<PAGE>
As filed with the Securities and Exchange Commission on July 28, 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._11_ [__X__]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
(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)
__X_ On August 1, 1995 pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)(i)
____ On ____________________ pursuant to Rule 485(a)(i)
____ 75 days after filing pursuant to Rule 485(a)(ii)
____ On ____________________ pursuant to Rule 485(a)(ii)
Registrant has filed a declaration pursuant to Rule 24f-2 under
the Investment Company Act of 1940 and filed the notice required by such
Rule for its most recent fiscal year on 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 D Shares of:
PaineWebber Regional Financial Growth Fund Inc.
------------------------------------------------
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PaineWebber Regional Financial Growth Fund Inc.
Form N-1A Cross Reference Sheet
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
1. Cover Page . . . . . . . Cover Page
2. Synopsis . . . . . . . . Prospectus Summary
3. Condensed Financial Financial Highlights; Performance
Information . . . . . . Information
4. General Description of Prospectus Summary; Investment
Registrant . . . . . . . Objective and Policies; General
Information
5. Management of the Fund . Management; General Information
6. Capital Stock and Other Cover Page; Conversion of Class B
Securities . . . . . . . Shares; Dividends and Taxes;
General Information
7. Purchase of Securities Purchases; Exchanges; Valuation of
Being Offered . . . . . Shares; Other Services and
Information; Management
8. Redemption or Repurchase Redemptions; Other Services and
Information
9. Pending Legal Not Applicable
Proceedings . . . . . .
Part B Item No. Statement of Additional
and Caption Information Caption
-------------- ---------------------
10. Cover Page . . . . . . . Cover Page
<PAGE>
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- -----------------------
11. Table of Contents . . . Table of Contents
12. General Information and
History . . . . . . . . Other Information
13. Investment Objective and Investment Policies and
Policies . . . . . . . . Restrictions; Hedging Strategies;
Portfolio Transactions
14. Management of the Fund . Directors and Officers
15. Control Persons and
Principal Holders of Directors and Officers
Securities . . . . . . .
16. Investment Advisory and Investment Advisory and
Other Services . . . . . Distribution Arrangements; Other
Information
17. Brokerage Allocation . . Portfolio Transactions
18. Capital Stock and Other Conversion of Class B Shares; Other
Securities . . . . . . . Information
19. Purchase, Redemption and Reduced Sales Charges, Additional
Pricing of Securities Exchange and Redemption Information
Being Offered . . . . . 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
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 August 1, 1995 (which is
incorporated by reference herein) has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
without charge and further inquiries can be made, by contacting the Fund, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
------------------------------------------------------
PROSPECTIVE WISCONSIN INVESTORS SHOULD NOTE THAT THE FUND MAY INVEST UP TO 10%
OF ITS NET ASSETS IN RESTRICTED SECURITIES (OTHER THAN RULE 144A SECURITIES
DETERMINED TO BE LIQUID BY THE FUND'S BOARD OF DIRECTORS). INVESTMENT IN
RESTRICTED SECURITIES (OTHER THAN SUCH RULE 144A SECURITIES) IN EXCESS OF 5% OF
THE FUND'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY AND MAY RESULT
IN GREATER RISK AND INCREASED FUND EXPENSES.
------------------------------------------------------
August 1, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PAINEWEBBER
REGIONAL FINANCIAL
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.................. 20
Other Services and Information................ 20
Dividends and Taxes........................... 21
Valuation of Shares........................... 23
Management.................................... 23
Performance Information....................... 25
General Information........................... 25
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 regional commercial banks, thrift
institutions and their holding 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 REGIONAL FINANCIAL 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 Regional Financial 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 regional commercial banks,
thrift institutions and their holding companies.
Total Net Assets: Over $78.6 million at June 30, 1995.
Investment Adviser: Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'), an asset management subsidiary of
PaineWebber Incorporated ('PaineWebber' or 'PW'),
manages over $43.5 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 D
shares, each with a public offering price that
reflects different sales charges and expense
levels. See 'Flexible Pricing System,'
'Purchases,' 'Redemptions' and 'Conversion of
Class B Shares.'
Class A Shares Offered at net asset value plus any applicable
sales charge (maximum is 4.5% of public offering
price).
</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 D Shares Offered at net asset value without an initial or
contingent deferred sales charge. Class D shares
pay higher ongoing expenses than Class A shares
and do not convert into another Class.
Exchanges: Shares may be exchanged for shares of the
corresponding Class of most PaineWebber and
Mitchell Hutchins/Kidder, Peabody ('MH/KP') mutual
funds.
Redemptions: PaineWebber clients may redeem through
PaineWebber; other shareholders must redeem
through the Transfer Agent.
Dividends: Declared and paid annually; net capital gain also
is distributed annually. See 'Dividends and
Taxes.'
Reinvestment: All dividends and capital gain distributions are
paid in Fund shares of the same Class at net asset
value unless the shareholder has requested cash.
Minimum Purchase: $1,000 for first purchase; $100 for subsequent
purchases.
</TABLE>
<TABLE>
<S> <C> <C>
Other Features:
Class A Shares Automatic investment plan Quantity discounts on
initial sales charge
Systematic withdrawal 365-day reinstatement
plan privilege
Rights of accumulation
Class B Shares Automatic investment plan Systematic withdrawal
plan
Class D Shares Automatic investment plan Systematic withdrawal
plan
</TABLE>
WHO SHOULD INVEST. The Fund invests primarily in equity securities of
regional commercial banks, thrift institutions (sometimes referred to as
'thrifts') 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 banking and thrift
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 banking and thrift industries subjects its shares to greater risk than the
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. Neither the federal
3
<PAGE>
insurance of bank and thrift deposits nor government regulation of the bank and
thrift industries ensures the solvency or profitability of commercial banks and
thrifts or their holding companies or insures against the risks of investing in
the equity securities issued by these institutions. 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 D
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares
(as a percentage of public offering
price)..................................... 4.5% None None
Sales charge on reinvested dividends......... None None None
Exchange fee................................. $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as
a percentage of redemption proceeds)....... None 5% None
</TABLE>
ANNUAL FUND OPERATING EXPENSES(2)
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Management fees.............................. 0.70% 0.70% 0.70%
12b-1 fees (3)............................... 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 waivers are available for Class A and Class B shares,
reduced sales charge purchase plans are available for Class A shares and
exchange fee waivers are available for all three Classes. The maximum 5%
contingent deferred sales charge on Class B shares applies to redemptions during
the first year after purchase; the charge generally declines by 1% annually
thereafter, reaching zero after six years. See 'Purchases.'
(2) See 'Management' for additional information. All expenses are those
actually incurred for the fiscal year ended March 31, 1995.
