMATIC INVESTMENT PLAN
/ / SYSTEMATIC WITHDRAWAL PLAN
/ / EXCHANGE PRIVILEGES
/ / SUITABLE FOR RETIREMENT PLANS
- ------------------------------------------------------
PROSPECTUS
, 1995
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. 1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Financial Services Growth Fund Inc. ('Fund') is a diversified,
professionally managed mutual fund. The Fund seeks long-term capital
appreciation and invests primarily in equity securities of financial services
companies. The Fund's investment adviser, administrator and distributor is
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned
subsidiary of PaineWebber Incorporated ('PaineWebber'). As distributor for the
Fund, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive
dealer for the sale of Fund shares. This Statement of Additional Information is
not a prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated , 1995. A copy of the Prospectus may be
obtained by calling any PaineWebber investment executive or correspondent firm
or by calling toll-free 1-800-647-1568. This Statement of Additional Information
is dated , 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
RATINGS OF DEBT OBLIGATIONS. Moody's Investors Service, Inc. ('Moody's'),
Standard & Poor's, a division of The McGraw Hill Companies, Inc., ('S&P') and
other nationally recognized statistical rating organizations ('NRSROs') are
private services that provide ratings of the credit quality of debt obligations.
A description of the ratings assigned to corporate debt obligations by Moody's
and S&P is included in the Appendix to this Statement of Additional Information.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. These ratings represent the NRSROs' opinions as to the quality of
the securities that they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in
illiquid securities. The term 'illiquid securities' for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased over-the-counter ('OTC')
options, repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins has determined are liquid pursuant
to guidelines established by the Fund's board of directors. The assets used as
cover for OTC options written by the Fund will be considered illiquid unless the
OTC options are sold to qualified dealers who agree that the Fund may repurchase
any OTC option it writes at a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC option written subject to
this procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ('1933 Act').
<PAGE>
Where registration is required, the Fund may be obligated to pay all or part of
the registration expenses, and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities, and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a 'safe harbor' from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
the Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
The board of directors has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of factors
in reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of restricted securities in each Fund's portfolio and reports
periodically on such decisions to the board of directors.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. The Fund maintains custody
of the underlying securities prior to their repurchase; thus, the obligation of
the bank or dealer to pay the repurchase price on the date agreed to is, in
effect, secured by such securities. If the value of such securities is less than
the repurchase price, plus any agreed-upon additional amount, the other party to
the agreement must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to
2
<PAGE>
be received upon repurchase of the securities and the price that was paid by the
Fund upon acquisition is accrued as interest and included in the Fund's net
investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to a Fund if the other party to a
repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's board of directors. Mitchell Hutchins reviews and
monitors the creditworthiness of those institutions under the board's general
supervision.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of its total assets. Such agreements involve the sale of securities
held by the Fund subject to the Fund's agreement to repurchase the securities at
an agreed-upon date and price reflecting a market rate of interest. Such
agreements are considered to be borrowings and may be entered into only for
temporary or emergency purposes. While a reverse repurchase agreement is
outstanding, the Fund's custodian segregates assets to cover the Fund's
obligations under the reverse repurchase agreement. See 'Investment Policies and
Restrictions--Segregated Accounts.'
LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, the Fund
is authorized to lend up to 10% of the total value of its portfolio securities
to broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains with the Fund's custodian bank
collateral either in cash or money market instruments, marked to market daily,
in an amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The Fund will
retain authority to terminate any loans at any time. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will regain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. To the extent the
Fund holds securities of foreign issuers, such securities may not be registered
with the Securities and Exchange Commission ('SEC'), nor are the issuers thereof
subject to its reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by the Fund
than is available concerning U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory requirements comparable to those applicable to U.S. companies.
In addition to purchasing securities of foreign issuers in foreign markets,
the Fund may invest in American Depository Receipts ('ADRs'), European
Depository Receipts ('EDRs') or other securities
3
<PAGE>
convertible into securities of corporations based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets and EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. For purposes of the Fund's investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR evidencing ownership of common stock will be
treated as common stock.
The Fund anticipates that its brokerage transactions involving securities
of companies headquartered in countries other than the United States will be
conducted primarily on the principal exchanges of such countries. Transactions
on foreign exchanges are usually subject to fixed commissions that are generally
higher than negotiated commissions on U.S. transactions, although the Fund will
endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United States.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Fund may purchase securities on a 'when-issued' or delayed delivery basis. A
security purchased on a when-issued or delayed delivery basis is recorded as an
asset on the commitment date and is subject to changes in market value,
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When the Fund agrees to purchase securities on a
when-issued or delayed delivery basis, its custodian segregates assets to cover
the amount of the commitment. See 'Investment Policies and Restrictions--
Segregated Accounts.' The Fund purchases when-issued securities only with the
intention of taking delivery, but may sell the right to acquire the security
prior to delivery if Mitchell Hutchins deems it advantageous to do so, which may
result in a gain or loss to the Fund.
SHORT SALES 'AGAINST THE BOX.' As indicated in the Prospectus, the Fund
may engage in short sales of securities it owns or has the right to acquire at
no added cost through conversion or exchange of other securities it owns (short
sales 'against the box') to defer realization of gains or losses for tax or
other purposes. To make delivery to the purchaser in a short sale, the executing
broker borrows the securities being sold short on behalf of the Fund, and the
Fund is obligated to replace the securities borrowed at a date in the future.
When the Fund sells short, it will establish a margin account with the broker
effecting the short sale and will deposit collateral with the broker. In
addition, the Fund will maintain with its custodian, in a segregated account,
the securities that could be used to cover the short sale. The Fund will incur
transaction costs, including interest expense, in connection with opening,
maintaining and closing short sales against the box. The Fund currently does not
intend to have obligations under short sales that at any time during the coming
year exceed 5% of the Fund's net assets.
The Fund might make a short sale 'against the box' in order to hedge
against market risks when Mitchell Hutchins believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by the Fund or a security convertible into or exchangeable for a security owned
by the Fund, or when Mitchell Hutchins wants to sell a security that the Fund
owns at a current
4
<PAGE>
price, but also wishes to defer recognition of gain or loss for federal income
tax purposes. In such case, any loss in the Fund's long position after the short
sale should be reduced by a gain in the short position. Conversely, any gain in
the long position should be reduced by a loss in the short position. The extent
to which gains or losses in the long position are reduced will depend upon the
amount of the securities sold short relative to the amount of the securities the
Fund owns, either directly or indirectly, and in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
SEGREGATED ACCOUNTS. When 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, the Fund will maintain with an approved custodian in a
segregated account cash, U.S. government securities or other liquid high-grade
debt securities, marked to market daily, in an amount at least equal to the
Fund's obligation or commitment under such transactions. As described below
under 'Hedging Strategies,' segregated accounts may also be required in
connection with certain transactions involving options or futures contacts.
INVESTMENT LIMITATIONS. The Fund may not (1) issue senior securities or
borrow money, except from banks or through reverse repurchase agreements for
emergency or temporary purposes, and then in an aggregate amount not in excess
of 10% of the value of the Fund's total assets at the time of such borrowing,
provided that the Fund will not purchase securities while borrowings (including
reverse repurchase agreements) in excess of 5% of the Fund's total assets are
outstanding; (2) make an investment in any one industry if doing so would cause
the value of investments in such industry or group of industries to equal or
exceed 25% of the total assets of the Fund taken at market value, except that
the Fund will invest, under normal circumstances, at least 25% of its total
assets, taken at market value, in the related group of industries consisting of
the financial services industries; (3) purchase securities of any one issuer
(other than U.S. government securities) if as a result more than 5% of the
Fund's total assets would be invested in securities of such issuer or the Fund
would own or hold 10% or more 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 these limitations; (4) purchase securities on margin, except for
short-term credit necessary for clearance of portfolio transactions, and except
that the Fund may make margin deposits in connection with its use of options,
futures contracts and options on futures contracts; (5) underwrite securities of
other issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under federal
securities laws; (6) make short sales of securities or maintain a short
position, except that the Fund may make short sales and maintain short positions
in connection with its use of options, futures contracts and options on futures
contracts and may sell short 'against the box'; (7) purchase or sell real
estate, provided that the Fund may invest in securities secured by real estate
or interests therein or issued by companies which invest in real estate or
interests therein, including real estate investment trusts; (8) purchase or sell
commodities or commodity contracts, except that the Fund may purchase or sell
stock index, interest rate and foreign currency futures contracts and options
thereon; (9) invest in oil, gas or mineral-related programs or leases, provided
that the Fund may invest in securities issued by companies that engage in such
activities; (10) make loans, except through loans of portfolio securities as
described in the Prospectus or this Statement of Additional Information and
except through repurchase agreements, provided that for purposes of this
limitation the acquisition of publicly distributed bonds, debentures or other
corporate debt securities and investment in government
5
<PAGE>
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed to be the making of a loan; or (11) purchase any
securities issued by any other investment company, except by purchase in the
open market where no commission or profit, other than a customary brokers'
commission, is earned by any sponsor or dealer associated with the investment
company whose shares are acquired as a result of such purchase, provided that
such securities in the aggregate do not represent more than 10% of the total
assets of the Fund, and except in connection with the merger, consolidation or
acquisition of all the securities or assets of another investment company.
The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or amount of total
assets will not be considered a violation of any of the foregoing limitations.
The Fund will continue to interpret fundamental investment limitation (7) to
prohibit investment in real estate limited partnerships.
The following investment restrictions may be changed by the vote of the
board of directors of the Fund without shareholder approval:
(1) the Fund will not purchase or retain the securities of any issuer if,
to the knowledge of the Fund's management, the officers and directors of the
Fund and Mitchell Hutchins (each owning beneficially more than 1/2 of 1% of the
outstanding securities of the issuer) own in the aggregate more than 5% of the
securities of such issuer;
(2) the Fund will not invest more than 10% of its net assets in illiquid
securities, a term which means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the securities and includes, among other things,
repurchase agreements maturing in more than seven days;
(3) the Fund's investments in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets, which amount may
include warrants that are not listed on the New York Stock Exchange, Inc.
('NYSE') or the American Stock Exchange, Inc., provided that such unlisted
warrants, valued at the lower of cost or market, do not exceed 2% of the Fund's
net assets, and further provided that this restriction does not apply to
warrants attached to, or sold as a unit with, other securities;
(4) the Fund will not purchase any security if as a result the Fund would
have more than 5% of its total assets invested in securities of companies which
together with any predecessors have been in continuous operation for less than
three years; and
(5) the Fund will not invest more than 35% of its total assets in debt
securities rated Ba or lower by Moody's or BB or lower by S&P (or determined by
Mitchell Hutchins to be of comparable quality). This non-fundamental policy (5)
can be changed only upon 30 days' advance notice to shareholders.
6
<PAGE>
HEDGING STRATEGIES
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ('Hedging Instruments'), including certain options,
futures contracts (sometimes referred to as 'futures') and options on futures
contracts to attempt to hedge the Fund's portfolio. The particular Hedging
Instruments used by the Fund are described in the Appendix to the Prospectus.
Hedging strategies can be broadly categorized as 'short hedges' and 'long
hedges.' A short hedge is a purchase or sale of a Hedging Instrument intended to
partially or fully offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transactions
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on stock indices, in contrast, generally
are used to hedge against price movements in broad equity market sectors in
which the Fund has invested or expects to invest. Hedging Instruments on debt
securities may be used to hedge either individual securities or broad fixed
income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ('CFTC') and various state regulatory
authorities. In addition, the Fund's ability to use Hedging Instruments will be
limited by tax considerations. See 'Taxes.'
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins expects to discover additional opportunities
in connection with options, futures contracts and other hedging techniques.
These new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Fund's investment objective and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund's
Prospectus or
7
<PAGE>
Statement of Additional Information will be supplemented to the extent that new
products or techniques involve materially different risks than those described
below or in the Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities, currency and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. While Mitchell Hutchins is experienced
in the use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded.
The effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged. Because the Fund invests
primarily in equity securities of financial services companies and their holding
companies, there might be a significant lack of correlation between the
portfolio and the stock indices underlying any such Hedging Instruments used by
the Fund.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
positions expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction
8
<PAGE>
closing out the position. Therefore, there is no assurance that any hedging
position can be closed out at a time and price that is favorable to the Fund.
COVER FOR HEDGING STRATEGIES. The Fund will not use Hedging Instruments
for speculative purposes or for purposes of leverage. Transactions using Hedging
Instruments, other than purchased options, expose the Fund to an obligation to
another party. The Fund will not enter into any such transactions unless it owns
either (1) an offsetting ('covered') position in securities, currencies or other
options or futures contracts or (2) cash and short-term liquid debt securities,
with a value sufficient at all times to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for hedging transactions and will, if the guidelines
so require, set aside cash, U.S. government securities or other liquid,
high-grade debt securities in a segregated account with its custodian in the
prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Fund may purchase put and call options, and write (sell)
covered put or call options, on equity and debt securities in which the Fund is
authorized to invest and stock indices and foreign currencies. The purchase of
call options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing covered call options serves as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. Writing covered put options
serves as a limited long hedge because increases in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the market price of the security underlying a covered put
option declines to less than the exercise price of the option, minus the premium
received, the Fund would expect to suffer a loss. The securities or other assets
used as cover for OTC options written by the Fund would be considered illiquid
to the extent described under 'Investment Policies and Restrictions--Illiquid
Securities.'
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
9
<PAGE>
The Fund may purchase and write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities and foreign currencies exist but are
relatively new, and these instruments are primarily traded on the OTC market.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction. The Fund will enter into OTC option transactions only with contra
parties that have a net worth of at least $20 million.
Generally, the OTC debt options used by the Funds are European style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are exercisable
at any time prior to the expiration date of the option.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
GUIDELINES FOR OPTIONS. The Fund's use of options is governed by the
following guidelines, which can be changed by the Fund's board of directors
without shareholder vote:
(1) The Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
(2) The aggregate value of securities underlying put options written by the
Fund, determined as of the date the put options are written, will not exceed 50%
of the Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on future
contracts) purchased by the Fund that are held at any time will not exceed 20%
of the Fund's net assets.
