<PAGE>
As filed with the Securities and Exchange Commission on November 23, 1998
1933 Act Registration No. 33-39659
1940 Act Registration No. 811-6292
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 25 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 25 [ X ]
(Check appropriate box or boxes.)
PAINEWEBBER INVESTMENT TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, ESQ.
BENJAMIN J. HASKIN, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W. 2nd Floor
Washington, D.C. 20036-1800
Telephone (202) 778-9000
Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.
[ ] Immediately upon filing pursuant to Rule 485(b)
[x] On November 30, 1998 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] On pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
PaineWebber Investment Trust
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PaineWebber Investment Trust:
PaineWebber Tactical Allocation Fund
Form N-lA Cross Reference Sheet
Part A Item No. and Caption Prospectus Caption
--------------------------- ------------------
1. Cover Page Cover Page
2. Synopsis The Funds at a Glance;
Expense Table
3. Condensed Financial Information Financial Highlights;
Performance
4. General Description of Registrant The Funds at a Glance;
Investment Objectives &
Policies; Investment
Philosophy & Process;
The Funds' Investments;
General Information
5. Management of the Fund Management; General
Information
5A.Management's Discussion of Fund Performance Financial Highlights
6. Capital Stock and Other Securities Cover Page; Flexible
Pricing(ServiceMark);
Dividends & Taxes;
General Information
7. Purchase of Securities Being Offered Flexible Pricing
(Service Mark);
How to Buy Shares;
How to Sell Shares;
Other Services;
Management; Determining
the Shares' Net Asset
Value
8. Redemption or Repurchase How to Sell Shares;
Other Services
9. Pending Legal Proceedings Not Applicable
Statement of Additional
Part B Item No. and Caption Information Caption
--------------------------- -------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objectives and Policies Investment Policies and
Restrictions;
Strategies Using
Derivative Instruments;
Portfolio Transactions
14. Management of the Fund Trustees and Officers;
Principal Holders of
Securities
15. Control Persons and Principal Holders of Trustees and Officers;
Securities Principal Holders of
Securities
16. Investment Advisory and Other Services Investment Advisory and
Distribution
Arrangements
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Conversion of Class B
Shares; Other
Information
19. Purchase, Redemption and Pricing of Securities Reduced Sales Charges,
Being Offered Additional Exchange and
Redemption Information
and Other Services;
Valuation of Shares
20. Tax Status Taxes
<PAGE>
Part B Item No. and Caption Information Caption
--------------------------- -------------------
21. Underwriters Investment Advisory and
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>
------------------------------
PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- NOVEMBER 30, 1998
PaineWebber Asset Allocation Funds are designed for investors
generally seeking high total return. PaineWebber Balanced Fund
invests in a combination of equity securities, bonds and money
market instruments and maintains a fixed income allocation of at
least 25% at all times. PaineWebber Tactical Allocation Fund follows
a systematic investment strategy that allocates its assets between
equity securities and U.S. Treasury notes or U.S. Treasury bills.
This Prospectus concisely sets forth information that a prospective
investor should know about the Funds before investing. Please read
this Prospectus carefully and retain a copy for future reference.
A Statement of Additional Information dated November 30, 1998 has
been filed with the Securities and Exchange Commission ("SEC" or
"Commission") and is legally part of this Prospectus. The Statement
of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund,
your PaineWebber investment executive, PaineWebber's correspondent
firms or by calling toll-free 1-800-647-1568. In addition, the
Commission maintains a website (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by
reference, and other information regarding registrants that file
electronically with the Commission.
- --------------------------------------------------------------------------------
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of seven broad
categories, which are presented here. Generally, investors seeking
to maximize return must assume greater risk. The Funds offered by
this Prospectus are both in the ASSET ALLOCATION category.
<TABLE>
<S> <C>
o MONEY MARKET FUND for income and stability by
investing in high-quality, short-term
investments.
o BOND FUNDS for income by investing mainly in
bonds.
o TAX-FREE BOND FUNDS for income exempt from
federal income tax and, in some cases, state and
local income taxes, by investing in municipal
bonds.
o ASSET ALLOCATION FUNDS for high total return by
investing in stocks and bonds.
o STOCK FUNDS for long-term growth by investing
mainly in equity securities.
o GLOBAL FUNDS for long-term growth by investing
mainly in foreign stocks or high current income
by investing mainly in global debt instruments.
o FUNDS OF FUNDS for either long-term growth of
capital; total return; or income and,
secondarily, growth of capital by investing in
other PaineWebber mutual funds.
</TABLE>
A complete listing of the PaineWebber Family of Mutual Funds is
found on the back cover of this Prospectus.
- --------------------------------------------------------------------------------
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED
TO IN THIS PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO SELL SHARES OF THE
FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR DISTRIBUTOR MAY
NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------
Prospectus Page 1
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance................... 3
Expense Table........................... 5
Investment Objectives & Policies........ 7
Investment Philosophy & Process......... 8
Performance............................. 10
The Funds' Investments.................. 13
Flexible Pricing(Service Mark).......... 19
How to Buy Shares....................... 22
How to Sell Shares...................... 23
Other Services.......................... 24
Management.............................. 25
Determining the Shares' Net Asset
Value................................. 27
Dividends & Taxes....................... 27
General Information..................... 28
Financial Highlights.................... 30
</TABLE>
-----------------
Prospectus Page 2
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------
The Funds offered by this Prospectus are not intended to provide a complete
investment program, but one or both of them may be appropriate as a component of
an investor's overall portfolio. Some common reasons to invest in these Funds
are to finance college educations, plan for retirement or diversify a portfolio.
When selling shares, investors should be aware that they may get more or less
for their shares than they originally paid for them. As with any mutual fund,
there is no assurance that the Funds will achieve their goals.
BALANCED FUND
GOAL: To increase the value of your investment by investing in a combination of
equity securities, bonds and money market instruments, while maintaining a fixed
income allocation of at least 25% at all times (including bonds and cash).
INVESTMENT OBJECTIVE: High total return with low volatility.
RISKS: Although Balanced Fund seeks total return, it may not achieve as high a
level of either of the two components of total return -- capital appreciation
and current income -- as a fund that has only one of those objectives as its
primary objective. Equity securities historically have shown greater growth
potential than other types of securities, but they have also shown greater
volatility. Because the Fund invests in equity securities, its price will rise
and fall. Certain bonds in which the Fund may invest have speculative
characteristics. The bonds in which the Fund may invest are subject to interest
rate risk, which means that their prices can be expected to decrease when
interest rates rise. The Fund may invest in mortgage- and asset-backed
securities, which involve additional risks, such as those relating to the
prepayment of principal on the underlying obligations. The Fund may invest in
U.S. dollar-denominated securities of foreign companies, which may involve more
risk than investing in the securities of U.S. companies. The Fund also may
invest up to 10% of its total assets in high yield, high risk bonds, including
convertible securities, which are considered predominantly speculative and
involve major risk exposure to adverse conditions. The Fund may use derivatives,
such as options and futures, in its investment activities, which may involve
additional risks. Investors may lose money by investing in the Fund; the
investment is not guaranteed.
SIZE: On October 31, 1998 Balanced Fund had over $242 million in assets.
TACTICAL ALLOCATION FUND
GOAL: To increase the value of your investment by following a systematic
investment strategy that allocates Tactical Allocation Fund's assets between
equity securities and U.S. Treasury notes or U.S. Treasury bills.
INVESTMENT OBJECTIVE: Total return, consisting of long-term capital appreciation
and current income.
RISKS: Although Tactical Allocation Fund seeks total return, it may not achieve
as high a level of either capital appreciation or current income as a fund that
has only one of those objectives as its primary objective. The Fund invests in
equity securities included in the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index"). Equity securities historically have shown greater
growth potential than other types of securities, but they have also shown
greater volatility. Because the Fund invests in equity securities, its price
will rise and fall. The Fund may invest in U.S. dollar-denominated securities of
foreign companies, which may involve more risk than investing in the securities
of U.S. companies. The U.S. Treasury notes and U.S. Treasury bills in which the
Fund may invest are subject to interest rate risk, which means that their prices
can be expected to decrease when interest rates rise. The Fund may use
derivatives, such as options and futures, in its investment activities, which
may involve additional risks. Investors may lose money by investing in the Fund;
the investment is not guaranteed.
SIZE: On October 31, 1998, Tactical Allocation Fund had over $1.5 billion in
assets.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of each Fund.
-----------------
Prospectus Page 3
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
THE FUNDS AT A GLANCE
(Continued)
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors need
only $100.
WHO SHOULD INVEST
BALANCED FUND is for investors who want total return, consisting of long-term
capital appreciation and current income, with relatively low volatility through
investments in equity securities, bonds and money market instruments. The Fund
is designed for investors who want an investment that maintains a fixed income
allocation at all times, yet has the flexibility to change its investment mix in
response to changing market conditions. Over time, the 25% minimum in fixed
income investments (including bonds and cash) should result in a lower risk
profile for the Fund and lower volatility than if it could invest 100% of its
assets in equity securities.
TACTICAL ALLOCATION FUND is for investors who want total return, consisting of
long-term capital appreciation and current income, through a systematic
investment strategy that allocates assets between equity securities included in
the S&P 500 Index and U.S. Treasury notes or U.S. Treasury bills. The Fund is
designed for investors who want to participate in the broad stock market, yet
want the flexibility to take a more defensive posture when a cyclical decline in
stock prices is anticipated. This disciplined approach to investing in stocks
attempts to shift the asset mix in anticipation of, not in response to, changing
market trends.
* * * *
See page 9 for a summary of certain significant differences between Balanced
Fund and Tactical Allocation Fund.
HOW TO PURCHASE SHARES OF THE FUNDS
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4.5% of the public offering price. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
"contingent deferred sales charge" and applies when investors sell their
Class B shares within six years after purchase. After six years, Class B shares
convert to Class A shares, which have lower ongoing expenses and no contingent
deferred sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 1% is charged on shares sold
within one year of purchase. Class C shares never convert to any other class of
shares.
CLASS Y SHARES
Class Y shares are offered only to limited groups of investors. The price is the
net asset value. Investors do not pay an initial sales charge when they buy
Class Y shares. As a result, 100% of their purchase is immediately invested.
Investors also do not pay a contingent deferred sales charge when they sell
Class Y shares. Class Y shares have lower ongoing expenses than any other class
of shares.
-----------------
Prospectus Page 4
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
EXPENSE TABLE
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Funds.
Expenses shown below are based on those incurred for the most recent fiscal
year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)........................................... 4.5% None None None
Sales Charge on Reinvested Dividends (as a % of offering
price).................................................... None None None None
Maximum Contingent Deferred Sales Charge (as a % of offering
price or net asset value at the time of sale, whichever
is less).................................................. None 5% 1% None
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (as a % of average net
assets)
BALANCED FUND
Management Fees............................................. 0.75% 0.75% 0.75% 0.75%
12b-1 Fees.................................................. 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.26 0.28 0.25 0.14
----- ----- ----- -----
Total Operating Expenses.................................... 1.26% 2.03% 2.00% 0.89%
----- ----- ----- -----
----- ----- ----- -----
TACTICAL ALLOCATION FUND
Management Fees............................................. 0.46% 0.46% 0.46% 0.46%
12b-1 Fees.................................................. 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.24 0.25 0.24 0.21
----- ----- ----- -----
Total Operating Expenses.................................... 0.95% 1.71% 1.70% 0.67%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to an initial
sales charge. However, if a shareholder sells these shares within one year
after purchase, a contingent deferred sales charge of 1% of the offering price
or the net asset value of the shares at the time of sale by the shareholder,
whichever is less, is imposed.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: If a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, is imposed.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees. Class Y
shares may be purchased by participants in certain investment programs that are
sponsored by PaineWebber and that may invest in PaineWebber mutual funds ("PW
Programs"), when Class Y shares are purchased through that PW Program.
Participation in a PW Program is subject to an advisory fee at the effective
maximum annual rate of 1.5% of assets held through that PW Program. This
account charge is not included in the table because investors who are not PW
Program participants also are permitted to purchase Class Y shares.
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees.......................................... 0.25% 0.25% 0.25% None
12b-1 distribution fees..................................... None 0.75 0.75 None
</TABLE>
For more information, see "Management" and "Flexible Pricing(Service Mark)."
-----------------
Prospectus Page 5
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the SEC applicable to
all mutual funds. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES OF A FUND MAY BE MORE OR LESS THAN
THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in a Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
BALANCED FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A............................ $57 $ 83 $111 $ 190
Class B (Assuming sale of all
shares at end of period)......... $71 $ 94 $129 $ 198
Class B (Assuming no sale of
shares).......................... $21 $ 64 $109 $ 198
Class C (Assuming sale of all
shares at end of period)......... $30 $ 63 $108 $ 233
Class C (Assuming no sale of
shares).......................... $20 $ 63 $108 $ 233
Class Y............................ $ 9 $ 28 $ 49 $ 110
<CAPTION>
TACTICAL ALLOCATION FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A............................ $54 $ 74 $ 95 $ 156
Class B (Assuming sale of all
shares at end of period)......... $67 $ 84 $113 $ 163
Class B (Assuming no sale of
shares).......................... $17 $ 54 $ 93 $ 163
Class C (Assuming sale of all
shares at end of period)......... $27 $ 54 $ 92 $ 201
Class C (Assuming no sale of
shares).......................... $17 $ 54 $ 92 $ 201
Class Y............................ $ 7 $ 21 $ 37 $ 83
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
o ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain the
same for years shown.
o CLASS A SHARES: Deduction of the maximum 4.5% initial sales charge at the
time of purchase.
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred sales
charge at the time of sale, which declines over a period of six years.
Ten-year figures assume that Class B shares convert to Class A shares at the
end of the sixth year.
o CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for sales
of shares within one year of purchase.
-----------------
Prospectus Page 6
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. The Funds' other investment policies, except where noted, are not
fundamental and may be changed by their respective boards. See the summary on
page 9 for certain significant differences between Balanced Fund and Tactical
Allocation Fund.
BALANCED FUND
Balanced Fund's investment objective is high total return with low volatility.
Total return consists of long-term capital appreciation and current income. The
Fund pursues this objective by investing primarily in a combination of three
asset classes: stocks (equity securities), bonds and cash (money market
securities). The portion invested in each of these asset classes is based on
Mitchell Hutchins' judgment of the best allocation of the Fund's assets.
However, the Fund maintains a fixed income allocation (including bonds and cash)
of at least 25% at all times, which should result in lower volatility for the
Fund relative to a fund that invests solely in equity securities.
The Fund may invest in a broad range of:
o Equity securities issued by companies believed by Mitchell Hutchins to have
the potential for rapid earnings growth;
o Investment grade bonds, that is, bonds that, at the time of purchase, are
assigned one of the four highest grades by Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ("S&P"), or Moody's Investors Service, Inc.
("Moody's"), are comparably rated by another nationally recognized statistical
rating agency or, if unrated, are determined by Mitchell Hutchins to be of
comparable quality;
o U.S. government securities;
o Bonds and other securities (including convertible securities, rated at least B
by S&P or Moody's, comparably rated by another nationally recognized
statistical rating agency or, if unrated, determined by Mitchell Hutchins to
be of comparable quality. Securities rated BB or B by S&P (or Ba or B by
Moody's) are below investment grade and regarded as having predominantly
speculative characteristics with respect to the ability to pay interest and
repay principal. While such securities may have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposure
to adverse conditions. The Fund will not invest more than 10% of its total
assets in bonds and other securities rated below investment grade; and
o High quality money market securities.
TACTICAL ALLOCATION FUND
Tactical Allocation Fund's investment objective is total return, consisting of
long-term capital appreciation and current income. The Fund seeks to achieve its
objective by using a systematic investment strategy that allocates its assets
between common stocks and U.S. Treasury notes or U.S. Treasury bills.
In seeking total return, the Fund shifts its asset mix between an equity
portion, designed to track the performance of the S&P 500 Index (the Fund holds
approximately 465 of the 500 stocks in the S&P 500 Index), and a bond portion,
consisting of five-year U.S. Treasury notes, or a cash portion, consisting of
30-day U.S. Treasury bills. The allocation among these three segments is
determined by the asset mix recommendation of the Mitchell Hutchins Tactical
Allocation Model.
The Fund seeks to achieve total return during all economic and financial market
cycles, with lower volatility than that of the S&P 500 Index, by investing in
common stocks held in the S&P 500 Index, but taking a more defensive posture
when Mitchell Hutchins Tactical Allocation Model signals a potential bear
market, a prolonged or significant downturn in stock prices.
* * * *
As with any mutual fund, there is no assurance that either Fund will achieve its
investment objective. Each Fund's net asset value fluctuates based upon changes
in the value of its portfolio securities.
-----------------
Prospectus Page 7
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
BALANCED FUND
Mitchell Hutchins believes that superior performance can be obtained by
reallocating assets from time to time before changes in the consensus outlook of
investors have been fully discounted by the market. Mitchell Hutchins also
believes that returns on stocks and bonds are fundamentally related to key
economic variables, such as interest rates, profit growth and inflation. Based
on these fundamental relationships, values of the key economic variables and the
current market environment, Mitchell Hutchins determines the asset allocation it
believes to be optimal.
Once Balanced Fund's asset allocation is determined, the portfolio managers
specializing in each asset class select individual securities for each portion
of the portfolio. Mitchell Hutchins regularly monitors the outlooks for key
economic variables and shifts the asset allocation mix when there are
significant changes in market outlooks.
Balanced Fund uses the following investment process to determine the individual
securities for each portion of the Fund:
o EQUITY SECURITIES. Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks providing a combination of value and price momentum.
The Model screens a universe of small-to large-capitalization companies from
ten different business sectors to identify undervalued companies with strong
earnings momentum that rank well in three measures:
--VALUE: projected dividends, cash flow, earnings and book value;
--MOMENTUM: earnings and price to identify companies that could surprise on
the upside; and
--ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.
The equity securities ranking in the top 20% of the Factor Valuation Model's
universe are screened twice a month. Then the portfolio managers take a closer
look at those equity securities that rank higher based on value and momentum.
Mitchell Hutchins applies traditional analysis and may speak to the management
of these companies, as well as to the management of their competitors.
o BONDS. Mitchell Hutchins selects these securities based on its analysis of
their duration and risk structures (comparing yields on U.S. Treasury
securities to yields on riskier types of debt securities).
o MONEY MARKET INSTRUMENTS. Mitchell Hutchins' decision to use these securities
is based on its judgment of how they can further the Fund's investment
objective.
Mitchell Hutchins may make changes to its investment models over time.
As of August 31, 1998, the Fund's net assets were allocated as follows: equity
securities, 50%; bonds, 44%; and cash and cash equivalents (including other
assets net of liabilities), 6%. At February 28, 1998, the net asset allocations
were: equity securities, 68%; bonds, 25%; and cash and cash equivalents
(including other assets net of liabilities), 7%.
TACTICAL ALLOCATION FUND
Mitchell Hutchins allocates Tactical Allocation Fund's assets between stocks and
either bonds or cash, determined by the Tactical Allocation Model's quantitative
assessment of the projected rates of return of each asset class. The Model
embraces the concept that incremental return to the S&P 500 Index can be
achieved through the tactical allocation of portfolio assets across three main
asset classes--stocks, bonds and cash. This systematic approach to investing in
stocks attempts to shift the asset mix in anticipation of, not in response to,
changing market trends. The emphasis of the Model is to avoid or reduce exposure
to the stock market during down cycles and to track the S&P 500 Index in periods
of strongly positive market performance. In contrast to a typical S&P 500 Index
fund that maintains a 100% allocation to the Index at all times, the Fund is
designed to take a more defensive posture when the Tactical Allocation Model
signals a potential bear market or a prolonged or significant downturn in stock
prices.
The basic premise of the Tactical Allocation Model is that investors accept the
risk of owning stocks, measured as volatility of return, because they expect a
return advantage. This expected return advantage of owning stocks is called the
equity risk premium ("ERP"). The Model projects the stock market's expected ERP
based on several factors including:
o current prices of stocks and their expected future dividends; and
o yield-to-maturity of the one-year U.S. Treasury bill.
When the stock market's ERP is high, the Tactical Allocation Model signals the
Fund to invest 100% in stocks. Conversely, when the ERP decreases below
-----------------
Prospectus Page 8
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
certain threshold levels, the Model signals the Fund to reduce its exposure to
stocks. The Model can recommend stock allocations of 100%, 75%, 50%, 25% or 0%.
If the Tactical Allocation Model recommends a stock allocation of less than
100%, the Model also recommends a fixed income allocation for the remainder of
the Fund's assets. The Model will recommend either bonds (five-year U.S.
Treasury notes) or cash (30-day U.S. Treasury bills), but not both. To make this
determination, the Model calculates the risk premium available for the notes.
This "bond risk premium" ("BRP") is calculated based on the yield-to-maturity of
the five-year U.S. Treasury note and the one-year U.S. Treasury bill.
Asset reallocations are made on the first business day of each month. In
addition to any reallocation of assets dictated by the Tactical Allocation
Model, any material amounts resulting from appreciation or receipt of dividends,
other distributions, interest payments and proceeds from securities maturing in
each of the asset classes are reallocated (or "rebalanced") to the extent
practicable to re-establish the Model's recommended asset allocation mix.
Mitchell Hutchins may make changes to the Model over time.
The Fund deviates from the recommendations of the Tactical Allocation Model only
to the extent necessary to maintain an amount in cash, not expected to exceed 2%
of its total assets under normal market conditions, to pay Fund operating
expenses, dividends and other distributions on its shares and to meet
anticipated sales of shares by Fund investors.
As a result, even if the Tactical Allocation Model does not recommend an
allocation to cash, the Fund still may hold cash.
As of August 31, 1998 and February 28, 1998, 100% of the Fund's assets were
allocated to stocks.
SIGNIFICANT DIFFERENCES BETWEEN BALANCED FUND AND TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
BALANCED FUND TACTICAL ALLOCATION FUND
------------- ------------------------
<S> <C> <C>
Investment Objective High total return with low volatility. Total return, consisting of long-term
capital appreciation and current income.
Asset Allocation Decision Assets may be reallocated at any time, Assets may be reallocated only on the first
based on Mitchell Hutchins' fundamental business day of each month based on the
valuations for each asset class using its Mitchell Hutchins' Tactical Allocation
consensus forecast for certain economic Model.
variables.
Asset Mix Fixed income allocation (bonds and cash): Tactical Allocation Model signals a stock
at least 25% at all times, which should segment of 100%, 75%, 50%, 25% or 0% and
result in lower volatility for the Fund selects bonds or cash for the balance, if
relative to a fund that invests solely in any.
equity securities.
Stock Selection Discretionary, based on the Mitchell When there is a stock allocation, invests
Hutchins Factor Valuation Model, which in about 465 of the 500 common stocks that
evaluates companies' potential for rapid make up the S&P 500 Index.
earnings growth.
Fixed Income Selection Discretionary, may select from broad range When there is a bond allocation, five- year
of debt securities with government or U.S. Treasury notes. When there is a cash
private issuers. allocation, 30-day U.S. Treasury bills.
</TABLE>
-----------------
Prospectus Page 9
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
PERFORMANCE
- --------------------------------------------------------------------------------
These charts show the calendar year total returns for the Funds. Sales charges
have not been deducted from total returns for Class A, B and C shares. Returns
would be lower if sales charges were deducted. Average annual returns, both
before and after deducting the maximum sales charges, are shown below in the
tables that follow the performance charts. Past results are not a guarantee of
future results. Balanced Fund had no Class Y shares outstanding during the
calendar years shown.
BALANCED FUND
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 11.53% 5.18% 15.63% -9.88% 23.13% 14.74% 24.57%
Class B 11.34% 10.84% 1.95% 18.52% 4.46% 14.66% -10.51% 22.23% 13.81% 23.63%
Class C 5.08% 14.79% -10.48% 22.15% 13.86% 23.61%
</TABLE>
The 1991 return for Class A shares represents the period from inception on
July 1, 1991 through December 31, 1991.
The 1992 return for Class C shares represents the period from inception on
July 2, 1992 through December 31, 1992.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of August 31, 1998
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Inception Date..................... 7/1/91 12/12/86 7/2/92 3/26/98
ONE YEAR
Before deducting maximum sales
charges....................... 4.69 % 3.87 % 3.89% N/A
After deducting maximum sales
charges....................... (0.03)% (0.64)% 2.99% N/A
FIVE YEARS
Before deducting maximum sales
charges....................... 10.93 % 10.12 % 10.11% N/A
After deducting maximum sales
charges....................... 9.92 % 9.86 % 10.11% N/A
TEN YEARS OR LIFE OF CLASS
Before deducting maximum sales
charges....................... 11.23% 10.22% 10.42% (9.41)%
After deducting maximum sales
charges....................... 10.52% 10.22% 10.42% (9.41)%
</TABLE>
-----------------
Prospectus Page 10
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
TACTICAL ALLOCATION FUND
Year Class A Class B Class C Class Y
- ---- ------- -------- ------- -------
7/22/92-12/31/92 0.00 % 0.00% 6.67 % 0.00 %
1993 6.48 % 0.00% 7.64 % 6.65 %
1994 (0.59)% 0.00% (1.28)% (0.28)%
1995 35.12 % 0.00% 34.09 % 35.48 %
1996 21.53 % 18.06% 20.66 % 21.79 %
1997 32.00 % 31.05% 31.01 % 32.39 %
The 1993 returns for Class A shares and Class Y shares represent the period from
inception on May 10, 1993 through December 31, 1993. The 1996 return for
Class B shares represents the period from inception on January 30, 1996 through
December 31, 1996. The 1992 return for Class C shares represents the period from
inception on July 22, 1992 through December 31, 1992. Investment advisory
functions for the Fund were transferred from Kidder Peabody Asset Management,
Inc. to Mitchell Hutchins on February 13, 1995.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of August 31, 1998
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Inception Date..................... 5/10/93 1/30/96 7/22/92 5/10/93
ONE YEAR
Before deducting maximum sales
charges....................... 7.31% 6.49% 6.49% 7.62%
After deducting maximum sales
charges....................... 2.47% 1.49% 5.49% 7.62%
FIVE YEARS
Before deducting maximum sales
charges....................... 16.70% N/A 15.84% 17.00%
After deducting maximum sales
charges....................... 15.62% N/A 15.84% 17.00%
LIFE
Before deducting maximum sales
charges....................... 16.75% 17.76% 15.17% 17.06%
After deducting maximum sales
charges....................... 15.74% 16.86% 15.17% 17.06%
</TABLE>
-----------------
Prospectus Page 11
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized
returns show the change in value of an investment in a Fund as a steady compound
annual rate of return. Actual year-to-year returns fluctuate and may be higher
or lower than standardized return. Standardized returns for Class A shares
reflect deduction of the Funds' maximum initial sales charge of 4.5% at the time
of purchase, and standardized returns for Class B and Class C shares of the
Funds reflect deduction of the applicable contingent deferred sales charge
imposed on the sale of shares held for the period. One-, five- and ten-year
periods will be shown, unless the Fund or class has been in existence for a
shorter period. If so, returns will be shown for the period since inception,
known as "Life". Total return calculations assume reinvestment of dividends and
other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-to-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
Total return information reflects past performance and does not indicate future
results. The investment return and principal value of shares of the Funds will
fluctuate. The amount investors receive when selling shares may be more or less
than what they paid. Further information about each Fund's performance is
contained in its Annual Report to Shareholders, which may be obtained without
charge by contacting the Fund, your PaineWebber investment executive or
PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568.