4
<PAGE>
(3) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
12b-1 service fees............... 0.25% 0.25% 0.25%
12b-1 distribution fees.......... 0.00 0.75 0.75
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B
and Class D shareholders may pay more in direct and indirect sales charges
(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 D Shares........... $ 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 D share of the Fund for each of the
periods shown. This information is supplemented by the financial statements and
accompanying notes appearing in the Fund's Annual Report to Shareholders for the
fiscal year ended 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. 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
PERIOD MAY 22,
FOR THE YEARS ENDED MARCH 31, 1986+ TO
----------------------------------------------------------------------------- MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 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)..... 0.25 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................... 1.34 (0.76) 6.01 3.92 0.86 0.37 0.77 (1.45) (0.09)
------- ------- ------- ------- ------- ------- ------- ------- --------------
Total income (loss) from investment
operations........................ 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...... $ 17.11 $ 16.92 $ 19.45 $ 13.36 $ 9.50 $ 8.63 $ 8.31 $ 7.53 $ 9.36
------- ------- ------- ------- ------- ------- ------- ------- --------------
------- ------- ------- ------- ------- ------- ------- ------- --------------
Total Return(1)..................... 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)... $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............................ 1.45% 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...... 1.40% 0.76% 0.60% 1.32% 2.56% 2.60% 3.20% 2.64% 2.82%*
Portfolio turnover rate............. 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.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS D
-------------------------------------------- -------------------------------------
FOR THE FOR THE
FOR THE YEARS PERIOD JULY 1, FOR THE YEARS PERIOD JULY 2,
ENDED MARCH 31, 1991++ TO ENDED MARCH 31, 1992++ TO
--------------------------- MARCH 31, -------------------- MARCH 31,
1995 1994 1993 1992 1995 1994 1993
------- ------- ------- -------------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 16.71 $ 19.34 $ 13.36 $10.24 $16.71 $ 19.34 $14.61
------- ------- ------- ------ ------ ----------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..... 0.11 0.02 (0.01) -- 0.11 0.01 --
Net realized and unrealized gains
(losses) from investment
transactions................... 1.33 (0.75) 5.99 3.18 1.33 (0.73) 4.77
------- ------- ------- ------ ------ ----------- ------
Total income (loss) from investment
operations........................ 1.44 (0.73) 5.98 3.18 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...... $ 16.85 $ 16.71 $ 19.34 $13.36 $16.86 $ 16.71 $19.34
------- ------- ------- ------ ------ ----------- ------
------- ------- ------- ------ ------ ----------- ------
Total Return(1)..................... 9.37% (3.83)% 44.76% 31.16% 9.34% (3.76)% 32.66%
------- ------- ------- ------ ------ ----------- ------
------- ------- ------- ------ ------ ----------- ------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)... $16,368 $11,517 $10,364 $ 765 $4,160 $ 4,370 $4,636
Ratio of expenses to average net
assets............................ 2.22% 2.16% 2.45% 2.72%* 2.23% 2.17% 2.36%*
Ratio of net investment income
(loss) to average net assets...... 0.67% 0.05% (0.03)% 0.14%* 0.61% 0.03% 0.01%*
Portfolio turnover rate............. 14.00% 21.82% 27.97% 30.68% 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 D None Service fee of 0.25%; --
distribution fee of 0.75%
</TABLE>
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES
In deciding which Class of shares to purchase, investors should consider
the cost of sales charges together with the cost of the ongoing annual expenses
described below, as well as any other relevant facts and circumstances.
SALES CHARGES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.5% of the public offering price. Because of this initial
sales charge, not all of a Class A shareholder's purchase price is invested in
the Fund. Class B shares are sold with no initial sales charge, but a contingent
deferred sales charge of up to 5% of the redemption proceeds applies to
redemptions made within six years of purchase. Class D shareholders pay no
initial or contingent deferred sales charges. Thus, the entire amount of a Class
B or Class D shareholder's purchase price is immediately invested in the Fund.
WAIVERS AND REDUCTIONS OF CLASS A SALES CHARGES. Class A share purchases
over $50,000 and Class A share purchases made under the Fund's reduced sales
charge plan may be made at a reduced sales charge. In considering the combined
cost of sales charges and ongoing annual expenses, investors should take into
account any reduced sales charges on Class A shares for which they may be
eligible.
The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class D shares, investors eligible for complete waivers
should purchase Class A shares.
ONGOING ANNUAL EXPENSES. All three Classes of Fund shares pay an annual
12b-1 service fee of 0.25% of average daily net assets. Class B and Class D
shares pay an annual 12b-1 distribution fee of 0.75% of average daily net
assets. Annual 12b-1 distribution fees are a form of
8
<PAGE>
asset-based sales charge. An investor should consider both ongoing annual
expenses and initial or contingent deferred sales charges in estimating the
costs of investing in the respective Classes of Fund shares over various time
periods.
For example, assuming a constant net asset value, the cumulative
distribution fees on the Fund's Class B or Class D shares and the 4.5% maximum
initial sales charge on the Fund's Class A shares would all be approximately
equal if the shares were held for six years. Because Class B shares convert to
Class A shares (which do not bear the expense of ongoing distribution fees)
approximately six years after purchase, an investor expecting to hold Fund
shares for longer than six years would generally pay lower cumulative expenses
by purchasing Class A or Class B shares than by purchasing Class D shares. An
investor expecting to hold Fund shares for less than six years would generally
pay lower cumulative expenses by purchasing Class D shares than by purchasing
Class A shares and, due to the contingent deferred sales charges that would
become payable on redemption of Class B shares, such an investor would generally
pay lower cumulative expenses by purchasing Class D shares than Class B shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net asset
value of Fund shares, which will affect the actual amount of expenses paid.
Expenses borne by Classes may differ slightly because of the allocation of other
Class-specific expenses. The 'Example of Effect of Fund Expenses' under
'Prospectus Summary' shows the cumulative expenses an investor would pay over
time on a hypothetical investment in each Class of Fund shares, assuming an
annual return of 5%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of
compensation for selling one particular Class of Fund shares rather than
another. Investors should understand that distribution fees and initial and
contingent deferred sales charges all are intended to compensate Mitchell
Hutchins for distribution services.
See 'Purchases,' 'Redemptions' and 'Management' for a more complete
description of the initial and contingent 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 regional
commercial banks, thrifts 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 and are well-positioned to take
advantage of regulatory developments in the banking and thrift industries. In
selecting securities for investment, Mitchell 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 banking and thrift
industries.
The Fund may invest up to 35% of its total assets in equity securities of
money center banks, community banks, other financial services companies and
other issuers (whether or not involved
9
<PAGE>
in 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.
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 ('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 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.
The Fund categorizes financial institutions as follows. Regional banks are
domestic commercial banks (other than money center banks) with consolidated
assets of $250 million or more and typically conduct business in one state or
two or more states in the same geographic area. Money center banks are
commercial banks located in an international financial center deriving more than
25% of their revenues from international business and having more than 25% of
their consolidated assets outside the United States, and community banks are
commercial banks with assets of less than $250 million that generally operate in
a single, relatively small community. Thrifts include domestic savings
associations, savings banks, building and loan associations, cooperative banks,
homestead associations and similar institutions. The Fund may invest in the
holding companies of commercial banks and thrifts provided that such holding
companies are principally engaged in the operation of one or more commercial
banks or thrifts and related activities. A holding company is 'principally
engaged' in the operation of commercial banks or thrifts and related activities
if such operations comprise more than 50% of its assets on a consolidated basis.
The
10
<PAGE>
Fund invests only in banks and thrifts with deposits that are insured by the
Federal Deposit Insurance Corporation ('FDIC') and in holding companies of such
banks and thrifts. Neither the Fund's portfolio securities nor its shares are
insured by the FDIC.
In selecting securities of regional commercial banks, thrifts and their
holding companies for investment, Mitchell Hutchins considers whether the
institution is:
(1) located in a geographic region experiencing strong economic growth and
able to participate in such growth;
(2) well-managed and currently providing above-average returns on assets
and shareholders' equity;
(3) expanding its business into new financial services or geographic areas;
or
(4) an attractive candidate for acquisition or partner for a business
combination with another bank or thrift as a result of opportunities
created by the trend toward interstate banking. New federal legislation
has been enacted which will eliminate most of the remaining
restrictions on interstate banking over the next few years.
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 BANKING AND THRIFT
INDUSTRIES. Because the Fund's investments are concentrated in the banking and
thrift 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.
Commercial banks, thrifts and their holding companies are especially subject to
the adverse effects of volatile interest rates, portfolio concentrations in
loans to particular businesses such as energy or real estate and competition
from new entrants in their fields of business. Economic conditions in the real
estate market can have a significant effect upon banks and thrifts that have a
substantial percentage of their assets invested in loans secured by real estate.