10
<PAGE>
FUTURES. The Fund may purchase and sell stock index futures contracts,
interest rate futures contracts and foreign currency futures contracts. The Fund
may also purchase put and call options, and write covered put and call options,
on futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, and writing
covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered call options on
securities or indices.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing an option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a put or call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case
11
<PAGE>
of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS. The Fund's use of futures and
related options is governed by the following guidelines, which can be changed by
the Fund's board of directors without shareholder vote:
(1) To the extent the Fund enters into futures contracts and options on
futures positions, including options on foreign currencies traded on a
commodities exchange, that are not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are 'in-the-money') may not exceed 5% of
the Fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on futures
contracts) purchased by the Fund that are held at any time will not exceed 20%
of the Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's total
assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The Fund may
use options and futures on foreign currencies, as described above, to hedge
against movements in the values of the foreign currencies in which the Fund's
securities are denominated. Such currency hedges can protect against price
movements in a security the Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on other currencies, the
values of which Mitchell Hutchins believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Hedging Instrument will not
12
<PAGE>
correlate perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Hedging Instruments, the
Fund could be disadvantaged by having to deal in the odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
13
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Director and Mr. Bewkes is a director of Paine
69** Chairman of the Webber Group Inc. ('PW Group')
Board of (holding company of PaineWebber
Directors and Mitchell Hutchins) and a
consultant to PW Group. Prior to
1988, he was chairman of the
board, president and chief
executive officer of American
Bakeries Company. Mr. Bewkes is
also a director of Interstate
Bakeries Corporation and NaPro
BioTherapeutics, Inc. and a
director or trustee of 25 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 53 Director Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia
New York, New York 10027 University. Prior to 1989, he was
president of the Illinois
Institute of Technology. Dean
Feldberg is also a director of
AMSCO International Inc., Fed-
erated Department Stores, Inc.
and New World Communications
Group Incorporated and a director
or trustee of 17 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
George W. Gowen; 66 Director Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was
a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen
is also a director of Columbia
Real Estate Investments, Inc.
and a director or trustee of 15
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
Frederic V. Malek; 58 Director Mr. Malek is chairman of Thayer
901 15th Street, N.W. Capital Partners (investment
Suite 300 bank) and a co-chairman and
Washington, D.C. 20005 director of CB Commercial Group
Inc. (real estate). From January
1992 to November 1992 he was
campaign manager of Bush-Quayle
'92. From 1990 to 1992 he was
vice chairman and, from 1989 to
1990, he was president of
Northwest Airlines Inc., NWA Inc.
(holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA
Inc.). Prior to 1989, he was
employed by the Marriott
Corporation (hotels, restaurants,
airline catering and contract
feeding), where he most recently
was an executive vice president
and president of Marriott Hotels
and Resorts. Mr. Malek is also a
director of American Management
Systems, Inc., Automatic Data
Processing, Inc., Avis, Inc., FPL
Group, Inc., ICF International,
Manor Care, Inc. and National
Education Corporation and a
director or trustee of 15 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Judith Davidson Moyers; Director Mrs. Moyers is president of Public
60 Affairs Television, Inc., an
Public Affairs Television educational consultant and a home
356 W. 58th Street economist. Mrs. Moyers is also a
New York, New York 10019 director of Columbia Real Estate
Investments, Inc. and Ogden
Corporation and a director or
trustee of 15 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Margo N. Alexander; 48 President Ms. Alexander is president, chief
executive officer and a director
of Mitchell Hutchins. Prior to
January 1995, Ms. Alexander was
an executive vice president of
PaineWebber. Ms. Alexander is
also a director or trustee of 26
other investment
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president
and manager--advisory
administration of Mitchell
Hutchins. Prior to November 1993,
she was compliance manager of
Hyperion Capital Management,
Inc., an investment advisory
firm. Prior to April 1993, Ms.
Boyle was a vice president
and manager--legal administration
of Mitchell Hutchins. Ms. Boyle
is also a vice president of 37
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Joan L. Cohen; 31 Vice President Ms. Cohen is a vice president and
and Assistant attorney of Mitchell Hutchins.
Secretary Prior to December 1993, she was
an associate at the law firm of
Seward & Kissell. Ms. Cohen is
also a vice president and
assistant secretary of 25 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Karen L. Finkel; 37 Vice President Mrs. Finkel is a first vice
president and portfolio manager
of Mitchell Hutchins. Mrs. Finkel
is also a vice president of 1
other investment company for
which Mitchell Hutchins serves as
investment adviser.
C. William Maher; 34 Vice President Mr. Maher is a first vice president
and Assistant and the senior manager of the
Treasurer Fund Administration Division of
Mitchell Hutchins. Mr. Maher is
also a vice president and assis-
tant treasurer of 37 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
Ann E. Moran; 38 Vice President Ms. Moran is a vice president of
and Assistant Mitchell Hutchins. Ms. Moran is
Treasurer also a vice president and
assistant treasurer of 37 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 43 Vice President Ms. O'Donnell is a senior vice
and Secretary president and deputy general
counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice
president and secretary of 37
other investment companies for
which Mitchell Hutchins and
PaineWebber serves as investment
adviser.
Victoria E. Schonfeld; 44 Vice President Ms. Schonfeld is a managing
director and general counsel of
Mitchell Hutchins. From April
1990 to May 1994, she was a
partner in the law firm of Arnold
& Porter. Prior to April 1990,
she was a partner in the law firm
of Shereff, Friedman, Hoffman &
Goodman. Ms. Schonfeld is also a
vice president of 37 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 32 Vice President Mr. Schubert is a first vice
and Assistant president of Mitchell Hutchins.
Treasurer From August 1992 to August 1994,
he was a vice president of
BlackRock Financial Management,
L.P. Prior to August 1992, he was
an audit manager with Ernst &
Young LLP. Mr. Schubert is also a
vice president and assistant
treasurer of 37 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 35 Vice President Mr. Sluyters is a senior vice
and Treasurer president and the director of the
mutual fund finance division of
Mitchell Hutchins. Prior to 1991,
he was an audit senior manager
with Ernst & Young LLP.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
Mr. Sluyters is also a vice
president and treasurer of 37
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director
and chief investment
officer--U.S. equity investments
of Mitchell Hutchins. Prior to
March 1995, he was a vice
president and directed the U.S.
funds management and equity
research areas of Chase Man-
hattan Private Bank. Mr. Tincher
is also vice president of 10
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Gregory K. Todd; 38 Vice President Mr. Todd is a first vice president
and Assistant and associate general counsel of
Secretary Mitchell Hutchins. Prior to 1993,
he was a partner in the law firm
of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice
president and assistant secretary
of 37 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Keith A. Weller; 34 Vice President Mr. Weller is a first vice
and Assistant president and associate general
Secretary counsel of Mitchell Hutchins.
From September 1987 to March
1995, he was an attorney in
private practice. Mr. Weller is
also a vice president and
assistant secretary of 24 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an 'interested person' of the Fund as defined in the Investment
Company Act of 1940 ('1940 Act') by virtue of his position with PW Group.
18
<PAGE>
The Fund pays directors who are not 'interested persons' of the Fund $1,500
annually and $250 per meeting of the board or any committee thereof. Directors
are reimbursed for any expenses incurred in attending meetings. Directors and
officers of the Fund own in the aggregate less than 1% of the shares of the
Fund. Since Mitchell Hutchins and PaineWebber perform substantially all of the
services necessary for the operation of the Fund, the Fund requires no
employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
presently receives any compensation from the Fund for acting as a director or
officer. The table below includes certain information relating to the
compensation of the Fund's current directors who held office during the fiscal
year ended March 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT ESTIMATED TOTAL
AGGREGATE BENEFITS ANNUAL COMPENSATION
COMPENSATION ACCRUED AS PART BENEFITS FROM THE
FROM THE OF THE FUND'S UPON FUND AND THE
NAME OF PERSON, POSITION FUND* EXPENSES RETIREMENT COMPLEX+
- ------------------------------ ------------ --------------- ---------- ------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr. .......
Director and Chairman of the
Board of Directors -- -- -- --
Meyer Feldberg ...............
Director $3,000 -- -- $86,050
George W. Gowen ..............
Director $2,750 -- -- $71,425
Frederic V. Malek ............
Director $3,000 -- -- $77,875
Judith Davidson Moyers .......
Director $2,500 -- -- $71,125
</TABLE>
- ------------------
* Represents fees paid to each director during the fiscal year ended March 31,
1995.
+ Represents total compensation paid to each director during the calendar year
ended December 31, 1994.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract with the Fund dated
April 1, 1990 ('Advisory Contract'). Under the Advisory Contract, the Fund pays
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.70% of the Fund's average daily net assets. During the fiscal years ended
March 31, 1995, March 31, 1994 and March 31, 1993, the Fund paid (or accrued) to
Mitchell Hutchins investment advisory and administration fees totalling
$480,025, $513,461 and $376,258, respectively.
Pursuant to a service agreement with the Fund that is reviewed by the
Fund's board of directors annually, PaineWebber provides certain services to the
Fund not otherwise provided by its transfer agent. Pursuant to the service
agreement, for the fiscal years ended March 31, 1995, March 31, 1994 and March
31, 1993, the Fund paid (or accrued) to PaineWebber $22,723, $22,270 and
$14,702, respectively.
19
<PAGE>
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to the Fund's directors who are not interested persons (as defined in
the 1940 Act) of the Fund or Mitchell Hutchins; (6) all expenses incurred in
connection with the directors' services, including travel expenses; (7) taxes
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectable items of deposit and other insurance or fidelity
bonds; (9) any costs, expenses or losses arising out of a liability of or claim
for damages or other relief asserted against the Fund for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the independent directors; (11) charges of custodians, transfer
agents and other agents; (12) costs of preparing share certificates; (13)
expenses of setting in type and printing prospectuses, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders, and costs of mailing such materials to shareholders; (14) any
extraordinary expenses (including fees and disbursements of counsel) incurred by
the Fund; (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the board
and any committees thereof; (17) the cost of investment company literature and
other publications provided to directors and officers; and (18) costs of
mailing, stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse the Fund
if and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such limit
applicable to the Fund is 2.5% of the first $30 million of the Fund's average
daily net assets, 2.0% of the next $70 million of its average daily net assets
and 1.5% of its average daily net assets in excess of $100 million. Certain
expenses, such as brokerage commissions, taxes, interest, distribution fees and
extraordinary items, are excluded from this limitation. No reimbursements were
required for the 1995, 1994 and 1993 fiscal years pursuant to state regulation.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon assignment and is terminable at any time without penalty by
the Fund's board of directors or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.
20
<PAGE>
The following table shows the approximate net assets as of ,
1995, sorted by category of investment objective, of the investment companies as
to which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- ------------------------------------------------------------ -----------
<S> <C>
Domestic (excluding Money Market)...........................
Global......................................................
Equity/Balanced.............................................
Fixed Income (excluding Money Market).......................
Taxable Fixed Income...................................
Tax-Free Fixed Income..................................
Money Market Funds..........................................
</TABLE>
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber mutual funds and other Mitchell Hutchins
advisory accounts held by all Mitchell Hutchins' directors, officers and
employees, that establishes procedures for personal investing and restricts
certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require pre-
clearance and short-term trading and participation in initial public offerings
generally are prohibited. In addition, the code of ethics puts restrictions on
the timing of personal investing in relation to trades by PaineWebber funds and
other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class A, Class B and Class C shares of the Fund under separate distribution
contracts with the Fund dated July 7, 1993 and November 10, 1995 (collectively,
'Distribution Contracts'). Each Distribution Contract requires Mitchell Hutchins
to use its best efforts, consistent with its other businesses, to sell shares of
the Fund. Shares of the Fund are offered continuously. Under separate exclusive
dealer agreements between Mitchell Hutchins and PaineWebber dated July 7, 1993
and November 10, 1995 relating to the Class A, Class B and Class C shares of the
Fund (collectively, 'Exclusive Dealer Agreements'), PaineWebber and its
correspondent firms sell the Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by the Fund in the manner prescribed under Rule 12b-1
under the 1940 Act ('Class A Plan,' 'Class B Plan' and 'Class C Plan,'
collectively, 'Plans'), the Fund pays Mitchell Hutchins a service fee, accrued
daily and payable monthly, at the annual rate of 0.25% of the average daily net
assets of each Class of shares. Under the Class B Plan and Class C Plan, the
Fund also 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 and Class C shares, respectively.
21
<PAGE>
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the Fund's board of directors at least quarterly, and the directors
will review, reports regarding all amounts expended under the Plan and the
purposes for which such expenditures were made, (2) the Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the Fund's board of directors, including those
directors who are not 'interested persons' of the Fund and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to the Plan, acting in person at a meeting called for that purpose, (3)
payments by the Fund under the Plan shall not be materially increased without
the affirmative vote of the holders of a majority of the outstanding shares of
the relevant Class and (4) while the Plan remains in effect, the selection and
nomination of directors who are not 'interested persons' of the Fund shall be
committed to the discretion of the directors who are not interested persons of
the Fund.
In reporting amounts expended under the Plans to the directors, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
shares to such Class based on the ratio of sales of such Class to the sales of
all three Classes of shares. The fees paid by one Class of Fund shares will not
be used to subsidize the sale of any other Class of Fund shares.
For the fiscal year ended March 31, 1995, the Fund paid (or accrued) the
following fees to Mitchell Hutchins under the Class A, Class B and Class C
Plans:
<TABLE>
<S> <C>
Class A..................................................... $124,319
Class B..................................................... $142,332
Class C..................................................... $ 46,135
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the Fund during the fiscal year
ended March 31, 1995:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------- ----------- -----------
<S> <C> <C> <C>
Marketing and advertising............... $14,403 $ 18,082 $ 25,515
Amortization of commissions............. N/A $ 67,011 $ 19,875
Printing of prospectuses and statements
of additional information............. $ 4,851 $ 1,611 $ 409
Branch network costs allocated and
interest expense...................... $63,628 $117,529 $195,843
Service fees paid to PaineWebber
investment executives................. $55,944 $ 16,012 $ 5,190
</TABLE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. 'Branch network costs
allocated and interest expense' consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of the Fund's
shares, including the PaineWebber retail branch system.
In approving the Fund's overall Flexible Pricing(Service Mark) system of
distribution, the Fund's board of directors considered several factors,
including that implementation of Flexible Pricing would (1) enable investors to
choose the purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in the Fund and
attracting new investors and assets to the Fund to the benefit of the Fund and
its shareholders, (2) facilitate distribution of the
22
<PAGE>
Fund's shares and (3) maintain the competitive position of the Fund in relation
to other funds that have implemented or are seeking to implement similar
distribution arrangements.
In approving the Class A Plan, the directors considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the Fund than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in the Fund's assets and potential continued growth, (4) the services provided
to the Fund and its shareholders by Mitchell Hutchins, (5) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, the directors considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from Fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales commissions when Class B shares are sold and continuing service
fees thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the investment
executives and correspondent firms, resulting in greater growth of the Fund than
might otherwise be the case, (4) the advantages to the shareholders of economies
of scale resulting from growth in the Fund's assets and potential continued
growth, (5) the services provided to the Fund and its shareholders by Mitchell
Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service- and distribution-related expenses and costs. The directors also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives, without the concomitant receipt by Mitchell Hutchins of
initial sales charges, was conditioned upon its expectation of being compensated
under the Class B Plan.