-----------------
Prospectus Page 12
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
BALANCED FUND
EQUITY SECURITIES include common stocks, most preferred stocks and securities
that are convertible into them, including convertible debentures and notes and
common stock purchase warrants and rights. Common stocks, the most familiar
type, represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, similar to a bond, but is
actually equity in a company, like common stock. Convertible securities may
include debentures, notes and preferred equity securities, which are convertible
into common stock, of the same or a different issuer, within a particular period
of time at a specified price or formula.
BONDS are fixed or variable rate debt obligations, including notes, debentures
and similar instruments and securities. Mortgage and asset-backed and income
producing, non-convertible preferred stocks may be treated as bonds for
investment purposes. Corporations, governments and other issuers utilize bonds
as a way to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest and normally must repay the amount borrowed at or
before maturity. Bonds have varying degrees of investment risk and varying
levels of sensitivity to changes in interest rates.
U.S. GOVERNMENT BONDS include direct obligations of the U.S. government (such as
U.S. Treasury bills, notes and bonds) and obligations issued or guaranteed by
the U.S. government, its agencies or its instrumentalities. U.S. government
bonds include mortgage-backed securities issued or guaranteed by government
agencies or government-sponsored enterprises. Other U.S. government bonds may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer,
such as the Resolution Funding Corporation, the Student Loan Marketing
Association ("Sallie Mae"), the Federal Home Loan Banks and the Tennessee Valley
Authority.
CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts or
other non-governmental entities.
MORTGAGE AND ASSET-BACKED SECURITIES are bonds backed by specific types of
assets. Mortgage-backed securities represent a direct or indirect interests in
pools of underlying mortgage loans that are secured by real property. U.S.
government mortgage-backed securities are issued or guaranteed as to principal
and interest (but not as to market value) by Ginnie Mae (also known as the
Government National Mortgage Association), Freddie Mac (also known as the
Federal Home Loan Mortgage Corporation), Fannie Mae (also known as the Federal
National Mortgage Association) or other government sponsored enterprises. Other
mortgage-backed securities are sponsored or issued by private entities,
including investment banking firms and mortgage originators. Foreign
mortgage-backed securities may be issued by mortgage banks and other private or
governmental entities outside the United States and are supported by interests
in foreign real estate. Mortgage-backed securities may be composed of one or
more classes and may be structured as either pass-through securities or
collateralized debt obligations. Multiple-class mortgage-backed securities are
referred to in this Prospectus as "CMOs." Some CMOs are directly supported by
other CMOs, which in turn are supported by mortgage pools. Investors typically
receive payments out of the interest and principal on the underlying mortgages.
The portions of these payments that investors receive, as well as the priority
of their rights to receive payments, are determined by the specific terms of the
CMO class. CMOs involve special risks; and evaluating them requires special
knowledge.
When interest rates go down and property owners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Asset-backed securities are similar to mortgage-backed securities, except that
the underlying assets are different. These underlying assets may be nearly any
type of financial asset or receivable, such as motor vehicle installment sales
contracts, home equity loans, leases of various types of real and personal
property and receivables from credit cards.
ZERO COUPON BONDS are securities that make no periodic interest payments but
instead are sold at a deep discount from their face value. The buyer of these
bonds receives a rate of return by the gradual appreciation of the security,
which results from the
-----------------
Prospectus Page 13
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
fact that it will be paid at face value on a specified maturity date. There are
many kinds of zero coupon bonds. Some are issued in zero-coupon form, including
stripped U.S. government securities issued through the U.S. Treasury. Others are
created by brokerage firms that strip (separate) the coupons (unmatured interest
payments) from interest-paying bonds and sell the principal and the coupons
separately. Balanced Fund may invest in other securities with original issue
discount ("OID"), a term that means the securities are issued at a price lower
than their value at maturity even though the securities also may make periodic
cash payments. OID securities are more sensitive to changes in interest rates
than securities that pay interest in cash.
MONEY MARKET SECURITIES in which Balanced Fund may invest include:
o U.S. Treasury bills and other obligations issued or guaranteed as to interest
and principal by the U.S. government, its agencies and instrumentalities;
o Obligations of U.S. banks (including certificates of deposit and bankers'
acceptances) with total assets in excess of $1.5 billion at the time of
purchase;
o Interest-bearing savings deposits in U.S. commercial and savings banks with
principal amounts that are fully insured by the Federal Deposit Insurance
Corporation (the aggregate amount of these deposits may not exceed 5% of the
value of the Fund's assets);
o Commercial paper and other short-term corporate obligations; and
o Variable and floating-rate securities and repurchase agreements.
In addition, Balanced Fund may hold cash and may invest in participation
interests in the money market securities mentioned above without limitation.
These participation interests are the interests of securities held by others on
a pro-rata basis.
TACTICAL ALLOCATION FUND
STOCK PORTION. In its stock portion, Tactical Allocation Fund attempts to
duplicate, before the deduction of operating expenses, the investment results of
the S&P 500 Index by investing in approximately 465 of the 500 common stocks
included in that Index. The S&P 500 Index, which is chosen by S&P on a
statistical basis and may change from time to time, emphasizes large
capitalization stocks and is based on such factors as the market capitalization
and trading activity of each stock and its adequacy as a representative of
stocks in a particular industry sector. The Fund attempts to achieve a
correlation between the performance of the stock portion and that of the S&P 500
Index of at least 0.95, before the deduction of operating expenses (a
correlation of 1.00 would be perfect, which would mean that the net asset value
of the stock portion increased or decreased in exactly the same proportion as
changes in the Index).
BOND PORTION. In its bond portion, Tactical Allocation Fund invests in U.S.
Treasury notes having five years remaining to maturity at the beginning of the
then-current calendar year or, if those instruments are unavailable at favorable
prices, in U.S. Treasury notes with remaining maturities as close as possible to
five years. The Fund does not invest in bonds and cash simultaneously, except as
noted below.
CASH PORTION. In its cash portion, Tactical Allocation Fund invests in U.S.
Treasury bills with remaining maturities of 30 days or, if those instruments are
unavailable at favorable prices, in U.S. Treasury bills with remaining
maturities as close as possible to 30 days. Limited amounts of the Fund's assets
are normally invested in cash, generally to pay expenses.
RISKS
Following is a discussion of risks that are common to both Funds:
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a Fund may experience a
substantial or complete loss on an individual equity investment.
BONDS. Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and bonds prices will fall,
lowering the value of the Funds' bond investments. Long-term bonds are generally
more sensitive to interest rate changes than short-term bonds. See "Duration."
Credit risk is the risk that the issuer or guarantor may be unable to pay
interest or repay principal on the bond. This can be affected by many factors,
including adverse changes in the issuer's own financial condition or in economic
conditions.
FOREIGN SECURITIES. Balanced Fund may invest in U.S. dollar-denominated
securities of foreign issuers that are traded on recognized U.S. exchanges or in
the U.S. over-the-counter ("OTC") market. Because the S&P 500 Index can include
common stocks of foreign
-----------------
Prospectus Page 14
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
issuers, Tactical Allocation Fund is also subject to certain risks associated
with investments in U.S. dollar-denominated securities of foreign issuers.
Investing in securities of foreign companies can involve more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate. Values
may also be affected by foreign tax laws, changes in foreign economic or
monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies. In general, less
information may be available about foreign companies than about U.S. companies,
and they are generally not subject to the same accounting, auditing and
financial reporting standards as are U.S. companies.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as "derivatives," because their value depends on (or "derives" from)
the value of an underlying asset, reference rate or index. These instruments
include options, futures contracts, swaps and similar instruments. There is only
limited consensus as to what constitutes a "derivative" security. However, in
Mitchell Hutchins' view, derivative securities also include "stripped"
securities and specially structured types of mortgage-and asset-backed
securities, such as interest only and principal only classes of securities. The
market value of derivative instruments and securities sometimes is more volatile
than that of other investments, and each type of derivative instrument may pose
its own special risks. Mitchell Hutchins takes these risks into account in its
management of the Funds.
COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or
insolvency of a counterparty. To help lessen those risks, Mitchell Hutchins,
subject to the supervision of the board of each Fund, monitors and evaluates the
creditworthiness of the counterparties with which each Fund does business.
YEAR 2000 RISKS. Like other mutual funds, and other financial and business
organizations around the world, each of the Funds could be adversely affected if
the computer systems used by Mitchell Hutchins, other service providers and
entities with computer systems that are linked to Fund records do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Issue." Mitchell Hutchins is
taking steps that it believes are reasonably designed to address the Year 2000
Issue with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Fund's other, major service providers. However, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds.
Similarly, the companies in which the Funds invest and trading systems used by
the Funds could be adversely affected by the Year 2000 Issue. The ability of a
company or trading system to respond successfully to the Year 2000 Issue
requires both technological sophistication and diligence, and there can be no
assurance that any steps taken will be sufficient to avoid an adverse impact.
BALANCED FUND--ADDITIONAL RISKS
In addition to the general risks, investments in Balanced Fund are subject to
the following risks:
BOND RATINGS. Balanced Fund invests in a broad range of investment grade bonds.
Investment grade quality means that the securities are rated within the four
highest categories by a rating agency such as S&P or Moody's. Moody's considers
bonds rated Baa (its lowest investment grade rating) to have speculative
characteristics. This means that changes are more likely to lead to a weakened
capacity to make principal and interest payments than is the case for
higher-rated bonds.
Balanced Fund may invest up to 10% of its total assets in bonds and other
securities (including convertible securities) rated below investment grade, that
is, below BBB by S&P or Baa by Moody's, but no lower than B by S&P or Moody's.
Bonds rated below investment grade generally offer a higher current yield than
that available for higher grade issues, but they involve higher risks. They are
especially subject to adverse changes in general economic conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. These securities, commonly referred to as "junk bonds," are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal and may involve major risk exposure to adverse
conditions. The Fund's policy of investing a portion of its assets in lower
rated securities thus entails greater risks than those associated with
investment in higher rated securities.
Credit ratings attempt to evaluate the safety of principal and interest payments
and do not evaluate the volatility of the bond's value or its liquidity and do
not guarantee the performance of the issuer. The rating agencies also may fail
to make timely changes in credit ratings in response to subsequent events, so
that an issuer's current financial condition may be
-----------------
Prospectus Page 15
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
better or worse than the rating indicates. There is a risk that rating agencies
will downgrade bonds.
RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of the
mortgage-and asset-backed securities in which Balanced Fund may invest differ
from those of traditional bonds. Among the major differences are that interest
and principal payments are made more frequently (usually monthly) and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. Generally, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Mortgage- and
asset-backed securities may also decrease in value as a result of increases in
interest rates and, because of prepayments, may benefit less than other fixed
income securities from declining interest rates. Reinvestments of prepayments
may occur at lower interest rates than the original investment, thus adversely
affecting the Fund's yield. Actual prepayment experience may cause the yield of
a mortgage-backed security to differ from what was assumed when the Fund
purchased the security. Prepayments at a slower rate than expected may lengthen
the effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
The market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
CMO classes may be specially structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market interest
rates, the attractiveness of some CMO classes and the ability of the structure
to provide the anticipated investment characteristics may be significantly
reduced. These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are structured in a
manner that makes them extremely sensitive to changes in prepayment rates.
Interest-only ("IO") and principal-only ("PO") classes are examples of this. IOs
are entitled to receive all or a portion of the interest, but none (or only a
nominal amount) of the principal payments, from the underlying mortgage assets.
If the mortgage assets underlying an IO experience greater than anticipated
principal prepayments, then the total amount of interest payments allocable to
the IO class, and therefore the yield to investors, generally will be reduced.
In some instances, an investor in an IO may fail to recoup all of his or her
initial investment, even if the security is government guaranteed or is
considered to be of the highest credit quality. Conversely, PO classes are
entitled to receive all or a portion of the principal payments, but none of the
interest, from the underlying mortgage assets. PO classes are purchased at
substantial discounts from par, and the yield to investors will be reduced if
principal payments are slower than expected. Some IOs and POs, as well as other
CMO classes, are structured to have special protections against the effects of
prepayments. These structural protections, however, normally are effective only
within certain ranges of prepayment rates and thus will not protect investors in
all circumstances. Inverse floating rate CMO classes also may be extremely
volatile. These classes pay interest at a rate that decreases when a specified
index of market rates increases.
The value and liquidity of many mortgage-backed securities declined sharply in
the recent past due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which the Fund may invest, including IO and PO
classes of mortgage-backed securities, can be extremely volatile and these
securities may become illiquid. Mitchell Hutchins seeks to manage the Fund's
investments in mortgage-backed securities so that the volatility of the Fund's
portfolio, taken as a whole, is consistent with the Fund's investment objective.
If market interest rates or other factors that affect the volatility of
securities held by the Fund change in ways that Mitchell Hutchins does not
anticipate, the Fund's ability to meet its investment objective may be reduced.
RISKS OF ZERO COUPON AND OID BONDS. Zero coupon bonds pay no interest to holders
prior to maturity. Accordingly, they are generally more sensitive to changes in
interest rates than other bonds. This means that when interest rates fall, the
value of zero coupon bonds rises more rapidly than bonds paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically. A portion of the OID on the zero coupon bonds must be included in
Balanced Fund's income each year. This also is true for other OID bonds.
Accordingly, to continue to qualify for tax treatment as a regulated investment
company and to avoid a federal excise tax (see "Taxes" in the Statement of
Additional Information), the Fund may be required to distribute as dividends
amounts that are greater than the total amount of cash it actually receives.
These
-----------------
Prospectus Page 16
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
distributions must be made from the Fund's cash assets or, if necessary, from
the proceeds of sales of portfolio securities. The Fund will not be able to
purchase additional securities with cash used to make such distributions, and
its current income ultimately may be reduced as a result.
Zero coupon bonds and OID bonds usually trade at a discount from their face or
par value. These securities are subject to greater fluctuations of market value
in response to changing interest rates than bonds of comparable maturities that
make current distributions of interest in cash.
DURATION. Duration is a measure of the expected life of a bond on a present
value basis. Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure and is one of the fundamental
tools used by Mitchell Hutchins in selecting bonds for Balanced Fund's
portfolio.
Duration takes the length of the time intervals between the present time and the
time that the interest and principal payments are scheduled or, in the case of a
callable bonds, expected to be made, and weighs them by the present values of
the cash to be received at each future point in time. For any bond with interest
payments occurring prior to the payment of principal, duration is always less
than maturity.
Duration allows Mitchell Hutchins to make certain predictions as to the effect
that changes in the level of interest rates will have on the value of Balanced
Fund's portfolio. Various factors, such as changes in anticipated prepayment
rates, qualitative considerations and market supply and demand, can cause
particular securities to respond somewhat differently to changes in interest
rates than expected. Moreover, in the case of mortgage-backed and other complex
securities, duration calculations are estimates and are not precise. This is
particularly true during periods of market volatility.
LIMITS OF ASSET ALLOCATION STRATEGIES. Although each Fund seeks total return,
consisting of both long-term capital appreciation and current income, a Fund may
not achieve as high a level of either capital appreciation or current income as
a fund that has only one of these objectives as its primary objective.
TACTICAL ALLOCATION
FUND--ADDITIONAL RISKS
In addition to the general risks, investments in Tactical Allocation Fund are
subject to the following risks:
ASSET ALLOCATION STRATEGY AND INDEX INVESTING. The Fund is also subject to the
risk that the Tactical Allocation Model may not correctly predict the
appropriate times to shift the Fund's assets from one type of investment to
another. Also, in the event the Tactical Allocation Model recommends frequent or
significant shifts in the Fund's asset allocation mix, at a time when there are
large amounts of unrealized capital gains, the Fund could potentially realize
substantial capital gains. Realization of any such capital gains by the Fund
would normally increase the amount of taxable distributions to shareholders in
that fiscal year.
While Tactical Allocation Fund's stock portion attempts to duplicate, before
deduction of operating expenses, the investment results of the S&P 500 Index,
the investment results of the stock portion generally are not identical to those
of the S&P 500 Index. Deviations from the performance of the S&P 500 Index may
result from shareholder purchases and sales of shares that occur daily, as well
as from expenses borne by the Fund.
INVESTMENT TECHNIQUES AND STRATEGIES
STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Fund may use derivative
instruments, including options (on securities, futures and indices) and futures
contracts (on stock indices and debt securities) in strategies intended to
reduce the overall risk of its investments ("hedge") or to enhance income or
return (including adjusting a Fund's exposure to different asset classes or to
maintain an exposure to stocks or bonds while maintaining a cash balance for
Fund management purposes, such as to provide liquidity to meet anticipated sales
by shareholders and for Fund operating expenses). Use of these derivative
instruments solely to enhance income or return may be considered a form of
speculation. New financial products and risk management techniques continue to
be developed and may be used if consistent with the Funds' investment objectives
and policies. Balanced Fund also may enter into interest rate swaps and similar
contracts to preserve a return or spread on a particular investment or portion
of its portfolio or to protect against an increase in the price of securities
the Fund anticipates purchasing at a later date. The Funds' ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations. The Statement of Additional Information contains further
information on these strategies.
The Funds might not use any derivative instruments or strategies, and there can
be no assurance that any strategy will succeed. If Mitchell Hutchins is
incorrect in its judgment on interest rates, market values or other economic
factors in using a derivative
-----------------
Prospectus Page 17
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
instrument or strategy, a Fund might have lower net income and a net loss on the
investment. Each strategy involves certain risks, which include:
o the fact that the skills needed to use derivative instruments are different
from those needed to select securities for the Funds,
o the possibility of imperfect correlation, or even no correlation, between
price movements of derivative instruments used in hedging strategies and price
movements of the securities being hedged,
o possible constraints on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
"cover" or to segregate securities, and
o the possibility that a Fund is unable to close out or liquidate its position.
PORTFOLIO TURNOVER. Each Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. A higher turnover rate for a Fund (100% or more)
will involve correspondingly greater transaction costs, which will be borne
directly by that Fund, and may increase the potential for short-term capital
gains.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. These include repurchase agreements maturing in more than
seven days, certain cover for OTC options and securities whose disposition is
restricted under the federal securities laws. The Funds do not consider
securities that are eligible for resale under SEC Rule 144A to be illiquid if
Mitchell Hutchins has determined them to be liquid, based upon the trading
markets for the securities under procedures approved by the Funds' boards.
Investing in 144A securities could have the effect of increasing the level of
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. The lack of a liquid
secondary market for illiquid securities may make it more difficult for a Fund
to assign a value to those securities for purposes of calculating its net asset
value.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. Lending securities enables the Funds to earn additional income,
but could result in a loss or delay in recovering these securities.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements.
Repurchase agreements are transactions in which a Fund purchases obligations
from a bank or securities dealer (or its affiliate) and simultaneously commits
to resell the securities to the counterparty at an agreed-upon date or upon
demand and at a price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased obligations. Each Fund maintains
custody of the underlying obligations prior to their repurchase, either through
a regular custodian of through a special "tri-party" custodian or sub-custodian
that maintains separate accounts for both the Fund and its counterparty. Thus,
the obligation of the counterparty to pay the repurchase price on the date
agreed to or upon demand is, in effect, secured by such obligations.
Repurchase agreements carry certain risks not associated with direct investments
in securities, including a possible decline in the market value of the
underlying obligations. Repurchase agreements involving obligations other than
U.S. government securities (such as commercial paper and corporate bonds), may
be subject to special risks and may not have the benefit of certain protections
in the event of the counterparty's insolvency. If the seller or guarantor
becomes insolvent, a Fund may suffer delays, costs and possible losses in
connection with the disposition of collateral.
OTHER INFORMATION. Each Fund may purchase securities on a "when-issued" or
delayed-delivery basis. In when-issued or delayed delivery transactions,
delivery of the securities occurs beyond normal settlement periods, but the Fund
would not pay for such securities or start earning interest on them until they
are delivered. However, it immediately assumes the risks of ownership, including
the risk of price fluctuation. Each Fund may borrow money for temporary or
emergency purposes, but not in excess of 10% (Balanced Fund) or 20% (Tactical
Allocation Fund) of its total assets, including (in the case of Balanced Fund)
reverse repurchase agreements up to an aggregate value of 5% of its net assets.
-----------------
Prospectus Page 18
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FLEXIBLE PRICING(Service Mark)
- --------------------------------------------------------------------------------
Each Fund offers through this Prospectus four classes of shares that differ in
terms of sales charges and expenses. An eligible investor can select the class
that is best suited to his or her investment needs, based upon the holding
period and the amount of investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales
charge (the maximum is 4.5% of the public offering price) next calculated after
PaineWebber's New York City headquarters or PFPC Inc., the Funds' transfer agent
("Transfer Agent") receives the purchase order. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than those of Class B and Class C shares. Class A shares sales
charges are calculated as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED
---------------------------------------- DEALERS AS PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- ----------------------------------- -------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than $50,000.................. 4.50% 4.71% 4.25%
$50,000 to $99,999................. 4.00 4.17 3.75
$100,000 to $249,999............... 3.50 3.63 3.25
$250,000 to $499,999............... 2.50 2.56 2.25
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
</TABLE>
- ------------------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may withdraw no more than 12% of the value of the Fund account
under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors purchasing Class A shares in more than one PaineWebber mutual fund may
combine those purchases to get a reduced sales charge. Investors who already own
Class A shares in one or more PaineWebber mutual funds may combine the amount
they are currently purchasing with the value of such previously owned shares to
qualify for a reduced sales charge. To determine the sales charge reduction in
either case, please refer to the chart above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
o their spouses, parents or children under age 21;
o their Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o any company controlled by the investor;
o trusts created by the investor;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of individuals for the benefit of the investors'
children; or
o accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
o is an employee, director, trustee or officer of PaineWebber, its affiliates or
any PaineWebber mutual fund;
o is the spouse, parent or child of any of the above;
o buys these shares through a PaineWebber investment executive who was formerly
employed as a broker with a competing brokerage firm that was registered as a
broker-dealer with the SEC; and
o was the investment executive's client at the competing brokerage firm;
o within 90 days of buying Class A shares in this Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor
either paid a sales charge to buy those shares, paid a
-----------------
Prospectus Page 19
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
contingent deferred sales charge when selling them or held those shares
until the contingent deferred sales charge was waived; and
o the amount that the investor purchases does not exceed the total amount
of money the investor received from the sale of the other mutual fund;
o is a certificate holder of unit investment trusts sponsored by PaineWebber and
has elected to have dividends and other distributions from that investment
automatically invested in Class A shares;
o is an employer establishing an employee benefit plan qualified under
section 401, including a salary reduction plan qualified under section 401(k),
or section 403(b) of the Internal Revenue Code ("Code") (each a "qualified
plan"). (This waiver is subject to minimum requirements, with respect to the
number of employees and amount of plan assets, established by Mitchell
Hutchins. Currently, the plan must have 50 or more eligible employees and at
least $1 million in plan assets.) For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested;
o is a participant in the PaineWebber Members Only Program(Trademark). For
investments made pursuant to this waiver, Mitchell Hutchins may make payments
out of its own resources to PaineWebber and to participating membership
organizations in a total amount not to exceed 1% of the amount invested;
o is a variable annuity offered only to qualified plans. For investments made
pursuant to this waiver, Mitchell Hutchins may make payments out of its own
resources to PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed 1% of the amount invested;
o acquires Class A shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for program
services, provided that the program sponsor has entered into a written
agreement with PaineWebber permitting the sale of Class A shares at net asset
value to that program. For investments made pursuant to this waiver, Mitchell
Hutchins may make a payment to PaineWebber out of its own resources in an
amount not to exceed 1% of the amount invested. For subsequent investments or
exchanges made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also waived;
o acquires Class A shares in connection with a reorganization pursuant to which
a Fund acquires substantially all of the assets and liabilities of another
investment company in exchange solely for shares of the Fund; or
o acquires Class A shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were acquired
during that fund's initial public offering of shares and that meet certain
other conditions described in its prospectus.
For more information on how to get any reduced sales charge, investors should
contact a PaineWebber investment executive or a correspondent firm or call
1-800-647-1568. Investors must provide satisfactory information to PaineWebber
or the Fund if they seek any of these sales charge reductions or waivers.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Fund investment, investors may have to pay
a sales charge when they sell their Fund shares. This sales charge is called a
"contingent deferred sales charge." The amount of the charge depends on how long
the investor owned the shares. The sales charge is calculated by multiplying the
offering price (net asset value of the shares at the time of purchase) or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, by the percentage shown on the following table. Investors who own
shares for more than six years do not have to pay a sales charge when selling
those shares.
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
ASSET
VALUE IS
IF THE INVESTOR SELLS SHARES WITHIN: MULTIPLIED:
- ------------------------------------- -------------------
<S> <C>
1st year of purchase................. 5%
2nd year of purchase................. 4
3rd year of purchase................. 3
4th year of purchase................. 2
5th year of purchase................. 2
6th year of purchase................. 1
7th year of purchase................. None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other
-----------------
Prospectus Page 20
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming they are selling:
o First, Class B shares owned through reinvested dividends and capital gain
distributions; and
o Second, Class B shares held in the portfolio the longest.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
o sales of shares under a Fund's "Systematic Withdrawal Plan" (investors may
withdraw annually no more than 12% of the value of the Fund account under the
Plan);
o a distribution from an IRA, a self-employed individual retirement plan
("Keogh Plan ") or a custodial account under section 403(b) of the Code (after
the investor reaches age 591/2);
o a tax-free return of an excess IRA contribution;
o a tax-qualified retirement plan distribution following retirement; or
o Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
Investors must provide satisfactory information to PaineWebber or the Funds if
they seek any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Investors do not pay an initial sales charge when
they buy Class C shares, but the ongoing expenses of Class C shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class C shares, 100% of their purchase is immediately
invested. Class C shares never convert to any other class of shares.