Commercial banks and thrifts and their holding companies are subject to
extensive federal regulation and, in some cases, to state regulation as well.
However, neither federal insurance of deposits nor governmental regulation of
the bank and thrift industries ensures the solvency or profitability of
commercial banks or thrifts or their holding companies, or insures against the
risks of investing in the equity securities issued by these institutions.
Legislation has been enacted which has altered the regulatory structure and
capital requirements of the banking and thrift industries. This legislation was
enacted as a response to financial problems experienced by a number of banks and
thrifts relating to inadequate capital, adverse economic conditions and alleged
fraud and mismanagement. This legislation also strengthened the civil sanctions
and criminal penalties for defrauding or otherwise damaging depository
institutions and their depositors and curtailed the authority of thrifts to
engage in real estate investment and certain other activities. In addition, the
legislation has given federal regulators substantial authority to use all of the
assets of a bank or thrift holding company to satisfy federal claims against an
insolvent thrift or bank owned by the holding company and mandated regulatory
action against institutions with inadequate capital levels. Legislative and
regulatory actions have also increased the capital requirements applicable to
commercial banks and thrifts. These changes have expanded the risk to holding
company shareholders in the event of the insolvency of any depository
institution owned by the holding company.
11
<PAGE>
There are currently pending legislative proposals that could expose bank
holding companies to well-established competitors, such as securities firms and
insurance companies, as well as companies engaged in other areas of business.
Increased competition may also result from the broadening of interstate banking
powers, which trend has already led to a reduction in the number of publicly
traded regional banks. Additionally, changes in the extent to which the FDIC
will insure deposits may result in a higher cost of funds for banks and thrifts
and the loss of deposits to competitors that are viewed as better capitalized.
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.
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
12
<PAGE>
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 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
13
<PAGE>
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 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 regional commercial banks, thrifts and
their holding companies and its policy of investing only in banks and thrifts
with deposits insured by the FDIC, 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 D shares are sold
without an initial or a contingent deferred sales charge but are subject to
higher ongoing expenses than Class A shares and do not convert into another
Class. See 'Flexible Pricing System' and 'Conversion of Class B Shares.'
Shares of the Fund are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the Transfer
Agent. Investors may contact a local PaineWebber office to open an account. The
minimum initial investment is $1,000, and the minimum for additional purchases
is
14
<PAGE>
$100. These minimums may be waived or reduced for investments by employees of
PaineWebber or its affiliates, certain pension plans and retirement accounts and
participants in the Fund's automatic investment plan. Purchase orders will be
priced at the net asset value per share next determined (see 'Valuation of
Shares') after the order is received by PaineWebber's New York City offices or
by the Transfer Agent, plus any applicable sales charge for Class A shares. The
Fund and Mitchell Hutchins reserve the right to reject any purchase order and to
suspend the offering of Fund shares for a period of time.
When placing purchase orders, investors should specify whether the order is
for Class A, Class B or Class D shares. All share purchase orders that fail to
specify a Class will automatically be invested in Class A shares.
PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due on
the 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 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.
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.
15
<PAGE>
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares are available without
a sales charge through exchanges for Class A shares of most other PaineWebber
and MH/KP mutual funds. See 'Exchanges.' In addition, Class A shares may be
purchased without a sales charge, and exchanges of any Class of shares made
without the $5.00 exchange fee, by employees, directors and officers of
PaineWebber or its affiliates, directors or trustees and officers of any
PaineWebber or MH/KP mutual funds, their spouses, parents and children and
advisory clients of Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the purchase
is made through a PaineWebber investment executive who formerly was employed as
a broker with another firm registered as a broker-dealer with the SEC, provided
(1) the purchaser was the investment executive's client at the competing
brokerage firm, (2) within 90 days of the purchase of Class A shares the
purchaser redeemed shares of one or more mutual funds for which that competing
firm or its affiliates was principal underwriter, provided the purchaser either
paid a sales charge to invest in those funds, paid a contingent deferred sales
charge upon redemption or held shares of those funds for the period required not
to pay the otherwise applicable contingent deferred sales charge and (3) the
total amount of shares of all PaineWebber and MH/KP mutual funds purchased under
this sales charge waiver does not exceed the amount of the purchaser's
redemption proceeds from the competing firm's funds. To take advantage of this
waiver, an investor must provide satisfactory evidence that all the above-noted
conditions are met. Qualifying investors should contact their PaineWebber
investment executives for more information.
Certificate holders of unit investment trusts ('UITs') sponsored by
PaineWebber may acquire Class A shares of the Fund without regard to minimum
investment requirements and without sales charges by electing to have dividends
and other distributions from their UIT investment automatically invested in
Class A shares.
REDUCED SALES CHARGE PLANS--CLASS A SHARES. If an investor or eligible
group of related Fund investors purchases Class A shares concurrently with Class
A shares of other PaineWebber or MH/KP mutual funds, the purchases may be
combined to take advantage of the reduced sales charge applicable to larger
purchases. In addition, the right of accumulation permits a Fund investor or
eligible group of related Fund investors to pay the lower sales charge
applicable to larger purchases by basing the sales charge on the dollar amount
of Class A shares currently being purchased, plus the net asset value of the
investor's or group's total existing Class A shareholdings in other PaineWebber
or MH/KP mutual funds.
An 'eligible group of related Fund investors' includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ('IRA'), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to Minors
Act/Uniform Transfers to Minors Act accounts created by the individual or
eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes a group of
related employers and one or more qualified retirement plans of such employers.
For more information, an investor should consult the Statement of Additional
Information or contact a PaineWebber investment executive or correspondent firm
or the Transfer Agent.
CONTINGENT DEFERRED SALES CHARGE-- CLASS B SHARES. The public offering
price of the Class B shares is the next determined net asset value, and no
initial sales charge is imposed. A contingent deferred sales charge, however, is
16
<PAGE>
imposed upon certain redemptions of Class B shares.
Class B shares that are redeemed will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents (1)
capital appreciation of Fund assets, (2) reinvestment of dividends or capital
gain distributions or (3) shares redeemed more than six years after their
purchase. Otherwise, redemptions of Class B shares will be subject to a
contingent deferred sales charge. The amount of any applicable contingent
deferred sales charge will be calculated by multiplying the net asset value of
such shares at the time of redemption by the applicable percentage shown in the
table below.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED SALES
CHARGE AS A
PERCENTAGE OF NET
REDEMPTION ASSET VALUE AT
DURING REDEMPTION
- ----------------------------------- -----------------
<S> <C>
1st Year Since Purchase............ 5%
2nd Year Since Purchase............ 4
3rd Year Since Purchase............ 3
4th Year Since Purchase............ 2
5th Year Since Purchase............ 2
6th Year Since Purchase............ 1
7th Year Since Purchase............ None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of Class B shares
representing capital appreciation, next of shares representing the reinvestment
of dividends and capital gain distributions and finally of other shares held by
the shareholder for the longest period of time. The holding period of Class B
shares acquired through an exchange with another PaineWebber mutual fund will be
calculated from the date that the Class B shares were initially acquired in one
of the other PaineWebber funds, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gain distribution reinvestments in such other funds. This will result in
any contingent deferred sales charge being imposed at the lowest possible rate.
For federal income tax purposes, the amount of the contingent deferred sales
charge will reduce the gain or increase the loss, as the case may be, on the
amount realized on redemption. The amount of any contingent deferred sales
charge will be paid to Mitchell Hutchins.
SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge
will be waived for exchanges, as described below, and for redemptions in
connection with the Fund's systematic withdrawal plan. In addition, the
contingent deferred sales charge will be waived for: a total or partial
redemption made within one year of the death of the shareholder. The contingent
deferred sales charge waiver is available where the decedent is either the sole
shareholder or owns the shares with his or her spouse as a joint tenant with
right of survivorship. This waiver applies only to redemption of shares held at
the time of death. The contingent deferred sales charge will also be waived in
connection with a lump-sum or other distribution in the case of an IRA,
self-employed individual retirement plan (so-called 'Keogh Plan') or custodial
account under Section 403(b) of the Internal Revenue Code following attainment
of age 59 1/2; any 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.
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<PAGE>
PURCHASE OF CLASS D SHARES. The public offering price of the Class D
shares of the Fund is the next determined net asset value. No initial or
contingent deferred sales charge is imposed.
EXCHANGES
Shares of the Fund may be exchanged for shares of the corresponding Class
of the PaineWebber and MH/KP mutual funds listed below, or may be acquired
through an exchange of shares of the corresponding Class of those funds. No
initial sales charge is imposed on the shares being acquired, and no contingent
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. Class B shares of MH/KP mutual
funds differ from those of PaineWebber mutual funds. Class B shares of MH/KP
mutual funds are equivalent to Class D shares of PaineWebber mutual funds. A
$5.00 exchange fee is charged for each exchange, and exchanges may be subject to
minimum investment requirements of the fund into which exchanges are made.
The other PaineWebber and MH/KP mutual funds with which Fund shares may be
exchanged include:
INCOME FUNDS
o MH/KP ADJUSTABLE RATE GOVERNMENT FUND
o MH/KP GLOBAL FIXED INCOME FUND
o MH/KP GOVERNMENT INCOME FUND
o MH/KP INTERMEDIATE FIXED INCOME
FUND
o PW GLOBAL INCOME FUND
o PW HIGH INCOME FUND
o PW INVESTMENT GRADE INCOME FUND
o PW SHORT-TERM U.S. GOVERNMENT
INCOME FUND
o PW STRATEGIC INCOME FUND
o PW U.S. GOVERNMENT INCOME FUND
TAX-FREE INCOME FUNDS
o MH/KP MUNICIPAL BOND FUND
o PW CALIFORNIA TAX-FREE INCOME FUND
o PW MUNICIPAL HIGH INCOME FUND
o PW NATIONAL TAX-FREE INCOME FUND
o PW NEW YORK TAX-FREE INCOME FUND
GROWTH FUNDS
o MH/KP EMERGING MARKETS EQUITY
FUND
o MH/KP GLOBAL EQUITY FUND
o MH/KP SMALL CAP GROWTH FUND
o PW ATLAS GLOBAL GROWTH FUND
o PW BLUE CHIP GROWTH FUND
o PW CAPITAL APPRECIATION FUND
o PW COMMUNICATIONS & TECHNOLOGY
GROWTH FUND
o PW EUROPE GROWTH FUND
o PW GROWTH FUND
o PW SMALL CAP VALUE FUND
GROWTH AND INCOME FUNDS
o MH/KP ASSET ALLOCATION FUND
o MH/KP EQUITY INCOME FUND
o PW BALANCED FUND
o PW GLOBAL ENERGY FUND
o PW GLOBAL GROWTH AND INCOME FUND
o PW GROWTH AND INCOME FUND
o PW UTILITY INCOME FUND
PAINEWEBBER MONEY MARKET FUND
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms unless the
18
<PAGE>
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 and MH/KP mutual fund shares to be acquired may be
legally made. Before making any exchange, shareholders should contact their
PaineWebber investment executives or correspondent firms or the Transfer Agent
to obtain more information and prospectuses of the PaineWebber and MH/KP mutual
funds to be acquired through the exchange.
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 may redeem non-certificated shares through PaineWebber or its
correspondent firms; all other shareholders must redeem through the Transfer
Agent. If a redeeming shareholder owns shares of more than one Class, the shares
will be redeemed in the following order unless the shareholder specifically
requests otherwise: Class D shares, then Class A shares, and finally Class B
shares.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. Within 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
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<PAGE>
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 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
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<PAGE>
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 D 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. No contingent deferred sales charge will be imposed on
such withdrawals for Class B shares. The minimum amount for all withdrawals
of Class A or Class D shares is $100, and minimum monthly, quarterly and
semi-annual withdrawal amounts for Class B shares are $200, $400 and $600,
respectively. Quarterly withdrawals are made in March, June, September and
December, and semi-annual withdrawals are made in June and December. A
Class B shareholder may not withdraw an amount exceeding 12% annually of
his or her 'Initial Account Balance,' a term that means the value of the
Fund account at the time the shareholder elects to participate in the
systematic withdrawal plan. A Class B shareholder's participation in the
systematic withdrawal plan will terminate automatically if the Initial
Account Balance (plus the net asset value on the date of purchase of Fund
shares acquired after the election to participate in the systematic
withdrawal plan), less aggregate redemptions made other than pursuant to
the systematic withdrawal plan, is less than $20,000. Shareholders who
receive dividends or other distributions in cash may not participate in the
systematic withdrawal plan. Purchases of additional Fund shares 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 paid on all Classes of Fund shares are
calculated at the
21
<PAGE>
same time and in the same manner. Dividends on Class B and Class D shares of the
Fund are expected to be lower than those for its Class A shares because of the
higher expenses resulting from distribution fees borne by the Class B and Class
D shares. Dividends on each Class also might be affected differently by the
allocation of other Class-specific expenses. See 'Valuation of Shares.'
Dividends and capital gain distributions 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 that it will be
relieved of federal income tax on that part of its investment company taxable
income (consisting generally of net investment income and net short-term capital
gain) and net capital gain that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid
in cash or in additional shares) generally are taxable to its shareholders as
ordinary income. Distributions of the Fund's net capital gain (whether paid in
cash or in additional shares) are taxable to its shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Shareholders not subject to tax on their income 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
payable to the shareholder are more or less than the shareholder's adjusted
basis for the redeemed shares (which normally includes any initial sales
charge paid on Class A shares). An exchange of Fund shares for shares of
another PaineWebber or MH/KP 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
or MH/KP 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 or
MH/KP 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.
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<PAGE>
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be other
federal, state or local tax considerations applicable to a particular investor.
Prospective shareholders are 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.
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 D 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 June 30, 1995, Mitchell Hutchins was adviser or
subadviser of 41 investment companies with 86 separate portfolios and aggregate
assets of over $27.9 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.
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 D shares ('Class A Plan,' 'Class B Plan' and
'Class D Plan,' collectively, 'Plans'), the Fund pays Mitchell Hutchins
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monthly service fees at the annual rate of 0.25% of the average daily net assets
of each Class of shares and monthly distribution fees at the annual rate of
0.75% of the average daily net assets of the Class B and Class D shares.
Under all three Plans, Mitchell Hutchins uses the service fees primarily to
pay PaineWebber for shareholder servicing, currently at the annual rate of 0.25%
of the aggregate investment amounts maintained in the Fund by PaineWebber
clients. PaineWebber passes on a portion of these fees to its investment
executives to compensate them for shareholder servicing that they perform and
retains the remainder to offset its own expenses in servicing and maintaining
shareholder accounts. These expenses may include costs of the PaineWebber branch
office in which the investment executive is based, such as rent, communications
equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class D
Plans to offset the commissions it pays to PaineWebber for selling Class B
and Class D shares. PaineWebber passes on to its investment executives a
portion of these commissions and retains the remainder to offset its
expenses in selling Class B and Class D shares. These expenses may include
the branch office costs noted above. In addition, Mitchell Hutchins uses
the distribution fees under the Class B and Class D Plans to offset the
Fund's marketing costs attributable to such Classes, such as preparation of
sales literature, advertising and printing and distributing prospectuses
and other shareholder materials to prospective investors. Mitchell Hutchins
also may use the distribution fees to pay additional compensation to
PaineWebber and other costs allocated to Mitchell Hutchins' and
PaineWebber's distribution activities, including employee salaries, bonuses
and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives at
the time of sale of Class D shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class D shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class D shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid
upon the purchase of Class A shares and the contingent deferred sales charge
paid upon certain redemptions of Class B shares, and may use these proceeds for
any of the distribution expenses described above. See 'Purchases.'