In approving the Class C Plan for the Fund, the directors considered all
the features of the distribution system, including (1) the advantage to
investors in having no initial sales charges deducted from the Fund's purchase
payments and instead having the entire amount of their purchase payments
immediately invested in Fund shares, (2) the advantage to investors in being
free from contingent deferred sales charges upon redemption for shares held more
than one year and paying for distribution on an ongoing basis, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales compensation for their sales of Class C
shares on an ongoing basis, along with continuing service fees, while their
customers invest their entire purchase payments immediately in Class C shares
and generally do not face contingent deferred sales charges, would prove
attractive to the investment executives and correspondent firms, resulting in
greater growth to the Fund than might otherwise be the case, (4) the advantages
to the shareholders of economies of scale resulting from growth in the Fund's
assets and potential continued growth, (5) the services provided to the Fund and
its shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The directors also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment
23
<PAGE>
executives without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption, was conditioned
upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the directors considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The directors also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of the Fund, which
fees would increase if the Plan were successful and the Fund attained and
maintained significant asset levels.
Under the Distribution Contract between the Fund and Mitchell Hutchins for
the Class A shares and a similar prior distribution contract, for the periods
set forth below, Mitchell Hutchins earned the following approximate amounts of
initial sales charges and retained the following approximate amounts, net of
concessions to PaineWebber as exclusive dealer:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Earned.................................. $104,620 $130,214 $ 65,516
Retained................................ 15,815 85,205 37,931
</TABLE>
For the fiscal year ended March 31, 1995, Mitchell Hutchins earned and
retained $81,254 from contingent deferred sales charges paid upon certain
redemptions of Class B shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Fund's board of directors, Mitchell
Hutchins is responsible for the execution of the Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for the
Fund, taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. Prices paid to dealers in
principal transactions, through which most debt securities and some equity
securities are traded, generally include a 'spread,' which is the difference
between the prices at which the dealer is willing to purchase and sell a
specific security at the time. The Fund may invest in securities traded in the
OTC markets and will engage primarily in transactions with the dealers who make
markets in such securities, unless a better price or execution could be obtained
by using a broker. While Mitchell Hutchins generally seeks reasonably
competitive commission rates and dealer spreads, payment of the lowest
commission or spread is not necessarily consistent with obtaining the best net
results. During the fiscal years ended March 31, 1995, March 31, 1994 and March
31, 1993, the Fund paid approximately $20,088, $28,924 and $49,552,
respectively, in brokerage commissions.
The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted through Mitchell Hutchins or its affiliates, including PaineWebber.
The Fund's board of directors has adopted procedures in conformity with Rule
17e-1 under the 1940 Act to ensure that all brokerage commissions paid to
Mitchell Hutchins or its affiliates are reasonable and fair. Specific provisions
in the Advisory Contract authorize Mitchell Hutchins and any of its affiliates
that is a member of a national securities exchange to effect portfolio
transactions for
24
<PAGE>
the Fund on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid in accordance with applicable SEC regulations. No brokerage commissions
were paid to PaineWebber or any other affiliate of Mitchell Hutchins during the
1995 or 1994 fiscal years. During the fiscal year ended March 31, 1993, the Fund
paid $4,200 to PaineWebber in brokerage commissions.
Transactions in futures contracts are executed through futures commission
merchants ('FCMs'), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Fund's transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
Consistent with the interests of the Fund and subject to the review of the
Fund's board of directors, Mitchell Hutchins may cause the Fund to purchase and
sell portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund may
pay to those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins determines in good faith that such commission is
reasonable in terms either of that particular transaction or of the overall
responsibility of Mitchell Hutchins to the Fund and its other clients and that
the total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For the fiscal year ended March 31,
1995, Mitchell Hutchins directed $743,887 in portfolio transactions to brokers
chosen because they provided research services, for which the Fund paid $1,400
in commissions.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC equity and debt securities in return for
research and execution services. These transactions are entered into only in
compliance with procedures ensuring that the transaction (including commissions)
is at least as favorable as it would have been if effected directly with a
market-maker that did not provide research or execution services. These
procedures include Mitchell Hutchins receiving multiple quotes from dealers
before executing the transaction on an agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Fund effects securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts and, conversely, research
services furnished to Mitchell Hutchins in connection with other funds or
accounts may be used in advising the Fund. Information and research received
from such brokers or dealers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contract.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are
25
<PAGE>
then averaged as to price and allocated between the Fund and such other
account(s) as to amount according to a formula deemed equitable to the Fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the underwriting
or selling group except pursuant to procedures adopted by the Fund's board of
directors pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the spread or commission paid in connection with such a
purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the date
of the public offering and that Mitchell Hutchins or any affiliate thereof not
participate in or benefit from the sale to the Fund.
PORTFOLIO TURNOVER. The Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
securities in the portfolio during the year. For the fiscal years ended March
31, 1995 and March 31, 1994, the Fund's portfolio turnover rate was 14.00% and
21.82%, respectively.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Fund
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges indicated in the table of
sales charges for Class A shares in the Prospectus. The sales charge payable on
the purchase of Class A shares of the Fund and Class A shares of such other
funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An 'eligible group of related Fund investors' can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
26
<PAGE>
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
or
(g) an employer (or a group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer).
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related Fund investors (as defined above) are permitted to purchase
Class A shares of the Fund among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A Fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the individual shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing system
on July 1, 1991 ('CDSC Funds'). The contingent deferred sales charge is waived
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 by officers, directors (trustees) or employees of the CDSC Funds,
Mitchell Hutchins or their affiliates (or their spouses and children under age
21). In addition, the contingent deferred sales charge will be reduced by 50%
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 with a net asset value at the time of purchase of at least $1
million. If Class B shares of a CDSC Fund purchased prior to July 1, 1991 are
exchanged for Class B shares of a Fund, any waiver or reduction of the
contingent deferred sales charge that applied to the Class B shares of the CDSC
Fund will apply to the Class B shares of the Fund acquired through the exchange.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Fund may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce the exchange fee and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or the Fund temporarily delays or ceases the sales
of its shares because it is unable to invest amounts effectively in accordance
with the Fund's investment objective, policies and restrictions.
If conditions exist which make cash payments undesirable, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset
27
<PAGE>
value. If payment is made in securities, a shareholder may incur brokerage
expenses in converting these securities into cash. The Fund has elected,
however, to be governed by Rule 18f-1 under the 1940 Act, under which the Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for one shareholder.
This election is irrevocable unless the SEC permits its withdrawal. The Fund may
suspend redemption privileges or postpone the date of payment during any period
(1) when the NYSE is closed or trading on the NYSE is restricted as determined
by the SEC, (2) when an emergency exists, as defined by the SEC, that makes it
not reasonably practicable for the Fund to dispose of securities owned by it or
fairly to determine the value of its assets or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of the Fund's portfolio at the time.
SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or
semi-annual plans, PaineWebber will arrange for redemption by the Fund of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Fund's systematic withdrawal plan. The payment generally is
mailed approximately five Business Days (defined under 'Valuation of Shares')
after the redemption date. Withdrawal payments should not be considered
dividends, but redemption proceeds, with the tax consequences described under
'Dividends and Taxes' in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends, a shareholder's investment may be correspondingly
reduced. A shareholder may change the amount of the systematic withdrawal or
terminate participation in the systematic withdrawal plan at any time without
charge or penalty by written instructions with signatures guaranteed to
PaineWebber or PFPC Inc. ('Transfer Agent'). Instructions to participate in the
plan, change the withdrawal amount or terminate participation in the plan will
not be effective until five days after written instructions with signatures
guaranteed are received by the Transfer Agent. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
investment executives, correspondent firms or the Transfer Agent at
1-800-647-1568.
REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
without a sales charge. Shareholders may exercise the reinstatement privilege by
notifying the Transfer Agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible, to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described in 'Dividends and Taxes' in the Prospectus.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
28
<PAGE>
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(ServiceMark)
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED)(RMA(REGISTERED))
Shares of the PaineWebber mutual funds (each a 'PW Fund' and, collectively,
the 'PW Funds') are available for purchase through the RMA Resource Accumulation
Plan ('Plan') by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ('RMA accountholders'). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under 'Valuation of Shares') after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of 'dollar cost averaging.' By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of low share prices. However, over time, dollar cost averaging
generally results in a lower average original investment cost than if an
investor invested a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT(REGISTERED).
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(Registered) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities
held in the account;
29
<PAGE>
o comprehensive preliminary 9-month and 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 seven RMA money market funds--RMA Money Market Portfolio,
RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California
Municipal Money Fund, RMA Connecticut Municipal Money Fund, RMA New
Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each
monthly market fund attempts to maintain a stable price per share of
$1.00, although there can be no assurance that it will be able to do so.
Investments in the money market funds are not insured or guaranteed by
the U.S. government;
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 expanded account protection to $25 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and
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 the Fund will automatically convert to Class A shares,
based on the relative net asset values per share of the two Classes, as of the
close of business on the first Business Day (as defined under 'Valuation of
Shares') of the month in which the sixth anniversary of the initial issuance of
such Class B shares of the Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (1) the date on which such Class B shares were issued, or
(2) for Class B shares obtained through an exchange, or a series of exchanges,
the date on which the original Class B shares were issued. For purposes of
conversion to Class A, Class B shares purchased through the reinvestment of
dividends and other distributions paid in respect of Class B shares will be held
in a separate sub-account. If the shareholder acquired Class B shares of a Fund
through an exchange of Class B shares of a CDSC Fund that were acquired prior to
July 1, 1991, the shareholder's holding period for purposes of conversion will
be determined based on the date the CDSC Fund shares were initially issued. Each
time any Class B shares in the shareholder's regular account (other than those
in the sub-account) convert to Class A, a pro rata portion of the Class B shares
in the sub-account will also convert to Class A. The portion will be determined
by the ratio that the shareholder's Class B shares converting to Class A bears
to the shareholder's total Class B shares not acquired through dividends and
other distributions.
30
<PAGE>
The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends and
other distributions paid on Class A and Class B shares will not result in
'preferential dividends' under the Internal Revenue Code and (2) the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the Class B shares
beyond six years from the date of purchase. Mitchell Hutchins has no reason to
believe that these conditions for the availability of the conversion feature
will not continue to be met.
VALUATION OF SHARES
The Fund determines the net asset value per share separately for each Class
of shares as of the close of regular trading (currently 4:00 p.m., Eastern time)
on the NYSE on each Business Day, which is defined as each Monday through Friday
when the NYSE is open. Currently, the NYSE is closed on the observance of the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on stock exchanges are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are generally valued on the exchange considered by
Mitchell Hutchins as the primary market. Securities traded in the OTC market and
listed on Nasdaq are valued at the last trade price listed on Nasdaq at 4:00
p.m., Eastern time; other OTC securities are valued at the last bid price
available prior to valuation. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Fund's board of directors.
Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of the Fund's net asset value on that day. If events
materially affecting the value of such investments or currency exchange rates
occur during such time period, the investments will be valued at their fair
value as determined in good faith by or under the direction of the Fund's board
of directors. The foreign currency exchange transactions of the Fund conducted
on a spot (that is, cash) basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. This rate, under
normal market conditions differs from the prevailing exchange rate in an amount
generally less than one-tenth of one percent due to the costs of converting from
one currency to another.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ('Performance Advertisements') represent past performance and is not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
31
<PAGE>
TOTAL RETURN CALCULATIONS. Average annual total return quotes
('Standardized Return') used in the Fund's Performance Advertisements are
calculated according to the following formula:
<TABLE>
<S> <C> <C> <C>
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to
purchase shares of a specified Class
T = average annual total return of shares of that
n = Class number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of that period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value for Class A shares, the
maximum 4.5% sales charge is deducted from the initial $1,000 payment and for
Class B and Class C shares the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). The Fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return of Class B shares for
periods of over six years will reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B
and Class C (formerly Class D) shares of the Fund for the periods indicated. All
returns for periods of more than one year are expressed as an average annual
return:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended March 31, 1995:
Standardized Return*.................... 5.24% 4.37% 9.34%
Non-Standardized Return................. 10.22% 9.37% 9.34%
Inception** to March 31, 1995:
Standardized Return*.................... 11.25% 19.91% 12.91%
Non-Standardized Return................. 11.84% 20.24% 12.91%
Five years ended March 31, 1995:
Standardized Return*.................... 19.25% NA NA
Non-Standardized Return................. 20.36% NA NA
</TABLE>
(Footnotes on next page)
32
<PAGE>
- ------------------
* 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 charge imposed on a redemption of shares held for the period.
** The inception dates for the Class A, Class B and Class C shares of the Fund
are as follows: May 22, 1986, July 1, 1991 and July 2, 1992, respectively.
OTHER INFORMATION. In Performance Advertisements, the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. for financial services funds ('Lipper'), CDA
Investment Technologies, Inc. ('CDA'), Wiesenberger Investment Companies Service
('Wiesenberger'), Investment Company Data Inc. ('ICD') or Morningstar Mutual
Funds ('Morningstar') or with the performance of recognized stock and other
indexes, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average, the Wilshire 5000 Index,
the Dow Jones Regional Bank Industry Group Index, the Dow Jones Financial Index
and changes in the Consumer Price Index as published by the U.S. Department of
Commerce. The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper, CDA, Wiesenberger, ICD or Morningstar. Performance
Advertisements also may refer to discussions of the Fund and comparative mutual
fund data and ratings reported in independent periodicals, including (but not
limited to) THE WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK,
FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE
WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in Performance
Advertisements may be in graphic form.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested by
being paid in additional Fund shares, any future income or capital appreciation
of the Fund would increase the value, not only of the original Fund investment,
but also of the additional Fund shares received through reinvestment. As a
result, the value of the Fund investment would increase more quickly than if
dividends or other distributions had been paid in cash.
The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(Registered) Money Markets. In comparing the
Fund's performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. Government and
offer fixed principal and fixed or variable rates of interest, and that bank CD
yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Fund are not insured or guaranteed by
the U.S. government and returns and net asset value will fluctuate. The
securities held by the Fund generally have longer maturities than most CDs and
may reflect interest rate fluctuations for longer term securities. An investment
in the Fund involves greater risks than an investment in either a money market
fund or a CD.
33
<PAGE>
TAXES
In order to continue to qualify for treatment as a regulated investment
company ('RIC') under the Internal Revenue Code, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
('Distribution Requirement') and must meet several additional requirements.
Among these requirements are the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options
or futures) derived with respect to its business of investing in securities or
those currencies ('Income Requirement'); (2) the Fund must derive less than 30%
of its gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three
months--options or futures (other than those on foreign currencies), or foreign
currencies (or options or futures thereon) that are not directly related to the
Fund's principal business of investing in securities (or options and futures
with respect to securities) ('Short-Short Limitation'); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or in additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by the Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record date
for any dividend or capital distribution, the shareholder will pay full price
for the shares and receive some portion of the price back as a taxable gain
distribution.