A contingent deferred sales charge of 1% of the offering price (net asset value
of at the time of purchase) or net asset value of the shares at the time of sale
by the shareholder, whichever is less, is charged on sales of shares made within
one year of the purchase date. Other PaineWebber mutual funds may impose a
different contingent deferred sales charge on Class C shares sold within one
year of the purchase date. A sale of Class C shares acquired through an exchange
and held less than one year will be subject to the same contingent deferred
sales charge that would have been imposed on the Class C shares of the
PaineWebber mutual fund originally purchased. Class C shares representing
reinvestment of any dividends or capital gains are not subject to the 1% charge.
Withdrawals under the Systematic Withdrawal Plan also are not subject to this
charge. However, investors may withdraw no more than 12% of the value of the
Fund account under the Plan in the first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED: Eligible investors may purchase Class Y shares at the
net asset value next calculated after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do not pay
an initial sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. No contingent deferred sales charge is imposed on Class Y
shares, and the ongoing expenses for Class Y shares are lower than for the other
classes because Class Y shares are not subject to 12b-1 distribution or service
fees.
LIMITED GROUP OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
o a participant in the PW Programs listed below when Class Y shares are
purchased through that PW Program;
o an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing(Service Mark) System;
o a qualified plan that has either
5,000 or more eligible employees or
$50 million or more in assets;
o an investment company advised by PaineWebber or an affiliate of PaineWebber;
and
o for Tactical Allocation Fund, the trustee of the PaineWebber 401(k) Plus Plan
("PW 401(k) Plan"), formerly known as PaineWebber Savings Investment Plan ("PW
SIP")
PACE MULTI-ADVISOR PROGRAM. An investor who participates in PACE Multi-Advisor
Program is eligible to purchase Class Y shares. The PACE Multi-Advisor Program
is an advisory program sponsored by
-----------------
Prospectus Page 21
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
PaineWebber that provides comprehensive investment services, including investor
profiling, a personalized asset allocation strategy using an appropriate
combination of funds, and a quarterly investment performance review.
Participation in the PACE Multi-Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee.
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available to the PACE Multi-Advisor Program.
PURCHASES BY THE TRUSTEE OF THE
PW 401(K) PLAN
The Class Y shares of Tactical Allocation Fund also are offered for sale to the
trustee of the PW 401(k) Plan, a defined contribution plan sponsored by Paine
Webber Group Inc. ("PW Group"). The trustee of the PW 401(k) Plan purchases and
sells Class Y shares to implement the investment choices of individual plan
participants with respect to their PW 401(k) Plan contributions. Individual plan
participants should consult the Summary Plan Description and other plan material
of the PW 401(k) Plan (collectively, the "Plan Documents") for a description of
the procedures and limitations applicable to making and changing investment
choices.
Copies of the Plan Documents are available from the Benefits Connection, 100
Halfday Road, Lincolnshire, IL 60069 or by calling 1-888-PWebber
(1-999-793-2237).
As described in the Plan Documents, the average net asset value per share at
which Class Y shares of Tactical Allocation Fund are purchased or sold by the
trustee of the PW 401(k) Plan for the accounts of individual participants might
be more or less than the net asset value per share prevailing at the time that
such participants made their investment choices or made their contributions to
the PW 401(k) Plan.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Prices are calculated for each class of a Fund's shares once each Business Day,
normally at the close of regular trading on the New York Stock Exchange ("NYSE")
(usually 4:00 p.m., Eastern time). Prices will be calculated earlier when the
NYSE closes early because trading has been halted for the day. A "Business Day"
is any day, Monday through Friday, on which the NYSE is open for business.
The Funds and Mitchell Hutchins reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or an individual Fund that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up an
account through the Transfer Agent (PFPC Inc.) by completing an account
application, which can be obtained by calling 1-800-647-1568. The application
and check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
New investors to PaineWebber may complete and sign an account application and
mail it along with a check. Investors also may open an account in person.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
o mail an application with a check; or
o open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in the Fund.
-----------------
Prospectus Page 22
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
MINIMUM INVESTMENTS
To open an account................. $1,000
To add to an account............... $ 100
A Fund may waive or reduce these minimums for:
o employees of PaineWebber or its affiliates;
o participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plan; or
o transactions in Class A and Class Y shares made in certain investment
programs.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of most other PaineWebber mutual fund shares. For
classes of shares where no initial sales charge is imposed, a contingent
deferred sales charge may apply if the investor sells the shares acquired
through the exchange. Class Y shares are not exchangeable.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
o Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or wire.
o Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of
instruction must include:
o the investor's name and address;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be sold; and
o a guarantee of each registered owner's signature. A signature guarantee may be
obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association which is a participant in a medallion program
recognized by the Securities Transfer Association. The three recognized
medallion programs are Securities Transfer Agent Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and the New York Stock Exchange
Medallion Signature Program (MSP). Signature guarantees which are not a part
of these programs will not be accepted.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when Class A, B or C shares are
exchanged for the corresponding class of shares of other PaineWebber mutual
funds. A Fund will use the purchase date of the initial investment to determine
any contingent deferred sales charge due when the acquired shares are sold. Fund
shares may be exchanged only after the settlement date has passed and payment
for the shares has been made. The exchange privilege is available only in those
jurisdictions where the sale of the fund shares to be acquired is authorized.
This exchange privilege may be modified or terminated at any time and, when
required by SEC rules, upon 60 days' notice. See the back cover of this
Prospectus for a listing of other PaineWebber mutual funds.
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated after the order is received and accepted
(less any applicable contingent deferred sales charge). Share prices are
normally calculated at the close of regular
trading on the NYSE (usually 4:00 p.m., Eastern time). Prices will be calculated
earlier when the NYSE closes early because trading has been halted for the day.
Investors who own more than one class of shares should specify which class they
are selling. If they do not, the Fund will assume they are first selling their
Class A shares, then Class C, then Class B and last, Class Y.
If a shareholder wants to sell shares which were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the case
of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through the Transfer Agent, may
-----------------
Prospectus Page 23
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
sell shares by writing a "letter of instruction," as detailed in "How to
Exchange Shares."
Because the Funds incur certain fixed costs in maintaining shareholder accounts,
each Fund reserves the right to purchase back all of its shares in any
shareholder account with a net asset value of less than $500. If a Fund elects
to do so, it will notify the shareholder of the opportunity to increase the
amount invested to $500 or more within 60 days of the notice. A Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.
SALES BY PARTICIPANTS IN PW SIP
The trustee of the PW 401(k) Plan sells Class Y shares of Tactical Allocation
Fund to implement the investment choices of individual plan participants with
respect to their PW 401(k) Plan contributions, as described in the Plan
Documents referenced under "Flexible Pricing" above. The price at which Class Y
shares are sold by the trustee of the PW 401(k) Plan might be more or less than
the price per share at the time the participants made their investment choices.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive at
PaineWebber or one of its correspondent firms at the time of purchase.
- --------------------------------------------------------------------------------
OTHER SERVICES
- --------------------------------------------------------------------------------
Investors should consult their investment executive at PaineWebber or one of its
correspondent firms to learn more about the following services available with
respect to the Funds' Class A, B and C shares.
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan Service with a minimum initial
investment of $1,000 through which the Funds will, on a monthly, quarterly,
semiannual or annual basis, deduct $50 or more from the investor's bank account
to invest directly in the Fund. In addition to providing a convenient and
disciplined manner of investing, participation in the Automatic Investment Plan
enables the investor to use the technique of "dollar cost averaging."
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December), semiannual (June and December), or annual
(December) withdrawals from their PaineWebber Mutual Fund accounts. Minimum
balances and withdrawals vary according to the class of shares:
o CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.
o CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly, semiannual and annual withdrawals of $200, $400, $600 and $800,
respectively.
Withdrawals under the Systematic Withdrawal Plan are not subject to a contingent
deferred sales charge. Investors may withdraw no more than 12% of the value of
the Fund account when the investor signed up for the Plan (for Class B shares
annually; for Class A and Class C shares, during the first year under the Plan).
Shareholders who elect to receive dividends or other distributions in cash may
not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-Directed IRAs are available through PaineWebber in which purchases of
PaineWebber funds and other investments may be made. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be moved
to an account with the Transfer Agent. However, if the other firm has entered
into a selected dealer agreement with Mitchell Hutchins relating to the Fund,
the shareholder may be able to hold Fund shares in an account with the other
firm.
-----------------
Prospectus Page 24
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
MANAGEMENT
- --------------------------------------------------------------------------------
Balanced Fund is a series of PaineWebber Master Series, Inc. ("Corporation") and
Tactical Allocation Fund is a series of PaineWebber Investment Trust ("Trust").
The board of directors of the Corporation and the board of trustees of the Trust
(each a "board") oversee the Funds' operations and, as part of this overall
management responsibility, oversee various organizations responsible for the
day-to-day management of each Fund. Each board has appointed Mitchell Hutchins
as investment adviser and administrator responsible for the Fund's operations
(subject to the authority of the board).
In accordance with procedures adopted by each board, brokerage transactions for
the Funds may be conducted through PaineWebber or its affiliates and the Funds
may pay fees to PaineWebber for its services as lending agent in their portfolio
securities lending programs.
Mitchell Hutchins personnel may engage in securities transactions for their own
accounts pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is a wholly owned asset management subsidiary of PaineWebber
Incorporated, which is wholly owned by Paine Webber Group Inc., a publicly owned
financial services holding company. On October 31, 1998, Mitchell Hutchins was
adviser or sub-adviser of investment companies with 73 separate portfolios
and aggregate assets of approximately $41.2 billion.
As investment adviser and administrator for Balanced Fund and Tactical
Allocation Fund, Mitchell Hutchins makes and implements all investment decisions
and supervises all aspects of each Fund's operations.
T. Kirkham Barneby is responsible for the asset allocation decisions for both
Balanced Fund and Tactical Allocation Fund. He has been responsible for the
day-to-day management of Tactical Allocation Fund since February 1995.
Mr. Barneby is a managing director and chief investment officer of quantitative
investments of Mitchell Hutchins. Mr. Barneby rejoined Mitchell Hutchins in
1994, after being with Vantage Global Management for one year. During the eight
years that Mr. Barneby was previously with Mitchell Hutchins, he was a senior
vice president responsible for quantitative management and asset allocation
models.
Mark A. Tincher is responsible for the day-to-day management of the equity
portion of Balanced Fund. Mr. Tincher is a managing director and chief
investment officer of equities of Mitchell Hutchins, responsible for overseeing
the management of equity investments. From March 1988 to March 1995,
Mr. Tincher worked for Chase Manhattan Private Bank where he was a vice
president. Mr. Tincher directed the U.S. funds management and equity research
area at Chase and oversaw the management of all Chase U.S. equity funds (the
Vista Funds and Trust Investment Funds).
Dennis L. McCauley is responsible for the day-to-day management of the debt
securities portion of Balanced Fund. Mr. McCauley is a managing director and
chief investment officer of fixed income investments of Mitchell Hutchins,
responsible for overseeing all active fixed income investments, including
domestic and global taxable and tax-exempt mutual funds. Prior to joining
Mitchell Hutchins in 1994, Mr. McCauley worked for IBM Corporation, where he was
director of fixed income investments responsible for developing and managing
investment strategy for all fixed income and cash management investments of
IBM's pension fund and self-insured medical funds. Mr. McCauley has also served
as vice president of IBM Credit Corporation's mutual funds and as a member of
the retirement fund investment committee.
Nirmal Singh and Craig M. Varrelman, CFA, assist Mr. McCauley in managing
Balanced Fund's debt securities. Mr. Singh and Mr. Varrelman are both senior
vice presidents of Mitchell Hutchins. Mr. Singh has been with Mitchell Hutchins
since September 1993. Mr. Varrelman has been with Mitchell Hutchins as a
portfolio manager since 1988 and manages fixed income portfolios with an
emphasis on U.S. government securities.
Susan Ryan is responsible for the day-to-day management of the portion of
Balanced Fund's assets invested in money market instruments. Ms. Ryan has been
with Mitchell Hutchins since 1982 and is a senior vice president of Mitchell
Hutchins.
Each of these managers first assumed responsibilities with respect to Balanced
Fund in August 1995.
Other members of Mitchell Hutchins' domestic equity and domestic fixed income
investments groups provide
-----------------
Prospectus Page 25
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
input on market outlook, interest rate forecasts, investment research and other
considerations pertaining to each Fund's investments.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. Under advisory
contracts, Balanced Fund pays a monthly fee at an annual rate of 0.75% of
average daily net assets up to $500 million. This fee is reduced to 0.725% of
assets from $500 million to $1 billion, with further breakpoints as assets
increase. Tactical Allocation Fund pays a monthly fee at the annual rate of
0.50% of average daily net assets up to $250 million, and 0.45% of average daily
net assets over $250 million. For the fiscal year ended August 31, 1998,
Balanced Fund paid advisory fees to Mitchell Hutchins at the annual rate of
0.75% of its average daily net assets and Tactical Allocation Fund paid advisory
fees to Mitchell Hutchins at the effective annual rate of 0.46% of its average
daily net assets.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribution plan with respect to the Funds' Class Y shares. Under distribution
plans for Class A, Class B and Class C shares ("Class A Plan," "Class B Plan"
and "Class C Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins:
o Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
o Monthly distribution fees at the annual rate of 0.75% of the average daily net
assets of Class B shares and Class C Shares.
Under the Plans, Mitchell Hutchins primarily uses the service fees to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund's Class A, Class B and
Class C shares by PaineWebber clients. PaineWebber then compensates its
investment executives for shareholder servicing that they perform and offsets
its own expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans
to:
o Offset the commissions it pays to PaineWebber for selling each Fund's Class B
and Class C shares, respectively.
o Offset each Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are purchased by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from either Fund or investors at the time
Class B or C shares are purchased.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid upon
sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related distribution contracts for Class A, Class B and
Class C shares ("Distribution Contracts") specify that each Fund must pay
service and distribution fees to Mitchell Hutchins for its activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
Funds will not be obligated to pay more than those fees. On the other hand, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. Expenses in excess of service and distribution fees
received or accrued through the termination date of any Plan will be Mitchell
Hutchins' sole responsibility and not that of the Funds. Annually, the board of
each Fund reviews each Plan and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.
-----------------
Prospectus Page 26
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
DETERMINING THE SHARES' NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of a Fund's shares fluctuates and is determined separately
for each class, normally as of the close of regular trading on the NYSE (usually
4:00 p.m., Eastern time) each Business Day. Each Fund's net asset value per
share is determined by dividing the value of the securities held by the Fund,
plus any cash or other assets, minus all liabilities, by the total number of
Fund shares outstanding.
If trading on the NYSE is halted for the day before 4:00 p.m., Eastern time, and
trading on the NYSE will not resume again that day, the Funds' net asset value
per share will be calculated at the time trading was halted.
Each Fund values its assets based on their current market value when market
quotations are readily available. If market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of its board. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless its board determines that this does not represent fair value.
It should be recognized that judgment plays a greater role in valuing
lower-rated corporate bonds because there is less reliable, objective data
available.
- --------------------------------------------------------------------------------
DIVIDENDS & TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Balanced Fund pays dividends semiannually from its net investment income and
also may distribute net short-term capital gain, if any, with a periodic
dividend. While Balanced Fund will not declare any distribution in excess of the
amount of its net investment income and net short-term capital gain available at
the time of declaration, it is possible that net capital losses sustained after
the declaration of a distribution including net short-term capital gain could
convert a portion of such a distribution to a non-taxable return of capital.
Tactical Allocation Fund pays an annual dividend from its net investment income
and net short-term capital gain, if any. Net investment income includes dividend
income, accrued interest and discount, less amortization of premium and accrued
expenses. Substantially all of each Fund's net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, and any
undistributed net short-term capital gain, is distributed at least annually.
Each Fund may make additional distributions if necessary to avoid income or
excise taxes.
Dividends and other distributions paid on each class of shares of a Fund are
calculated at the same time and in the same manner. Dividends on Class A, B and
C shares of a Fund are expected to be lower than those on its Class Y shares
because the other shares have higher expenses resulting from their service fees,
and, in the case of Class B and Class C shares, their distribution fees.
Dividends on Class B and Class C shares of a Fund are expected to be lower than
those on its Class A shares because Class B and Class C shares have higher
expenses resulting from their distribution fees. Dividends on each class also
might be affected differently by the allocation of other class-specific
expenses. See "General Information."
A Fund's dividends and other distributions are paid in additional Fund shares of
the same class at net asset value, unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and other distributions in
cash, either mailed to them by check or credited to their PaineWebber accounts,
should contact their investment executives at PaineWebber or one of its
correspondent firms or complete the appropriate section of the account
application. For PW 401(k) Plan participants, Tactical Allocation Fund's Class Y
dividends and other distributions are paid in additional Class Y shares at net
asset value unless the Transfer Agent is instructed otherwise.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under the Code so that it will not have to pay federal income tax on the
part of its investment company taxable income (generally consisting of net
investment income and net short-term capital gain) and net capital gain that it
distributes to its shareholders.
-----------------
Prospectus Page 27
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
Dividends from each Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) generally are taxable to its shareholders as
ordinary income. Distributions of each Fund's net capital gain (whether paid in
cash or in additional Fund shares) are taxable to its shareholders as long-term
capital gain, regardless of how long they have held their Fund shares. Under the
Taxpayer Relief Act of 1997, as modified by recent legislation, the maximum tax
rate applicable to a non-corporate taxpayer's net capital gain recognized on
capital assets held for more than one year is 20% (10% for taxpayers in the 15%
marginal tax bracket). In the case of regulated investment companies such as the
Funds, the relevant holding period is determined by how long the Fund has held
the portfolio securities on which the gain was realized, not by how long the
shareholders have held their Fund shares.
Shareholders not subject to tax on their income generally will not be required
to pay tax on distributions from the Funds.
YEAR-END TAX REPORTING
Each Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year and any portion of those dividends that qualifies for special
treatment.
BACKUP WITHHOLDING
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and capital gain distributions payable to such shareholders who otherwise are
subject to backup withholding.
TAX ON THE SALE OR EXCHANGE OF FUND SHARES
A shareholder's sale (redemption) of Fund shares may result in a taxable gain or
loss. This depends upon whether the shareholder receives more or less than the
adjusted basis for the shares (which normally includes any initial sales charge
paid on Class A shares). An exchange of a Fund's shares for shares of another
PaineWebber mutual fund generally will have similar tax consequences. In
addition, if a Fund's shares are bought within 30 days before or after selling
other shares of the Fund (regardless of class) at a loss, all or a portion of
that loss will not be deductible and will increase the basis of the newly
purchased shares.
SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells (redeems) or exchanges Class A
shares within 90 days of purchase and subsequently purchases Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss thereon would be decreased, by the amount of the sales charge paid when
those shares were bought, and that amount would increase the basis of the
PaineWebber mutual fund shares subsequently acquired.
No gain or loss will be recognized to a shareholder as a result of conversion of
Class B shares into Class A shares.
* * * *
Because the foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders, please see the
further discussion in the Statement of Additional Information. Prospective
shareholders are urged to consult their tax advisers.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION
BALANCED FUND
Balanced Fund is a diversified series of the Corporation, an open-end management
investment company that was incorporated in Maryland on October 29, 1985. The
Corporation has authority to issue 10 billion shares of common stock of separate
series, par value $.001 per share; four billion of these shares are classified
as shares of Balanced Fund. Shares of one other series have been authorized.
-----------------
Prospectus Page 28
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
TACTICAL ALLOCATION FUND
Tactical Allocation Fund is a diversified series of the Trust, an open-end
management investment company that was formed on March 28, 1991, as a business
trust under the laws of the Commonwealth of Massachusetts. The trustees have
authority to issue an unlimited number of shares of beneficial interest of
separate series, with a par value of $.001 per share. Shares of one other series
have been authorized.
SHARES
The shares of each Fund are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. Each class represents an identical interest
in the respective Fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege. The different sales charges
and other expenses applicable to the different classes of shares of the Funds
will affect the performance of those classes.
Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due to
the differing expenses of the classes, dividends and liquidation proceeds on
each Fund's Class A, B, C and Y shares will differ.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for misstatements in the Prospectus about the other Fund.
The boards of the Corporation and the Trust have considered this factor in
approving the use of a single, combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, as a result, the holders of more than 50% of all the shares of the
Corporation or the Trust may elect all of its board members. The shares of a
Fund will be voted together except that only the shareholders of a particular
class of a Fund may vote on matters affecting only that class, such as the terms
of a Plan as it relates to that class. The shares of each series of the
Corporation or the Trust will be voted separately, except when an aggregate vote
of all the securities is required by law.
SHAREHOLDER MEETING
The Funds do not hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Corporation or the Trust may remove a board member through a declaration in
writing or by vote cast in person or by proxy at a meeting called for that
purpose. A meeting will be called to vote on the removal of a board member at
the written request of holders of 10% of the Corporation's or Trust's
outstanding shares.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated herein by reference, is available
to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Funds' custodian and recordkeeping
agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds' transfer
and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
-----------------
Prospectus Page 29
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BALANCED FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements, accompanying notes and
the report of PricewaterhouseCoopers LLP, independent accountants, which appear
in the Fund's Annual Report to Shareholders for the fiscal year ended
August 31, 1998, and are incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
information in the table below relating to the fiscal years ended August 31,
1998 and 1997, the period March 1, 1996 through August 31, 1996 and to each of
the three years in the period ended February 29, 1996, have been audited by
PricewaterhouseCoopers LLP. Further information about the Fund's performance is
also included in the Annual Report to Shareholders, which may be obtained
without charge by calling 1-800-647-1568. Prior to August 14, 1995, the Fund
pursued certain different investment policies; thus, the information shown below
for periods prior to that date may not necessarily be indicative of current or
future operations.
<TABLE>
<CAPTION>
BALANCED FUND
---------------------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------------------
FOR THE
FOR THE FOR THE PERIOD
FOR THE YEARS ENDED SIX MONTHS YEAR FOR THE YEARS ENDED JULY 1,
AUGUST 31, ENDED ENDED FEBRUARY 28, 1991+ TO
----------------------- AUGUST 31, FEBRUARY 29, ------------------------------ FEBRUARY 29,
1998 1997 1996(2) 1996 1995 1994 1993 1992
---------- ---------- ---------- ------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54 $ 11.01 $10.09
-------- -------- -------- -------- -------- -------- -------- ------
Net investment income.......... 0.23++ 0.23++ 0.12++ 0.27++ 0.26 0.22 0.33 0.19
Net realized and unrealized
gains (losses) from
investments, futures and
options....................... 0.31++ 2.79++ (0.12)++ 1.84++ (1.07) 1.31 0.54 0.96
-------- -------- -------- -------- -------- -------- -------- ------
Net increase (decrease) from
investment operations......... 0.54 3.02 0.00 2.11 (0.81) 1.53 0.87 1.15
-------- -------- -------- -------- -------- -------- -------- ------
Dividends from net investment
income........................ (0.22) (0.24) (0.10) (0.31) (0.23) (0.25) (0.34) (0.23)
Distributions from net realized
gains from investment
transactions.................. (1.55) (0.55) (0.48) (0.75) (1.20) (0.78) -- --
-------- -------- -------- -------- -------- -------- -------- ------
Total dividends and other
distributions to
shareholders.................. (1.77) (0.79) (0.58) (1.06) (1.43) (1.03) (0.34) (0.23)
-------- -------- -------- -------- -------- -------- -------- ------
Net asset value, end of
period........................ $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54 $11.01
-------- -------- -------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- -------- -------- ------
Total investment return (1) ... 4.69% 30.67% 0.03% 22.08% (6.02)% 13.57% 8.09% 11.43%
-------- -------- -------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- -------- -------- ------
Ratios/Supplemental data:
Net assets, end of period
(000's)....................... $182,362 $176,403 $157,525 $171,609 $174,761 $216,492 $154,594 $ 916
Expenses to average net
assets........................ 1.26% 1.46% 1.34%* 1.29% 1.26% 1.21% 1.18% 1.30%*
Net investment income to
average
net assets.................... 1.88% 2.02% 2.19%* 2.55% 2.41% 1.74% 2.52% 3.43%*
Portfolio turnover rate........ 190% 188% 103% 188% 107% 69% 33% 84%
<CAPTION>
CLASS B
------------------------------------
FOR THE
FOR THE YEARS ENDED SIX MONTHS
AUGUST 31, ENDED
----------------------- AUGUST 31,
1998 1997 1996(2)
---------- ---------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.70 $ 10.42 $ 11.00
-------- -------- --------
Net investment income.......... 0.14++ 0.14++ 0.08++
Net realized and unrealized
gains (losses) from
investments, futures and
options....................... 0.31++ 2.84++ (0.11)++
-------- -------- --------
Net increase (decrease) from
investment operations......... 0.45 2.98 (0.03)
-------- -------- --------
Dividends from net investment
income........................ (0.12) (0.15) (0.07)
Distributions from net realized
gains from investment
transactions.................. (1.55) (0.55) (0.48)
-------- -------- --------
Total dividends and other
distributions to
shareholders.................. (1.67) (0.70) (0.55)
-------- -------- --------
Net asset value, end of
period........................ $ 11.48 $ 12.70 $ 10.42
-------- -------- --------
-------- -------- --------
Total investment return (1) ... 3.87% 29.70% (0.30)%
-------- -------- --------
-------- -------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's)....................... $ 26,425 $ 22,768 $ 22,307
Expenses to average net
assets........................ 2.03% 2.22% 2.09%*
Net investment income to
average
net assets.................... 1.13% 1.27% 1.43%*
Portfolio turnover rate........ 190% 188% 103%
</TABLE>
- ------------------
* Annualized
+ Commencement of issuance of shares.
++ Calculated using the average shares outstanding for the year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) Fiscal year changed to August 31.