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ('Distribution Contracts') obligate
the Fund to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. 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.
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PERFORMANCE INFORMATION
The Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may be
higher or lower than standardized return. Standardized return for the Class A
shares reflects deduction of the Fund's maximum initial sales charge at the time
of purchase, and standardized return for the Class B shares reflects deduction
of the applicable contingent deferred sales charge imposed on a redemption of
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 Regional Financial 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 D shares. Each Class
represents interests in the same assets of the Fund. The Classes differ as
follows: (1) each Class of shares has exclusive voting rights on matters
pertaining to its 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 D shares are subject to neither an initial nor a contingent
deferred sales charge, bear ongoing distribution fees and do not convert into
another Class and (5) each Class may bear differing amounts of certain
Class-specific expenses. The 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
25
<PAGE>
as noted above. Each share of the Fund is entitled to participate equally in
dividends and other distributions and the proceeds of any liquidation except
that, due to the differing expenses borne by the three Classes, dividends and
liquidation proceeds of Class B and Class D shares are likely to be lower than
for the Class A shares.
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.
26
<PAGE>
APPENDIX A
The Fund may use the following hedging instruments:
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.
A-1
Shares of the Fund can be exchanged for shares of the following PaineWebber
('PW') and Mitchell Hutchins/Kidder Peabody ('MH/KP') Mutual Funds:
INCOME FUNDS
o MH/KP Adjustable Rate Government Fund
o MH/KP Global Fixed Income Fund
o MH/KP Government Income Fund
o MH/KP Intermediate Fixed Income Fund
o PW Global Income Fund
o PW High Income Fund
o PW Investment Grade Income Fund
o PW Short-Term U.S. Government Income Fund
o PW Strategic Income Fund
o PW U.S. Government Income Fund
TAX-FREE INCOME FUNDS
o MH/KP Municipal Bond Fund
o PW California Tax-Free Income Fund
o PW Municipal High Income Fund
o PW National Tax-Free Income Fund
o PW New York Tax-Free Income Fund
GROWTH FUNDS
o MH/KP Emerging Markets Equity Fund
o MH/KP Global Equity Fund
o MH/KP Small Cap Growth Fund
o PW Atlas Global Growth Fund
o PW Blue Chip Growth Fund
o PW Capital Appreciation Fund
o PW Communications & Technology Growth Fund
o PW Europe Growth Fund
o PW Growth Fund
o PW Small Cap Value Fund
GROWTH AND INCOME FUNDS
o MH/KP Asset Allocation Fund
o MH/KP Equity Income Fund
o PW Balanced Fund
o PW Global Energy Fund
o PW Global Growth and Income Fund
o PW Growth and Income Fund
o PW Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
------------------------
A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read the prospectus carefully before
investing.
(Copyright) 1995 PaineWebber Incorporated
[LOGO] Recycled
Paper
PAINEWEBBER
REGIONAL
FINANCIAL
GROWTH FUND INC.
- ------------------------------------------------------
/ / LONG-TERM CAPITAL APPRECIATION
/ / PROFESSIONAL MANAGEMENT
/ / PORTFOLIO DIVERSIFICATION
/ / DIVIDEND AND CAPITAL GAIN REINVESTMENT
/ / FLEXIBLE PRICING(Service Mark)
/ / LOW MINIMUM INVESTMENT
/ / AUTOMATIC INVESTMENT PLAN
/ / SYSTEMATIC WITHDRAWAL PLAN
/ / EXCHANGE PRIVILEGES
/ / SUITABLE FOR RETIREMENT PLANS
- ------------------------------------------------------
PROSPECTUS
August 1, 1995
<PAGE>
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Regional Financial Growth Fund Inc. ('Fund') is a diversified,
professionally managed mutual fund. The Fund seeks long-term capital
appreciation with investments primarily in regional commercial banks, thrift
institutions and their holding 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 August 1, 1995. A copy
of the Prospectus may be obtained by calling any PaineWebber investment
executive or correspondent firm or by calling toll-free 1-800-647-1568. This
Statement of Additional Information is dated August 1, 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 ('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 Appendix A to this Statement
of Additional Information. The Fund may use these ratings in determining whether
to purchase, sell or hold a security. These ratings represent 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
<PAGE>
with respect to which a registration statement is in effect under the Securities
Act of 1933 ('1933 Act'). Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities, and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a 'safe harbor' from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
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
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repurchase price, plus any agreed-upon additional amount. The difference between
the total amount to be received upon repurchase of the securities and the price
that was paid by the Fund upon acquisition is accrued as interest and included
in the Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible 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 stated in the Prospectus, the Fund may
lend a portion of the total value of its portfolio securities 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
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<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
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<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 or group of related
industries (other than the related group of industries consisting of the banking
industry and the thrift 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; (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 obligations, short-term
commercial paper, certificates of deposit and bankers' acceptances
5
<PAGE>
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.
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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 Appendix A to the Prospectus.
Hedging strategies can be broadly categorized as 'short hedges' and 'long
hedges.' A short hedge is a purchase or sale of a Hedging Instrument intended 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
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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 regional commercial banks and thrift
institutions 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
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<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.
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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.
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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 business addresses
and principal occupations during the past five years and ages 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
68** 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 26 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 52 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.,
Inco Homes Corporation 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; 65 Director Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was
a partner in the
law firm of Fryer, Ross & Gowen.
Mr. Gowen is also a director of
Columbia Real Estate Investments,
Inc. and a director
or trustee of 15 other investment
companies for which Mitchell
Hutchins or
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
PaineWebber serves as investment
adviser.
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.
Frank P.L. Minard; 50** Director Mr. Minard is chairman of the board
of Mitchell Hutchins, chairman of
the board of Mitchell Hutchins
Institutional Investors Inc. and
a director of PaineWebber. Prior
to 1993, Mr. Minard was managing
director of Oppenheimer Capital
in New York and Director of
Oppenheimer Capital Ltd. in
London. Mr. Minard is also a
director or trustee of 29 other
investment companies for which
Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
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 Ogden Corporation and
a director or trustee of 15 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Thomas F. Murray; 84 Director Mr. Murray is a real estate and
400 Park Avenue financial consultant. Mr. Murray
New York, New York 10022 is also a director and chairman
of American Continental
Properties, Inc., a trustee of
Prudential Realty Trust 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 president of 39 and a
trustee of one other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Teresa M. Boyle; 36 Vice President Ms. Boyle is a 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 39 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
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
of Seward & Kissell. Ms. Cohen is
also a vice president and
assistant secretary of 26 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Karen L. Finkel; 37 Vice President Mrs. Finkel is a first vice
president and portfolio manager
of Mitchell Hutchins. Mrs. Finkel
is also a vice president of two
other investment companies for
which Mitchell Hutchins serves as
investment adviser.
Ellen R. Harris; 49 Vice President Ms. Harris is a managing director
of Mitchell Hutchins. Ms. Harris
is also a vice president of 18
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
C. William Maher; 34 Vice President Mr. Maher is 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 26 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 38 Vice President Ms. Moran is a vice president of
and Assistant Mitchell Hutchins. Ms. Moran is
Treasurer also a vice president and
assistant treasurer of 39 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 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 39
other investment companies for
which Mitchell Hutchins and
PaineWebber serves as investment
adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
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 39 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 32 Vice President Mr. Schubert is a vice president of
and Assistant Mitchell Hutchins. From August
Treasurer 1992 to August 1994, he was a
vice president of BlackRock
Financial Management, L.P. Prior
to August 1992, he was an audit
manager with Ernst & Young LLP.