The Fund will be subject to a nondeductible 4% excise tax ('Excise Tax') to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
34
<PAGE>
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Fund would be subject.
The Fund may invest in the stock of 'passive foreign investment companies'
('PFICs') if such stock is denominated in U.S. dollars and otherwise is a
permissible investment. A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any 'excess distribution' received
on the stock of a PFIC or of any gain on disposition of such stock (collectively
'PFIC income'), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a 'qualified
electing fund,' then in lieu of the foregoing tax and interest obligation, the
Fund will be required to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss), even if
they are not distributed to the Fund; those amounts likely would have to be
distributed to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax. In most instances it will be very difficult, if not impossible, to
make this election because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to 'mark-to-market' their stock in certain PFICs.
'Marking-to-market,' in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the character and timing of recognition of the gains and
losses the Fund realizes in connection therewith. Income from the disposition of
foreign currencies, and income from transactions in options and futures
contracts derived by the Fund with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement. However, income from the disposition of options and futures
contracts (other than those on foreign currencies) will be subject to the
Short-Short Limitation if they are held for less than three months. Income from
the disposition of foreign currencies, and options and futures on foreign
currencies, that are not directly related to the Fund's principal business of
investing in securities (or options and futures with respect to securities) also
will be subject to the Short-Short Limitation if they are held for less than
three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek
35
<PAGE>
to qualify for this treatment for its hedging transactions. To the extent the
Fund does not qualify for this treatment, it may be forced to defer the closing
out of certain options and futures contracts beyond the time when it otherwise
would be advantageous to do so, in order for the Fund to continue to qualify as
a RIC.
OTHER INFORMATION
Effective December 14, 1995 the name of the Fund was changed from
'PaineWebber Regional Financial Growth Fund Inc.' to its current name. Prior to
November 10, 1995, the Fund's Class C shares were known as 'Class D' shares.
Prior to July 1, 1991, the Fund's name was 'PaineWebber Classic Regional
Financial Fund Inc.' and, prior to April 1, 1990, the Fund operated as a
closed-end investment company under the name of 'Regional Financial Shares
Investment Fund Inc.'
The Fund is authorized to issue Class Y shares in addition to Class A,
Class B and Class C shares. Class Y shares, if issued, would bear no service or
distribution fees, would be sold with no initial sales charge and would be
redeemable at net asset value without the imposition of a contingent deferred
sales charge.
CLASS-SPECIFIC EXPENSES. The Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those borne
by Class A or Class C shares. The higher fee is imposed due to the higher costs
incurred by the Transfer Agent in tracking shares subject to a contingent
deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the applicable
charge. Moreover, the tracking and calculations required by the automatic
conversion feature of the Class B shares will cause the Transfer Agent to incur
additional costs. Although the transfer agency fee will differ on a per account
basis as stated above, the specific extent to which the transfer agency fees
will differ between the Classes as a percentage of net assets is not certain,
because the fee as a percentage of net assets will be affected by the number of
shareholder accounts in each Class and the relative amounts of net assets in
each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C., 20036-5891, counsel to the Fund, has passed upon the legality
of the shares offered by the Prospectus. Kirkpatrick & Lockhart LLP also acts as
counsel to PaineWebber and Mitchell Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended March
31, 1995 and its Semi-Annual Report to Shareholders for the six months ended
September 30, 1995 are separate documents supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
(with respect to the Annual Report to Shareholders) report of independent
auditors appearing therein are incorporated herein by this reference.
36
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which made the long term risks appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future; Baa. Bonds which are rated Baa are
considered as medium grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through Baa in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong. AA. Debt rated AA has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree. A. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. BBB. Debt rated BBB is
regarded as having adequate capacity to pay interest and repay principal.
Whereas it normally exhibits protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in higher
rated categories.
Plus (+) or Minus (-): The ratings from 'AA' to 'BBB' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
37
<PAGE>
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38
<PAGE>
[This page intentionally left blank]
39
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging Strategies............................. 7
Directors and Officers......................... 14
Investment Advisory and Distribution
Arrangements................................. 19
Portfolio Transactions......................... 24
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 26
Conversion of Class B Shares................... 30
Valuation of Shares............................ 31
Performance Information........................ 31
Taxes.......................................... 34
Other Information.............................. 36
Financial Statements........................... 36
Appendix....................................... 37
</TABLE>
PAINEWEBBER
FINANCIAL SERVICES
GROWTH FUND INC.
- ------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
, 1995
(Copyright) 1995 PaineWebber Incorporated
Recycled Paper
<PAGE>
PART C. OTHER INFORMATION
---------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included in Part A of this Registration Statement:
Unaudited Financial Highlights for one Class A, B
and C share of the Fund for the six months ended
September 30, 1995.
Financial Highlights for one Class A share of the
Fund for each of the eight years in the period
ended March 31, 1995 and for the period May 22,
1986 (commencement of operations) to March 31,
1987.
Financial Highlights for one Class B share of the
Fund for each of the three years in the period
ended March 31, 1995 and for the period July 1,
1991 (commencement of offering) to March 31, 1992.
Financial Highlights for one Class D share of the
Fund for each of the two years in the period ended
March 31, 1995 and for the period July 2, 1992
(commencement of offering) to March 31, 1993.
Included in part B of this Registration Statement through incorporation by
reference from the Semi-Annual Report to Shareholders (previously filed
with the Securities and Exchange Commission through EDGAR on December 4,
1995, Accession No. 0000950130-95-002620:
Portfolio of Investments at September 30, 1995
(unaudited)
Statement of Assets and Liabilities at September
30, 1995 (unaudited)
Statement of Operations for the six months ended
September 30, 1995 (unaudited)
Statement of Changes in Net Assets for the six
months ended September 30, 1995 and for the year
ended March 31, 1995 (unaudited)
Notes to Financial Statements (unaudited)
C-1
<PAGE>
Financial Highlights for one Class A, B and C
share of the Fund for the six months ended
September 30, 1995 (unaudited).
Included in part B of this Registration Statement through incorporation by
reference from the Annual Report to Shareholders (previously filed with
the Securities and Exchange Commission through EDGAR on May 26, 1995,
Accession No. 0000789576-95-000001):
Portfolio of Investments at March 31, 1995
Statement of Assets and Liabilities at March 31,
1995
Statement of Operations for the year ended March
31, 1995
Statement of Changes in Net Assets for each of
the two years in the period ended March 31, 1995
Notes to Financial Statements
Financial Highlights for one Class A share of
the Fund for each of the five years in the
period ended March 31, 1995.
Financial Highlights for one Class B share of
the Fund for each of the three years in the
period ended March 31, 1995 and for the period
July 1, 1991 (commencement of offering) to March
31, 1992.
Financial Highlights for one Class D share of
the Fund for each of the two years in the period
ended March 31, 1995 and for the period July 2,
1992 (commencement of offering) to March 31,
1993.
Report of Ernst & Young LLP, Independent
Auditors, dated May 19, 1995.
(b) Exhibits:
(1) (a) Amended and Restated Articles of
Incorporation 2/
(b) Articles of amendment effective July 1,
1995 (filed herewith)
C-2
<PAGE>
(c) Articles of Amendment effective June 15,
1995 (filed herewith)
(d) Articles of Amendment effective November
10, 1995 (filed herewith)
(2) (a) By-Laws as amended 2/
(b) Certificate of Amendment dated September
28, 1994 to By-Laws 11/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of
Registrant's shares of common stock 9/
(5) Investment Advisory and Administration
Contract 3/
(6) (a) Distribution Contract with respect to
Class A shares 10/
(b) Distribution Contract with respect to
Class B shares 10/
(c) Distribution Contract with respect to
Class C shares (filed herewith)
(d) Exclusive Dealer Agreement with respect
to Class A shares 10/
(e) Exclusive Dealer Agreement with respect
to Class B shares 10/
(f) Exclusive Dealer Agreement with respect
to Class C shares (filed herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
(9) (a) Transfer Agency and Service Contract 5
(b) Service Contract 3/
(10) (a) Opinion and consent of Kirkpatrick &
Lockhart LLP, counsel to the Registrant,
with respect to Class A and B shares 5/
(b) Opinion and consent of Kirkpatrick &
Lockhart LLP, counsel to the registrant,
with respect to Class C shares 7/
(11) Other opinions, appraisals, rulings and
consents: Independent Auditors' Consent (filed
herewith)
(12) Financial statements omitted from prospectus-
none
(13) Letter of investment intent 1/
(14) Prototype Retirement Plan 6/
(15) (a) Plan of Distribution pursuant to Rule
12b-1 with respect to Class A shares 7/
C-3
<PAGE>
(b) Plan of Distribution pursuant to Rule
12b-1 with respect to Class B shares 7/
(c) Plan of Distribution pursuant to Rule
12b-1 with respect to Class C shares 8/
(16) (a) Schedule for Computation of Performance
Quotations with respect to Class A
shares 5/
(b) Schedule for Computation of Performance
Quotations with respect to Class B
shares 7/
(c) Schedule for Computation of Performance
Quotations with respect to Class C
shares 8/
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 11/
1/ Incorporated by reference from Pre-Effective Amendment
No. 2 to the registration statement on Form N-2, SEC
File No. 33-3317, filed May 14, 1986.
2/ Incorporated by reference from Pre-Effective Amendment
No. 1 to the registration statement on Form N-1A, SEC
File No. 33-33231, filed April 11, 1990.
3/ Incorporated by reference from Post-Effective
Amendment No. 1 to the registration statement on Form
N-1A, SEC File No. 33-33231, filed July 27, 1990.
4/ Incorporated by reference from Post-Effective
Amendment No. 2 to the registration statement on Form
N-1A, SEC File No. 33-33231, filed May 1, 1991.
5/ Incorporated by reference from Post-Effective
Amendment No. 3 to the registration statement on Form
N-1A, SEC File No. 33-33231, filed June 21, 1991.
6/ Incorporated by reference from Post-Effective
Amendment No. 20 to the registration statement of
PaineWebber Managed Investments Trust, SEC File No. 2-
91362, filed April 1, 1992.
7/ Incorporated by reference from Post-Effective
Amendment No. 6 to the registration statement on Form
N-1A, SEC File No. 33-33231, filed June 24, 1992.
8/ Incorporated by reference from Post-Effective
Amendment No. 8 to the registration statement on Form
N-1A, SEC File No. 33-33231, filed July 29, 1993.
C-4
<PAGE>
9/ Incorporated by reference from Articles Sixth,
Seventh, Eighth, Eleventh and Twelfth of the
Registrant's Articles of Incorporation, as amended
July 1, 1991, June 15, 1992 and November 10, 1995, and
from Articles II, VIII, X, XI, and XII of the
Registrant's By-Laws, as amended September 28, 1994.
10/ Incorporated by reference from Post-Effective
Amendment No. 9 to the registration statement on Form
N-1A, SEC File No. 33-33231, filed July 22, 1994.
11/ Incorporated by reference from Post-Effective
Amendment No. 11 to the registration statement on Form
N-1A, SEC File No. 33-33231, filed July 28, 1995.
Item 25. Persons Controlled by or under Common Control with
Registrant
--------------------------------------------------
None
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Holders
Title of Class as of October 23, 1995
------------- ------------------------
Shares of Common Stock,
par value $0.001 per share
--------------------------
PaineWebber Regional
Financial Growth Fund Inc.
Class A Shares 5,356
Class B Shares 2,387
Class D Shares 715
Item 27. Indemnification
---------------
Section 10.1 of ARTICLE TENTH of the Amended and Restated
Articles of Incorporation provides that to the maximum extent permitted by
the law, no director or officer of the Registrant shall be liable to the
Registrant or its stockholders for money damages.
Section 10.2 of ARTICLE TENTH further provides that to the
maximum extent permitted by law, the Registrant shall indemnify and
advance expenses as provided in the By-Laws to its present and past
directors, officers, employees and agents, and persons who are serving or
C-5
<PAGE>
have served at the request of the Registrant as a director, officer,
employee or agent in similar capacities for other entities.
Section 10.3 of ARTICLE TENTH further provides that the
Registrant may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Registrant, or is
or was serving at the request of the Registrant as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity or arising out of his
or her status as such, whether or not the Registrant would have the power
to indemnify him or her against such liability.
Additionally, Section 10.4 of ARTICLE TENTH provides that any
repeal or modification of ARTICLE TENTH or adoption or modification of any
other provision of the Articles or By-Laws inconsistent with ARTICLE TENTH
shall be prospective only, to the extent that such repeal or modification
would, if applied retroactively, adversely affect any limitation of
liability of any director or officer of the Registrant or indemnification
to any person covered by ARTICLE TENTH with respect to any act or omission
which occurred prior to such repeal, modification or adoption.
Section 9.01 of the By-Laws sets forth the procedures by which
the Registrant will indemnify its directors, officers, employees and
agents. Section 9.02 of Article IX of the By-Laws further provides that
the Registrant may purchase and maintain insurance or other sources of
reimbursement to the extent permitted by law on behalf of any person who
is or was a director, officer, employee or agent of the Registrant, or is
or was serving at the request of the Registrant as a director, officer,
employee, or agent of a corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and
incurred by him or her in or arising out of his or her position.
Section 9 of the Investment Advisory and Administration
Contract between Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") and the Registrant provides that Mitchell Hutchins shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by any series or the Registrant in connection with the matters to
which the Contract relates, except for a loss resulting from the willful
misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the
performance of its duties or from its reckless disregard of its
obligations and duties under the Contract. Section 9 further provides
that any person, even though also an officer, director, employee or agent
of Mitchell Hutchins, who may be or become an officer, director or
employee of the Registrant shall be deemed, when rendering services to any
series or the Registrant or acting with respect to any business of such
series or the Registrant, to be rendering such service to or acting solely
for any series or the Registrant and not as an officer, director,
employee, or agent or one under the control or direction of Mitchell
Hutchins even though paid by it.
C-6
<PAGE>
Section 9 of each Distribution Contract provides that the
Registrant will indemnify Mitchell Hutchins and its officers, directors
and controlling persons against all liabilities arising from any alleged
untrue statement of material fact in the Registration Statement or from
any alleged omission to state in the Registration Statement a material
fact required to be stated in it or necessary to make the statements in
it, in light of the circumstances under which they were made, not
misleading, except insofar as liability arises from untrue statements or
omissions made in reliance upon and in conformity with information
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").