-----------------
Prospectus Page 30
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 9.90 $ 12.10 $ 11.56 $ 10.99 $ 10.21 $ 9.86 $ 9.92 $ 10.18
------- ------- ------- -------- -------- -------- -------- --------
Net investment income.......... 0.19++ 0.44 0.26 0.30 0.35 0.59 0.65 0.54
Net realized and unrealized
gains (losses) from
investments, futures and
options....................... 1.86++ (1.32) 1.18 0.48 0.78 0.38 0.10 (0.28)
------- ------- ------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations......... 2.05 (0.88) 1.44 0.78 1.13 0.97 0.75 0.26
------- ------- ------- -------- -------- -------- -------- --------
Dividends from net investment
income........................ (0.20) (0.12) (0.12) (0.21) (0.35) (0.62) (0.70) (0.52)
Distributions from net realized
gains from investment
transactions.................. (0.75) (1.20) (0.78) -- -- -- (0.11) --
------- ------- ------- -------- -------- -------- -------- --------
Total dividends and other
distributions to
shareholders.................. (0.95) (1.32) (0.90) (0.21) (0.35) (0.62) (0.81) (0.52)
------- ------- ------- -------- -------- -------- -------- --------
Net asset value, end of
period........................ $ 11.00 $ 9.90 $ 12.10 $ 11.56 $ 10.99 $ 10.21 $ 9.86 $ 9.92
------- ------- ------- -------- -------- -------- -------- --------
------- ------- ------- -------- -------- -------- -------- --------
Total investment return (1) ... 21.20% (6.68)% 12.62% 7.25% 11.24% 10.29% 7.53% 2.73%
------- ------- ------- -------- -------- -------- -------- --------
------- ------- ------- -------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's)....................... $26,627 $37,104 $83,178 $160,115 $346,290 $403,557 $557,646 $651,003
Expenses to average net
assets........................ 2.05% 1.98% 2.05% 1.98% 2.02% 1.83% 1.84% 1.94%
Net investment income to
average
net assets.................... 1.81% 1.60% 1.00% 2.02% 3.25% 5.46% 6.04% 5.37%
Portfolio turnover rate........ 188% 107% 69% 33% 84% 169% 327% 159%
<CAPTION>
-------------------------------------------------------------------------------------------------
CLASS C
-------------------------------------------------------------------------------------------------
FOR THE YEARS
ENDED SIX MONTHS FOR THE YEARS ENDED FOR THE PERIOD
AUGUST 31, ENDED YEAR ENDED FEBRUARY 28, JULY 2, 1992+ TO
------------------ AUGUST 31, FEBRUARY 29, --------------- FEBRUARY 28,
1998 1997 1996(2) 1996 1995 1994 1993
------- ------ ---------- ------------ ------ ------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.52 $10.29 $10.88 $ 9.82 $12.03 $ 11.54 $10.86
------- ------ ------ ------ ------ ------- ------
Net investment income.......... 0.14++ 0.14++ 0.08++ 0.19++ 0.19 0.14 0.13
Net realized and unrealized
gains (losses) from
investments, futures and
options....................... 0.31++ 2.80++ (0.12)++ 1.84++ (1.07) 1.30 0.71
------- ------ ------ ------ ------ ------- ------
Net increase (decrease) from
investment operations......... 0.45 2.94 (0.04) 2.03 (0.88) 1.44 0.84
------- ------ ------ ------ ------ ------- ------
Dividends from net investment
income........................ (0.14) (0.16) (0.07) (0.22) (0.13) (0.17) (0.16)
Distributions from net realized
gains from investment
transactions.................. (1.55) (0.55) (0.48) (0.75) (1.20) (0.78) --
------- ------ ------ ------ ------ ------- ------
Total dividends and other
distributions to
shareholders.................. (1.69) (0.71) (0.55) (0.97) (1.33) (0.95) (0.16)
------- ------ ------ ------ ------ ------- ------
Net asset value, end of
period........................ $ 11.28 $12.52 $10.29 $10.88 $ 9.82 $ 12.03 $11.54
------- ------ ------ ------ ------ ------- ------
------- ------ ------ ------ ------ ------- ------
Total investment return (1) ... 3.89% 29.70% (0.38)% 21.12% (6.69)% 12.75% 7.78%
------- ------ ------ ------ ------ ------- ------
------- ------ ------ ------ ------ ------- ------
Ratios/Supplemental data:
Net assets, end of period
(000's)....................... $14,581 $8,736 $6,979 $7,469 $8,525 $12,916 $7,058
Expenses to average net
assets........................ 2.00% 2.21% 2.09%* 2.08% 2.01% 1.96% 1.95%*
Net investment income to
average
net assets.................... 1.18% 1.27% 1.44%* 1.77% 1.62% 0.97% 1.91%*
Portfolio turnover rate........ 190% 188% 103% 188% 107% 69% 33%
-----------------
Prospectus Page 31
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND
---------------------
CLASS Y
---------------------
FOR THE PERIOD
MARCH 26, 1998+
THROUGH
AUGUST 31, 1998
---------------------
<S> <C>
Net asset value, beginning of period.................................................................... $ 12.55
-------
Net investment income................................................................................... 0.11++
Net realized and unrealized gains (losses) from investments, futures and options........................ (1.28)++
-------
Net increase (decrease) from investment operations...................................................... (1.17)
-------
Dividends from net investment income.................................................................... (0.11)
Distributions from net realized gains from investment transactions...................................... --
-------
Total dividends and other distributions to shareholders................................................. (0.11)
-------
Net asset value, end of period.......................................................................... $ 11.27
-------
-------
Total investment return (1)............................................................................. (9.41)%
-------
-------
Ratios/supplemental data:
Net assets, end of period (000's)....................................................................... $ 175
Expenses to average net assets.......................................................................... 0.89%*
Net investment income to average net assets............................................................. 2.48%*
Portfolio turnover rate................................................................................. 190%
</TABLE>
- ------------------
* Annualized
+ Commencement of issuance of shares.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include program fees; results would be lower if program fees were
included. Total investment return for periods of less than one year has not
been annualized.
-----------------
Prospectus Page 32
<PAGE>
------------------------------
[This page intentionally left blank]
-----------------
Prospectus Page 33
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
TACTICAL ALLOCATION FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements, accompanying notes and
the report of Ernst & Young LLP, independent auditors, which appear in the
Fund's Annual Report to Shareholders for the fiscal year ended August 31, 1998,
and are incorporated by reference into the Statement of Additional Information.
The financial statements and notes, as well as the financial information in the
tables below relating to each of the four fiscal years in the period ended
August 31, 1998 have been audited by Ernst & Young LLP. The financial
information for the year ended August 31, 1994 and the prior periods was audited
by other auditors, whose report on this data was unqualified. Further
information about the Fund's performance is also included in the Annual Report
to Shareholders, which may be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
-----------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------
FOR THE YEARS FOR THE PERIOD
ENDED MAY 10, 1993+
AUGUST 31, TO AUGUST 31,
---------------------------------------------------- ---------------
1998 1997 1996 1995** 1994 1993
-------- -------- ------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $ 22.23 $ 16.15 $ 14.86 $ 13.78 $13.50 $ 12.90
-------- -------- ------- ------- ------ -------
Net investment income (loss)............. 0.15 0.18@ 0.18 0.22 0.24 0.08
Net realized and unrealized gains from
investments............................. 1.47 6.12@ 2.31 2.05 0.32 0.59
-------- -------- ------- ------- ------ -------
Net increase from investment
operations.............................. 1.62 6.30 2.49 2.27 0.56 0.67
-------- -------- ------- ------- ------ -------
Dividends from net investment income..... (0.12) (0.14) (0.14) (0.22) (0.24) (0.07)
Distributions from net realized gains
from investment transactions............ (0.18) (0.08) (1.06) (0.97) (0.04) --
-------- -------- ------- ------- ------ -------
Total dividends and other distributions
to shareholders......................... (0.30) (0.22) (1.20) (1.19) (0.28) (0.07)
-------- -------- ------- ------- ------ -------
Net asset value, end of period........... $ 23.55 $ 22.23 $ 16.15 $ 14.86 $13.78 $ 13.50
-------- -------- ------- ------- ------ -------
-------- -------- ------- ------- ------ -------
Total investment return(1)............... 7.31% 39.26% 17.35% 18.43% 4.21% 5.17%
-------- -------- ------- ------- ------ -------
-------- -------- ------- ------- ------ -------
Ratios/Supplemental data:
Net assets, end of period (000's)........ $340,245 $170,759 $23,551 $ 1,944 $1,801 $ 3,007
Expenses to average net assets........... 0.95% 0.99% 1.17% 1.46% 1.13% 1.06%*
Net investment income (loss) to average
net assets.............................. 0.74% 0.88% 1.12% 1.60% 1.64% 1.71%*
Portfolio turnover rate.................. 33% 6% 6% 53% 4% 0%
<CAPTION>
-----------------------------------------
CLASS B
-----------------------------------------
FOR THE PERIOD
JANUARY 30,
FOR THE YEARS 1996+
ENDED AUGUST 31, TO AUGUST 31,
------------------------ -------------
1998 1997 1996
-------- ---------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period..... $ 22.08 $ 16.13 $ 15.54
-------- -------- --------
Net investment income.................... 0.00 0.03@ 0.02
Net realized and unrealized gains from
investment transactions................. 1.43 6.09@ 0.57
-------- -------- --------
Net increase from investment
operations.............................. 1.43 6.12 0.59
-------- -------- --------
Dividends from net investment income..... (0.01) (0.09) --
Distributions from net realized gains
from investment transactions............ (0.18) (0.08) --
-------- -------- --------
Total dividends and other distributions
to shareholders......................... (0.19) (0.17) --
-------- -------- --------
Net asset value, end of period........... $ 23.32 $ 22.08 $ 16.13
-------- -------- --------
-------- -------- --------
Total investment return(1)............... 6.49% 38.14% 3.80%
-------- -------- --------
-------- -------- --------
Ratios/Supplemental data:
Net assets, end of period (000's)........ $483,068 $239,836 $ 28,495
Expenses to average net assets........... 1.71% 1.74% 1.84%*
Net investment income to average net
assets.................................. (0.02) 0.13% 0.47%*
Portfolio turnover rate.................. 33% 6% 6%
</TABLE>
- ------------------
+ Commencement of issuance of shares.
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges or program fees would be lower if sales charges or
program fees were included. Total investment returns for periods of less
than one year have not been annualized.
-----------------
Prospectus Page 34
<PAGE>
------------------------------
PaineWebber Balanced Fund Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
----------------------------------------------------------------------------------
CLASS C
----------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED JULY 22, 1992+
AUGUST 31, TO AUGUST 31,
---------------------------------------------------------------------- --------------
1998 1997 1996 1995** 1994 1993 1992
-------- -------- ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $ 22.18 $ 16.12 $ 14.87 $ 13.78 $ 13.49 $ 12.12 $ 12.00
-------- -------- ------- ------- ------- -------- -------
Net investment income.................... (0.01) 0.03@ 0.06 0.12 0.13 0.18 0.03
Net realized and unrealized gains from
investment transactions................. 1.45 6.11@ 2.32 2.06 0.33 1.34 0.09
-------- -------- ------- ------- ------- -------- -------
Net increase from investment
operations.............................. 1.44 6.14 2.38 2.18 0.46 1.52 0.12
-------- -------- ------- ------- ------- -------- -------
Dividends from net investment income..... -- -- (0.07) (0.12) (0.13) (0.15) --
Distributions from net realized gains
from investment transactions............ (0.17) (0.08) (1.06) (0.97) (0.04) -- --
-------- -------- ------- ------- ------- -------- -------
Total dividends and other distributions
to shareholders......................... (0.17) (0.08) (1.13) (1.09) (0.17) (0.15) --
-------- -------- ------- ------- ------- -------- -------
Net asset value, end of period........... $ 23.45 $ 22.18 $ 16.12 $ 14.87 $ 13.78 $ 13.49 $ 12.12
-------- -------- ------- ------- ------- -------- -------
-------- -------- ------- ------- ------- -------- -------
Total investment return(1)............... 6.49% 38.20% 16.52% 17.57% 3.46% 12.61% 0.98%
-------- -------- ------- ------- ------- -------- -------
-------- -------- ------- ------- ------- -------- -------
Ratios/Supplemental data:
Net assets, end of period (000's)........ $397,767 $233,044 $73,630 $48,105 $62,970 $107,761 $50,222
Expenses to average net assets........... 1.70% 1.75% 1.95% 2.22% 1.88% 1.73% 1.75%*
Net investment income to average net
assets.................................. (0.01)% 0.14% 0.35% 0.86% 0.89% 1.04% 2.42%*
Portfolio turnover rate.................. 33% 6% 6% 53% 4% 0% 0%
<CAPTION>
-----------------------------------------------------------------------------
CLASS Y
-----------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED JULY 22, 1993+
AUGUST 31, TO AUGUST 31,
------------------------------------------------------------- --------------
1998 1997 1996 1995** 1994 1993
---------- ---------- ------------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $ 22.33 $ 16.20 $ 14.88 $13.79 $ 13.52 $12.90
-------- -------- -------- ------ ------- ------
Net investment income.................... 0.21 0.23@ 0.30 0.23 0.25 0.09
Net realized and unrealized gains from 1.49 6.13@ 2.24 2.09 0.33 0.60
investment transactions................. -------- -------- -------- ------ ------- ------
1.70 6.36 2.54 2.32 0.58 0.69
Net increase from investment -------- -------- -------- ------ ------- ------
operations.............................. (0.17) (0.15) (0.16) (0.26) (0.27) (0.07)
(0.18) (0.08) (1.06) (0.97) (0.04) --
Dividends from net investment income..... -------- -------- -------- ------ ------- ------
Distributions from net realized gains (0.35) (0.23) (1.22) (1.23) (0.31) (0.07)
from investment transactions............ -------- -------- -------- ------ ------- ------
$ 23.68 $ 22.33 $ 16.20 $14.88 $ 13.79 $13.52
Total dividends and other distributions -------- -------- -------- ------ ------- ------
to shareholders......................... -------- -------- -------- ------ ------- ------
7.62% 39.55% 17.70% 18.79% 4.41% 5.30%
Net asset value, end of period........... -------- -------- -------- ------ ------- ------
-------- -------- -------- ------ ------- ------
$ 74,872 $ 36,467 $ 12,803 $2,506 $ 3,880 $3,379
Total investment return(1)............... 0.67% 0.74% 0.95% 1.23% 0.88% 0.81%*
1.03% 1.16% 1.38% 1.86% 1.90% 1.96%*
33% 6% 6% 53% 4% 0%
</TABLE>
-----------------
Prospectus Page 35
<PAGE>
------------------------------
PaineWebber Balanced Fund
PaineWebber Tactical Allocation Fund
PROSPECTUS -- NOVEMBER 30, 1998
/ / PAINEWEBBER BOND FUNDS
High Income Fund
Investment Grade Income Fund
Low Duration U.S. Government Income Fund
Strategic Income Fund
U.S. Government Income Fund
/ / PAINEWEBBER TAX-FREE BOND FUNDS
California Tax-Free Income Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund
/ / PAINEWEBBER ASSET
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund
/ / PAINEWEBBER STOCK FUNDS
Financial Services Growth Fund
Growth Fund
Growth and Income Fund
Mid Cap Fund
Small Cap Fund
S&P 500 Index Fund
Tax-Managed Equity Fund
Utility Income Fund
/ / PAINEWEBBER GLOBAL FUNDS
Asia Pacific Growth Fund
Emerging Markets Equity Fund
Global Equity Fund
Global Income Fund
/ / PAINEWEBBER MONEY MARKET FUND
/ / PAINEWEBBER FUNDS OF FUNDS
Mitchell Hutchins Conservative Portfolio
Mitchell Hutchins Moderate Portfolio
Mitchell Hutchins Aggressive Portfolio
A prospectus containing more complete information for any of the
above funds, including charges and expenses, can be obtained
from a PaineWebber investment executive or correspondent firm.
Please read it carefully before investing. It is important you
have all the information you need to make a sound investment
decision.
-----------------
<PAGE>
PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The two funds named above (each a "Fund") are diversified series of
professionally managed, open-end management investment companies organized as a
Maryland corporation and a Massachusetts business trust, respectively.
PaineWebber Balanced Fund ("Balanced Fund"), a series of PaineWebber Master
Series, Inc. ("Corporation"), seeks high total return with low volatility; it
invests primarily in a combination of equity securities, bonds and money market
instruments. PaineWebber Tactical Allocation Fund ("Tactical Allocation Fund"),
a series of PaineWebber Investment Trust ("Trust"), seeks total return,
consisting of long-term capital appreciation and current income, by utilizing a
systematic investment strategy that actively allocates the Fund's assets between
equity securities and U.S. Treasury notes or U.S. Treasury bills.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the Funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of Fund shares.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated November 30,
1998. 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 November 30,
1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or the Statement of Additional Information, there
are no policy limitations on a Fund's ability to use the investments or
techniques discussed in these documents.
YIELD FACTORS AND RATINGS. Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's")
and other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of bond, debt
obligations and certain other securities. A description of the ratings assigned
to corporate debt obligations by Moody's and S&P is included in the Appendix to
this Statement of Additional Information. The process by which S&P and Moody's
determine ratings for mortgage- and other asset-backed securities includes
consideration of the likelihood of the receipt by security holders of all
distributions, the nature of the underlying assets, the credit quality of the
guarantor, if any, and the structural, legal and tax aspects associated with
such securities. Not even the highest such ratings represents an assessment of
the likelihood that principal prepayments will be made by obligors or the
underlying assets or the degree to which such prepayments may differ from that
originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to prepayments.
Balanced 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 debt obligations that they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, debt obligations with the same maturity, interest rate
and rating may have different market prices. Subsequent to its purchase by
Balanced Fund, an issue of debt obligations may cease to be rated or its rating
may be reduced below the minimum rating required for purchase by the Fund.
Mitchell Hutchins will consider such an event in determining whether the Fund
should continue to hold the obligation but is not required to dispose of it.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins will analyze interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds and other debt securities in which Balanced Fund
invests are dependent on a variety of factors, including general money market
conditions, general conditions in the bond market, the
<PAGE>
financial condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the payment
of interest and principal on their bonds.
Balanced Fund may invest in non-invesment grade securities, that is, rated
Ba or lower by Moody's, BB or lower by S&P, comparably rated by another NRSRO or
determined by Mitchell Hutchins to be of comparable quality. Balanced Fund will
not invest in securities rated lower than B by Moody's or S&P, comparably rated
by another NRSRO or determined by Mitchell Hutchins to be of comparable quality.
Non-investment grade securities are deemed by those agencies to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal and may involve major risk exposure to adverse conditions.
Non-investment grade securities are commonly referred to as "junk bonds," and
generally offer a higher current yield than that available for investment grade
issues, but they involve higher risks, in that they are especially subject to
adverse changes in general economic conditions and in the industries in which
the issuers are engaged, to changes in the financial condition of the issuers
and to price fluctuations in response to changes in interest rates. During
periods of economic downturn or rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
make payments of interest and principal and increase the possibility of default.
In addition, such issuers may not have more traditional methods of financing
available to them and may be unable to repay debt at maturity by refinancing.
The risk of loss due to default by such issuers is significantly greater because
such securities frequently are unsecured and subordinated to the prior payment
of senior indebtedness.
The market for non-investment grade debt securities has expanded rapidly in
recent years, which has been a period of generally expanding growth and lower
inflation. These securities will be susceptible to greater risk when economic
growth slows or reverses and when inflation increases or deflation occurs. In
the past, the prices of many lower rated debt securities declined substantially,
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower rated debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or defaults. There can be no
assurance that such declines will not recur. The market for non-investment grade
debt issues generally is thinner and less active than that for higher quality
securities, which may limit a Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of non-investment grade
securities, especially in a thinly traded market.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sale
contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. The U.S. government mortgage-backed securities in which Balanced
Fund may invest include mortgage-backed securities issued or guaranteed as to
the payment of principal and interest (but not as to market value) by Ginnie Mae
(also known as the Government National Mortgage Association), Fannie Mae (also
known as the Federal National Mortgage Association), or Freddie Mac (also known
as the Federal Home Loan Mortgage Corporation). Other mortgage-backed securities
are issued by private issuers, generally originators of and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers and special
2
<PAGE>
purpose entities (collectively "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement.
New types of mortgage-backed securities are developed and marketed from
time to time and, consistent with its investment limitations, Balanced Fund
expects to invest in those new types of mortgage-backed securities that Mitchell
Hutchins believes may assist the Fund in achieving its investment objective.
Similarly, Balanced Fund may invest in mortgage-backed securities issued by new
or existing governmental, private or commercial issuers other than those
identified herein.
GINNIE MAE CERTIFICATES. Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificateholders such as Balanced Fund.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES. Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as "conventional mortgage loans" or "conventional loans")
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interests and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES. Freddie Mac also facilitates a national
secondary market for conventional residential and U.S. government-insured
mortgage loans through its mortgage purchase and mortgage-backed securities
sales activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). Each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. Freddie Mac generally
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely payment
of both principal and interest. GMCs also represent a pro rata interest in a
pool of mortgages. These instruments, however, pay interest semiannually and
return principal once a year in guaranteed minimum payments. The Freddie Mac
guarantee is not backed by the full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES. Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to CMOs issued or guaranteed
by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed securities may
be supported by pools of U.S. government or agency insured or guaranteed
mortgage loans or by other mortgage-backed securities issued by a government
agency or instrumentality, but they generally are supported by pools of
conventional (i.e., non-government guaranteed or insured) mortgage loans. Since
such mortgage-backed securities normally are not guaranteed by an entity having
the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they normally are
structured with one or more types of credit enhancement. See "--Types of Credit
Enhancement." These credit enhancements do not protect investors from changes in
market value.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS. CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called "Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by
government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage
pass-through securities are interests in trusts that are comprised of Mortgage
Assets and that have multiple classes similar to those in CMOs. Unless the
context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-
3
<PAGE>
through securities. Payments of principal of and interest on the Mortgage Assets
(and in the case of CMOs, any reinvestment income thereon) provide the funds to
pay debt service on the CMOs or to make schedule distributions on the
multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any
principal-only class) on a monthly, quarterly or semiannual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. In some CMO structures, all or a portion of the interest
attributable to one or more of the CMO classes may be added to the principal
amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest rates--
i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an "inverse IO," on which the holders are entitled
to receive no payments of principal and are entitled to receive interest at a
rate that will vary inversely with a specified index or a multiple thereof.
TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors
on mortgage assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets (usually the bank, savings
association or mortgage banker that transferred the underlying loans to the
issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring the
transaction or through a combination of such approaches. Balanced Fund will not
pay any additional fees for such credit enhancement, although the existence of
credit enhancement may increase the price of a security. Credit enhancements do
not provide protection against changes in the market value of the security.
Examples of credit enhancement arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "spread accounts" or "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical
4
<PAGE>
information regarding the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated could adversely affect
the return on an investment in such a security.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The
yield characteristics of mortgage-and asset-backed securities differ from those
of traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally are
of a shorter maturity and thus are less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-backed securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of Balanced Fund.
ADDITIONAL INFORMATION ON ARM AND FLOATING RATE MORTGAGE-BACKED
SECURITIES. Adjustable rate mortgage ("ARM") securities are mortgage-backed
securities that represent a right to receive interest payments at a rate that is
adjusted to reflect the interest earned on a pool of mortgage loans bearing
variable or adjustable rates of interest (such mortgage loans are referred to as
"ARMs"). Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans.
Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining
5
<PAGE>
rates, ARMs generally do not increase in value as much as fixed rate securities.
ARM mortgage-backed securities represent a right to receive interest payments at
a rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be adjusted
above a specified lifetime maximum rate or, in some cases, below a minimum
lifetime rate. In addition, certain ARMs provide for limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may provide for limitations on changes in the maximum amount
by which the borrower's monthly payment may adjust for any single adjustment
period. In the event that a monthly payment is not sufficient to pay the
interest accruing on the ARM, any such excess interest is added to the mortgage
loan ("negative amortization"), which is repaid through future monthly payments.
If the monthly payment exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment that would have been necessary
to amortize the outstanding principal balance over the remaining term of the
loan, the excess reduces the principal balance of the ARM. Borrowers under ARMs
experiencing negative amortization may take longer to build up their equity in
the underlying property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and, therefore, on certain
ARM mortgage-backed securities, are based on indices, such as the one-year
constant maturity Treasury rate, that reflect changes in market interest rates.
Others are based on indices, such as the 11th District Federal Home Loan Bank
Cost of Funds Index ("COFI"), that tend to lag behind changes in market interest
rates. The values of ARM mortgage-backed securities supported by ARMs that
adjust based on lagging indices tend to be somewhat more sensitive to interest
rate fluctuations than those reflecting current interest rate levels, although
the values of such ARM mortgage-backed securities still tend to be less
sensitive to interest rate fluctuations than fixed-rate securities.
As with ARM mortgage-backed securities, interest rate adjustments on
floating rate mortgage-backed securities may be based on indices that lag behind
market interest rates. Interest rates on floating rate mortgage-backed
securities generally are adjusted monthly. Floating rate mortgage-backed
securities are subject to lifetime interest rate caps, but they generally are
not subject to limitations on monthly or other periodic changes in interest
rates or monthly payments.
DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept "term
to maturity." Traditionally, a debt security's "term to maturity" has been used
as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until a debt security
provides for a final payment, taking no account of the pattern of the security's
payments prior to maturity.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a Treasury note with a
remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining stated
maturity and the duration is likely to be much greater. Duration also allows
Mitchell Hutchins to make certain predictions as to the effect that changes in
the level of interest rates will have on the value of Balanced Fund's portfolio.
For example, when the level of interest rates increases by 1%, the value of a
fixed income security having a positive duration of three years generally will
decrease by approximately 3%. Thus, if Mitchell Hutchins calculates the duration
of the Fund's portfolio as three years, it normally would expect the portfolio
to change in value by approximately 3% for every 1% change in the level of
interest rates. However, various factors, such as changes in anticipated
prepayment rates, qualitative considerations and market supply and demand, can
cause particular securities to respond somewhat differently to changes in
interest rates than indicated in the above example.
Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Fund's duration by approximately the
same amount as
6
<PAGE>
would holding an equivalent amount of the underlying securities. Short futures
or put option shave durations roughly equal to the negative duration of the
securities that underlie these positions, and have the effect of reducing
portfolio duration by approximately the same amount as would selling an
equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
will use more sophisticated analytical techniques that incorporate the economic
life of a security into the determination of its duration and, therefore, its
interest rate exposure.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities 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 to be liquid
pursuant to guidelines established by the Corporation's board of directors or
the Trust's board of trustees (each a "board"). The assets used as cover for OTC
options written by a 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. Under current
SEC guidelines, interest-only ("IO") and principal-only ("PO") classes of
mortgage-backed securities, in which Balanced Fund may invest, are considered
illiquid. However, IO and PO classes of fixed-rate mortgage-backed securities
issued by the U.S. government or one of its agencies or instrumentalities will
not be considered illiquid if Mitchell Hutchins has determined that they are
liquid pursuant to guidelines established by the board.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time 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. A large institutional market
has developed for many securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public but, instead, will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. Such markets might include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a Fund, however, could affect adversely the marketability of such portfolio
securities, and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in
7
<PAGE>
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 boards.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities or other obligations and simultaneously commits to
resell them to the counterparty at an agreed-upon date or upon demand and at a
price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased obligations. Each Fund maintains custody of the
underlying obligations prior to their repurchase, either through its regular
custodian or through a special "tri-party" custodian that maintains separate
accounts for both the Fund and its counterparty. Thus, the obligation of the
counterparty to pay the repurchase price on the date agreed to or upon demand
is, in effect, secured by such obligations. If their value becomes less than the
repurchase price, plus any agreed-upon additional amount, the counterparty must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
obligations and the price that was paid by a Fund upon their acquisition is
accrued as interest and included in the Fund's net investment income.