Mr. Schubert is also a vice
president and assistant
treasurer of 39 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Martha J. Slezak; 33 Vice President Ms. Slezak is a vice president of
and Assistant Mitchell Hutchins. From September
Treasurer 1991 to April 1992, she was a
fundraising director for a U.S.
Senate campaign. Prior to
September 1991, she was a tax
manager with Arthur Andersen &
Co. LLP. Ms. Slezak is also a
vice president and assistant
treasurer of 39 other investment
companies for which Mitchell
Hutchins or 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. Mr. Sluyters
is also a vice president and
treasurer of 39 other investment
companies for which Mitchell
Hutchins or
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
PaineWebber serves as investment
adviser.
Gregory K. Todd; 38 Vice President Mr. Todd is a first vice president
and Assistant and
Secretary associate general counsel of
Mitchell Hutchins. Prior to 1993,
he was a partner in the law firm
of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice
president and assistant secretary
of 39 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes and Minard are 'interested persons' of the Fund as defined in
the Investment Company Act of 1940 ('1940 Act') by virtue of their positions
with PW Group, PaineWebber and/or Mitchell Hutchins.
The 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 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
</TABLE>
19
<PAGE>
<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>
Frederic V. Malek ............
Director $3,000 -- -- $ 77,875
Frank P.L. Minard ............
Director -- -- -- --
Judith Davidson Moyers .......
Director $2,500 -- -- $ 71,125
Thomas F. Murray .............
Director $2,750 -- -- $ 71,925
</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.
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
20
<PAGE>
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 $100 million. Certain
expenses, such as brokerage commissions, taxes, interest, distribution fees and
extraordinary items, are excluded from this limitation. No reimbursements were
required for the 1995, 1994 and 1993 fiscal years pursuant to state regulation.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon assignment and is terminable at any time without penalty by
the Fund's board of directors or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.
The following table shows the approximate net assets as of June 30, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- ------------------------------------------------------------ -----------
<S> <C>
Domestic (excluding Money Market)........................... $ 5,655.1
Global...................................................... 3,266.9
Equity/Balanced............................................. 2,731.9
Fixed Income (excluding Money Market)....................... 6,190.1
Taxable Fixed Income................................... 4,435.2
Tax-Free Fixed Income.................................. 1,754.9
Money Market Funds.......................................... 19,093.6
</TABLE>
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of other PaineWebber and Mitchell Hutchins/Kidder Peabody ('MH/KP')
funds and other Mitchell Hutchins advisory accounts by all Mitchell Hutchins
directors, officers and employees, establishes procedures for personal investing
and restricts certain transactions. For example, employee accounts generally
must be maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber and MH/KP funds and other Mitchell Hutchins advisory clients.
21
<PAGE>
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class A, Class B and Class D shares of the Fund under separate distribution
contracts with the Fund dated July 7, 1993 (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 relating
to the Class A, Class B and Class D shares of the Fund (collectively, 'Exclusive
Dealer Agreements'), PaineWebber and its correspondent firms sell the Fund's
shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class D shares adopted by the Fund in the manner prescribed under Rule 12b-1
under the 1940 Act ('Class A Plan,' 'Class B Plan' and 'Class D Plan,'
collectively, 'Plans'), the Fund pays Mitchell Hutchins a service fee, accrued
daily and payable monthly, at the annual rate of 0.25% of the average daily net
assets of each Class of shares. Under the Class B Plan and Class D 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 D shares, respectively.
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 D
Plans:
<TABLE>
<S> <C>
Class A..................................................... $ 124,319
Class B..................................................... $ 142,332
Class D..................................................... $ 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 D
--------- ----------- -----------
<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>
22
<PAGE>
'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 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 D Plan for the Fund, the directors considered all
the features of the distribution system, including (1) the advantage to
investors in having no initial sales charges deducted from the Fund's purchase
payments and instead having the entire amount of their purchase payments
23
<PAGE>
immediately invested in Fund shares, (2) the advantage to investors in being
free from contingent deferred sales charges upon redemption and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber investment executives and correspondent firms to receive sales
compensation for their sales of Class D shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class D shares and do not face contingent deferred sales
charges, would prove attractive to the investment executives and correspondent
firms, resulting in greater growth to the Fund than might otherwise be the case,
(4) the advantages to the shareholders of economies of scale resulting from
growth in the Fund's assets and potential continued growth, (5) the services
provided to the Fund and its shareholders by Mitchell Hutchins, (6) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The directors also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption, was conditioned
upon its expectation of being compensated under the Class D Plan.
With respect to each Plan, the directors considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The directors also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated 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
24
<PAGE>
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 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-
25
<PAGE>
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 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 or MH/KP
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.
26
<PAGE>
An 'eligible group of related Fund investors' can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
or
(g) an employer (or a group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer).
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related Fund investors (as defined above) are permitted to purchase
Class A shares of the Fund among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A Fund shares and Class A shares of any other PaineWebber or
MH/KP mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares 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
27
<PAGE>
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 or MH/KP mutual funds.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or the Fund temporarily
delays or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the Fund's investment objective, policies and
restrictions.
If conditions exist which make cash payments undesirable, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. 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 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
28
<PAGE>
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.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(Service Mark);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA(REGISTERED))
Shares of the PaineWebber and MH/KP 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.
29
<PAGE>
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;
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 five RMA money market funds--RMA Money Market Portfolio,
RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California
Municipal Money Fund and RMA New York Municipal Money Fund. Each 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
30
<PAGE>
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 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.
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
31
<PAGE>
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.
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>
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to
purchase shares of a specified Class
T = average annual total return of shares of that
Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment 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 shares the applicable contingent deferred sales charge imposed on a
redemption of Class B shares held for the period is deducted. All dividends and
other distributions are assumed to have been reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). The Fund
32
<PAGE>
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 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 D
------- ------- -------
<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>
- ------------------
* The Standardized Return data have been recomputed to reflect the current
maximum initial sales charge on Class A shares of 4.5% that went into effect on
April 12, 1990 on the commencement of the Fund's continuous offering of its
shares. The data does not reflect the experience of an investor in the Fund
while it was a closed-end investment company. All Standardized Return figures
for Class B shares reflect deduction of the applicable contingent deferred sales
charge imposed on a redemption of shares held for the period. Class D shares do
not impose an initial or a contingent deferred sales charge; therefore,
Non-Standardized Return is identical to Standardized Return.
** The inception dates for the Class A, Class B and Class D 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
33
<PAGE>
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 Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote(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.
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
34
<PAGE>
(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.
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'). 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
35
<PAGE>
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to 'mark-to-market' their stock in certain PFICs.
'Marking-to-market,' in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the owner's adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
The 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 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
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 C shares in addition to Class A,
Class B and Class D shares, but the Fund's board of directors has no current
intention of doing so. Class C shares, if issued, would bear no service or
distribution fees, would be sold with no initial sales charge and would be
redeemable at net asset value without the imposition of a contingent deferred
sales charge.
CLASS-SPECIFIC EXPENSES. The Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those borne
by Class A or Class D shares. The higher fee is imposed due to the higher costs
incurred by the Transfer Agent in tracking shares subject to a contingent
deferred sales charge
36
<PAGE>
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 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
37
<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; AA. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which 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.