Section 6 of the Service Contract provides that PaineWebber
shall be indemnified and held harmless by the Registrant against all
liabilities, except those arising out of bad faith, gross negligence,
willful misfeasance or reckless disregard of its duties under the Service
Contract.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be provided to directors, officers
and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding
or payment pursuant to any insurance policy) is asserted against the
Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
C-7
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered
investment adviser and is a wholly owned subsidiary of PaineWebber which
is, in turn, a wholly owned subsidiary of Paine Webber Group Inc.
Mitchell Hutchins is primarily engaged in the investment advisory
business. Information as to the officers and directors of Mitchell
Hutchins is included in its Form ADV filed on February 22, 1995, with the
Securities and Exchange Commission (registration number 801-13219) and is
incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
a) Mitchell Hutchins serves as principal underwriter and/or
investment adviser for the following investment companies:
ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
MITCHELL HUTCHINS/KIDDER, PEABODY INSTITUTIONAL SERIES
TRUST
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST II
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST III
PAINEWEBBER AMERICA FUND
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER PREMIER HIGH INCOME FUND TRUST INC.
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
PAINEWEBBER PREMIER TAX-FREE INCOME FUND, INC.
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
PAINEWEBBER SECURITIES TRUST
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the principal underwriter for the
Registrant. PaineWebber acts as exclusive dealer for the shares of the
Registrant. The directors and officers of Mitchell Hutchins, their
principal business addresses, and their positions and offices with
Mitchell Hutchins are identified in its Form ADV filed February 22, 1995
with the Securities and Exchange Commission (registration number 801-
13219). The directors and officers of PaineWebber, their principal
C-8
<PAGE>
business addresses, and their positions and offices with PaineWebber are
identified in its Form ADV filed March 31, 1995 with the Securities and
Exchange Commission (registration number 801-7163). The foregoing
information is hereby incorporated herein by reference. The information
set forth below is furnished for those directors and officers of Mitchell
Hutchins or PaineWebber who also serve as directors or officers of the
Registrant:
<TABLE>
<CAPTION>
Name and Positions and Offices
Principal Business Positions and Offices With Underwriter or
Address With Registrant Exclusive Dealer
------------------ ---------------------- ----------------------
<S> <C> <C>
Margo N. Alexander President President, Chief Executive
1285 Avenue of the Americas Officer and a Director of
New York, NY 10019 Mitchell Hutchins
Teresa M. Boyle Vice President First Vice President and Manager
1285 Avenue of the Americas - Advisory Administration of
New York, NY 10019 Mitchell Hutchins
Joan L. Cohen Vice President Vice President and Attorney of
1285 Avenue of the Americas Mitchell Hutchins
New York, NY 10019
Karen Finkel Vice President First Vice President and
1285 Avenue of the Americas Portfolio Manager of Mitchell
New York, NY 10019 Hutchins
C. William Maher Vice President and Assistant First Vice President and Senior
1285 Avenue of the Americas Treasurer Manager of Fund Administration
New York, NY 10019 Division of Mitchell Hutchins
Ann E. Moran Vice President and Assistant Vice President of Mitchell
1285 Avenue of the Americas Treasurer Hutchins
New York, NY 10019
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy
1285 Avenue of the Americas General Counsel of Mitchell
New York, NY 10019 Hutchins
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
Name and Positions and Offices
Principal Business Positions and Offices With Underwriter or
Address With Registrant Exclusive Dealer
------------------ ---------------------- ----------------------
<S> <C> <C>
Victoria E. Schonfeld Vice President Managing Director and General
1285 Avenue of the Americas Counsel of Mitchell Hutchins
New York, NY 10019
Paul H. Schubert Vice President and Assistant First Vice President of Mitchell
1285 Avenue of the Americas Treasurer Hutchins
New York, NY 10019
Julian F. Sluyters Vice President and Treasurer Senior Vice President and
1285 Avenue of the Americas Director of Mutual Fund Finance
New York, NY 10019 Division of
Mitchell Hutchins
Mark Tincher Vice President Managing Director and Chief
1285 Avenue of the Americas Investment Officer - U.S. Equity
New York, NY 10019 Investments of Mitchell Hutchins
Gregory K. Todd Vice President and Assistant First Vice President and
1285 Avenue of the Americas Secretary Associate General Counsel of
New York, NY 10019 Mitchell Hutchins
Keith A. Weller Vice President and Assistant First Vice President and
1285 Avenue of the Americas Secretary Associate General Counsel of
New York, NY 10019 Mitchell Hutchins
</TABLE>
(c) None
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained
in the physical possession of Mitchell Hutchins, 1285 Avenue of the
Americas, New York, New York 10019. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession
of Registrant's transfer agent and custodian.
C-10
<PAGE>
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, PaineWebber Regional
Financial Growth Fund Inc., has duly caused this Post-Effective Amendment
to be signed on its behalf by the undersigned, thereunto duly authorized,
in this City of New York and State of New York, on the 7th day of
December, 1995.
PAINEWEBBER REGIONAL FINANCIAL
GROWTH FUND INC.
/s/ Gregory K. Todd
By:__________________________________
Gregory K. Todd
Vice President and
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President December 7, 1995
________________________________________ (Chief Executive Officer)
Margo N. Alexander*
/s/ E. Garrett Bewkes, Jr. Director and Chairman of the Board of December 7, 1995
_______________________________________ Directors
E. Garrett Bewkes, Jr.**
/s/ Meyer Feldberg Director December 7, 1995
________________________________________
Meyer Feldberg***
/s/ George W. Gowen Director December 7, 1995
________________________________________
George W. Gowen****
/s/ Frederic V. Malek Director December 7, 1995
________________________________________
Frederic V. Malek****
/s/ Judith Davidson Moyers Director December 7, 1995
________________________________________
Judith Davidson Moyers****
/s/ Julian F. Sluyters Vice President and Treasurer (Principal December 7, 1995
________________________________________ Financial and Accounting Officer)
Julian F. Sluyters
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated May 8, 1995 and incorporated by reference from Post-
Effective Amendment No. 34 to the registration statement of PaineWebber
America Fund, SEC File No. 2-78626, filed May 10, 1995.
** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated January 3, 1994 and incorporated by reference from Post-
Effective Amendment No. 20 to the registration statement of PaineWebber
Master Series, Inc., SEC File 33-2524, filed February 28, 1994.
*** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated December 27, 1990 and incorporated by reference from Post-
Effective Amendment No. 2 to the registration statement of PaineWebber
Regional Financial Growth Fund Inc., SEC File No. 33-33231, filed May 1,
1991.
**** Signatures affixed by Elinor W. Gammon pursuant to powers of
attorney dated April 30, 1990 and incorporated by reference from Post-
Effective Amendment No. 1 to the registration statement of PaineWebber
Classic Regional Financial Fund Inc., SEC File No. 33-33231, filed July
27, 1990.
<PAGE>
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
EXHIBIT INDEX
-------------
Exhibit
Number
-------
(1) (a) Amended and Restated Articles of Incorporation 2/
(b) Articles of Amendment effective July 1, 1991 (filed
herewith)
(c) Articles of Amendment effective June 15, 1992 (filed
herewith)
(c) Articles of Amendment effective November 10, 1995 (filed
herewith)
(2) (a) By-Laws as amended 2/
(b) Certificates of Amendment dated September 28, 1994 to By-
Laws 11/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's
shares of common stock 9/
(5) Investment Advisory and Administration Contract 3/
(6) (a) Distribution Contract with respect to Class A shares 10/
(b) Distribution Contract with respect to Class B shares 10/
(c) Distribution Contract with respect to Class C shares
(filed herewith)
(d) Exclusive Dealer Agreement with respect to Class A shares
10/
(e) Exclusive Dealer Agreement with respect to Class B shares
10/
(f) Exclusive Dealer Agreement with respect to Class C shares
(filed herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
(9) (a) Transfer Agency and Service Contract 5/
(b) Service Contract 3/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant, with respect to Class A and B
shares 5/
(b) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the registrant, with respect to Class C shares
7/
(11) Other opinions, appraisals, rulings and consents: Independent
Auditors' Consent (filed herewith)
(12) Financial statements omitted from prospectus-none
(13) Letter of investment intent 1/
(14) Prototype Retirement Plan 6/
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class A shares 7/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class B shares 7/
(c) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class C shares 8/
<PAGE>
(16) (a) Schedule for Computation of Performance Quotations with
respect to Class A shares 5/
(b) Schedule for Computation of Performance Quotations with
respect to Class B shares 7/
(c) Schedule for Computation of Performance Quotations with
respect to Class C shares 8/
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 11/
______________________
1/ Incorporated by reference from Pre-Effective Amendment No. 2 to
the registration statement on Form N-2, SEC File No. 33-3317,
filed May 14, 1986.
2/ Incorporated by reference from Pre-Effective Amendment No. 1 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed April 11, 1990.
3/ Incorporated by reference from Post-Effective Amendment No. 1 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed July 27, 1990.
4/ Incorporated by reference from Post-Effective Amendment No. 2 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed May 1, 1991.
5/ Incorporated by reference from Post-Effective Amendment No. 3 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed June 21, 1991.
6/ Incorporated by reference from Post-Effective Amendment No. 20 to
the registration statement of PaineWebber Managed Investments
Trust, SEC File No. 2-91362, filed April 1, 1992.
7/ Incorporated by reference from Post-Effective Amendment No. 6 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed June 24, 1992.
8/ Incorporated by reference from Post-Effective Amendment No. 8 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed July 29, 1993.
9/ Incorporated by reference from Articles Sixth, Seventh, Eighth,
Eleventh, and Twelfth of the Registrant's Articles of
Incorporation, as amended July 1, 1991, June 15, 1992 and
November 10, 1995, and from Articles II, VIII, X, XI and XII of
the Registrant's By-Laws, as amended September 28, 1994.
10/ Incorporated by reference from Post-Effective Amendment No. 9 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed July 22, 1994.
11/ Incorporated by reference from Post-Effective Amendment No. 11 to
the registration statement on Form N-1A, SEC File No. 33-33231,
filed July 28, 1995.
<PAGE>
EXHIBIT 1(b)
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
PAINEWEBBER CLASSIC REGIONAL FINANCIAL FUND INC.
PAINEWEBBER CLASSIC REGIONAL FINANCIAL FUND INC., a Maryland
corporation having its principal office in Maryland in the City of
Baltimore (hereinafter "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
I. Article SECOND and Sections 5.1, 5.4, 5.6, 5.7 and 5.8 of Article
FIFTH of the Corporation's Articles of Incorporation are amended effective
July 1, 1991 by striking the present article, or section as appropriate,
in its entirety and substituting therefor the following:
SECOND: Name.
The name of the corporation is PaineWebber Regional
Financial Growth Fund Inc. ("Corporation").
FIFTH: Capital Stock.
Section 5.1. Authority to Issue. The total number of
shares of capital stock which the Corporation shall have
authority to issue is three hundred million (300,000,000) shares,
$.001 par value per share, ("Shares") having an aggregate par
value of $300,000. The Shares may be issued by the Board of
Directors in such separate and distinct series ("Series") and
classes of Series ("Classes") as the Board of Directors shall
from time to time create and establish. The Board of Directors
shall have full power and authority, in its sole discretion, to
create and establish Series and Classes having such preferences,
rights, voting powers, terms of Conversion, restrictions,
limitations on dividends, qualifications, and terms and
conditions of redemption as shall be fixed and determined from
time to time by resolution or resolutions providing for the
issuance of such Shares adopted by the Board of Directors. In
event of establishment of Classes, each Class of a Series shall
represent interests in the assets of that Series and have
identical voting, dividend, liquidation and other rights and the
same terms and conditions as any other Class of that Series,
except as provided in these Articles of Incorporation (provided
that additional terms of conversion may be adopted in accordance
with Section 5.8(3)(e) of these Articles) and except that
expenses allocated to the Class of a Series may be borne solely
by such Class as shall be determined by the Board of Directors
and a Class of a Series may have exclusive voting rights with
respect to matters affecting only that Class. Expenses related
<PAGE>
to the distribution of, and other identified expenses that should
properly be allocated to, the Shares of a particular Class or
Series may be charged to and borne solely by such Class or Series
and the bearing of expenses solely by a Class or Series may be
appropriately reflected (in a manner determined by the Board of
Directors) and cause differences in the net asset value
attributable to, and the dividend, redemption and liquidation
rights of, the Shares of each Class or Series. In addition, the
Board of Directors is hereby expressly granted authority to
increase or decrease the number of Shares of any Series or Class,
but the number of Shares of any Series or Class shall not be
decreased by the Board of Directors below the number of Shares
thereof then outstanding.
The Board of Directors of the Corporation is authorized
from time to time to classify or to reclassify, as the case may
be, any unissued Shares of the Corporation in separate Series or
Classes. The Shares of said Series or Classes shall have such
preferences, rights, voting powers, terms of conversion,
restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption as shall be fixed and
determined from time to time by the Board of Directors. The
Corporation may hold as treasury shares, reissue for such
consideration and on such terms as the Board of Directors may
determine, or cancel, at their discretion from time to time, any
Shares reacquired by the Corporation. No holder of any of the
Shares shall be entitled as of right to subscribe for, purchase,
or otherwise acquire any Shares of the Corporation which the
Corporation proposes to issue or reissue.
The Corporation shall have authority to issue any
additional Shares hereafter authorized and any Shares redeemed or
repurchased by the Corporation. All Shares of any Series or
Class when properly issued in accordance with these Articles of
Incorporation shall be fully paid and nonassessable.
Section 5.4. Net Asset Value Per Share. The net asset
value of each Share of the Corporation, or each Series or Class,
shall be the quotient obtained by dividing the value of the net
assets of the Corporation, or if applicable of the Series (being
the value of the assets of the Corporation or of the particular
Series less its actual and accrued liabilities exclusive of
capital stock and surplus), by the total number of outstanding
Shares of the Corporation, or of the Series. Such determination
may be made on a Series-by-Series basis or made or adjusted on a
Class-by-Class basis, as appropriate and shall include any
expenses allocated to a specific Series or Class thereof. The
Board of Directors shall have the power and duty to determine
from time to time the net asset value per Share at such times and
by such methods as it shall determine, subject to any
restrictions or requirements under the Investment Company Act of
1940, as amended, and the rules, regulations and interpretations
- 2 -
<PAGE>
thereof promulgated or issued by the Securities and Exchange
Commission or insofar as permitted by any order of the Securities
and Exchange Commission applicable to the Corporation. The Board
of Directors may delegate such power and duty to any one or more
of the directors and officers of the Corporation, the
Corporation's administrator, investment adviser, custodian or
depository of the Corporation's assets, or another agent of the
Corporation.