The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins to present minimal credit
risks in accordance with guidelines established by each board. Mitchell Hutchins
reviews and monitors the creditworthiness of those institutions under each
board's general supervision.
REVERSE REPURCHASE AGREEMENTS. Balanced Fund may enter into reverse
repurchase agreements with banks and securities dealers up to an aggregate value
of not more than 5% of its net 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 or upon demand and at a 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."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a Fund might be unable to deliver them when the Fund seeks to
repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or a trustee or receiver
may receive an extension of time to determine whether to enforce a Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the repurchase agreement may effectively be restricted pending such decision.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. A security purchased on a
when-issued or delayed delivery basis is recorded as an asset on the commitment
date and is subject to changes in market value, generally based upon changes in
the level of interest rates. Thus, fluctuation in the value of the security from
the time of the commitment date will affect a Fund's net asset value. When a
Fund commits to purchase securities on a when-issued or delayed delivery basis,
its custodian segregates assets to cover the amount of the commitment. See
"Investment Policies and Restrictions--Segregated Accounts." Each Fund purchases
when-issued securities only with the intention of taking delivery, but may sell
the right to acquire the security prior to delivery if Mitchell Hutchins deems
it advantageous to do so, which may result in a gain or loss to the Fund.
SECTION 4(2) PAPER. Commercial paper issues in which Balanced Fund may
invest include securities issued by major corporations without registration
under the 1933 Act in reliance on the exemption from such registration afforded
by Section 3(a)(3) thereof and commercial paper issued in reliance on the
so-called "private placement" exemption from registration afforded by
Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. The Fund's 10% limitation on investments in illiquid securities
includes Section 4(2) paper, other than Section 4(2) paper that Mitchell
Hutchins has determined to be liquid pursuant to guidelines established by the
board. The board has delegated to Mitchell Hutchins the function of making
day-to-day determinations of liquidity with respect to Section 4(2) paper,
pursuant to guidelines approved by the board that require Mitchell Hutchins to
take into account the same factors described under
8
<PAGE>
"Illiquid Securities" above for other restricted securities and require Mitchell
Hutchins to perform the same monitoring and reporting functions.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Securities of
foreign issuers may not be registered with the SEC, nor may the issuers thereof
subject to its reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by a Fund
than is available concerning U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory requirements comparable to those applicable to U.S. companies.
The Funds may invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). Generally, ADRs, are in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. For purposes of each Fund's
investment policies, ADRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR evidencing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter ("OTC") in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
Investment income on certain foreign securities in which the Funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which a Fund would be subject.
CONVERTIBLE SECURITIES. Balanced Fund is permitted to invest in
convertible securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable non-convertible securities. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than the issuer's common stock, although the extent to which
such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock because they have fixed income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its
9
<PAGE>
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding a fixed income
security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by Balanced Fund is called for
redemption, the Fund will be required to permit the issuer to redeem the
security, convert it into underlying common stock or sell it to a third party.
SEGREGATED ACCOUNTS. When a Fund enters into certain transactions to make
future payments to third parties, such as reverse repurchase agreements or the
purchase of securities on a when-issued or delayed delivery basis, it will
maintain with an approved custodian in a segregated account cash or liquid
securities, marked to market daily, in an amount at least equal to the Fund's
obligation or commitment under such transactions. As described under "Strategies
Using Derivative Instruments," segregated accounts may also be required in
connection with certain transactions involving options, futures contracts, swaps
or similar instruments.
SHORT SALES "AGAINST THE BOX." Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a Fund, and the Fund is
obligated to replace the securities borrowed at a date in the future. When a
Fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the Fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. The Fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box. Neither Fund currently expects to have obligations under
short sales that at any time during the coming year exceed 5% of its net assets.
A 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.
In such case, any loss in the Fund's long position after the short sale should
be reduced by a corresponding gain in the short position. Conversely, any gain
in the long position after the short sale should be reduced by a corresponding
loss in the short position. The extent to which gains or losses in the long
position are reduced will depend upon the amount of the securities sold short
relative to the amount of the securities the Fund owns, either directly or
indirectly, and in the case where the Fund owns convertible securities, changes
in the investment values or conversion premiums of such securities.
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to
331/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with the Fund's custodian, marked to market daily, in an
amount at least equal to the market value of the securities loaned, plus accrued
interest and dividends. Acceptable collateral is limited to cash, U.S.
government securities and irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins. Each Fund may reinvest cash
collateral in money market instruments or other short-term liquid investments.
In determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each Fund will retain authority to terminate
any of its loan transactions at any time. A Fund may pay reasonable fees in
connection with a loan and may pay the borrower or placing broker a negotiated
portion of the interest earned on the cash or money market instruments held as
collateral. A Fund will receive amounts equivalent to any dividends, interest or
other distributions on the securities loaned. A 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.
Pursuant to procedures adopted by the boards governing the Funds'
securities lending program, PaineWebber has been retained to serve as lending
agent for each Fund. The appropriate board also has authorized the payment of
fees (including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
10
<PAGE>
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Fund without the affirmative vote of the lesser of (1)
more than 50% of the outstanding shares of the Fund or (2) 67% or more of the
shares of the Fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by a proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations.
Each Fund will not:
(1) purchase securities of any one issuer if, as a result, more than
5% of the Fund's total assets would be invested in securities of that
issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Fund's total
assets may be invested without regard to this limitation, and except that
this limitation does not apply to securities issued or guaranteed by the
U.S. government, its agencies and instrumentalities or to securities issued
by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities.
(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ("1940 Act") and then not in excess of
331/3% of the Fund's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the Fund
may borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt securities or
instruments, or participations or other interests therein and investments
in government obligations, commercial paper, certificates of deposit,
bankers' acceptances or similar instruments will not be considered the
making of a loan.
(5) engage in the business of underwriting securities of other
issuers, except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with its
disposition of portfolio securities.
(6) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation,
and except that the Fund may exercise rights under agreements relating to
such securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real
estate can be liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the Fund may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are not
fundamental and may be changed by the vote of a Fund's board without shareholder
approval:
Each Fund may not:
(1) invest more than 10% of its net assets in illiquid securities, a
term that means securities that cannot be disposed of within seven days in
the ordinary course of business at approximately the amount at which the
Fund has valued the securities and includes, among other things, repurchase
agreements maturing in more than seven days.
11
<PAGE>
(2) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the Fund
may make margin deposits in connection with its use of financial options
and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b) maintain
short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not
apply to securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation or merger.
(5) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may use a
variety of financial instruments ("Derivative Instruments"), including certain
options, futures contracts (sometimes referred to as "futures") and options on
futures contracts, to attempt to hedge the Funds' portfolios and to enhance
income or return, including adjusting a Fund's exposure to different asset
classes or maintaining exposure to stocks or bonds while maintaining a cash
balance for Fund management purposes (such as to provide liquidity to meet
anticipated shareholder sales of Fund shares and for Fund operating expenses). A
Fund may enter into transactions involving one or more types of Derivative
Instruments under which the full value of its portfolio is at risk, and Tactical
Allocation Fund, in particular, may use Derivative Instruments to this extent in
reallocating its exposure to different asset classes when the Tactical
Allocation Model's recommended asset allocation mix changes. Under normal
circumstances, however, a Fund's use of these instruments will place at risk a
much smaller portion of its assets. Balanced Fund may also enter into certain
interest rate protection transactions. Balanced Fund may use all of the
instruments identified below. Tactical Allocation Fund is limited to stock index
options and futures, futures on five-year U.S. Treasury notes and options on
these permitted futures contracts.
OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to buy the underlying security at the
exercise price.
OPTIONS ON INDICES--A securities index assigns relative values to the
securities included in the index and fluctuates with changes in the market
values of these securities. A securities index option operates in the same way
as more traditional securities options, except that the exercise of a securities
index option is effected with cash payment and does not involve delivery of
securities. Thus, upon exercise of a securities index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the securities index.
SECURITIES INDEX FUTURES CONTRACTS--A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
12
<PAGE>
INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities, 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, 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 which represents the amount
by which the market price of the futures contract exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the future. The writer of an option, upon exercise, will assume a short position
in the case of a call and a long position in the case of a put.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in a Fund's portfolio. Thus, in a short hedge a Fund takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, a Fund might purchase
a put option on a security to hedge against a potential decline in the value of
that security. If the price of the security declined below the exercise price of
the put, the Fund could exercise that put and thus limit its loss below the
exercise price to the premium paid plus transaction costs. In the alternative,
because the value of the put option can be expected to increase as the value of
the underlying security declines, the Fund might be able to close out the put
option and realize a gain to offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge a Fund takes a position in a Derivative Instrument whose price is expected
to move in the same direction as the price of the prospective investment being
hedged. For example, a Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Fund might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Each Fund may purchase and write (sell) covered straddles on securities or
indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. The Fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. A Fund might enter into a short straddle when
Mitchell Hutchins believes it unlikely that the prices of securities will be as
volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity markets
sectors in which a Fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
Income strategies include the writing of covered options to obtain the
related option premiums. Return strategies include the use of Derivative
Instruments to increase or reduce a Fund's exposure to an asset class without
buying or selling the underlying instruments.
13
<PAGE>
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, the Funds'
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins expects to discover additional opportunities
in connection with Derivative Instruments and hedging, income and return
strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may utilize these
opportunities to the extent that they are consistent with a Fund's investment
objective and permitted by a Fund's investment limitations and applicable
regulatory authorities. The Funds' Prospectus or Statement of Additional
Information will be supplemented to the extent that new products or techniques
involve materially different risks than those described below or in the
Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow:
(1) Successful use of most Derivative Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Derivative Instruments, there can be no assurance that any particular
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors affecting the markets in which Derivative Instruments
are traded rather than the value of the investments being hedged. The
effectiveness of hedges using Derivative Instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because Mitchell Hutchins projected a decline in the price of a security
in 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 Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss. In either case, the Fund would have been in a better
position had it not hedged at all.
(4) As described below, each Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If a Fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any position in a Derivative
Instrument can be closed out at a time and price that is favorable to a Fund.
COVER FOR STRATEGIES USING DERIVATIVES. Transactions using Derivative
Instruments, other than purchased options, expose the Funds to an obligation to
another party. A Fund will not enter into any such transactions unless it owns
either (1) an offsetting ("covered") position in securities or other options on
futures contracts or (2) cash or liquid securities, with a value sufficient at
all times to cover its potential obligations to
14
<PAGE>
the extent not covered as provided in (1) above. The Funds will comply with SEC
guidelines regarding cover for transactions and will, if the guidelines so
require, set aside cash or liquid securities in a segregated account with its
custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Fund's assets to cover positions or to segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put and call options, on specific securities. The purchase of options
can serve to enhance return by increasing or reducing a Fund's exposure to an
asset class without purchasing or selling the underlying securities. The
purchase of call options serves as a long hedge, and the purchase of put options
serves as a short hedge. Writing covered put or call options can enable a Fund
to enhance income by reason of the premiums paid by the purchasers of such
options. In addition, writing covered put options serves as a limited long
hedge, because increases in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options serves as a limited
short hedge, because declines in the value of the hedged investment would be
offset to the extent of the premium received for 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. If the covered
call option is an OTC option, the securities or other assets used as cover would
be considered illiquid to the extent described above under "Investment Policies
and Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, OTC options on debt securities are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option. Options that expire unexercised have no value.
The Funds may effectively terminate their rights or obligations under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Funds to realize profits or
limit losses on an option position prior to its exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between a Fund and its counterparty (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when a Fund purchases
or writes an OTC option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
The Funds' ability to establish and close out positions in exchange-traded
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with counterparties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that a Fund will in fact be able to close out an OTC
15
<PAGE>
option position at a favorable price prior to expiration. In the event of
insolvency of the counterparty, a Fund might be unable to close out an OTC
option position at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
The Funds may purchase and write put and call options on securities indices
in much the same manner as the more traditional options discussed above, except
the index options may serve as a hedge against overall fluctuations in the
equity or bond market (or market sectors) rather than anticipated increases or
decreases in the value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The Funds' use of options is governed
by the following guidelines, which can be changed by each board without
shareholder vote:
1. Each Fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums on
all other options purchased by the Fund, does not exceed 5% of its total assets.
2. The aggregate value of securities underlying put options written by each
Fund, determined as of the date the put options are written, will not exceed 50%
of its net assets.
3. The aggregate premiums paid on all options (including options on
securities, stock securities indices and options on futures contracts) purchased
by each Fund that are held at any time will not exceed 20% of its net assets.
FUTURES. The Funds may purchase and sell interest rate futures contracts,
stock index futures contracts or debt securities index futures contracts. The
Funds also may purchase put and call options, and write covered put and call
options, on the futures contracts they are allowed to purchase and sell. The
purchase of futures or call options thereon can serve as a long hedge, and the
sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a limited
short hedge, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
call options on securities or indices. In addition, the Funds may purchase or
sell futures contracts or options thereon to enhance return by increasing or
reducing exposure to an asset class without purchasing or selling the underlying
securities.
Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
a Fund, the Fund may sell an interest rate futures contract or a call option
thereon, or purchase a put option on that futures contract. If Mitchell Hutchins
wishes to lengthen the average duration of a Fund's portfolio, the Fund may buy
an interest rate futures contract or a call option thereon or sell a put option
thereon.
The Funds may also write put options on interest rate futures contracts
while at the same time purchasing call options on the same futures contracts in
order synthetically to create a long futures contract position. Such options
would have the same strike prices and expiration dates. A Fund will engage in
this strategy only when it is more advantageous to the Fund than is purchasing
the futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, a Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
16
<PAGE>
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a 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 a Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or options position due to the
absence of a liquid secondary market or the imposition of price limits, it could
incur substantial losses. The Fund would continue to be subject to market risk
with respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The Funds' use of
futures and related options is governed by the following guidelines, which can
be changed by each board without shareholder vote:
1. To the extent a Fund enters into futures contracts and options on
futures positions 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 its net
assets.
2. The aggregate premiums paid on all options (including options on
securities, stock indices and indices of debt securities and options on futures
contracts) purchased by a Fund that are held at any time will not exceed 20% of
its net assets.
3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Fund will not exceed 5% of its total assets.
SWAP TRANSACTIONS. Balanced Fund may enter into swap transactions,
including interest rate swaps and interest rate caps, floors and collars. Swap
transactions involve an agreement between two parties to
17
<PAGE>
exchange payments that are based, for example, on variable and fixed rates of
interest and that are calculated on the basis of a specified amount of principal
(the "notional principal amount") for a specified period of time. Interest rate
cap and floor transactions involve an agreement between two parties in which the
first party agrees to make payments to the counterparty when a designated market
interest rate goes above (in the case of a cap) or below (in the case of a
floor) a designated level on predetermined dates or during a specified time
period. Interest rate collar transactions involve an agreement between two
parties in which payments are made when a designated market interest rate either
goes above a designated ceiling level or goes below a designated floor level on
predetermined dates or during a specified time period. The Fund intends to use
these transactions as a hedge and not as a speculative investment. Interest rate
protection transactions are subject to risks comparable to those described above
with respect to other hedging strategies.
Balanced Fund may enter into interest rate swaps, caps, floors and collars
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate protection transactions are entered
into for good faith hedging purposes, and inasmuch as segregated accounts will
be established with respect to such transactions, Mitchell Hutchins believes
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the Fund's borrowing restrictions. The net amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and
appropriate Fund assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account as described above
in "Investment Policies and Restrictions--Segregated Accounts." The Fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis and with
respect to any caps, floors and collars that are written by the Fund.
Balanced Fund will enter into interest rate protection transactions only
with banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risk in accordance with guidelines established by its
board. If there is a default by the other party to such a transaction, the Fund
will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
18
<PAGE>
DIRECTORS, TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The directors, trustees and executive officers of the Corporation and/or
the Trust, their ages, business addresses and principal occupations during the
past five years are:
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATION/TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Director/Trustee and Mrs. Alexander is president, chief executive
President officer and a director of Mitchell Hutchins
(since January 1995) and an executive vice
president and a director of PaineWebber
(since March 1984). Mrs. Alexander is
president and a director or trustee of 32
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Richard Q. Armstrong; 63 Director/Trustee Mr. Armstrong is chairman and principal of
One Old Church Road R.Q.A. Enterprises (management consulting
Unit #6 firm) (since April 1991 and principal
Greenwich, CT 06830 occupation since March 1995). Mr. Arm-
strong was chairman of the board, chief
executive officer and co-owner of
Adirondack Beverages (producer and dis-
tributor of soft drinks and sparkling/still
waters) (October 1993-March 1995).
Mr. Armstrong was a partner of The New
England Consulting Group (management
consulting firm) (December 1992-September
1993). He was managing director of LVMH
U.S. Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
E. Garrett Bewkes, Jr.**; 72 Director/Trustee and Mr. Bewkes is a director of Paine Webber
Chairman of the Board of Group Inc. ( "PW Group") (holding company
Directors/Trustees of PaineWebber and Mitchell Hutchins).
Prior to December 1995, he was a consultant
to PW Group. Prior to 1988, he was chairman
of the board, president and chief executive
officer of American Bakeries Company.
Mr. Bewkes is a director of Interstate
Bakeries Corporation. Mr. Bewkes is a
director or trustee of 34 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATION/TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Richard R. Burt; 51 Director/Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Avenue, N.W. (international investments and consulting
Washington, D.C. 20004 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director
of Archer-Daniels-Midland Co. (ag-
ricultural commodities), Hollinger Inter-
national Co. (publishing), Homestake Mining
Corp., Powerhouse Technologies Inc. and
Wierton Steel Corp. He was the chief
negotiator in the Strategic Arms Re-
duction Talks with the former Soviet Union
(1989-1991) and the U.S. Ambassador to the
Federal Republic of Germany (1985-1989).
Mr. Burt is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Mary C. Farrell**; 48 Director/Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the In-
vestment Policy Committee of PaineWebber.
Ms. Farrell joined PaineWebber in 1982. She
is a member of the Financial Women's
Association and Women's Economic
Roundtable, and appears as a regular
panelist on Wall $treet Week with Louis
Rukeyser. She also serves on the Board of
Overseers of New York University's Stern
School of Business. Ms. Farrell is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Meyer Feldberg; 56 Director/Trustee Mr. Feldberg is Dean and Professor of Man-
Columbia University agement of the Graduate School of Busi-
101 Uris Hall ness, Columbia University. Prior to 1989,
New York, New York 10027 he was president of the Illinois Institute
of Technology. Dean Feldberg is also a di-
rector of Primedia Inc., Federated De-
partment Stores, Inc. and Revlon Inc. Dean
Feldberg is a director or trustee of 33
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
George W. Gowen; 69 Director/Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to
New York, New York 10017 May 1994, he was a partner in the law firm
of Fryer, Ross & Gowen. Mr. Gowen is a
director or trustee of 31 investment com-
panies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATION/TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Frederic V. Malek; 61 Director/Trust Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, N.W. Partners (merchant bank). From January 1992
Suite 350 to November 1992, he was campaign manager
Washington, D.C. 20004 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 presi-
dent of Marriott Hotels and Resorts. Mr.
Malek is also a director of American
Management Systems, Inc. (management
consulting and computer-related services),
Automatic Data Processing, Inc., CB
Commercial Group, Inc. (real estate
services), Choice Hotels International
(hotel and hotel franchising), FPL Group,
Inc. (electric services), Manor Care, Inc.
(healthcare), and Northwest Airlines Inc.
Mr. Malek is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Carl W. Schafer; 62 Director/Trust Mr. Schafer is president of the Atlantic
66 Witherspoon Street Foundation (charitable foundation sup-
#1100 porting mainly oceanographic exploration
Princeton, New Jersey 08542 and research). He also is a director of
Base Ten Systems, Inc. (software), Road-
way Express, Inc. (trucking), The Guardi-
an Group of Mutual Funds, the Harding
Loevner Funds, Evans Systems, Inc. (a motor
fuels, convenience store and diversified
company), Electronic Clearing House, Inc.
(financial transactions pro-
cessing), Frontier Oil Corporation and
Nutraceutix Inc. (biotechnology company.)
Prior to January 1993, he was chairman of
the Investment Advisory Committee of the
Howard Hughes Medical Institute.
Mr. Schafer is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATION/TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing director and chief
investment officer--quantitative invest-
ments of Mitchell Hutchins. Prior to Sep-
tember 1994, he was a senior vice presi-
dent at Vantage Global Management.
Mr. Barneby is a vice president of six in-
vestment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Lawrence Chinsky; 29 Vice President and Mr. Chinsky is an assistant vice president
Assistant Treasurer and investment monitoring officer of the
mutual fund finance department of Mitchell
Hutchins. Prior to August 1997, he was a
securities compliance examiner with the
Office of Compliance, Inspections and
Examinations in the New York Regional
Office of the United States Securities and
Exchange Commission. Mr. Chinsky is vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of
Mitchell Hutchins. Prior to September 1997,
he was an audit manager in the financial
services practice of Ernst & Young LLP. Mr.
Lee is a vice president and assistant
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Dennis McCauley; 52 Vice President (Master Mr. McCauley is a managing director and chief
Series, Inc.) investment officer--fixed income of
Mitchell Hutchins. Prior to December 1994,
he was director of fixed income in-
vestments of IBM Corporation. Mr. Mc-
Cauley is a vice president of 22 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Ann E. Moran; 41 Vice President amd Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of
Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 32 in-
vestment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president
Secretary and deputy general counsel of Mitchell
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATION/TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Hutchins. Ms. O'Donnell is a vice presi-
dent and secretary of 31 investment com-
panies and a vice president and assistant
secretary of one investment company for
which Mitchell Hutchins, Paine Webber or
their affiliates serve as investment
adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president and di-
rector of operations and control for Mitch-
ell Hutchins. Mr. Polito is also vice
president of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Susan P. Ryan; 38 Vice President (Master Ms. Ryan is a senior vice president and port-
Series, Inc.) folio manager of Mitchell Hutchins and has
been with Mitchell Hutchins since 1982.
Ms. Ryan is a vice president of five
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Prior
to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 31 investment companies
and a vice president and secretary of one
investment company for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice president and
Treasurer the director of the mutual fund finance
department of Mitchell Hutchins. From
August 1992 to August 1994, he was a
vice president of BlackRock Financial
Management, Inc. Mr. Schubert is a vice
president and treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Nirmal Singh; 42 Vice President (Master Mr. Singh is a senior vice president and a
Series, Inc.) portfolio manager of Mitchell Hutchins.
Mr. Singh is a vice president of four
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Barney A. Taglialatela; 37 Vice President Assistant Mr. Taglialatela is a vice president and a
Treasurer manager of the mutual fund finance de-
partment of Mitchell Hutchins. Prior to
February 1995, he was a manager of the
mutual fund finance division of Kidder
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE CORPORATION/TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Peabody Asset Management, Inc. Mr.
Taglialatela is a vice president and assis-
tant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Mark A. Tincher; 43 Vice President (Investment Mr. Tincher is a managing director and chief
Trust) investment officer--U.S. equities of
Mitchell Hutchins. Prior to March 1995, he
was a vice president and directed the U.S.
funds management and equity research areas
of Chase Manhattan Private Bank.
Mr. Tincher is a vice president of 13
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Craig M. Varrelman; 39 Vice President (Master Mr. Varrelman is a senior vice president and
Series, Inc.) a portfolio manager of Mitchell Hutchins.
Mr. Varrelman is a vice president of four
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and as-
Assistant Secretary sociate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an at-
torney in private practice. Mr. Weller is a
vice president and assistant secretary of
31 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Corporation and the Trust as defined in the 1940 Act by virtue of their
positions with PW Group, PaineWebber and/or Mitchell Hutchins.
The Corporation and the Trust each pays board members who are not
"interested persons" of the Corporation/Trust $1,500 annually for Balanced Fund
or Tactical Allocation Fund, as applicable, an additional $1,000 for the
Corporation's or Trust's second series, and $150 per series for each board
meeting and separate meeting of a board committee (other than committee meetings
that are held on the same day as a board meeting). Thus, the Corporation and
Trust each pays an independent board member $2,500 annually plus any additional
amounts due for board or committee meetings. Each chairman of the audit and
contract review committees of individual funds within the PaineWebber fund
complex receives additional compensation, aggregating $15,000 annually from the
relevant funds. All board members are reimbursed for any expenses incurred in
attending meetings. Board members and officers of the Corporation/Trust own in
the aggregate less than 1% of the shares of either Fund. Because PaineWebber and
Mitchell Hutchins perform substantially all of the services necessary for the
operation of the Corporation, the Trust and the Funds, the Corporation and the
Trust require no employees. No officer, director or employee of PaineWebber or
Mitchell Hutchins presently receives any compensation from the Corporation or
the Trust for acting as director, trustee or officer.
24
<PAGE>
The table below includes certain information relating to the compensation
of the Corporation's and the Trust's current board members who held office with
the Corporation or Trust or with other PaineWebber funds during the fiscal year
indicated.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
AGGREGATE AGGREGATE CORPORATION,
COMPENSATION COMPENSATION THE TRUSTS
FROM THE FROM THE AND THE
NAME OF PERSON, POSITION CORPORATION*++ TRUST*++ COMPLEX+
- ------------------------------------------------------------- ------------- -------------- ------------
<S> <C> <C> <C>
Richard Q. Armstrong, Director/Trustee....................... $ 5,585 $4,300 $ 94,885
Richard R. Burt, Director/Trustee............................ 3,285 4,000 87,085
Meyer Feldberg, Director/Trustee............................. 5,585 5,815 117,853
George W. Gowen, Director/Trustee............................ 6,450 4,000 101,567
Frederic V. Malek, Director/Trustee.......................... 5,585 4,300 95,845
Carl W. Schafer, Director/Trustee............................ 5,585 4,300 94,885
</TABLE>
- ------------------
(1) Only independent members of the board are compensated by the Corporation or
the Trust and identified above; board members who are "interested persons,"
as defined by the 1940 Act, do not receive compensation.
* Represents fees paid to each board member during the fiscal year ended
August 31, 1998 for the Trust and the Corporation.
+ Represents total compensation paid to each board member during the calendar
year ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
++ Aggregate compensation for the Corporation and the Trust are divided among
other portfolios.