38
<PAGE>
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39
<PAGE>
[This page intentionally left blank]
40
<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................................. 20
Portfolio Transactions......................... 24
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 26
Conversion of Class B Shares................... 31
Valuation of Shares............................ 31
Performance Information........................ 32
Taxes.......................................... 34
Other Information.............................. 36
Financial Statements........................... 37
Appendix A..................................... 38
</TABLE>
PAINEWEBBER
REGIONAL FINANCIAL
GROWTH FUND INC.
- ------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1995
(Copyright) 1995 PaineWebber Incorporated
[LOGO] Recycled Paper
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included in Part A of this Registration Statement:
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 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.
C-1
<PAGE>
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) Amended and Restated Articles of
Incorporation 2/
(2) (a) By-Laws as amended 2/
(b) Certificate of Amendment dated September 28,
1994 to By-Laws - (filed herewith)
(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
D shares 10/
(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 D shares 10/
(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, counsel to the Registrant, with
respect to Class A and B shares 5/
(b) Opinion and consent of Kirkpatrick &
Lockhart, counsel to the registrant, with
respect to Class D shares 7/
C-2
<PAGE>
(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 D 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 D shares 8/
(17) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
1/ Incorporated by reference from Pre-Effective Amendment
No. 2 to the registration statement 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
C-3
<PAGE>
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 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.
Item 25. Persons Controlled by or under Common Control with
Registrant
-------------------------------------------------
None
Item 26. Number of Holders of Securities
-------------------------------
Title of Class Number of Record Holders
as of July 18, 1995
--------------- ------------------------
Shares of Common Stock,
par value $0.001 per share
PaineWebber Regional
Financial Growth Fund Inc.
Class A Shares 5,304
Class B Shares 1,959
Class D Shares 603
Item 27. Indemnification
---------------
C-4
<PAGE>
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
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
C-5
<PAGE>
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.
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
C-6
<PAGE>
connection with the successful defense of any action, suit or proceeding
or payment pursuant to any insurance policy) is asserted against the
Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered
investment adviser and is a wholly owned subsidiary of PaineWebber which
is, in turn, a wholly owned subsidiary of Paine Webber Group Inc.
Mitchell Hutchins is primarily engaged in the investment advisory
business. 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 EQUITY INCOME FUND, INC.
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME 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 ATLAS 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
C-7
<PAGE>
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
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:
Positions and Positions and Offices
Name and Principal Offices With With Underwriter or
Business Address Registrant Exclusive Dealer
------------------ ------------- ----------------------
Frank P.L. Minard Director Chairman of the Board of
1285 Avenue of the Mitchell Hutchins and a
Americas Director of Mitchell
New York, NY 10019 Hutchins and PaineWebber
Margo N. Alexander President President, Chief
1285 Avenue of the Executive Officer and a
Americas Director of Mitchell
New York, NY 10019 Hutchins
Teresa M. Boyle Vice President First Vice President and
1285 Avenue of the Manager - Advisory
Americas Administration of
New York, NY 10019 Mitchell Hutchins
C-8
<PAGE>
Positions and Positions and Offices
Name and Principal Offices With With Underwriter or
Business Address Registrant Exclusive Dealer
------------------ ------------- ----------------------
Joan L. Cohen Vice President Vice President and
1285 Avenue of the Attorney of Mitchell
Americas Hutchins
New York, NY 10019
Karen Finkel Vice President First Vice President and
1285 Avenue of the Portfolio Manager of
Americas Mitchell Hutchins
New York, NY 10019
Ellen R. Harris Vice President Managing Director and
1285 Avenue of the Chief Domestic Equity
Americas Strategist of Mitchell
New York, NY 10019 Hutchins
C. William Maher Vice President First Vice President of
1285 Avenue of the and Assistant Mitchell Hutchins
Americas Treasurer
New York, NY 10019
Ann E. Moran Vice President Vice President of
1285 Avenue of the and Assistant Mitchell Hutchins
Americas Treasurer
New York, NY 10019
Dianne E. O'Donnell Vice President Senior Vice President and
1285 Avenue of the and Secretary Deputy General Counsel of
Americas Mitchell Hutchins
New York, NY 10019
Victoria E. Schonfeld Vice President Managing Director and
1285 Avenue of the General Counsel of
Americas Mitchell Hutchins
New York, NY 10019
C-9
<PAGE>
Positions and Positions and Offices
Name and Principal Offices With With Underwriter or
Business Address Registrant Exclusive Dealer
------------------ ------------- ----------------------
Paul H. Schubert Vice President Vice President of
1285 Avenue of the and Assistant Mitchell Hutchins
Americas Treasurer
New York, NY 10019
Martha J. Slezak Vice President Vice President of
1285 Avenue of the and Assistant Mitchell Hutchins
Americas Treasurer
New York, NY 10019
Julian F. Sluyters Vice President Senior Vice President and
1285 Avenue of the and Treasurer Director of Mutual Fund
Americas Finance Division of
New York, NY 10019 Mitchell Hutchins
Gregory K. Todd Vice President First Vice President and
1285 Avenue of the and Assistant Associate General Counsel
Americas Secretary of Mitchell Hutchins
New York, NY 10019
(c) None
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4),
(c) and (d) of Rule 31a-1 under the Investment Company Act of 1940 are
maintained in the physical possession of Mitchell Hutchins, 1285 Avenue of
the Americas, New York, New York 10019. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession
of Registrant's transfer agent and custodian.
Item 31. Management Services
-------------------
Not applicable.
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-10
<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., certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment No. 11 to
its Registration Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this Post-Effective Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, in this City
of New York and State of New York, on the 27th day of July, 1995.
PAINEWEBBER REGIONAL FINANCIAL
GROWTH FUND INC.
/s/ Dianne E. O'Donnell
By:------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
---------- ----- ----
/s/Margo N. Alexander President July 27, 1995
------------------------- (Chief Executive
Margo N. Alexander* Officer)
/s/E. Garrett Bewkes, Jr. Director and Chairman of July 27, 1995
------------------------- the Board of Directors
E. Garrett Bewkes, Jr.**
/s/Meyer Feldberg Director July 27, 1995
-------------------------
Meyer Feldberg***
/s/George W. Gowen Director July 27, 1995
-------------------------
George W. Gowen****
/s/Frederic V. Malek Director July 27, 1995
--------------------------
Frederic V. Malek****
/s/Frank P. L. Minard Director July 27, 1995
--------------------------
Frank P. L. Minard**
C-11
<PAGE>
/s/Judith Davidson Moyers Director July 27, 1995
--------------------------
Judith Davidson Moyers****
/s/Thomas F. Murray Director July 27, 1995
--------------------------
Thomas F. Murray****
/s/Julian F. Sluyters Vice President and July 27, 1995
-------------------------- Treasurer (Principal
Julian F. Sluyters Financial and Accounting
Officer)
C-12
<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.
** Signatures affixed by Elinor W. Gammon pursuant to powers of
attorney dated January 3, 1994 and November 20, 1993, respectively, 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.
C-13
<PAGE>
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
EXHIBIT INDEX
-------------
Exhibit
Number Page
-------- ----
(1) Amended and Restated Articles of Incorporation 2/
(2) (a) By-Laws as amended 2/
(b) Certificates of Amendment dated September 28, 1994 to
By-Laws - (filed herewith)
(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 D shares 10/
(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 D shares 10/
(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, counsel to the
Registrant, with respect to Class A and B shares 5/
(b) Opinion and consent of Kirkpatrick & Lockhart, counsel to the
registrant, with respect to Class D 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 D 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 D shares 8/
(17) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
1/
Incorporated by reference from Pre-Effective Amendment No. 2 to the
registration statement 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
and from Articles II, VIII, X, XI and XII of the Registrant's By-
Laws, as amended September 28, 1994.
<PAGE>
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.