Section 5.6. Assets and Liabilities of Series. All
consideration received by the Corporation for the issuance or
sale of Shares of a particular Series, together with all assets
in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof, including any
proceeds derived from the sale, exchange, or liquidation of such
assets, and any funds or payments derived from any reinvestment
of such proceeds in whatever form, shall be referred to as
"assets belonging to" that Series. In addition, any assets,
income, earnings, profits, and proceeds thereof, funds, or
payments which are not readily identifiable as belonging to any
particular Series shall be allocated by the Board of Directors
between and among one or more of the Series in such manner as the
Board of Directors, in its sole discretion, deems fair and
equitable. Each such allocation shall be conclusive and binding
upon the Stockholders of all Series for all purposes, and shall
be referred to as assets belonging to that Series. The assets
belonging to a particular Series shall be so recorded upon the
books of the Corporation. The assets belonging to each particular
Series shall be charged with the liabilities of that Series, and
all expenses, costs, charges, and reserves attributable to that
Series or Class thereof shall be borne by that Series or Class.
Any general liabilities, expenses, costs, charges, or reserves of
the Corporation which are not readily identifiable as belonging
to any particular Series or Class shall be allocated and charged
by the Board of Directors between or among any one or more of the
Series or Classes in such a manner as the Board of Directors in
its sole discretion deems fair and equitable. Each such
allocation shall be conclusive and binding upon the Stockholders
of all Series or Classes for all purposes.
Section 5.7. Dividends. Dividends and distributions on
Shares with respect to each Series or Class may be declared and
paid with such frequency and in such form and amount as the Board
of Directors may from time to time determine. Dividends may be
declared daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Board
of Directors may determine.
All dividends and distributions of Shares of a particular
Series shall be distributed pro rata to the holders of that
Series in proportion to the number of Shares of that Series held
by such holders at the date and time of record established for
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<PAGE>
the payment of such dividends or distributions, except that such
dividends and distributions shall appropriately reflect expenses
allocated to a particular Class of such Series.
The Board of Directors shall have the power, in its sole
discretion, to distribute in any fiscal year as dividends
(including dividends designated in whole or in part as capital
gain distributions) amounts sufficient, in the opinion of the
Board of Directors, to enable the Corporation, or where
applicable each Series of the Corporation, to qualify as a
regulated investment company under the Internal Revenue Code of
1986, as amended, or any successor or comparable statute thereto,
and regulations promulgated thereunder, and to avoid liability of
the Corporation, or each Series of the Corporation, for federal
income tax in respect of that year. The foregoing shall not
limit the authority of the Board of Directors to make
distributions greater than or less than the amount necessary to
qualify as a regulated investment company and to avoid liability
of the Corporation, or any Series of the Corporation, for such
tax.
Dividends and distributions may be paid in cash, property
or Shares, or a combination thereof, as determined by the Board
of Directors or pursuant to any program that the Board of
Directors may have in effect at the time. Any such dividend or
distribution paid in Shares will be paid at the current net asset
value thereof as defined in Section 5.4.
Section 5.8. Classes of Stock. One hundred and fifty
million (150,000,000) Shares of the Corporation are hereby
designated Class B Common Stock. The Shares of the Corporation
not designated as Class B Common Stock, including all such Shares
previously issued and outstanding as of the effective date of
these amendments, are hereby designated Class A Common Stock. The
Class A Common Stock and Class B Common Stock of each Series
represent interests in the same investment portfolio of such
Series. Shares of the Class B Common Stock shall be subject to
all provisions of Article FIFTH hereof relating to stock of the
Corporation generally and shall have the same preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of redemption as Shares of the Class A Common Stock,
except as follows:
(1) The dividends and distributions of investment
income and capital gains with respect to the Class A
Common Stock and Class B Common Stock shall be in such
amount as may be declared from time to time by the Board
of Directors, and such dividends and distributions may
vary between the Classes to reflect differing allocations
of the expenses of each Series of the Corporation between
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<PAGE>
the Classes to such extent and for such purposes as the
Board of Directors may deem appropriate.
(2) The proceeds of the redemption of a Share of
the Class B Common Stock (including a fractional share)
shall be reduced by the amount of any applicable
contingent deferred sales charge payable on such
redemption to the distributor of the Class B Common Stock
pursuant to the terms of the issuance of the Shares (to
the extent consistent with the Investment Company Act of
1940, as amended, or regulations or exemptions
thereunder) and the Corporation shall promptly pay to
such distributor the amount of such contingent deferred
sales charge.
(3)(a) Each Share of the Class B Common Stock,
other than a Share purchased through the reinvestment of
a dividend or a distribution with respect to the Class B
Common Stock, shall be converted automatically, and
without any action or choice on the part of the holder
thereof, into Shares of the Class A Common Stock, at the
relative net asset value of each Class, at the time of
the calculation of the net asset value of such Class of
Shares on the date that is the first Business Day (as
defined in such Series' prospectus and/or statement of
additional information) of the month in which the sixth
anniversary of the issuance of such Shares of the Class B
Common Stock occurs (which, for the purpose of
calculating the holding period required for conversion,
shall mean (i) the date on which the issuance of such
Class B Shares occurred or (ii) for Class B Shares
obtained through an exchange, the date on which the
issuance of the Class B Shares of an eligible PaineWebber
fund occurred, if such Shares were exchanged directly, or
through a series of exchanges, for the Corporation's
Class B Shares (the "Conversion Date")). The Board of
Directors shall adopt a resolution setting forth a list
of eligible PaineWebber funds for purposes of this
paragraph.
(b) Each Share of the Class B Common Stock
purchased through the reinvestment of a dividend or a
distribution with respect to the Class B Common Stock and
the dividends and distributions on such Shares shall be
segregated in a separate sub-account on the stock records
of the Corporation for each of the holders of record
thereof. On any Conversion Date, a number of the Shares
held in the sub-account of the holder of record of the
Share or Shares being converted, calculated in accordance
with the next following sentence, shall be converted
automatically, and without any action or choice on the
part of the holder thereof, into Shares of the Class A
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<PAGE>
Common Stock. The number of Shares in the holder's sub-
account so converted shall bear the same relation to the
total number of Shares maintained in the sub-account on
the Conversion Date as the number of Shares of the holder
converted on the Conversion Date pursuant to paragraph
(3)(a) hereof bears to the total number of Shares of the
Class B Common Stock of the holder on the Conversion Date
not purchased through the automatic reinvestment of
dividends or distributions with respect to the Class B
Common Stock.
(c) The number of Shares of the Class A Common
Stock into which a Share of the Class B Common Stock is
converted pursuant to Paragraphs (3)(a) and (3)(b) hereof
shall equal the number (including for this purpose
fractions of a Share) obtained by dividing the net asset
value per Share of the Class B Common Stock for purposes
of sales and redemptions thereof at the time of the
calculation of the net asset value on the Conversion Date
by the net asset value per Share of the Class A Common
Stock for purposes of sales and redemptions thereof at
the time of the calculation of the net asset value on the
Conversion Date.
(d) On the Conversion Date, the Shares of the
Class B Common Stock converted into Shares of the Class A
Common Stock will cease to accrue dividends and will no
longer be outstanding and the rights of the holders
thereof will cease (except the right to receive declared
but unpaid dividends to the Conversion Date).
(e) The Board of Directors shall have full power
and authority to adopt such other terms and conditions
concerning the conversion of the Shares of the Class B
Common Stock to Shares of the Class A Common Stock as
they deem appropriate; provided such terms and conditions
are not inconsistent with the terms contained in this
Section 5.8 and subject to any restrictions or
requirements under the Investment Company Act of 1940, as
amended, and the rules, regulations and interpretations
thereof promulgated or issued by the Securities and
Exchange Commission or any conditions or limitations
contained in an order issued by the Securities and
Exchange Commission applicable to the Corporation.
II. This amendment of the Corporation's Articles of Incorporation was
advised by the Corporation's board of directors on September 18, 1990 and
approved by the stockholders on December 20, 1990.
IN WITNESS WHEREOF, PAINEWEBBER CLASSIC REGIONAL FINANCIAL FUND
INC. has caused these presents to be signed in its name and on its behalf
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<PAGE>
by a Vice President of the Corporation and attested to by the
Corporation's Secretary on this 25th day of June, 1991.
PAINEWEBBER CLASSIC REGIONAL FINANCIAL
FUND INC.
/s/ Donald P. Spencer
_________________________________
By: Donald P. Spencer
Vice President
Attest:
/s/ Dianne E. O'Donnell
_________________________
Dianne E. O'Donnell
Secretary
THE UNDERSIGNED, a Vice President of PaineWebber Classic Regional
Financial Fund Inc., who executed on behalf of said Corporation the
foregoing Articles of Amendment, of which this certificate is made a part,
hereby acknowledges, in the name and on behalf of said Corporation, the
foregoing Articles of Amendment to be the corporate act of said
Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under
the penalties of perjury.
/s/ Donald P. Spencer
____________________________
Donald P. Spencer
Vice President
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<PAGE>
EXHIBIT 1(c)
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
FIRST: The Board of Directors of PaineWebber Regional Financial
Growth Fund Inc., a Maryland corporation ("Corporation"), by action on
February 26, 1992, has classified, out of the three hundred million
(300,000,000) shares of capital stock, $0.001 par value, ("Shares") it is
authorized to issue, one hundred million (100,000,000) unissued Shares as
Class D Common Stock. As so classified, the three hundred million
(300,000,000) Shares the Corporation is authorized to issue shall be
comprised of one hundred million (100,000,000) Shares of Class A Common
Stock, one hundred million (100,000,000) Shares of Class B Common Stock
and one hundred million (100,000,000) Shares of Class D Common Stock.
The Class A Common Stock, Class B Common Stock and Class D Common
Stock represent interests in the same investment portfolio. The Board of
Directors of the Corporation, also by action on February 26, 1992,
determined that the dividends and distributions of investment income and
capital gains with respect to the Class A Common Stock, Class B Common
Stock and Class D Common Stock may vary among the Classes to reflect
differing allocations of expenses of the Corporation among the Classes to
such extent and for such purposes as the Board of Directors may deem
appropriate.
Except as set forth above, the unissued Shares of the
Corporation, as so classified, the Shares of the Corporation already
issued and outstanding and any other shares that may from time to time be
authorized, established, or classified or reclassified by the Board of
Directors shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption specified in the Corporation's Articles of
Incorporation as currently in effect.
SECOND: The Board of Directors has classified such Shares under
the authority contained in Article Fifth of the Corporation's Articles of
Incorporation as currently in effect.
<PAGE>
IN WITNESS WHEREOF, the undersigned vice-president of PaineWebber
Regional Financial Growth Fund Inc. hereby executes these Articles
Supplementary on behalf of said Corporation, acknowledges that these
Articles Supplementary are the act of said Corporation and certifies that,
to the best of her knowledge, information and belief, the matters and
facts set forth herein are true in all material respects, under the
penalties of perjury.
/s/ Dianne E. O'Donnell
___________________________ ____________________________
Date: June 15, 1992 Dianne E. O'Donnell
Vice President
ATTEST: /s/ Donald P. Spencer
______________________
Donald P. Spencer
Assistant Secretary
<PAGE>
EXHIBIT 1(d)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
Pursuant to Sections 2-605(a)(4) and 2-607 of the Maryland
General Corporation Law, PaineWebber Regional Financial Growth Fund Inc.
("Corporation") adopts the following Articles of Amendment to the
Corporation's Articles of Incorporation, effective as of November 10,
1995:
FIRST: The Class D Common Stock of the Corporation is renamed
Class C Common Stock.
SECOND: The Amendment herein contained was approved by a
majority of the entire Board of Directors of the Corporation and is
limited to a change expressly permitted by Section 2-605(a)(4) of the
Maryland General Corporation Law to be made without action by the
stockholders of the Corporation.
THIRD: The Corporation is registered with the Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940, as amended.
IN WITNESS WHEREOF, the undersigned vice-president of the
Corporation hereby executes these Articles of Amendment on behalf of said
Corporation, acknowledging them to be the act of said Corporation and
certifies that, to the best of her knowledge, information and belief, the
matters and facts set forth herein are true in all material respects,
under the penalties of perjury.
Dated: November 6, 1995 PAINEWEBBER REGIONAL FINANCIAL
GROWTH FUND INC.
Attest: /s/ Gregory K. Todd By: /s/ Dianne E. O'Donnell
--------------------- -----------------------
Gregory K. Todd Dianne E. O'Donnell
Assistant Secretary Vice President
<PAGE>
EXHIBIT 6(c)
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
DISTRIBUTION CONTRACT
CLASS C SHARES
CONTRACT made as of November 10, 1995 between PAINEWEBBER
REGIONAL FINANCIAL GROWTH FUND INC., a Maryland corporation ("Fund") and
MITCHELL HUTCHINS ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell
Hutchins").
WHEREAS the Fund is registered under the Investment Company Act
of l940, as amended ("l940 Act"), as an open-end management investment
company and currently has one distinct series of shares of common stock
("Series"), which corresponds to a distinct portfolio; and
WHEREAS the Fund's board of directors ("Board") has established
shares of common stock of the above-referenced Series as Class C shares
("Class C Shares") (previously known as Class D shares); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act for its Class C Shares ("Plan") and desires
to retain Mitchell Hutchins as principal distributor in connection with
the offering and sale of the Class C Shares of the above-referenced Series
and of such other Series as may hereafter be designated by the Board and
have Class C Shares established; and
WHEREAS Mitchell Hutchins is willing to act as principal
distributor of the Class C Shares of each such Series on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as
follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins
as its exclusive agent to be the principal distributor to sell and to
arrange for the sale of the Class C Shares on the terms and for the period
set forth in this Contract. Mitchell Hutchins hereby accepts such
appointment and agrees to act hereunder. It is understood, however, that
this appointment does not preclude sales of the Class C Shares directly
through the Fund's transfer agent in the manner set forth in the Registra-
tion Statement. As used in this Contract, the term "Registration
Statement" shall mean the currently effective registration statement of
the Fund, and any supplements thereto, under the Securities Act of 1933,
as amended ("1933 Act"), and the 1940 Act.
2. Services and Duties of Mitchell Hutchins.
(a) Mitchell Hutchins agrees to sell Class C Shares on a
best efforts basis from time to time during the term of this Contract as
agent for the Fund and upon the terms described in the Registration
Statement.
<PAGE>
(b) Upon the later of the date of this Contract or
the initial offering of the Class C Shares to the public by a Series,
Mitchell Hutchins will hold itself available to receive purchase orders,
satisfactory to Mitchell Hutchins, for Class C Shares of that Series and
will accept such orders on behalf of the Fund as of the time of receipt of
such orders and promptly transmit such orders as are accepted to the
Fund's transfer agent. Purchase orders shall be deemed effective at the
time and in the manner set forth in the Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into
agreements to sell Class C Shares to such registered and qualified retail
dealers, including but not limited to PaineWebber Incorporated
("PaineWebber"), as it may select. In making agreements with such
dealers, Mitchell Hutchins shall act only as principal and not as agent
for the Fund.