PRINCIPAL HOLDERS OF SECURITIES. The Funds' records as of October 31, 1998
did not indicate that any shareholder owned of record more than 5% of any class
of a Fund's shares and the Trust and Corporation are not aware of any
shareholder who is the beneficial owner of 5% or more of a Fund's shares.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to a contract with the
Corporation dated August 4, 1988 and a contract with the Trust dated April 13,
1995 (each an "Advisory Contract"). Under the Advisory Contracts, and, for
Tactical Allocation Fund, substantially similar prior contracts, each Fund pays
Mitchell Hutchins an annual fee, computed daily and paid monthly, according to
the schedule set forth below:
<TABLE>
<CAPTION>
BALANCED FUND
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ------
<S> <C>
Up to $500 million................................................ 0.750%
In excess of $500 million up to $1.0 billion...................... 0.725
In excess of $1.0 billion up to $1.5 billion...................... 0.700
In excess of $1.5 billion up to $2.0 billion...................... 0.675
Over $2.0 billion................................................. 0.650
</TABLE>
TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ------
<S> <C>
Up to $250 million................................................ 0.500%
Over $250 million................................................. 0.450
</TABLE>
During the fiscal years ended August 31, 1998 and August 31, 1997, the
period March 1, 1996 through August 31, 1996 and the fiscal year ended February
29, 1996, the Corporation paid (or accrued) to Mitchell
25
<PAGE>
Hutchins investment advisory and administrative fees of $1,709,264, $1,465,166,
$739,209, and $1,584,083, respectively, with respect to Balanced Fund.
For the fiscal years ended August 31, 1998, August 31, 1997, and August 31,
1996, the Trust paid (or accrued) to Mitchell Hutchins and a prior investment
adviser and administrator management fees of $4,895,190, $1,756,146 and
$402,466, respectively, with respect to Tactical Allocation Fund.
Prior to August 1, 1997, pursuant to a service agreement, PaineWebber
provided certain services to Balanced Fund not otherwise provided by the Fund's
transfer agent PFPC Inc. ("PFPC"). No such service agreement was in effect with
respect to Tactical Allocation Fund. Pursuant to the service agreement between
PaineWebber and Balanced Fund, during the period September 1, 1996 to August 1,
1997, the period March 1, 1996 to August 31, 1996, and the fiscal years ended
February 29, 1996, PaineWebber earned fees in the amounts of $54,420, $32,992
and $77,050, respectively. Subsequent to August 1, 1997, PFPC (not the Funds)
pays PaineWebber for certain transfer agency related services that PFPC has
delegated to PaineWebber.
During the fiscal year ended August 31, 1998, the Funds paid (or accrued)
the following fees to PaineWebber for its services as securities lending agent:
<TABLE>
<CAPTION>
FUND SECURITIES LENDING FEES
---- -----------------------
<S> <C>
Balanced Fund.................................... $ 28,144
Tactical Allocation Fund......................... $ 134,065
</TABLE>
Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Corporation or the Trust not readily
identifiable as belonging to the Funds or to the Corporation's or Trust's other
series are allocated among series by or under the direction of the board in such
manner as the board deems to be fair and equitable. Expenses borne by each Fund
include the following (or the Fund's share of the following): (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares and the Corporation/Trust under federal and
state securities laws and maintenance of such registrations and qualifications;
(5) fees and salaries payable to board members who are not interested persons of
the Corporation/Trust or Mitchell Hutchins; (6) all expenses incurred in
connection with the board members' services, including travel expenses;
(7) taxes (including any income or franchise taxes) and governmental fees;
(8) costs of any liability, uncollectible items of deposit and other insurance
or fidelity bonds; (9) any costs, expenses or losses arising out of a liability
of or claim for damages or other relief asserted against the Corporation/Trust
or the Fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent board
members; (11) charges of custodians, transfer agents and other agents;
(12) costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders, and costs of mailing such materials to existing shareholders;
(14) any extraordinary expenses (including fees and disbursements of counsel)
incurred by the Corporation/Trust or the Fund; (15) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to board members
and officers; and (18) costs of mailing, stationery and communications
equipment.
Under the Advisory Contracts, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by either Fund in
connection with the performance of the Advisory Contracts, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically with respect to a Fund upon assignment and is terminable at any
time without penalty by the Corporation's or Trust's board or by vote of the
holders of a majority of a Fund's outstanding voting securities on 60 days'
written notice to Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written
notice to the Corporation or the Trust.
26
<PAGE>
The following table shows the approximate net assets as of October 31,
1998, 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)................................. $7,761.7
Global............................................................ 3,627.2
Equity/Balanced................................................... 6,301.2
Fixed Income (excluding Money Market)............................. 5,087.7
Taxable Fixed Income......................................... 3,496.1
Tax-Free Fixed Income........................................ 1,591.6
Money Market Funds................................................ 31,335.1
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber funds and other Mitchell Hutchins' advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each Fund under separate distribution contracts with the
Corporation and the Trust (collectively, "Distribution Contracts") that require
Mitchell Hutchins to use its best efforts, consistent with its other businesses,
to sell shares of the applicable Fund. Shares of the Funds are offered
continuously. Under separate exclusive dealer agreements between Mitchell
Hutchins and PaineWebber relating to each class of shares of the Funds
(collectively, "Exclusive Dealer Agreements"), PaineWebber and its correspondent
firms sell each Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of each Fund adopted by the Corporation and the Trust in the
manner prescribed under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B
Plan" and "Class C Plan," collectively, "Plans"), each Fund pays Mitchell
Hutchins a service fee, accrued daily and payable monthly, at the annual rate of
0.25% of the average daily net assets of each class of shares. Under the
Class B Plan and Class C Plan each Fund pays Mitchell Hutchins a distribution
fee, accrued daily and payable monthly, at the annual rate of 0.75% of the
average daily net assets of each class of shares. There is no distribution plan
with respect to the Funds' Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment thereto
is approved, by the applicable board, including those board members who are not
"interested persons" of the Corporation/Trust and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan, acting in person at a meeting called for that purpose, (3) payments by a
Fund under the Plan shall not be materially increased without the affirmative
vote of the holders of a majority of the outstanding shares of the relevant
class and (4) while the Plan remains in effect, the selection and nomination of
board members who are not "interested persons" of the Corporation/Trust shall be
committed to the discretion of the board members who are not interested persons
of the Corporation/Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins will allocate expenses attributable to the sale of each class
of Fund shares to such class based on the ratio of sales of shares of such class
to the sales of all three classes of shares. The fees paid by one class of Fund
shares will not be used to subsidize the sale of any other class of Fund shares.
27
<PAGE>
The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year ended August 31,
1998:
<TABLE>
<CAPTION>
TACTICAL
BALANCED FUND ALLOCATION FUND
------------- ---------------
<S> <C> <C>
Class A..................................................... $ 480,384 $ 688,221
Class B..................................................... 244,383 3,844,046
Class C..................................................... 112,695 3,395,234
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each Fund during the fiscal year
ended August 31, 1998.
CLASS A
<TABLE>
<CAPTION>
TACTICAL
BALANCED FUND ALLOCATION FUND
------------- ---------------
<S> <C> <C>
Marketing and advertising................................... $ 133,430 $ 651,985
Printing of prospectuses and statements of additional
information for other than current shareholders........... 3,389 4,261
Branch network costs allocated and interest expense......... 620,019 333,297
Service fees paid to PaineWebber investment executives...... 182,546 262,404
CLASS B
Marketing and advertising................................... $ 16,852 $ 901,704
Amortization of commissions................................. 72,325 1,149,132
Printing of prospectuses and statements of additional
information for other than current shareholders........... 421 5,893
Branch network costs allocated and interest expense......... 85,540 699,253
Service fees paid to PaineWebber investment executives...... 23,215 366,410
CLASS C
Marketing and advertising................................... $ 7,718 $ 779,562
Amortization of commissions................................. 32,119 880,992
Printing of prospectuses and statements of additional
information for other than current shareholders........... 190 5,095
Branch network costs allocated and interest expense......... 36,259 418,905
Service fees paid to PaineWebber investment executives...... 10,705 323,607
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. "Branch network costs
allocated and interest expense" consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of the Fund's
shares, including the PaineWebber retail branch system.
In approving each Fund's overall Flexible Pricing(Service Mark) system of
distribution, each board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the Funds and attracting
new investors and assets to the Funds to the benefit of each Fund and its
shareholders; (2) facilitate distribution of each Fund's shares; and (3)
maintain the competitive position of each Fund in relation to other funds that
have implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan each board considered all the features of the
distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in a greater growth of the Funds than
28
<PAGE>
might otherwise be the case, (3) the advantages to the shareholders of economies
of scale resulting from growth in each Fund's assets and potential continued
growth, (4) the services provided to each 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 each board considered all the features of the
distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from each
Fund's purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales commissions when Class B shares are sold and continuing service
fees thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the investment
executives and correspondent firms, resulting in greater growth of each Fund
than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in each Fund's assets and potential
continued growth, (5) the services provided to each Fund and its shareholders by
Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service- and distribution-related expenses and costs. The board
members also recognized that Mitchell Hutchins' willingness to compensate
PaineWebber and its investment executives, without the concomitant receipt by
Mitchell Hutchins of initial sales charges, was conditioned upon its expectation
of being compensated under the Class B Plan.
In approving the Class C Plan each board considered all the features of the
distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from Fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in Fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber investment executives and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the investment executives and
correspondent firms, resulting in greater growth to each Fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in each Fund's assets and potential continued
growth, (5) the services provided to each Fund and its shareholders by Mitchell
Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service-and distribution-related expenses and costs. The board members also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives, without the concomitant receipt by Mitchell Hutchins of
initial sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the boards considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of a Fund, which
fees would increase if the Plan were successful and the Funds attained and
maintained significant asset levels.
Under the Distribution Contracts between the Corporation and the Trust and
Mitchell Hutchins for the Class A shares for the fiscal years set forth below,
Mitchell Hutchins earned the following approximate amounts of initial sales
charges and retained the following approximate amounts, net of concessions to
PaineWebber as exclusive dealer:
BALANCED FUND
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FOR THE PERIOD
ENDED ENDED MARCH 1, 1996
AUGUST 31, AUGUST 31, THROUGH AUGUST 31,
1998 1997 1996
----------- ----------- ------------------
<S> <C> <C> <C>
Earned....................................... $ 368,103 $61,774 $7,576
Retained..................................... 16,048 2,215 459
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
TACTICAL ALLOCATION FUND
FISCAL YEARS ENDED
AUGUST 31,
------------------------------------------------
1998 1997 1996
----------- ----------- ------------------
<S> <C> <C> <C>
Earned....................................... $ 3,764,774 $ 2,887,643 $474,448
Retained..................................... 243,663 182,132 166,202
</TABLE>
For the fiscal year ended August 31, 1998, Mitchell Hutchins earned and
retained the following contingent deferred sales charges paid upon certain
redemptions of Class A, Class B and Class C shares:
<TABLE>
<CAPTION>
TACTICAL
ALLOCATION
BALANCED FUND FUND
--------------- --------
<S> <C> <C>
Class A......................................................... $ 0 $ 0
Class B......................................................... 28,910 638,930
Class C......................................................... 2,013 120,905
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of each Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the Funds, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved. Generally, bonds are traded on the
OTC market on a "net" basis without a stated commission through dealers acting
for their own account and not as brokers. Prices paid to dealers in principal
transactions generally include a "spread," which is the difference between the
prices at which the dealer is willing to purchase and sell a specific security
at the time. Balanced Fund, for fiscal years ended August 31, 1998, and
August 31, 1997 for the period March 1, 1996 through August 31, 1996, and for
the fiscal year ended February 29, 1996, paid $290,954, $249,609, $134,453, and
$335,166, respectively, in aggregate brokerage commissions. Tactical Allocation
Fund, for the fiscal years ended August 31, 1998, August 31, 1997, and
August 31, 1996, paid, $440,215, $211,116, and $41,271 respectively, in
aggregate brokerage commissions.
Neither Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. Each Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. Each board has adopted procedures in conformity with
Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to
Mitchell Hutchins and its affiliates are reasonable and fair. Specific
provisions in each Advisory Contract authorize Mitchell Hutchins and any of its
affiliates that are members of a national securities exchange to effect
portfolio transactions for each Fund on such exchange and to retain compensation
in connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.
For the fiscal year ended August 31, 1997, the period March 1, 1996 to
August 31, 1996 and the fiscal year ended February 29, 1996, Balanced Fund paid
$15,564, $2,220 and $1,350 in brokerage commissions to PaineWebber. For the
fiscal year ended August 31, 1998, Balanced Fund paid $1,038 in brokerage
commissions to PaineWebber, which represented 0.4% of the total commissions paid
by the Fund and 0.5% of the aggregate dollar amount of transactions involving
brokerage commission payments.
For the fiscal years ended August 31, 1998, August 31, 1997, and August 31,
1996, Tactical Allocation Fund paid $5,496, $2,422 and $0 commissions to
PaineWebber. For the fiscal year ended August 31, 1998, Tactical Allocation Fund
paid $5,496 in brokerage commissions to PaineWebber, which represented 1.25% of
total commission paid by the Fund, and 0.16% of the aggregate dollar amount of
transactions involving brokerage commissions.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Funds' procedures in selecting FCMs to execute the
30
<PAGE>
Funds' transactions in futures contracts, including procedures permitting the
use of Mitchell Hutchins and its affiliates, are similar to those in effect with
respect to brokerage transactions in securities.
Consistent with the interest of each Fund and subject to the review of the
applicable board, Mitchell Hutchins may cause the Fund to purchase and sell
portfolio securities through brokers who provide Mitchell Hutchins with
research, analysis, advice and similar services. A Fund may pay to those brokers
a higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that such commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to the Fund and its other clients and that the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term. For Balanced Fund's fiscal year ended August 31,
1998 Mitchell Hutchins directed $ 86,827,625 in portfolio transactions to
brokers chosen because they provided research services, for which Balanced Fund
paid $105,579 in commissions. For Tactical Allocation Fund's fiscal year ended
August 31, 1998, Mitchell Hutchins directed no transactions to brokers chosen
for research services.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with those transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC equity and debt securities in return for
research and execution services. These transactions are entered into only in
compliance with procedures ensuring that the transaction (including commissions)
is at least as favorable as it would have been if effected directly with a
market-maker that did not provide research or execution services. These
procedures include Mitchell Hutchins' receiving multiple quotes from dealers
before executing the transactions on an agency basis.
Information and research services furnished by the brokers or dealers
through which or with which a Fund effects securities transactions may be used
by Mitchell Hutchins in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that Mitchell Hutchins advises may be
used by Mitchell Hutchins in advising the Fund. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contracts.
Investment decisions for each Fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a Fund and one or more of such accounts.
In such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between a Fund and such other
account(s) as to amount according to a formula deemed equitable to the Fund and
such other account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Fund is
concerned or upon its ability to complete its entire order, in other cases it is
believed that coordination and the ability to participate in volume transactions
will be beneficial to the Fund.
The Funds will not purchase securities in underwritings in which Mitchell
Hutchins or any of its affiliates is a member of the underwriting or selling
group, except pursuant to procedures adopted by each board pursuant to Rule
10f-3 under the 1940 Act. Among other things, these procedures require that the
commission or spread paid in connection with such a purchase be reasonable and
fair, that the purchase be at not more than the public offering price prior to
the end of the first business day after the date of the public offering and that
Mitchell Hutchins or any affiliate thereof not participate in or benefit from
the sale to the Fund.
PORTFOLIO TURNOVER. The Funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate for
each Fund is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition
31
<PAGE>
were one year or less) by the monthly average value of the securities in the
portfolio during the year. For the fiscal years indicated, the Funds' portfolio
turnover rates were:
<TABLE>
<S> <C>
BALANCED FUND
Fiscal Year ended August 31, 1998............................... 190%
Fiscal Year ended August 31, 1997............................... 188%
TACTICAL ALLOCATION FUND
Fiscal Year ended August 31, 1998............................... 33%
Fiscal Year ended August 31, 1997............................... 6%
</TABLE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of each Fund
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges for Class A shares
indicated in the table of sales charges in the Prospectus. The sales charge
payable on the purchase of Class A shares of each Fund and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or a group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts.
The registered investment adviser must communicate at least quarterly
through a newsletter or investment update establishing a relationship with
all of the accounts.
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related Fund investors (as defined above) are permitted to purchase
Class A shares of the Funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A Fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares of the Funds is waived where
a total or partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
32
<PAGE>
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of each Fund may be exchanged for shares of the
corresponding class of other PaineWebber mutual funds. Shareholders will receive
at least 60 days' notice of any termination or material modification of the
exchange offer and no notice need be given if, under extraordinary
circumstances, either redemptions are suspended under the circumstances
described below or a Fund temporarily delays or ceases the sales of its shares
because it is unable to invest amounts effectively in accordance with the Fund's
investment objective, policies and restrictions.
If conditions exist that make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting those securities into cash. The Corporation and
the Trust have each elected, however, to be governed by Rule 18f-1 under the
1940 Act, under which a Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Fund during any
90-day period for one shareholder. This election is irrevocable unless the SEC
permits its withdrawal. Each Fund may suspend redemption privileges or postpone
the date of payment during any period (1) when the New York Stock Exchange
("NYSE") is closed or trading on the NYSE is restricted as determined by the
SEC, (2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for the Fund to dispose of securities owned by it or
fairly to determine the value of its assets, or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of a Fund's portfolio at the time.
SERVICE ORGANIZATIONS. A Fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A Fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the Fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Fund's net asset value per share is low and
fewer shares when the net asset value per share is high. Using this technique,
an investor's average purchase price per share over any given period will be
lower than if the investor purchased a fixed number of shares on a monthly basis
during the period. Of course, investing through the automatic investment plan
does not assure a profit or protect against loss in declining markets.
Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the "Initial Account Balance" (a
term that means the value of the Fund account at the time the investor elects to
participate in the systematic withdrawal plan) less aggregate redemptions made
other than pursuant to the systematic withdrawal plan is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional shares of a Fund concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, initial sales charges. On or about the 20th of a month for monthly,
quarterly, semiannual or annual plans, PaineWebber will arrange for redemption
by a Fund of sufficient Fund shares to provide the withdrawal payment specified
by participants in the Fund's systematic withdrawal plan. The payment generally
is mailed approximately five Business Days (defined under "Valuation of Shares")
after the redemption date. Withdrawal payments should not be considered
dividends, but redemption proceeds, with the tax consequences described under
"Dividends & Taxes" in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends and other distributions, a shareholder's investment
may be correspondingly reduced. A shareholder may change the amount of the
systematic withdrawal or terminate participation in the systematic withdrawal
plan at any time without charge or penalty by written instructions with
signatures guaranteed to PaineWebber or PFPC Inc. ("Transfer Agent").
33
<PAGE>
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber investment executives, correspondent
firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed Class A shares of a Fund may reinstate their
account without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
the shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described in "Dividends & Taxes" in the Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(Service Mark);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA(REGISTERED))
Shares of the PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan or an RMA accountholder's participation in the Plan
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
34
<PAGE>
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(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 six RMA money market funds--RMA Money Market Portfolio, RMA
U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA New Jersey Municipal Money Fund and RMA New York
Municipal Money Fund. An investment in a money market fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although a money market fund seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose money
by investing in a money market fund.
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
o Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
o expanded account protection to $100 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and
o automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of each Fund will automatically convert to Class A shares of
that Fund, based on the relative net asset value of the two classes, as of the
close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversnry of the initial issuance of
such Class B shares occurs. For the purpose of calculating the holding period
required for conversion of Class B shares, the date of initial issuance shall
mean (1) the date on which such Class B shares were issued, or (2) for Class B
shares obtained through an exchange, or a series of exchanges, the date on which
the original Class B shares were issued. For purposes of conversion to Class A
shares, Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A shares, a pro rata
portion of the Class B shares in the sub-account also converts to Class A
shares. The portion will be determined by the ratio that the shareholder's
Class B shares converting to Class A shares bears to the shareholder's total
Class B shares not acquired through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares would not be converted and would continue to be
subject to the higher ongoing expenses of the Class B shares beyond six years
from the
35
<PAGE>
date of purchase. Mitchell Hutchins has no reason to believe that this condition
for the availability of the conversion feature will not continue to be met.
VALUATION OF SHARES
Each Fund determines the net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually
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. Prices will be calculated
earlier when the NYSE closes early because trading has been halted for the day.
Currently, the NYSE is closed on the observance of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on exchanges are valued at the last sale price
prior to valuation on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on the
exchange considered by Mitchell Hutchins as the primary market. Securities
traded in the OTC market and listed on the Nasdaq Stock Market ("Nasdaq") are
valued at the last available sale price on Nasdaq prior to valuation; other OTC
securities are valued at the last bid price available prior to valuation. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining to maturity, unless the applicable board
determines that this does not represent fair value. All other assets are valued
at fair value as determined in good faith by or under the direction of each
board.
It should be recognized that judgment often plays a greater role in valuing
thinly traded securities and lower rated bonds than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available.
36
<PAGE>
PERFORMANCE INFORMATION
Each Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in each Fund's Performance Advertisements are calculated according
to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to
purchase shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value for Class A shares, each
Fund's maximum 4.5% initial sales charge is deducted from the initial $1,000
payment and, for Class B and Class C shares, the applicable contingent deferred
sales charge imposed on a redemption of Class B and Class C shares held for the
period is deducted. All dividends and other distributions are assumed to have
been reinvested at net asset value.
Each Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). Each Fund calculates Non-Standardized Return
for specified periods of time by assuming the investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of these charges
would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to
Class A shares at the end of the sixth year.
The following table shows performance information for each class of the
Funds outstanding, for the periods indicated. All returns for periods of more
than one year are expressed as an average return.
BALANCED FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal year ended August 31, 1998:
Standardized Return*.................. (0.03%) (0.64%) 2.99% N/A
Non-Standardized Return............... 4.69% 3.87% 3.89% N/A
Five years ended August 31, 1998:
Standardized Return*.................. 9.42% 9.86% 10.11% N/A
Non-Standardized Return................. 10.93% 10.12% 10.11% N/A
Ten years ended August 31, 1998:
Standardized Return*.................. N/A 10.22% N/A N/A
Non-Standardized Return............... N/A 10.22% N/A N/A
Inception** to August 31, 1998:
Standardized Return*.................. 10.52% 9.16% 10.42% (9.41%)
Non-Standardized Return............... 11.23% 9.16% 10.42% (9.41%)
</TABLE>
37
<PAGE>
TACTICAL ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal year ended August 31, 1998:
Standardized Return*.................. 2.47% 1.49% 5.49% 7.62%
Non-Standardized Return............... 7.31% 6.49% 6.49% 7.62%
Five years ended August 31, 1998:
Standardized Return*.................. 15.62% N/A 15.84% 17.00%
Non-Standardized Return............... 16.70% N/A 15.84% 17.00%
Inception** to August 31, 1998:
Standardized Return*.................. 15.74% 16.86% 15.17% 17.06%
Non-Standardized Return............... 16.75% 17.76% 15.17% 17.06%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore the performance information is the same for both standardized
return and non-standardized return for the periods indicated.
** The inception date for each class of shares is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balanced Fund........................... 07/01/91 12/12/86 07/02/92 03/26/98
Tactical Allocation Fund................ 05/10/93 01/30/96 07/22/92 05/10/93
</TABLE>
OTHER INFORMATION. In Performance Advertisements, each Fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Analytical Services, Inc. ("Lipper"); 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 indices,
including the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), the
Dow Jones Industrial Average ("DJIA"), the International Finance Corporation
Global Total Return Index the Nasdaq Composite Index, the Russell 2000 Index,
the Wilshire 5000 Index, the Lehman Bond Index, the Morgan Stanley Capital
International Perspective Indices, the Morgan Stanley Capital International
Energy Sources Index, The Standard & Poor's Oil Composite Index, Morgan Stanley
International Capital World Index, the Lehman Brothers 20+ Year Treasury Bond
Index, the Lehman Brothers Government/Corporate Bond Index, other similar Lehman
Brother indices or components thereof, the Salomon Brothers Non-U.S. World
Government Bond Index, and changes in the Consumer Price Index as published by
the U.S. Department of Commerce. Each Fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of the
Funds and comparative mutual fund data and ratings reported in independent
periodicals, including The Wall Street Journal, Money Magazine, Forbes, Business
Week, Financial World, Barron's, Fortune, The New York Times, The Chicago
Tribune, The Washington Post and The Kiplinger Letters. Comparisons in
Performance Advertisements may be in graphic form.
Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
Each Fund may also compare its performance with the performance of bank
certificates of deposits (CDs) as measured by the CDA, 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 a
Fund's performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that
38
<PAGE>
bank CD yields may vary depending on the financial institution offering the CD
and prevailing interest rates. Fund shares are not insured or guaranteed by the
U.S. government and returns thereon and net asset value will fluctuate. The debt
securities held by each Fund mayhave longer maturities than most CDs and may
reflect interest rate fluctuations for longer term debt securities. An
investment in either Fund involves greater risks than an investment in either a
money market fund or a CD.
TAXES
To continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code, each Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain) ("Distribution Requirement") and must meet several additional
requirements. With respect to each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities, or other income
(including gains from options and futures) derived with respect to its business
of investing in securities ("Income Requirement"); (2) 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 (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer. If a Fund failed to qualify for
treatment as a RIC for any taxable year, it would be taxed as an ordinary
corporation on its taxable income for that year (even if that income was
distributed to its shareholders) and all distributions out of its earnings and
profits would be taxable to its shareholders as dividends (that is, ordinary
income).
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or in additional Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by a Fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record date
for any dividend or capital gain distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Balanced Fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if the stock is denominated in U.S. dollars and otherwise
is a permissible investment. A PFIC is a foreign corporation--other than a
"controlled foreign corporation" (i.e., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which the Fund is a shareholder (effective for its
taxable year beginning September 1, 1998)--that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets
39
<PAGE>
produce, or are held for the production of, passive income. Under certain
circumstances, the Fund will be subject to federal income tax on a portion of
any "excess distribution" received on the stock of a PFIC or of any gain from
disposition of such stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders.
If Balanced Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(the excess of net long-term capital gain over net short-term capital
loss)--which probably would have to be distributed by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax--even if those
earnings and gain are not distributed to the Fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Balanced Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. The Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election.
The use of hedging strategies involving Derivative Instruments, such as
writing (selling) and purchasing options and futures, involves complex rules
that will determine for income tax purposes the amount, character and timing of
recognition of the gains and losses each Fund realizes in connection therewith.
Gains from options and futures derived by a Fund with respect to its business of
investing in securities will qualify as permissible income under the Income
Requirement.
If a Fund has an "appreciated financial position"--generally, an interest
(including an interest through an option, futures or forward contract, or short
sales) with respect to any stock, debt instrument (other than "straight debt"),
or partnership interest the fair market value of which exceeds its adjusted
basis--and enters into a "constructive sale" of the same or substantially
similar property, the Fund will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract, or futures or forward contract entered into by a Fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transaction during any taxable year that otherwise would be
treated as a constructive sale if the transaction is closed within 30 days after
the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (i.e., at no time during that 60-day
period is the Fund's risk of loss with respect to that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities.