<PAGE>
AMENDMENT TO BY-LAWS
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
CERTIFICATE OF VICE PRESIDENT AND ASSISTANT SECRETARY
I, Joan L. Cohen, Vice President and Assistant Secretary of PaineWebber
Regional Financial Growth Fund Inc. ('Fund'), hereby certify that, at a duly
convened meeting of the Board of Directors of the Fund held on September 28,
1994, the Directors adopted the following resolution:
RESOLVED, that the following language replace the second and third sentences
and revises the first sentence of Section 2.07 of the Fund's by-laws:
The right to vote by proxy shall exist only if the proxy is
authorized to act by (1) a written instrument, dated not more
than eleven months prior to the meeting and executed either by
the stockholder or by his or her duly authorized attorney in
fact (who may be so authorized by a writing or by any
non-written means permitted by the laws of the State of
Maryland) or (2) such electronic, telephonic, computerized or
other alternative means as may be approved by a resolution
adopted by the Directors.
Dated: June 19, 1995
By: /s/ Joan L. Cohen
_________________________________
Joan L. Cohen
Vice President and Assistant
Secretary
PaineWebber Regional Financial
Growth Fund Inc.
New York, New York (ss)
Subscribed and sworn before me this 19th day of June, 1995.
Jennifer Farrell
Notary Public
EXHIBIT 11
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/ Ernest & Young LLP
-----------------------------
ERNST & YOUNG LLP
New York, New York
July 26, 1995
EXHIBIT 18
PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
PaineWebber Regional Financial Growth Fund Inc. ("Fund") hereby
adopts this Multiple Class Plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940, as amended (the "1940 Act").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
-----------------------------------------------
1. Class A Shares. Class A shares of the Fund are sold to
the general public subject to an initial sales charge. The initial sales
charge for the Fund is waived for certain eligible purchasers and reduced
or waived for certain large volume purchases.
The maximum sales charge is 4.5% of the public offering price for
Class A shares of the Fund.
Class A shares of the Fund are subject to an annual service fee
based on a percentage of the average daily net assets of the Class A
shares of the Fund paid pursuant to a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
Class A shares of the Fund issued on or after November 1, 1995
will be subject to a contingent deferred sales charge ("CDSC") on
redemptions of shares (i) purchased without an initial sales charge due to
a sales charge waiver for purchases of $1 million or more and (ii) held
less than one year. The Class A CDSC is equal to 1% of the lower of:
(i) the net asset value of the shares at the time of purchase or (ii) the
net asset value of the shares at the time of redemption. Class A shares
of the Fund held one year or longer and Class A shares of the Fund
acquired through reinvestment of dividends or capital gains distributions
on shares otherwise subject to a Class A CDSC are not subject to the CDSC.
The CDSC for Class A shares of the Fund will be waived under certain
circumstances.
2. Class B Shares. Class B shares of the Fund are sold to
the general public subject to a CDSC, but without imposition of an initial
sales charge.
The maximum CDSC for Class B shares of the Fund is equal to 5% of
the lower of: (i) the net asset value of the shares at the time of
purchase or (ii) the net asset value of the shares at the time of
redemption.
Class B shares of the Fund held six years or longer and Class B
shares of the Fund acquired through reinvestment of dividends or capital
gains distributions are not subject to the CDSC.
Class B shares of the Fund are subject to an annual service fee
of .25% of average daily net assets and a distribution fee of .75% of
average daily net assets of the Class B shares of the Fund, each paid
PaineWebber Regional Financial Growth Fund Inc.
Multiple Class Plan
Page 2
pursuant to a plan of distribution adopted pursuant to Rule 12b-1 under
the 1940 Act.
Class B shares of the Fund convert to Class A shares
approximately six years after issuance at relative net asset value.
3. Class C Shares. Class C shares are sold without
imposition of an initial sales charge or CDSC and are not subject to any
service or distribution fees.
Class C shares of the Fund are available for purchase only by:
(i) employee benefit and retirement plans, other than individual
retirement accounts and self-employed retirement plans, of Paine Webber
Group Inc. and its affiliates; (ii) certain unit investment trusts
sponsored by PaineWebber Incorporated; (iii) participants in certain wrap
fee investment advisory programs that are currently or in the future
sponsored by PaineWebber Incorporated and that may invest in PaineWebber
proprietary funds, provided that shares are purchased through or in
connection with those programs; and (iv) the holders of Class C shares of
any Mitchell Hutchins/Kidder Peabody ("MH/KP") mutual fund provided that
such shares are issued in connection with the reorganization of a MH/KP
mutual fund into the Fund.
4. Class D Shares. Class D shares of the Fund are sold to
the general public without imposition of a sales charge.
Class D shares of the Fund are subject to an annual service fee
of .25% of average daily net assets and a distribution fee of .75% of
average daily net assets of Class D shares of the Fund, each pursuant to a
plan of distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
Class D shares of the Fund issued on or after November 1, 1995
will be subject to a CDSC on redemptions of Class D shares held less than
one year equal to 1% of the lower of: (i) the net asset value of the
shares at the time of purchase or (ii) the net asset value of the shares
at the time of redemption.
Class D shares of the Fund held one year or longer and Class D
shares of the Fund acquired through reinvestment of dividends or capital
gains distributions are not subject to the CDSC. The CDSC for Class D
shares of the Fund will be waived under certain circumstances.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
---------------------------------
Certain expenses may be attributable to a particular Class of
shares of the Fund ("Class Expenses"). Class Expenses are charged
directly to the net assets of the particular Class and, thus, are borne on
a pro rata basis by the outstanding shares of that Class.
PaineWebber Regional Financial Growth Fund Inc.
Multiple Class Plan
Page 3
In addition to the distribution and service fees described above,
each Class may also pay a different amount of the following other
expenses:
(1) printing and postage expenses related to
preparing and distributing materials
such as shareholder reports,
prospectuses, and proxies to current
shareholders of a specific Class;
(2) Blue Sky registration fees incurred by a specific
Class of shares;
(3) SEC registration fees incurred by a specific
Class of shares;
(4) expenses of administrative personnel and services
required to support the shareholders of a
specific Class of shares;
(5) Directors' fees incurred as a result of issues
relating to a specific Class of shares;
(6) litigation expenses or other legal expenses
relating to a specific Class of shares; and
(7) transfer agent fees identified as being
attributable to a specific Class.
C. EXCHANGE PRIVILEGES:
-------------------
Class A, Class B and Class D shares of the Fund may be exchanged
for shares of the corresponding Class of other PaineWebber mutual funds
and MH/KP mutual funds, or may be acquired through an exchange of shares
of the corresponding Class of those funds. Class C shares of the Fund are
not exchangeable.
These exchange privileges may be modified or terminated by the
Fund, and exchanges may only be made into funds that are legally
registered for sale in the investor's state of residence.
D. CLASS DESIGNATION
-----------------
Subject to approval by the Board of Directors of the Fund, the
Fund may alter the nomenclature for the designations of one or more of its
classes of shares.
PaineWebber Regional Financial Growth Fund Inc.
Multiple Class Plan
Page 4
E. ADDITIONAL INFORMATION:
----------------------
This Multiple Class Plan is qualified by and subject to the terms
of the then current prospectus for the applicable Class; provided,
however, that none of the terms set forth in any such prospectus shall be
inconsistent with the terms of the Classes contained in this Plan. The
prospectus for each Class contains additional information about that Class
and the Fund's multiple class structure.
F. DATE OF EFFECTIVENESS:
---------------------
This Multiple Class Plan is effective as of the date hereof,
provided that the CDSC imposed on the Class A shares and Class D shares of
the Fund shall apply only to Class A shares and Class D shares issued on
or after November 1, 1995.
July 20, 1995