(d) The offering price of the Class C Shares of each
Series shall be the net asset value per Share as next determined by the
Fund following receipt of an order at Mitchell Hutchins' principal office.
The Fund shall promptly furnish Mitchell Hutchins with a statement of each
computation of net asset value.
(e) Mitchell Hutchins shall not be obligated to sell any
certain number of Class C Shares.
(f) To facilitate redemption of Class C Shares by
shareholders directly or through dealers, Mitchell Hutchins is authorized
but not required on behalf of the Fund to repurchase Class C Shares
presented to it by shareholders and dealers at the price determined in
accordance with, and in the manner set forth in, the Registration
Statement. Such price shall reflect the subtraction of the contingent
deferred sales charge, if any, computed in accordance with and in the
manner set forth in the Registration Statement.
(g) Mitchell Hutchins shall provide ongoing
shareholder services, which include responding to shareholder inquiries,
providing shareholders with information on their investments in the Class
C Shares and any other services now or hereafter deemed to be appropriate
subjects for the payments of "service fees" under Section 26(d) of the
National Association of Securities Dealers, Inc. ("NASD") Rules of Fair
Practice (collectively, "service activities"). "Service activities" do
not include the transfer agency-related and other services for which
PaineWebber receives compensation under the Service Contract between
PaineWebber and the Fund.
(h) Mitchell Hutchins shall have the right to use any
list of shareholders of the Fund or any other list of investors which it
obtains in connection with its provision of services under this Contract;
provided, however, that Mitchell Hutchins shall not sell or knowingly
provide such list or lists to any unaffiliated person.
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<PAGE>
3. Authorization to Enter into Exclusive Dealer Agreements
and to Delegate Duties as Distributor. With respect to the Class C Shares
of any or all Series, Mitchell Hutchins may enter into an exclusive dealer
agreement with PaineWebber or any other registered and qualified dealer
with respect to sales of the Class C Shares or the provision of service
activities. In a separate contract or as part of any such exclusive
dealer agreement, Mitchell Hutchins also may delegate to PaineWebber or
another registered and qualified dealer ("sub-distributor") any or all of
its duties specified in this Contract, provided that such separate
contract or exclusive dealer agreement imposes on the sub-distributor
bound thereby all applicable duties and conditions to which Mitchell
Hutchins is subject under this Contract, and further provided that such
separate contract or exclusive dealer agreement meets all requirements of
the 1940 Act and rules thereunder.
4. Services Not Exclusive. The services furnished by
Mitchell Hutchins hereunder are not to be deemed exclusive and Mitchell
Hutchins shall be free to furnish similar services to others so long as
its services under this Contract are not impaired thereby. Nothing in
this Contract shall limit or restrict the right of any director, officer
or employee of Mitchell Hutchins, who may also be a director, officer or
employee of the Fund, to engage in any other business or to devote his or
her time and attention in part to the management or other aspects of any
other business, whether of a similar or a dissimilar nature.
5. Compensation.
(a) As compensation for its service activities under
this contract with respect to the Class C Shares, Mitchell Hutchins shall
receive from the Fund a service fee at the rate and under the terms and
conditions of the Plan adopted by the Fund with respect to the Class C
Shares of the Series, as such Plan is amended from time to time, and
subject to any further limitations on such fee as the Board may impose.
(b) As compensation for its activities under this
contract with respect to the distribution of the Class C Shares, Mitchell
Hutchins shall receive from the Fund a distribution fee at the rate and
under the terms and conditions of the Plan adopted by the Fund with
respect to the Class C Shares of the Series, as such Plan is amended from
time to time, and subject to any further limitations on such fee as the
Board may impose.
(c) As compensation for its activities under this
contract with respect to the distribution of the Class C Shares, Mitchell
Hutchins shall receive all contingent deferred sales charges imposed on
redemptions of Class C Shares of each Series. Whether and at what rate a
contingent deferred sales charge will be imposed with respect to a
redemption shall be determined in accordance with, and in the manner set
forth in, the Registration Statement.
(d) Mitchell Hutchins may reallow any or all of the
distribution fees, contingent deferred sales charges, or service fees
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<PAGE>
which it is paid under this Contract to such dealers as Mitchell Hutchins
may from time to time determine.
6. Duties of the Fund.
(a) The Fund reserves the right at any time to
withdraw offering Class C Shares of any or all Series by written notice to
Mitchell Hutchins at its principal office.
(b) The Fund shall determine in its sole discretion
whether certificates shall be issued with respect to the Class C Shares.
If the Fund has determined that certificates shall be issued, the Fund
will not cause certificates representing Class C Shares to be issued
unless so requested by shareholders. If such request is transmitted by
Mitchell Hutchins, the Fund will cause certificates evidencing Class C
Shares to be issued in such names and denominations as Mitchell Hutchins
shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully
informed of its affairs and shall make available to Mitchell Hutchins
copies of all information, financial statements, and
other papers which Mitchell Hutchins may reasonably request for use in
connection with the distribution of Class C Shares, including, without
limitation, certified copies of any financial statements prepared for the
Fund by its independent public accountant and such reasonable number of
copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell
Hutchins may request, and the Fund shall cooperate fully in the efforts of
Mitchell Hutchins to sell and arrange for the sale of the Class C Shares
of the Series and in the performance of Mitchell Hutchins under this
Contract.
(d) The Fund shall take, from time to time, all
necessary action, including payment of the related filing fee, as may be
necessary to register the Class C Shares under the 1933 Act to the end
that there will be available for sale such number of Class C Shares as
Mitchell Hutchins may be expected to sell. The Fund agrees to file, from
time to time, such amendments, reports, and other documents as may be
necessary in order that there will be no untrue statement of a material
fact in the Registration Statement, nor any omission of a material fact
which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify
and maintain the qualification of an appropriate number of Class C Shares
of each Series for sale under the securities laws of such states or other
jurisdictions as Mitchell Hutchins and the Fund may approve, and, if
necessary or appropriate in connection therewith, to qualify and maintain
the qualification of the Fund as a broker or dealer in such jurisdictions;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any jurisdiction, to
maintain an office in any jurisdiction, to change the terms of the offer-
ing of the Class C Shares in any jurisdiction from the terms set forth in
- 4 -
<PAGE>
its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction
other than with respect to claims arising out of the offering of the Class
C Shares. Mitchell Hutchins shall furnish such information and other
material relating to its affairs and activities as may be required by the
Fund in connection with such qualifications.
7. Expenses of the Fund. The Fund shall bear all costs and
expenses of registering the Class C Shares with the Securities and
Exchange Commission and state and other regulatory bodies, and shall
assume expenses related to communications with shareholders of each
Series, including (i) fees and disbursements of its counsel and
independent public accountant; (ii) the preparation, filing and printing
of registration statements and/or prospectuses or statements of additional
information required under the federal securities laws; (iii) the
preparation and mailing of annual and interim reports, prospectuses,
statements of additional information and proxy materials to shareholders;
and (iv) the qualifications of Class C Shares for sale and of the Fund as
a broker or dealer under the securities laws of such jurisdictions as
shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph
6(e) hereof, and the costs and expenses payable to each such jurisdiction
for continuing qualification therein.
8. Expenses of Mitchell Hutchins. Mitchell Hutchins shall
bear all costs and expenses of (i) preparing, printing and distributing
any materials not prepared by the Fund and other materials used by
Mitchell Hutchins in connection with the sale of Class C Shares under this
Contract, including the additional cost of printing copies of
prospectuses, statements of additional information, and annual and interim
shareholder reports other than copies thereof required for distribution to
existing shareholders or for filing with any federal or state securities
authorities; (ii) any expenses of advertising incurred by Mitchell
Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer
under federal or state laws and the expenses of continuing such
registration or qualification; and (iv) all compensation paid to Mitchell
Hutchins' employees and others for selling Class C Shares, and all
expenses of Mitchell Hutchins, its employees and others who engage in or
support the sale of Class C Shares as may be incurred in connection with
their sales efforts.
9. Indemnification.
(a) The Fund agrees to indemnify, defend and hold
Mitchell Hutchins, its officers and directors, and any person who controls
Mitchell Hutchins within the meaning of Section 15 of the 1933 Act, free
and harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection there-
with) which Mitchell Hutchins, its officers, directors or any such
controlling person may incur under the 1933 Act, or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
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<PAGE>
material fact contained in the Registration Statement or arising out of or
based upon any alleged omission to state a material fact required to be
stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabili-
ties or expenses arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon
and in conformity with information furnished in writing by Mitchell
Hutchins to the Fund for use in the Registration Statement; provided,
however, that this indemnity agreement shall not inure to the benefit of
any person who is also an officer or director of the Fund or who controls
the Fund within the meaning of Section 15 of the 1933 Act, unless a court
of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent, that such result would not be against
public policy as expressed in the 1933 Act; and further provided, that in
no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders
of any Series to which Mitchell Hutchins would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations under this Contract. The Fund shall not be liable to Mitchell
Hutchins under this indemnity agreement with respect to any claim made
against Mitchell Hutchins or any person indemnified unless Mitchell
Hutchins or other such person shall have notified the Fund in writing of
the claim within a reasonable time after the summons or other first
written notification giving information of the nature of the claim shall
have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on
any designated agent). However, failure to notify the Fund of any claim
shall not relieve the Fund from any liability which it may have to
Mitchell Hutchins or any person against whom such action is brought
otherwise than on account of this indemnity agreement. The Fund shall be
entitled to participate at its own expense in the defense or, if it so
elects, to assume the defense of any suit brought to enforce any claims
subject to this indemnity agreement. If the Fund elects to assume the
defense of any such claim, the defense shall be conducted by counsel
chosen by the Fund and satisfactory to indemnified defendants in the suit
whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the
defense of a suit, it will reimburse the indemnified defendants for the
reasonable fees and expenses of any counsel retained by the indemnified
defendants. The Fund agrees to notify Mitchell Hutchins promptly of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of
its Class C Shares.
(b) Mitchell Hutchins agrees to indemnify, defend,
and hold the Fund, its officers and directors and any person who controls
the Fund within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending against such
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<PAGE>
claims, demands or liabilities and any counsel fees incurred in connection
therewith) which the Fund, its directors or officers, or any such
controlling person may incur under the 1933 Act or under common law or
otherwise arising out of or based upon any alleged untrue statement of a
material fact contained in information furnished in writing by Mitchell
Hutchins to the Fund for use in the Registration Statement, arising out of
or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out
of any supplemental sales literature or advertising used by Mitchell
Hutchins in connection with its duties under this Contract. Mitchell
Hutchins shall be entitled to participate, at its own expense, in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce the claim, but if Mitchell Hutchins elects to assume the defense,
the defense shall be conducted by counsel chosen by Mitchell Hutchins and
satisfactory to the indemnified defendants whose approval shall not be
unreasonably withheld. In the event that Mitchell Hutchins elects to
assume the defense of any suit and retain counsel, the defendants in the
suit shall bear the fees and expenses of any additional counsel retained
by them. If Mitchell Hutchins does not elect to assume the defense of any
suit, it will reimburse the indemnified defendants in the suit for the
reasonable fees and expenses of any counsel retained by them.
10. Services Provided to the Fund by Employees of Mitchell
Hutchins. Any person, even though also an officer, director, employee or
agent of Mitchell Hutchins, who may be or become an officer, director,
employee or agent of the Fund, shall be deemed, when rendering services to
the Fund or acting in any business of the Fund, to be rendering such
services to or acting solely for the Fund and not as an officer, director,
employee or agent or one under the control or direction of Mitchell
Hutchins even though paid by Mitchell Hutchins.
11. Duration and Termination.
(a) This Contract shall become effective upon the date
hereabove written, provided that, with respect to any Series, this
Contract shall not take effect unless such action has first been approved
by vote of a majority of the Board and by vote of a majority of those
directors of the Fund who are not interested persons of the Fund, and have
no direct or indirect financial interest in the operation of the Plan
relating to the Series or in any agreements related thereto (all such
directors collectively being referred to herein as the "Independent
Directors"), cast in person at a meeting called for the purpose of voting
on such action.
(b) Unless sooner terminated as provided herein, this
Contract shall continue in effect for one year from the above written
date. Thereafter, if not terminated, this Contract shall continue
automatically for successive periods of twelve months each, provided that
such continuance is specifically approved at least annually (i) by a vote
of a majority of the Independent Directors, cast in person at a meeting
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<PAGE>
called for the purpose of voting on such approval, and (ii) by the Board
or with respect to any given Series by vote of a majority of the out-
standing voting securities of the Class C Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any
Series, this Contract may be terminated at any time, without the payment
of any penalty, by vote of the Board, by vote of a majority of the
Independent Directors or by vote of a majority of the outstanding voting
securities of the Class C Shares of such Series on sixty days' written
notice to Mitchell Hutchins or by Mitchell Hutchins at any time, without
the payment of any penalty, on sixty days' written notice to the Fund or
such Series. This Contract will automatically terminate in the event of
its assignment.
(d) Termination of this Contract with respect to any
given Series shall in no way affect the continued validity of this
Contract or the performance thereunder with respect to any other Series.
12. Amendment of this Contract. No provision of this Contract
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
13. Governing Law. This Contract shall be construed in
accordance with the laws of the State of Delaware and the 1940 Act. To
the extent that the applicable laws of the State of Delaware conflict with
the applicable provisions of the l940 Act, the latter shall control.
14. Notice. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient upon receipt in
writing at the other party's principal offices.
15. Miscellaneous. The captions in this Contract are included
for convenience of reference only and in no way define or delimit any of
the provisions hereof or otherwise affect their construction or effect.
If any provision of this Contract shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Contract shall
not be affected thereby. This Contract shall be binding upon and shall
inure to the benefit of the parties hereto and their respective
successors. As used in this Contract, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall
have the same meaning as such terms have in the l940 Act.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Contract
to be executed by their officers designated as of the day and year first
above written.
ATTEST: PAINEWEBBER REGIONAL FINANCIAL GROWTH
FUND INC.