Balanced Fund may acquire zero coupon securities or other securities issued
with original issue discount. As a holder of such securities, the Fund must
include in its gross income the portion of the original issue discount that
accrues on the securities during the taxable year, even if it receives no
corresponding payment on them during the year. Because the Fund annually must
distribute substantially all of its investment company taxable income, including
any accrued original issue discount, to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax, the Fund may be required in a particular
year to distribute as a dividend an amount that is greater than the total amount
of cash it actually receives. Those distributions will be made from the Fund's
cash assets or from the proceeds of sales of portfolio securities, if necessary.
The Fund may realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain.
40
<PAGE>
OTHER INFORMATION
Prior to August 1995, Balanced Fund was named "PaineWebber Asset Allocation
Fund." Prior to November 1, 1995, Tactical Allocation Fund was named "Mitchell
Hutchins/Kidder, Peabody Asset Allocation Fund" and prior to February 13, 1995,
it was named "Kidder, Peabody Asset Allocation Fund." Prior to November 10,
1995, Tactical Allocation Fund's Class C shares were called "Class B" shares and
Balanced Fund's Class C shares were called "Class D" shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of a series of the Trust
could, under certain circumstances, be held personally liable for the
obligations of the Trust or series. The Declaration of Trust states that persons
with claims against the Trust shall look solely to the Trust property or to the
property of one or more series of the Trust for satisfaction of claims. It also
states that notice of such disclaimer may be given in any obligation, contract,
instrument, certificate or undertaking made or issued by the trustees of the
Trust on behalf of the Trust. The Declaration of Trust also provides for
indemnification from the Trust's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust or a series.
Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust or series
would be unable to meet its obligations, a possibility that Mitchell Hutchins
believes is remote.
CLASS-SPECIFIC EXPENSES. Each Fund might determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares of a Fund bear higher transfer agency fees per
shareholder account than those borne by Class A or Class Y. The higher fee is
imposed due to the higher costs incurred by the Transfer Agent in tracking
shares subject to a contingent deferred sales charge because, upon redemption,
the duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Ave., N.W., Washington, D.C., 20036-1800, serves as counsel to the Corporation
and the Trust. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber
and Mitchell Hutchins in connection with other matters.
AUDITORS. PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New
York, New York 10036, serves as Balanced Fund's independent accountants. Ernst &
Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as Tactical
Allocation Fund's independent auditors.
FINANCIAL STATEMENTS
Each Fund's Annual Report to Shareholders for the most recent fiscal year
is a separate document supplied with this Statement of Additional Information
and the financial statements, accompanying notes and report of independent
accountants or independent auditors appearing therein are incorporated herein by
this reference.
41
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; AA. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future; Baa. Bonds which are rated Baa are
considered as medium grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the higher rated
issues only in small degree; A. An obligation rated A is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C
are regarded as having significant speculative characteristics. BB indicates the
lowest degree of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions; BB. An obligation
rated BB is less vulnerable to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation; B. An obligation
rated B is more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: "NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-1
<PAGE>
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; well
established access to a range of financial markets and assured sources of
alternate liquidity; PRIME-2. Issuers rated Prime-2 (or supporting
institutions) have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A-1. This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign
designation; A-2. Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY EITHER FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
EITHER 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
Strategies Using Derivative Instruments........ 12
Directors, Trustees and Officers; Principal
Holders of Securities........................ 19
Investment Advisory and Distribution
Arrangements................................. 25
Portfolio Transactions......................... 30
Reduced Sales Charges, Additional
Exchange and Redemption Information
and Other Services........................... 32
Conversion of Class B Shares................... 35
Valuation of Shares............................ 36
Performance Information........................ 37
Taxes.......................................... 39
Other Information.............................. 41
Financial Statements........................... 41
Appendix....................................... A-1
</TABLE>
(Copyright) 1998 PaineWebber Incorporated
PAINEWEBBER
BALANCED FUND
PAINEWEBBER
TACTICAL ALLOCATION FUND
-------------------------------------
Statement of Additional Information
November 30, 1998
-------------------------------------
PAINEWEBBER
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits
<TABLE>
<S> <C>
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of the holders of Registrant's shares
of beneficial interest 2/
(4) (a) Investment Advisory and Administration Contract applicable to
PaineWebber Tactical Allocation Fund 3/
(b) Investment Advisory and Administration Contract applicable to
PaineWebber Global Equity Fund (filed herewith)
(c) Sub-Advisory Contract with Invista Capital Management, Inc.
applicable to PaineWebber Global Equity Fund (filed herewith)
(5) (a) Distribution Contract for Class A Shares 4/
(b) Distribution Contract for Class B Shares 4/
(c) Distribution Contract for Class C Shares 4/
(d) Distribution Contract for Class Y Shares 4/
(e) Exclusive Dealer Agreement with respect to Class A Shares 4/
(f) Exclusive Dealer Agreement with respect to Class B Shares 4/
(g) Exclusive Dealer Agreement with respect to Class C Shares 4/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 4/
(6) Bonus, profit sharing or pension plans - none
(7) Custody Contract 1/
(8) Transfer Agency Services and Shareholder Services Agreement 5/
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' Consent
(filed herewith)
(11) Financial statements omitted from prospectus - none
(12) Purchase Agreement 1/
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
shares (filed herewith)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares (filed herewith)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C shares (filed herewith)
(14) and
(27) Financial Data Schedule (filed herewith)
(15) Plan pursuant to Rule 18f-3 6/
</TABLE>
- ------------------------------
1/ Incorporated by reference from Post-Effective Amendment No. 22 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on February 27, 1998.
C-1
<PAGE>
2/ Incorporated by reference from Articles IV, V, VI, VII, and X of
Registrant's Amended and Restated Declaration of Trust and from
Articles II and XI of Registrant's Restated By-Laws.
3/ Incorporated by reference from Post-Effective Amendment No. 14 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on December 29, 1995.
4/ Incorporated by reference from Post-Effective Amendment No. 15 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on July 1, 1996.
5/ Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on September 1, 1998
6/ Incorporated by reference from Post-Effective Amendment No. 16 to the
registration statement of PaineWebber Investment Trust, SEC File. No.
33-39659, filed on August 29, 1996.
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
None.
Item 25. Indemnification
---------------
Section 4.2 of Article IV of the Registrant's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Trust shall be
liable to the Trust, its shareholders, or to any shareholder, Trustee, officer,
employee, or agent thereof for any action or failure to act (including without
limitation the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for his or her own bad faith, willful
misfeasance, gross negligence or reckless disregard of the duties involved in
the conduct of his office.
Section 4.3(a) of Article IV of the Registrant's Declaration of Trust
provides that the appropriate series of the Registrant will indemnify its
Trustees and officers to the fullest extent permitted by law against all
liability and against all expenses reasonably incurred or paid by such Trustees
and officers in connection with any claim, action, suit or proceeding in which
such Trustee or officer becomes involved as a party or otherwise by virtue of
his or her being or having been a Trustee or officer and against amounts paid or
incurred by him or her in the settlement thereof. Additionally, Section 4.3(b)
of Article IV provides that no such person shall be indemnified (i) where such
person is liable to the Trust, a series thereof or the shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office, (ii) where such person has
been finally adjudicated not to have acted in good faith in the reasonable
belief that his or her action was in the best interest of the Trust, or a series
thereof, or (iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in (ii) above resulting in a payment
by a Trustee or officer, unless there has been a determination by the court of
other body approving the settlement or other disposition or based upon a review
of readily available facts by vote of a majority of the non-interested Trustees
or written opinion of independent legal counsel, that such Trustee or officer
did not engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office. Section
4.3(b) of Article IV further provides that the rights of indemnification may be
insured against by policies maintained by the Trust. Section 4.4 of Article IV
provides that no Trustee shall be obligated to give any bond or other security
for the performance of any of his or her duties hereunder.
Section 4.6 of Article IV provides that each Trustee, officer or
employee of the Trust or a series thereof shall, in the performance of his or
her duties, be fully and completely justified and protected with regard to any
act or any failure to act resulting from reliance in good faith upon the books
of account or other records of the Trust or a series thereof, upon an opinion of
counsel, or upon reports made to the Trust or a series thereof by any of its
officers or employees or by the Investment Adviser, the Administrator, the
Distributor, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust, regardless of whether such counsel or expert may also
be a Trustee.
C-2
<PAGE>
Section 9 of each Investment Advisory and Administration Contract with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") 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 of 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. Each Contract also provides that the Trustees shall
not be liable for any obligations of the Trust or any series under the Contract
and that Mitchell Hutchins shall look only to the assets and property of the
Registrant in settlement of such right or claim and not to the assets and
property of the Trustees.
Section 6 of the Sub-Investment Advisory Agreement between Mitchell
Hutchins and Invista Capital Management, Inc. ("Invista") provides that Invista
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the matters to which the Agreement
relates, except for a loss resulting from the willful misfeasance, bad faith, or
gross negligence of Invista in the performance of its duties or from its
reckless disregard of its obligations and duties under the Agreement.
Section 9 of each Distribution Contract provides that the Trust 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 Trust 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 Trust, its
officers and Trustees 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 the Contract.
Section 10 of each Distribution Contract contains provisions similar to
Section 13 of the Investment Advisory and Administration Contract.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to Trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise, the
Trust 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 Trust of expenses
incurred or paid by a Trustee, officer or controlling person of the Trust in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Trust by such
Trustee, officer or controlling person in connection with the securities being
registered, the Trust 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 26. Business and Other Connections of Investment Adviser
(a) Mitchell Hutchins Asset Management Inc. 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, as filed with
the Securities and Exchange Commission (registration number
801-13219) and is incorporated herein by reference.
C-3
<PAGE>
(b) Invista Capital Management, Inc. Invista Capital Management,
Inc. ("Invista") serves as investment sub-adviser for
PaineWebber Global Equity Fund. Invista, an Iowa Corporation,
is a registered investment adviser and is an indirect, wholly
owned subsidiary of Principal Life Insurance Company. Invista
is primarily engaged in the investment advisory business.
Information as to the officers and directors of Invista is
included on its Form ADV, as filed with the Securities and
Exchange Commission (registration number 801-23020), and is
incorporated herein by reference.
Item 27. Principal Underwriters
----------------------
(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS INSTITUTIONAL SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. The directors
and officers of Mitchell Hutchins, their principal business addresses, and their
positions and offices with Mitchell Hutchins are identified in its Form ADV, as
filed with the Securities and Exchange Commission (registration number
801-13219). The directors and officers of PaineWebber, their principal business
addresses, and their positions and offices with PaineWebber are identified in
its Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-7163). The foregoing information is hereby incorporated herein by
reference. The information set forth below is furnished for those directors and
officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant. Unless otherwise indicated, the principal address of
each person named is 1285 Avenue of the Americas, New York, NY 10019.
C-4
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices With Underwriter or
Name Positions and Offices With Registrant Exclusive Dealer
---- ------------------------------------- ----------------
<S> <C> <C>
Margo N. Alexander Trustee and President President, Chief Executive Officer and
Director of Mitchell Hutchins and an
Executive Vice President and a Director of
PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment
Strategist and Member of the Investment
Policy Committee of PaineWebber
T. Kirkham Barneby Vice President Managing Director and Chief Investment
Officer-Quantitative Investments of
Mitchell Hutchins
Lawrence Chinsky Vice President and Assistant Treasurer Assistant Vice President and Investment
Monitoring Officer of the Mutual Fund
Finance Department of Mitchell Hutchins
John J. Lee Vice President and Assistant Treasurer Vice President and a Manager of the Mutual
Fund Finance Department of Mitchell
Hutchins
Ann E. Moran Vice President and Assistant Treasurer Vice President and a Manager of the Mutual
Fund Finance Department of Mitchell
Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of
Operations and Control of Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of
Mitchell Hutchins
Paul H. Schubert Vice President and Treasurer Senior Vice President and Director of the
Mutual Fund Finance Department of Mitchell
Hutchins
Barney A. Taglialatela Vice President and Assistant Treasurer Vice President and a Manager of the Mutual
Fund Finance Department of Mitchell
Hutchins
Mark A. Tincher Vice President Managing Director and Chief Investment
Officer - U.S. Equity Investments of
Mitchell Hutchins
Keith A. Weller Vice President and Assistant Secretary First Vice President and Associate General
Counsel of Mitchell Hutchins
</TABLE>
(c) None.
C-5
<PAGE>
Item 28. 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 Registrant's investment adviser and administrator,
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 custodians.
Item 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
Registrant undertakes to call a meeting of its shareholders for the
purpose of voting upon the question of removal of a trustee or trustees of
Registrant when requested in writing to do so by the holders of at least 10% of
Registrant's outstanding shares and, in connection with the meeting, to comply
with the provisions of Section 16(c) of the 1940 Act relating to communications
with the shareholders of certain common-law trusts.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 23rd day of November, 1998.
PAINEWEBBER INVESTMENT TRUST
By: /s/ Dianne E. O'Donnell
--------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee November 23, 1998
- ------------------------------------ (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman November 23, 1998
- ------------------------------------ of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee November 23, 1998
- ------------------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee November 23, 1998
- ------------------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee November 23, 1998
- ------------------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee November 23, 1998
- ------------------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee November 23, 1998
- ------------------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee November 23, 1998
- ------------------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee November 23, 1998
- ------------------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and Treasurer (Chief November 23, 1998
- ------------------------------------ Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 30 to the registration statement of PaineWebber Managed
Municipal Trust, SEC File 2-89016, filed June 27, 1996.
<PAGE>
PAINEWEBBER INVESTMENT TRUST
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of the holders of Registrant's shares
of beneficial interest 2/
(4) (a) Investment Advisory and Administration Contract applicable to
PaineWebber Tactical Allocation Fund 3/
(b) Investment Advisory and Administration Contract applicable to
PaineWebber Global Equity Fund (filed herewith)
(c) Sub-Advisory Contract with Invista Capital Management, Inc.
applicable to PaineWebber Global Equity Fund (filed herewith)
(5) (a) Distribution Contract for Class A Shares 4/
(b) Distribution Contract for Class B Shares 4/
(c) Distribution Contract for Class C Shares 4/
(d) Distribution Contract for Class Y Shares 4/
(e) Exclusive Dealer Agreement with respect to Class A Shares 4/
(f) Exclusive Dealer Agreement with respect to Class B Shares 4/
(g) Exclusive Dealer Agreement with respect to Class C Shares 4/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 4/
(6) Bonus, profit sharing or pension plans - none
(7) Custody Contract 1/
(8) Transfer Agency Services and Shareholder Services Agreement 5/
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' Consent
(filed herewith)
(11) Financial statements omitted from prospectus - none
(12) Purchase Agreement 1/
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A shares (filed herewith)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares (filed herewith)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C shares (filed herewith)
(14) and
(27) Financial Data Schedule (filed herewith)
(15) Plan pursuant to Rule 18f-3 6/
</TABLE>
- ------------------------------
<TABLE>
<S> <C>
1/ Incorporated by reference from Post-Effective Amendment No. 22 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on February 27, 1998.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
2/ Incorporated by reference from Articles IV, V, VI, VII, and X of
Registrant's Amended and Restated Declaration of Trust and from
Articles II and XI of Registrant's Restated By-Laws.
3/ Incorporated by reference from Post-Effective Amendment No. 14 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on December 29, 1995.
4/ Incorporated by reference from Post-Effective Amendment No. 15 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on July 1, 1996.
5/ Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement of PaineWebber Investment Trust, SEC File No.
33-39659, filed on September 1, 1998
6/ Incorporated by reference from Post-Effective Amendment No. 16 to the
registration statement of PaineWebber Investment Trust, SEC File. No.
33-39659, filed on August 29, 1996.
</TABLE>
<PAGE>
Exhibit No.4(b)
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of October 1, 1998 between PAINEWEBBER INVESTMENT
TRUST, a Massachusetts business trust ("Trust"), and MITCHELL HUTCHINS ASSET
MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and as an investment adviser under the Investment Advisers Act of 1940,
as amended,
WHEREAS the Trust is registered under the Investment Company Act of
1940, as amended ("1940 Act"), as an open-end management investment company,
and offers for public sale two distinct series of shares of beneficial
interest, which correspond to distinct portfolios, one of which has been
designated as PaineWebber Global Equity Fund; and
WHEREAS the Trust desires to retain Mitchell Hutchins as investment
adviser and administrator to furnish certain administrative, investment
advisory and portfolio management services to the Trust with respect to
PaineWebber Global Equity Fund and any other Series as to which this Contract
may hereafter be made applicable (each a "Series"), and Mitchell Hutchins is
willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints Mitchell Hutchins as
investment adviser and administrator of the Trust and each Series for the
period and on the terms set forth in this Contract. Mitchell Hutchins accepts
such appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. Duties as Investment Adviser.
(a) Subject to the supervision of the Trust's Board of Trustees
("Board"), Mitchell Hutchins will provide a continuous investment program for
a Series, including investment research and management with respect to all
securities and investments and cash equivalents in the Series, and may
allocate the Series' portfolio investments between countries, regions or types
of investments. Mitchell Hutchins will determine from time to time what
securities and other investments will be purchased, retained or sold by the
Series. Mitchell Hutchins may delegate to a sub-adviser, in whole or in part,
Mitchell Hutchins' duty to provide a continuous investment management program
with respect to any Series, including the provision of investment management
services with respect to a portion of the Series' assets, in accordance with
paragraph 5 of this Agreement.
(b) Mitchell Hutchins agrees that in placing orders with brokers, it
will attempt to obtain the best net result in terms of price and execution;
provided that, on behalf of any Series, Mitchell Hutchins may, in its
discretion, use brokers who provide the Series with research, analysis, advice
and similar services to execute portfolio transactions on behalf of the
Series, and
<PAGE>
Mitchell Hutchins may pay to those brokers in return for brokerage and
research services a higher commission than may be charged by other brokers,
subject to Mitchell Hutchins' determining in good faith that such commission
is reasonable in terms either of the particular transaction or of the overall
responsibility of Mitchell Hutchins to such Series and its other clients and
that the total commissions paid by such Series will be reasonable in relation
to the benefits to the Series over the long term. In no instance will
portfolio securities be purchased from or sold to Mitchell Hutchins, or any
affiliated person thereof, except in accordance with the federal securities
laws and the rules and regulations thereunder, or any applicable exemptive
orders . Whenever Mitchell Hutchins simultaneously places orders to purchase
or sell the same security on behalf of a Series and one or more other accounts
advised by Mitchell Hutchins, such orders will be allocated as to price and
amount among all such accounts in a manner believed to be equitable to each
account. The Trust recognizes that in some cases this procedure may adversely
affect the results obtained for the Series.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and will
furnish the Board with such periodic and special reports as the Board
reasonably may request. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Mitchell Hutchins hereby agrees that all records which it
maintains for the Trust are the property of the Trust, agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act any records which it
maintains for the Trust and which are required to be maintained by Rule 31a-l
under the 1940 Act and further agrees to surrender promptly to the Trust any
records which it maintains for the Trust upon request by the Trust.
(d) Mitchell Hutchins will oversee the computation of the net asset
value and the net income of each Series as described in the currently
effective registration statement of the Trust under the Securities Act of
1933, as amended, and the 1940 Act and any supplements thereto ("Registration
Statement) or as more frequently requested by the Board.
(e) The Trust hereby authorizes Mitchell Hutchins and any entity or
person associated with Mitchell Hutchins which is a member of a national
securities exchange to effect any transaction on such exchange for the account
of any Series, which transaction is permitted by Section 11(a) of the 1934 Act
and the rules thereunder, and the Trust hereby consents to the retention of
compensation by Mitchell Hutchins or any person or entity associated with
Mitchell Hutchins for such transaction.
3. Duties as Administrator. Mitchell Hutchins will administer the
affairs of the Trust and each Series subject to the supervision of the Board
and the following understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of
the Trust and each Series, including oversight of transfer agency, custodial
and accounting services, except as hereinafter set forth; provided, however,
that nothing herein contained shall be deemed to relieve or deprive the Board
of its responsibility for and control of the conduct of the affairs of the
Trust and each Series.
(b) Mitchell Hutchins will provide the Trust and each Series with
such corporate, administrative and clerical personnel (including officers of
the Trust) and services as are
2
<PAGE>
reasonably deemed necessary or advisable by the Board, including the
maintenance of certain books and records of the Trust and each Series.
(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Trust's
Registration Statement, proxy material, tax returns and required reports to
each Series' shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Trust and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies
and similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. Further Duties. In all matters relating to the performance of this
Contract, Mitchell Hutchins will act in conformity with the Declaration of
Trust, By-Laws, and Registration Statement of the Trust and with the
instructions and directions of the Board and will comply with the requirements
of the 1940 Act, the rules thereunder, and all other applicable federal and
state laws and regulations.
5. Delegation of Mitchell Hutchins' Duties as Investment Adviser and
Administrator. With respect to any or all Series, Mitchell Hutchins may enter
into one or more contracts ("Sub-Advisory or Sub-Administration Contract")
with one or more sub-advisers or sub-administrators in which Mitchell Hutchins
delegates to such sub-advisers or sub-administrators any or all of its duties
specified in Paragraphs 2 and 3 of this Contract, provided that each
Sub-Advisory or Sub-Administration Contract imposes on the sub-adviser or
sub-administrator bound thereby all the corresponding duties and conditions to
which Mitchell Hutchins is subject by Paragraphs 2 and 3 of this Contract and
all the duties and conditions of paragraph 4 of this Contract, and further
provided that each Sub-Advisory or Sub-Administration Contract meets all
requirements of the 1940 Act and rules thereunder. Furthermore, to the extent
consistent with the regulations and orders of the Securities and Exchange
Commission, the appointment and engagement of any sub-advisor and delegation
to it of duties hereunder by Mitchell Hutchins shall be subject only to the
approval of the Board of Trustees of the Trust.
6. Services Not Exclusive. The services furnished by Mitchell
Hutchins hereunder are not to be deemed exclusive and Mitchell Hutchins shall
be free to furnish similar services to others so long as its services under
this Contract are not impaired thereby or unless otherwise agreed to by the
parties hereunder in writing. Nothing in this Contract shall limit or restrict
the right of any director, officer or employee of Mitchell Hutchins, who may
also be a Trustee, officer or employee of the Trust, to engage in any other
business or to devote his or her time and attention in part to the management
or other aspects of any other business, whether of a similar nature or a
dissimilar nature.
3
<PAGE>
7. Expenses.
(a) During the term of this Contract, each Series will bear all
expenses, not specifically assumed by Mitchell Hutchins, incurred in its
operations and the offering of its shares.
(b) Expenses borne by each series will include but not be limited to
the following (or each Series' proportionate share of the following): (i) the
cost (including brokerage commissions) of securities purchased or sold by the
Series and any losses incurred in connection therewith; (ii) fees payable to
and expenses incurred on behalf of the Series by Mitchell Hutchins under this
Contract; (iii) expenses of organizing the Trust and the Series; (iv) filing
fees and expenses relating to the registrations and qualification of the
Series' shares and the Trust under federal and/or securities laws and
maintaining such registration and qualifications; (v) fees and salaries
payable to the Trust's Trustees and officers who are not interested persons of
the Trust or Mitchell Hutchins; (vi) all expenses incurred in connection with
the Trustees' services, including travel expenses; (vii) taxes (including any
income or franchise taxes) and governmental fees; (viii) costs of any
liability, uncollectible items of deposit and other insurance and fidelity
bonds; (ix) any costs, expenses or losses arising out of a liability of or
claim for damages or other relief asserted against the Trust or Series for
violation of any law; (x) legal, accounting and auditing expenses, including
legal fees of special counsel for those Trustees of the Trust who are not
interested persons of the Trust; (xi) charges of custodians, transfer agents
and other agents; (xii) costs of preparing share certificates; (xiii) expenses
of setting in type and printing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and
proxy materials for existing shareholders; (xiv) costs of mailing prospectuses
and supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials to existing shareholders; (xv) any
extraordinary expenses (including fees and disbursements of counsel, costs of
actions, suits or proceedings to which the Trust is a party and the expenses
the Trust may incur as a result of its legal obligation to provide
indemnification to its officers, Trustees, agents and shareholders) incurred
by the Trust or Series; (xvi) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations;
(xvii) cost of mailing and tabulating proxies and costs of meetings of
shareholders, the Board and any committees thereof; (xviii) the cost of
investment company literature and other publications provided by the Trust to
its Trustees and officers; (xix) costs of mailing, stationery and
communications equipment; (xx) expenses incident to any dividend, withdrawal
or redemption options; (xxi) charges and expenses of any outside pricing
service used to value portfolio securities; and (xxii) interest on borrowings
of the Fund.
(c) The Trust or a Series may pay directly any expenses incurred by
it in its normal operations and, if any such payment is consented to by
Mitchell Hutchins and acknowledged as otherwise payable by Mitchell Hutchins
pursuant to this Contract, the Series may reduce the fee payable to Mitchell
Hutchins pursuant to Paragraph 8 thereof by such amount. To the extent that
such deductions exceed the fee payable to Mitchell Hutchins on any monthly
payment date, such excess shall be carried forward and deducted in the same
manner from the fee payable on succeeding monthly payment dates.
4
<PAGE>
(d) Mitchell Hutchins will assume the cost of any compensation for
services provided to the Trust received by the officers of the Trust and by
those Trustees who are interested persons of the Trust.
(e) The payment or assumption by Mitchell Hutchins of any expenses of
the Trust or a Series that Mitchell Hutchins is not required by this Contract
to pay or assume shall not obligate Mitchell Hutchins to pay or assume the
same or any similar expense of the Trust or a Series on any subsequent
occasion.
8. Compensation.
(a) For the services provided and the expenses assumed pursuant to
this Contract, with respect to Global Equity Fund, the Trust will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at an annual rate of
0.85% of the average daily net assets of such Series up to and including $500
million and 0.83% of the average daily net assets of such Series in excess of
$500 million up to an including $1 billion and 0.805% of the average daily net
assets of such Series in excess of $1 billion.
(b) For the services provided and the expenses assumed pursuant to
this Contract with respect to any other Series hereafter established, the
Trust will pay to Mitchell Hutchins from the assets of such Series a fee in an
amount to be agreed upon in a written fee agreement ("Fee Agreement") executed
by the Trust on behalf of such Series and by Mitchell Hutchins. All such Fee
Agreements shall provide that they are subject to all terms and conditions of
this Contract.
(c) The fee shall be computed daily and paid monthly to Mitchell
Hutchins on or before the first business day of the next succeeding calendar
month.
(d) If this Contract becomes effective or terminates before the end
of any month, the fee for the period from the effective day to the end of the
month or from the beginning of such month to the date of termination, as the
case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
9. Limitation of Liability of Mitchell Hutchins. Mitchell Hutchins
and its delegates, including any Sub-Adviser or Sub-Administrator to any
Series or the Trust, shall not be liable for any error of judgment or mistake
of law or for any loss suffered by any Series, the Trust or any of its
shareholders, in connection with the matters to which this Contract relates,
except to the extent that such a loss results from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Contract.