_____________________________ By: _______________________________
ATTEST: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By: ________________________________
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<PAGE>
EXHIBIT 6(f)
EXCLUSIVE DEALER AGREEMENT
CLASS C SHARES OF PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
AGREEMENT made as of November 10, 1995, between Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and
PaineWebber Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS PaineWebber Regional Financial Growth Fund Inc. ("Fund")
is a Maryland corporation registered under the Investment Company Act of
1940, as amended ("1940 Act"), as an open-end management investment
company; and
WHEREAS the Fund currently has one series of shares of common
stock ("Series"), which corresponds to a distinct portfolio; and
WHEREAS the Fund's board of directors ("Board") has established
shares of common stock of the above-referenced Series as Class C shares
("Class C Shares") (previously known as Class D shares) and has adopted a
Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act ("Plan")
with respect to the Class C Shares of the above-referenced Series and of
such other Series as may hereafter be designated by the Board and have
Class C Shares established; and
WHEREAS Mitchell Hutchins has entered into a Distribution
Contract with the Fund ("Distribution Contract") pursuant to which
Mitchell Hutchins serves as principal distributor in connection with the
offering and sale of the Class C Shares of each such Series; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its
exclusive agent in connection with the offering and sale of the Class C
Shares of each Series and to delegate to PaineWebber performance of
certain of the services which Mitchell Hutchins provides to the Fund under
the Distribution Contract; and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins'
exclusive agent in connection with the offering and sale of such Class C
Shares and to perform such services on the terms and conditions
hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein, Mitchell Hutchins and PaineWebber agree as
follows:
1. Appointment. Mitchell Hutchins hereby appoints
PaineWebber as its exclusive agent to sell and to arrange for the sale of
the Class C Shares on the terms and for the period set forth in this
Agreement. Mitchell Hutchins also appoints PaineWebber as its agent for
the performance of certain other services set forth herein which Mitchell
Hutchins provides to the Fund under the Distribution Contract.
PaineWebber hereby accepts such appointments and agrees to act hereunder.
It is understood, however, that these appointments do not preclude sales
<PAGE>
of Class C Shares directly through the Fund's transfer agent in the manner
set forth in the Registration Statement. As used in this Agreement, the
term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. Services, Duties and Representations of PaineWebber.
(a) PaineWebber agrees to sell the Class C Shares on
a best efforts basis from time to time during the term of this Agreement
as agent for Mitchell Hutchins and upon the terms described in this
Agreement and the Registration Statement.
(b) Upon the later of the date of this Agreement or
the initial offering of Class C Shares by a Series to the public,
PaineWebber will hold itself available to receive orders, satisfactory to
PaineWebber and Mitchell Hutchins, for the purchase of Class C Shares and
will accept such orders on behalf of Mitchell Hutchins and the Fund as of
the time of receipt of such orders and will promptly transmit such orders
as are accepted to the Fund's transfer agent. Purchase orders shall be
deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) PaineWebber in its discretion may sell Class C
Shares to (i) its correspondent firms and customers of such firms and (ii)
such other registered and qualified retail dealers as it may select,
subject to the approval of Mitchell Hutchins. In making agreements with
such dealers, PaineWebber shall act only as principal and not as agent for
Mitchell Hutchins or the Fund.
(d) The offering price of the Class C Shares of each
Series shall be the net asset value per Share as next determined by the
Fund following receipt of an order at PaineWebber's principal office.
Mitchell Hutchins shall promptly furnish or arrange for the furnishing to
PaineWebber of a statement of each computation of net asset value.
(e) PaineWebber shall not be obligated to sell any
certain number of Class C Shares.
(f) To facilitate redemption of Class C Shares by
shareholders directly or through dealers, PaineWebber is authorized but
not required on behalf of Mitchell Hutchins and the Fund to repurchase
Class C Shares presented to it by shareholders, its correspondent firms
and other dealers at the price determined in accordance with, and in the
manner set forth in, the Registration Statement. Such price shall reflect
the subtraction of the applicable contingent deferred sales charge, if
any, computed in accordance with and in the manner set forth in the
Registration Statement.
(g) Painewebber shall provide ongoing shareholder
services, which include responding to shareholder inquiries, providing
shareholders with information on their investments in the Class C Shares
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<PAGE>
and any other services now or hereafter deemed to be appropriate subjects
for the payments of "service fees" under Section 26(d) of the National
Association of Securities Dealers, Inc. ("NASD") Rules of Fair Practice
(collectively, "service activities"). "Service activities" do not include
the transfer agency-related and other services for which PaineWebber
receives compensation under the Service Contract between PaineWebber and
the Fund.
(h) PaineWebber represents and warrants that: (i) it
is a member in good standing of the NASD and agrees to abide by the Rules
of Fair Practice of the NASD; (ii) it is registered as a broker-dealer
with the Securities and Exchange Commission; (iii) it will maintain any
filings and licenses required by federal and state laws to conduct the
business contemplated under this Agreement; and (iv) it will comply with
all federal and state laws and regulations applicable to the offer and
sale of the Class C Shares.
(i) PaineWebber shall not incur any debts or obliga-
tions on behalf of Mitchell Hutchins or the Fund. PaineWebber shall bear
all costs that it incurs in selling the Class C Shares and in complying
with the terms and conditions of this Agreement as more specifically set
forth in paragraph 8.
(j) PaineWebber shall not permit any employee or
agent to offer or sell Class C Shares to the public unless such person is
duly licensed under applicable federal and state laws and regulations.
(k) PaineWebber shall not (i) furnish any information
or make any representations concerning the Class C Shares other than those
contained in the Registration Statement or in sales literature or
advertising that has been prepared or approved by Mitchell Hutchins as
provided in paragraph 6 or (ii) offer or sell the Class C Shares in
jurisdictions in which they have not been approved for offer and sale.
3. Services Not Exclusive. The services furnished by
PaineWebber hereunder are not to be deemed exclusive and PaineWebber shall
be free to furnish similar services to others so long as its services
under this Agreement are not impaired thereby. Nothing in this Agreement
shall limit or restrict the right of any director, officer or employee of
PaineWebber who may also be a director, officer or employee of Mitchell
Hutchins or the Fund, to engage in any other business or to devote his or
her time and attention in part to the management or other aspects of any
other business, whether of a similar or a dissimilar nature.
4. Compensation.
(a) As compensation for its service activities under
this Agreement with respect to the Class C Shares, Mitchell Hutchins shall
pay to PaineWebber service fees with respect to Class C Shares maintained
in shareholder accounts serviced by PaineWebber employees, correspondent
firms and other dealers in such amounts as Mitchell Hutchins and
PaineWebber may from time to time agree upon.
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<PAGE>
(b) As compensation for its activities under this
Agreement with respect to the distribution of the Class C Shares, Mitchell
Hutchins shall pay to PaineWebber such commissions for sales of the Class
C shares by PaineWebber employees, correspondent firms and other dealers
and such other compensation as Mitchell Hutchins and PaineWebber may from
time to time agree upon.
(c) Mitchell Hutchins' obligation to pay compensation to
PaineWebber as agreed upon pursuant to this paragraph 4 is not contingent
upon receipt by Mitchell Hutchins of any compensation from the Fund or
Series. Mitchell Hutchins shall advise the Board of any agreements or
revised agreements as to compensation to be paid by Mitchell Hutchins to
PaineWebber at their first regular meeting held after such agreement but
shall not be required to obtain prior approval for such agreements from
the Board.
(d) PaineWebber may reallow all or any part of the
service fees, commissions or other compensation which it is paid under
this Agreement to its correspondent firms or other dealers, in such
amounts as PaineWebber may from time to time determine.
5. Duties of Mitchell Hutchins.
(a) It is understood that the Fund reserves the right at
any time to withdraw all offerings of Class C Shares of any or all Series
by written notice to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully
informed of the Fund's affairs and shall make available to PaineWebber
copies of all information, financial statements and other papers which
PaineWebber may reasonably request for use in connection with the
distribution of Class C Shares, including, without limitation, certified
copies of any financial statements prepared for the Fund by its
independent public accountant and such reasonable number of copies of the
most current prospectus, statement of additional information, and annual
and interim reports of any Series as PaineWebber may request, and Mitchell
Hutchins shall cooperate fully in the efforts of PaineWebber to sell and
arrange for the sale of the Class C Shares and in the performance of
PaineWebber under this Agreement.
(c) Mitchell Hutchins shall comply with all state and
federal laws and regulations applicable to a distributor of the Class C
Shares.
6. Advertising. Mitchell Hutchins agrees to make available
such sales and advertising materials relating to the Class C Shares as
Mitchell Hutchins in its discretion determines appropriate. PaineWebber
agrees to submit all sales and advertising materials developed by it
relating to the Class C Shares to Mitchell Hutchins for approval.
PaineWebber agrees not to publish or distribute such materials to the
public without first receiving such approval in writing. Mitchell
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<PAGE>
Hutchins shall assist PaineWebber in obtaining any regulatory approvals of
such materials that may be required of or desired by PaineWebber.
7. Records. PaineWebber agrees to maintain all records
required by applicable state and federal laws and regulations relating to
the offer and sale of the Class C Shares. Mitchell Hutchins and its
representatives shall have access to such records during normal business
hours for review or copying.
8. Expenses of PaineWebber. PaineWebber shall bear all
costs and expenses of (i) preparing, printing, and distributing any
materials not prepared by the Fund or Mitchell Hutchins and other
materials used by PaineWebber in connection with its offering of Class C
Shares for sale to the public; (ii) any expenses of advertising incurred
by PaineWebber in connection with such offering; (iii) the expenses of
registration or qualification of PaineWebber as a dealer or broker under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to PaineWebber's Investment
Executives or other employees and others for selling Class C Shares, and
all expenses of PaineWebber, its Investment Executives and employees and
others who engage in or support the sale of Class C Shares as may be
incurred in connection with their sales efforts. PaineWebber shall bear
such additional costs and expenses as it and Mitchell Hutchins may agree
upon, such agreement to be evidenced in a writing signed by both parties.
Mitchell Hutchins shall advise the Board of any such agreement as to
additional costs and expenses borne by PaineWebber at their first regular
meeting held after such agreement but shall not be required to obtain
prior approval for such agreements from the Board.
9. Indemnification.
(a) Mitchell Hutchins agrees to indemnify, defend, and
hold PaineWebber, its officers and directors, and any person who controls
PaineWebber within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities, and
expenses (including the cost of investigating or defending such claims,
demands, or liabilities and any counsel fees incurred in connection
therewith) which PaineWebber, its officers, directors, or any such
controlling person may incur under the 1933 Act, under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registration Statement; arising out of or
based upon any alleged omission to state a material fact required to be
stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or
arising out of any sales or advertising materials with respect to the
Class C Shares provided by Mitchell Hutchins to PaineWebber. However,
this indemnity agreement shall not apply to any claims, demands,
liabilities, or expenses that arise out of or are based upon any such
untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with information furnished in writing
by PaineWebber to Mitchell Hutchins or the Fund for use in the
Registration Statement or in any sales or advertising material; and
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<PAGE>
further provided, that in no event shall anything contained herein be so
construed as to protect PaineWebber against any liability to Mitchell
Hutchins or the Fund or to the shareholders of any Series to which
PaineWebber would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence in the performance of its duties, or by
reason of its reckless disregard of its obligations under this Agreement.
(b) PaineWebber agrees to indemnify, defend, and hold
Mitchell Hutchins and its officers and directors, the Fund, its officers
and directors, and any person who controls Mitchell Hutchins or the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending against such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which Mitchell Hutchins or its officers or directors or the
Fund, its officers or directors, or any such controlling person may incur
under the 1933 Act, under common law or otherwise arising out of or based
upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or
the Fund for use in the Registration Statement; arising out of or based
upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or
necessary to make such information not misleading; or arising out of any
agreement between PaineWebber and a correspondent firm or any other retail
dealer; or arising out of any sales or advertising material used by
PaineWebber in connection with its duties under this Agreement.
10. Duration and Termination.
(a) This Agreement shall become effective upon the date
written above, provided that, with respect to any Series, this Contract
shall not take effect unless such action has first been approved by vote
of a majority of the Board and by vote of a majority of those directors of
the Fund who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plan or in any
agreements related thereto (all such directors collectively being referred
to herein as the "Independent Directors"), cast in person at a meeting
called for the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this
Agreement shall continue in effect for one year from the above written
date. Thereafter, if not terminated, this Agreement shall continue
automatically for successive periods of twelve months each, provided that
such continuance is specifically approved at least annually (i) by a vote
of a majority of the Independent Directors, cast in person at a meeting
called for the purpose of voting on such approval, and (ii) by the Board
or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class C Shares of such Series.
(c) Notwithstanding the foregoing, with respect to
any Series this Agreement may be terminated at any time, without the
payment of any penalty, by either party, upon the giving of 30 days'
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<PAGE>
written notice. Such notice shall be deemed to have been given on the
date it is received in writing by the other party or any officer thereof.
This Agreement may also be terminated at any time, without the payment of
any penalty, by vote of the Board, by vote of a majority of the
Independent Directors or by vote of a majority of the outstanding voting
securities of the Class C Shares of such Series on 30 days' written notice
to Mitchell Hutchins and PaineWebber.
(d) Termination of this Agreement with respect to any
given Series shall in no way affect the continued validity of this
Agreement or the performance thereunder with respect to any other Series.
This Agreement will automatically terminate in the event of its assignment
or in the event that the Distribution Contract is terminated.
(e) Notwithstanding the foregoing, Mitchell Hutchins
may terminate this Agreement without penalty, such termination to be
effective upon the giving of written notice to PaineWebber in the event
that the Plan is terminated or is amended to reduce the compensation
payable to Mitchell Hutchins thereunder or in the event that the
Registration Statement is amended so as to reduce the amount of
compensation payable to Mitchell Hutchins under the Distribution Contract,
provided that Mitchell Hutchins gives notice of termination pursuant to
this provision within 90 days of such amendment or termination of the Plan
or amendment of the Registration Statement.
11. Amendment of this Agreement. No provision of this
Agreement may be amended, changed, waived, discharged or terminated
orally, but only by an instrument in writing signed by the party against
which enforcement of the change, waiver, discharge or termination is
sought.
12. Use of PaineWebber Name. PaineWebber hereby authorizes
Mitchell Hutchins to use the name "PaineWebber Incorporated" or any name
derived therefrom in any sales or advertising materials prepared and/or
used by Mitchell Hutchins in connection with its duties as distributor of
the Class C Shares, but only for so long as this Agreement or any
extension, renewal or amendment hereof remains in effect, including any
similar agreement with any organization which shall have succeeded to the
business of PaineWebber.
13. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of Delaware and the 1940 Act. To
the extent that the applicable laws of the State of Delaware conflict with
the applicable provisions of the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit
any of the provisions hereof or otherwise affect their construction or
effect. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
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<PAGE>
respective successors. As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested person" and "assignment"
shall have the same meaning as such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers designated as of the day and year first
written above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: _______________________ By: ________________________
PAINEWEBBER INCORPORATED
Attest: _______________________ By: ________________________
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<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference therein of our report dated
May 19, 1995, in this Registration Statement (Form N-1A No. 33-33231) of
PaineWebber Regional Financial Growth Fund, Inc.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
December 11, 1995