Any person, even though also an officer, director, employee, or agent of
Mitchell Hutchins, who may be or become an officer, Trustee, employee or agent
of the Trust shall be deemed, when rendering services to any Series or the
Trust or acting with respect to any business of such Series or the Trust, to
be rendering such service to or acting solely for the Series or the Trust and
not as an officer, director, employee, or agent or one under the control or
direction of Mitchell Hutchins even though paid by it.
5
<PAGE>
10. Limitation of Liability of the Trustees and Shareholders of the
Trust. No Trustee, shareholder, officer, employee or agent of any Series shall
not be liable for any obligations of any Series or the Trust under this
Contract, and Mitchell Hutchins agrees that, in asserting any rights or claims
under this Contract, it shall look only to the assets and property of the
Trust in settlement of such right or claim, and not to any Trustee,
shareholder, officer, employee or agent.
11. Duration and Termination.
(a) This Contract shall become effective upon the date hereabove
written provided that, with respect to any Series, this Contract shall not
take effect unless it has first been approved (i) by a vote of a majority of
those Trustees of the Trust who are not parties to this Contract or interested
persons of any such party cast in person at a meeting called for the purpose
of voting on such approval, and (ii) by vote of a majority of that Series'
outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if
not terminated, this Contract shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of those Trustees of
the Trust who are not parties to this Contract or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on
such approval, and (ii) by the Board or with respect to any given Series by
vote of a majority of the outstanding voting securities of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the board or by a vote of a majority of the outstanding voting
securities of such Series on sixty days' written notice to Mitchell Hutchins
or by Mitchell Hutchins at any time, without the payment of any penalty, on
sixty days' written notice to the Trust. Termination of this Contract with
respect to any given Series shall in no way affect the continued validity of
this Contract or the performance thereunder with respect to any other Series.
This Contract will automatically terminate in the event of its assignment.
12. Amendment of this Contract. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this contract as to
any given Series shall be effective until approved by vote of a majority of
such Series' outstanding voting securities.
13. Governing Law. This Contract shall be construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws principles thereof, and in accordance with the 1940 Act, provided,
however, that Section 10 above will be construed in accordance with the laws
of the Commonwealth of Massachusetts. To the extent that the applicable laws
of the State of Delaware or the Commonwealth of Massachusetts conflict with
the applicable provisions of the 1940 Act, the latter shall control.
6
<PAGE>
14. Miscellaneous. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be
affected thereby. This Contract shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Contract, the terms "majority of the outstanding voting securities,"
"affiliated person," "interested person," "assignment," "broker," "investment
adviser," "national securities exchange," "net assets," "prospectus," "sale,"
"sell" and "security" shall have the same meaning as such terms have in the
1940 Act, subject to such exemption as may be granted by the Securities and
Exchange Commission by any rule, regulation or order. Where the effect of a
requirement of the 1940 Act reflected in any provision of this contract is
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or general application, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: /s/ Scott Griff By: /s/ Diane E. O'Donnell
------------------------- ------------------------------
First Vice President Senior Vice President
PAINEWEBBER INVESTMENT TRUST
Attest: /s/ Jennifer Farrell By: /s/ Keith A. Weller
------------------------- ------------------------------
Assistant Secretary Vice President and
Assistant Secretary
7
<PAGE>
Exhibit No.4(c)
SUB-ADVISORY CONTRACT
Agreement made as of October 1, 1998 ("Contract") between MITCHELL
HUTCHINS ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins"),
and INVISTA CAPITAL MANAGEMENT, INC., an Iowa corporation ("Sub-Adviser").
RECITALS
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Agreement, dated October, 1998 ("Management Agreement"), with
PaineWebber Investment Trust ("Trust"), an open-end management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act");
(2) The Trust offers for public sale distinct series of shares of
beneficial interest, including a series of shares of the Trust known as
PaineWebber Global Equity Fund ("Fund");
(3) Under the Management Agreement, Mitchell Hutchins has agreed to
provide certain investment advisory and administrative services to the Fund;
(4) The Management Agreement permits Mitchell Hutchins to delegate
certain of its duties as investment adviser thereunder to a sub-adviser;
(5) Mitchell Hutchins desires to allocate the portfolio investments
of the Fund between an international segment and a domestic segment, and to
retain the Sub-Adviser to furnish certain investment advisory services with
respect to the international segment of the investments of the Fund, and
(6) The Sub-Adviser is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, Mitchell Hutchins and the Sub-Adviser agree as follows:
1. Appointment. Mitchell Hutchins hereby appoints the Sub-Adviser as
an investment sub-adviser with respect to the international segment of the
Fund's investments for the period and on the terms set forth in this Contract.
The Sub-Adviser accepts that appointment and agrees to render the services
herein set forth, for the compensation herein provided.
2. Duties as Sub-Adviser.
(a) Subject to the supervision and direction of the Trust's Board of
Trustees ("Board") and review by Mitchell Hutchins, and any written guidelines
adopted by the Board or Mitchell Hutchins, the Sub-Adviser will provide a
continuous investment program with respect to the international segment of the
Fund's investments, including investment research and management to all
securities and investments and cash equivalents in the Fund allocated by
Mitchell Hutchins to
<PAGE>
the international segment of the Fund's investments. The Sub-Adviser will
determine from time to time what investments will be purchased, retained or
sold by the Fund in the international segment of the Fund's investments. The
Sub-Adviser will be responsible for placing purchase and sell orders for
investments and for other related transactions with respect to the
international segment of the Fund's investments. The Sub-Adviser will provide
services under this Contract in accordance with the Fund's investment
objective, policies and restrictions as stated in the Trust's currently
effective registration statement under the 1940 Act, and any amendments or
supplements thereto ("Registration Statement").
(b) The Sub-Adviser agrees that, in placing orders with brokers, it
will obtain the best net result in terms of price and execution; provided
that, on behalf of the Fund, the Sub-Adviser may, in its discretion, use
brokers who provide the Sub-Adviser with research, analysis, advice and
similar services to execute portfolio transactions, and the Sub-Adviser may
pay to those brokers in return for brokerage and research services a higher
commission than may be charged by other brokers, subject to the Sub-Adviser's
determining in good faith that such commission is reasonable in terms either
of the particular transaction or of the overall responsibility of the
Sub-Adviser 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. In no instance will portfolio securities be purchased from
or sold to the Sub-Adviser, or any affiliated person thereof, except in
accordance with the federal securities laws and the rules and regulations
thereunder. Whenever the Sub-Adviser simultaneously places orders to purchase
or sell the same security on behalf of the Fund and one or more other accounts
advised by the Sub-Adviser, the orders will be allocated as to price and
amount among all such accounts in a manner believed to be equitable over time
to each account. Mitchell Hutchins recognizes that in some cases this
procedure may adversely affect the results obtained for the Fund.
(c) The Sub-Adviser will maintain all books and records required to
be maintained pursuant to the 1940 Act and the rules and regulations
promulgated thereunder with respect to actions by the Sub-Adviser on behalf of
the Fund, and will furnish the Board and Mitchell Hutchins with such periodic
and special reports as the Board or Mitchell Hutchins reasonably may request.
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Sub-Adviser hereby agrees that all records that it maintains for the Fund are
the property of the Trust, agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any records that it maintains for the Trust and
that are required to be maintained by Rule 31a-1 under the 1940 Act, and
further agrees to surrender promptly to the Trust any records that it
maintains for the Fund upon request by the Trust.
(d) At such times as shall be reasonably requested by the Board or
Mitchell Hutchins, the Sub-Adviser will provide the Board and Mitchell
Hutchins with economic and investment analyses and reports as well as
quarterly reports setting forth the performance of the international segment
of the Fund's investments and make available to the Board and Mitchell
Hutchins any economic, statistical and investment services that the
Sub-Adviser normally makes available to its institutional or other customers.
(e) In accordance with procedures adopted by the Board, as amended
from time to time, the Sub-Adviser is responsible for assisting in the fair
valuation of all portfolio securities and will
2
<PAGE>
use its reasonable efforts to arrange for the provision of a price(s) from a
party(ies) independent of the Sub-Adviser for each portfolio security for
which the custodian does not obtain prices in the ordinary course of business
from an automated pricing service.
3. Further Duties. In all matters relating to the performance of this
Contract, the Sub-Adviser will act in conformity with the Trust's Declaration
of Trust, By-Laws and Registration Statement and with the written instructions
and written directions of the Board and Mitchell Hutchins; and will comply
with the requirements of the 1940 Act and the Investment Advisers Act of 1940,
as amended ("Advisers Act") and the rules under each, and all other federal
and state laws and regulations applicable to the Trust and the Fund. Mitchell
Hutchins agrees to provide to the Sub-Adviser copies of the Trust's
Declaration of Trust, By-Laws, Registration Statement, written instructions
and directions of the Board and Mitchell Hutchins, and any amendments or
supplements to any of these materials as soon as practicable after such
materials become available; and further agrees to identify to the Sub-Adviser
in writing any broker-dealers that are affiliated with Mitchell Hutchins
(other than PaineWebber Incorporated and Mitchell Hutchins itself).
4. Expenses. During the term of this Contract, the Sub-Adviser will
bear all expenses incurred by it in connection with its services under this
Contract.
5. Compensation.
(a) For the services provided and the expenses assumed by the
Sub-Adviser pursuant to this Contract, Mitchell Hutchins, not the Fund, will
pay Invista a sub-advisory fee, computed daily and paid monthly, at an annual
rate of 0.40% of the Fund's average daily net assets allocated to its
management up to and including $100 million, 0.29% of the Fund's average daily
net assets allocated to its management in excess of $100 million up to and
including $300 million, and 0.26% of the Fund's average daily net assets
allocated to its management in excess of $300 million. Under this fee
arrangement, Invista will receive fees based on the value of portfolio assets
under its management as these assets have been allocated to it by Mitchell
Hutchins.
(b) The fee shall be accrued daily and payable monthly to the
Sub-Adviser on or before the last business day of the next succeeding calendar
month.
(c) If this Contract becomes effective or terminates before the end
of any month, the fee for the period from the effective date to the end of the
month or from the beginning of such month to the date of termination, as the
case may be, shall be pro-rated according to the proportion that such period
bears to the full month in which such effectiveness or termination occurs.
6. Limitation of Liability. The Sub-Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund,
the Trust, its shareholders or by Mitchell Hutchins in connection with the
matters to which this Contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or from reckless disregard by it of its obligations and duties
under this Contract. Nothing in this paragraph shall be deemed a limitation or
waiver of any obligation or duty that may not by law be limited or waived.
3
<PAGE>
7. Representations of Sub-Adviser. The Sub-Adviser represents,
warrants and agrees as follows:
(a) The Sub-Adviser (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Contract remains in effect; (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Contract; (iii)
has met and will seek to continue to meet for so long as this Contract remains
in effect, any other applicable federal or state requirements, or the
applicable requirements of any regulatory or industry self-regulatory agency
necessary to be met in order to perform the services contemplated by this
Contract; (iv) has the authority to enter into and perform the services
contemplated by this Contract; and (v) will promptly notify Mitchell Hutchins
of the occurrence of any event that would disqualify the Sub-Adviser from
serving as an investment adviser of an investment company pursuant to Section
9(a) of the 1940 Act or otherwise.
(b) The Sub-Adviser has adopted a written code of ethics complying
with the requirements of Rule 17j-1 under the 1940 Act and will provide
Mitchell Hutchins and the Board with a copy of such code of ethics, together
with evidence of its adoption. Within forty-five days of the end of the last
calendar quarter of each year that this Contract is in effect, the president
or a vice-president of the Sub-Adviser shall certify to Mitchell Hutchins that
the Sub-Adviser has complied with the requirements of Rule 17j-1 during the
previous year and that there has been no violation of the Sub-Adviser's code
of ethics or, if such a violation has occurred, that appropriate action was
taken in response to such violation. Upon the written request of Mitchell
Hutchins, the Sub-Adviser shall permit Mitchell Hutchins, its employees or its
agents to examine the reports required to be made to the Sub-Adviser by Rule
17j-1(c)(1) and all other records relevant to the Sub-Adviser's code of
ethics.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of its
Form ADV, which as of the date of this Agreement is its Form ADV as most
recently filed with the Securities and Exchange Commission ("SEC") and
promptly will furnish a copy of all amendments to Mitchell Hutchins at least
annually.
(d) The Sub-Adviser will notify Mitchell Hutchins of any change of
control of the Sub-Adviser, including any change of its general partners or
25% shareholders, as applicable, and any changes in the key personnel who are
either the portfolio manager(s) of the Fund or senior management of the
Sub-Adviser, in each case prior to, or promptly after, such change.
(e) The Sub-Adviser agrees that neither it, nor any of its
affiliates, will in any way refer directly or indirectly to its relationship
with the Trust, the Fund, Mitchell Hutchins or any of their respective
affiliates in offering, marketing or other promotional materials without the
express written consent of Mitchell Hutchins.
8. Services Not Exclusive. The services furnished by the
Sub-Adviser hereunder are not to be deemed exclusive and the Sub-Adviser shall
be free to furnish similar services to others so long as its services under
this Contract are not impaired thereby or unless otherwise agreed to by the
parties hereunder in writing. Nothing in this Contract shall limit or restrict
the right of any director, officer or employee of the Sub-Adviser, who may
also be a trustee, officer or employee of the Trust,
4
<PAGE>
to engage in any other business or to devote his or her time and attention in
part to the management or other aspects of any other business, whether of a
similar nature or a dissimilar nature.
9. Duration and Termination.
(a) This Contract shall become effective upon the date first above
written, provided that this Contract shall not take effect unless it has first
been approved: (i) by a vote of a majority of those trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by vote of a majority of the Fund's outstanding securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods
of twelve months each, provided that such continuance is specifically approved
at least annually: (i) by a vote of a majority of those trustees of the Trust
who are not parties to this Contract or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval,
and (ii) by the Board or by vote of a majority of the outstanding voting
securities of the Fund.
(c) Notwithstanding the foregoing, this Contract may be terminated at
any time, without the payment of any penalty, by vote of the Board or by a
vote of a majority of the outstanding voting securities of the Fund on 60
days' written notice to the Sub-Adviser. This Contract may also be terminated,
without the payment of any penalty, by Mitchell Hutchins: (i) upon 120 days'
written notice to the Sub-Adviser; (ii) upon material breach by the
Sub-Adviser of any representations and warranties set forth in Paragraph 7 of
this Contract, if such breach has not been cured within a 20 day period after
notice of such breach; or (iii) immediately if, in the reasonable judgment of
Mitchell Hutchins, the Sub-Adviser becomes unable to discharge its duties and
obligations under this Contract, including circumstances such as financial
insolvency of the Sub-Adviser or other circumstances that could adversely
affect the Fund. The Sub-Adviser may terminate this Contract at any time,
without the payment of any penalty, on 120 days written notice to Mitchell
Hutchins. This Contract will terminate automatically in the event of its
assignment or upon termination of the Advisory Contract as it relates to the
Fund.
10. Amendment of this Contract. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Contract shall be
effective until approved (i) by a vote of a majority of those trustees of the
Trust who are not parties to this Contract or interested persons of any such
party, and (ii) by a vote of a majority of the Fund's outstanding voting
securities (unless in the case of (ii), the Trust receives an SEC order or
no-action letter permitting it to modify the Contract without such vote).
11. Governing Law. This Contract shall be construed in accordance
with the 1940 Act and the laws of the State of Delaware, without giving effect
to the conflicts of laws principles thereof. To the extent that the applicable
laws of the State of Delaware conflict with the applicable provisions of the
1940 Act, the latter shall control.
5
<PAGE>
12. Miscellaneous. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be
affected thereby. This Contract shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Contract, the terms "majority of the outstanding voting securities,"
"affiliated person," "interested person," "assignment," "broker," "investment
adviser," "net assets," "sale," "sell" and "security" shall have the same
meaning as such terms have in the 1940 Act, subject to such exemption as may
be granted by the SEC by any rule, regulation or order. Where the effect of a
requirement of the federal securities laws reflected in any provision of this
Contract is made less restrictive by a rule, regulation or order of the SEC,
whether of special or general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order. This Contract may be
signed in counterpart.
13. Notices. Any notice herein required is to be in writing and is
deemed to have been given to the Sub-Adviser or Mitchell Hutchins upon receipt
of the same at their respective addresses set forth below. All written notices
required or permitted to be given under this Contract will be delivered by
personal service, by postage mail - return receipt requested or by facsimile
machine or a similar means of same day delivery which provides evidence of
receipt (with a confirming copy by mail as set forth herein). All notices
provided to Mitchell Hutchins will be sent to the attention of Victoria E.
Schonfeld, General Counsel. All notices provided to the Sub-Adviser will be
sent to the attention of Dennis W. Cameron, compliance officer.
[rest of page left intentionally blank]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized signatories as of the date and year first
above written.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
1285 Avenue of the Americas
New York, New York 10019
Attest:
By: /s/ Keith A. Weller By: /s/ Dianne E. O'Donnell
----------------------------- -------------------------------
Name: Keith A. Weller Name: Dianne E. O'Donnell
Title: First Vice President Title: Senior Vice President
INVISTA CAPITAL MANAGEMENT,
INC.
1900 Hub Tower
699 Walnut Street
Des Moines, Iowa 50309
Attest:
By: /s/ Michael Roughton By: /s/ C. R. Barnes
------------------------------ -------------------------------
Name: Michael Roughton Name: C. R. Barnes
Title: Counsel Title: President
7
<PAGE>
Exhibit No. 9
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone 202-778-9000
www.kl.com
November 23, 1998
PaineWebber Investment Trust
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion, as counsel to PaineWebber Investment
Trust ("Trust"), as to certain matters regarding the issuance of certain
Shares of the Trust. As used in this letter, the term "Shares" means the Class
A, Class B, Class C and Class Y shares of beneficial interest of the series of
the Trust listed below during the time that Post-Effective Amendment No. 25 to
the Trust's Registration Statement on Form N-1A ("PEA") is effective and has
not been superseded by another post-effective amendment. The series of the
Trust is PaineWebber Tactical Allocation Fund.
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we
have deemed relevant to our opinion, as set forth herein. Our opinion is
limited to the laws and facts in existence on the date hereof, and it is
further limited to the laws (other than the conflict of law rules) in the
Commonwealth of Massachusetts that in our experience are normally applicable
to the issuance of shares by investment companies organized as business trusts
in that State and to the Securities Act of 1933 ("1933 Act"), the Investment
Company Act of 1940 ("1940 Act") and the regulations of the Securities and
Exchange Commission ("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of
the Shares has been duly authorized by the Trust and that, when sold in
accordance with the terms contemplated by the PEA, including receipt by the
Trust of full payment for the Shares and compliance with the 1933 Act and the
1940 Act, the Shares will have been validly issued, fully paid and
non-assessable.
We note, however, that the Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders could, under certain circumstances, be held personally liable for
the obligations of the Trust. The Declaration of Trust states that creditors
of, contractors with and claimants against the Trust or any series shall look
only to the assets of the Trust for the appropriate series for payment. It
also requires that notice of such disclaimer be given in each note, bond,
contract, certificate, undertaking or instrument made
<PAGE>
PaineWebber Investment Trust
November 23, 1998
Page 2
or issued by the officers or the trustees of the Trust on behalf of the Trust.
The Declaration of Trust further provides: (1) for indemnification from the
assets of the Trust or the appropriate series for all loss and expense of any
shareholder held personally liable for the obligations of the Trust or any
series by virtue of ownership of shares of the Trust or such series; and (2)
for the Trust or appropriate series to assume the defense of any claim against
the shareholder for any act or obligation of the Trust or series. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust or series would be
unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is
filed with the SEC and to the reference to our firm in the statement of
additional information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report on PaineWebber
Tactical Allocation Fund dated October 16, 1998 in this Registration Statement
(Form N-1A No. 33-39659) of PaineWebber Investment Trust.
ERNST & YOUNG LLP
New York, New York
November 19, 1998
<PAGE>
Exhibit No. 13(a)
PAINEWEBBER INVESTMENT TRUST -- CLASS A SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, PaineWebber Investment Trust ("Fund") is registered under
the Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company, and has two distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and
have been designated as PaineWebber Global Equity Fund and PaineWebber
Tactical Allocation Fund; and
WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act with respect to the above-referenced Series and
desires to replace it with this amended Plan of Distribution ("Plan") with
respect to the Class A shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Fund's board of trustees
("Board") and have Class A shares established; and
WHEREAS, the Fund has entered into a Distribution Contract
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") pursuant to which Mitchell Hutchins has agreed to serve as
Distributor of the Class A shares of each such Series;
NOW, THEREFORE, the Fund hereby adopts this Plan with respect to the
Class A shares of each Series in accordance with Rule 12b-1 under the 1940
Act.
1. A. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series'
Class A shares, a service fee at the rate of 0.25% on an annualized basis of
the average daily net assets of the Series' Class A shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as
the Board shall determine.
B. Any Series may pay a service fee to Mitchell Hutchins at a
lesser rate than the fee specified in Paragraph 1A of this Plan, as agreed
upon by the Board and Mitchell Hutchins and as approved in the manner
specified in Paragraph 4 of this Plan.
2. As Distributor of the Class A shares of each Series, Mitchell
Hutchins may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the Class A shares of the
Series or the servicing and maintenance of shareholder accounts, including,
but not limited to, compensation to employees of Mitchell Hutchins;
compensation to and expenses, including overhead and telephone and other
communication expenses, of Mitchell Hutchins, PaineWebber Incorporated
("PaineWebber") and other selected dealers who engage in or support the
distribution of shares or who service shareholder accounts; the printing of
prospectuses, statements of additional information, and reports for other than
existing shareholders; and the preparation, printing and distribution of sales
literature and advertising materials.
<PAGE>
3. If adopted with respect to Class A shares of a Series after any
public offering of those shares, this Plan shall not take effect with respect
to those shares unless it has first been approved by a vote of a majority of
the voting securities of the Class A shares of that Series. This provision
does not apply to adoption as an amended Plan of Distribution where the prior
Plan of Distribution either was approved by a vote of a majority of the voting
securities of the Class A shares of the applicable Series or such approval was
not required under Rule 12b-1.
4. This Plan shall not take effect with respect to the Class A shares
of any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members who approve the Plan's taking effect with respect to
such Series' Class A shares have reached the conclusion required by Rule
12b-1(e) under the 1940 Act.
5. After approval as set forth in Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
for so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class A shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"service activities," as defined in this Paragraph 6, to the Board in support
of the service fee payable hereunder.
For purposes of this Plan, "service activities" shall mean
activities in connection with the provision by Mitchell Hutchins or
PaineWebber of personal, continuing services to investors in the Class A
shares of the Series; provided, however, that if the National Association of
Securities Dealers, Inc. ("NASD") adopts a definition of "service fee" for
purposes of Section 2830(b)(9) of the NASD Conduct Rules that differs from the
definition of "service activities" hereunder, or if the NASD adopts a related
definition intended to define the same concept, the definition of "service
activities" in this Paragraph shall be automatically amended, without further
action of the parties, to conform to such NASD definition. Overhead and other
expenses of Mitchell Hutchins and PaineWebber related to their "distribution
activities" or "service activities," including telephone and other
communications expenses, may be included in the information regarding amounts
expended for such activities.
7. This Plan may be terminated with respect to the Class A shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, or by vote of a majority of the outstanding voting
securities of the Class A shares of that Series.
8. This Plan may not be amended to increase materially the amount of
service fees provided for in Paragraph 1A hereof unless such amendment is
approved by a majority of the
<PAGE>
outstanding voting securities of the Class A shares of the affected Series and
no material amendment to the Plan shall be made unless approved in the manner
provided for initial approval in Paragraph 4 hereof.
9. The amount of the service fees payable by the Series to Mitchell
Hutchins under Paragraph 1A hereof and the Contract is not related directly to
expenses incurred by Mitchell Hutchins on behalf of such Series in serving as
Distributor of the Class A shares, and Paragraph 2 hereof and the Contract do
not obligate the Series to reimburse Mitchell Hutchins for such expenses. The
service fees set forth in Paragraph 1A hereof will be paid by the Series to
Mitchell Hutchins until either the Plan or the Contract is terminated or not
renewed. If either the Plan or the Contract is terminated or not renewed with
respect to the Class A shares of any Series, any service-related expenses
incurred by Mitchell Hutchins on behalf of the Class A shares of the Series in
excess of payments of the service fees specified in Paragraph 1A hereof and
the Contract which Mitchell Hutchins has received or accrued through the
termination date are the sole responsibility and liability of Mitchell
Hutchins, and are not obligations of the Series.
10. While this Plan is in effect, the selection and nomination of the
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the
Fund.
11. As used in this Plan, the terms "majority of the outstanding
voting securities" and "interested person" shall have the same meaning as
those terms have in the 1940 Act.
12. The Fund shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant
to Paragraph 6 hereof for a period of not less than six years from the date of
this Plan, the first two years in an easily accessible place.
13. The Board members of the Fund and the shareholders of each Series
shall not be liable for any obligations of the Fund or any Series under this
Plan, and Mitchell Hutchins or any other person, in asserting any rights or
claims under this Plan, shall look only to the assets and property of the Fund
or such Series in settlement of such right or claim, and not to such Board
members or shareholders.
IN WITNESS WHEREOF, the Fund has executed this Amended Plan of
Distribution on the day and year set forth below in New York, New York.
Date: September 10, 1998
ATTEST: PAINEWEBBER INVESTMENT TRUST
/s/ Cristina Paradiso By: /s/ Dianne E. Donnell
- -------------------------------- ------------------------------------
<PAGE>
Exhibit No. 13(b)
PAINEWEBBER INVESTMENT TRUST -- CLASS B SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, PaineWebber Investment Trust ("Fund") is registered under
the Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company, and has two distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and
have been designated as PaineWebber Global Equity Fund and PaineWebber
Tactical Allocation Fund; and
WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act with respect to the above-referenced Series and
desires to replace it with this amended Plan of Distribution ("Plan") with
respect to the Class B shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Fund's board of trustees
("Board") and have Class B shares established; and
WHEREAS, the Fund has entered into a Distribution Contract
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") pursuant to which Mitchell Hutchins has agreed to serve as
Distributor of the Class B shares of each such Series;
NOW, THEREFORE, the Fund hereby adopts this Plan with respect to the
Class B shares of each Series in accordance with Rule 12b-1 under the 1940
Act.
1. A. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series'
Class B shares, distribution fees at the rate of 0.75%, on an annualized
basis, of the average daily net assets of the Series' Class B shares. Such
fees shall be calculated and accrued daily and paid monthly or at such other
intervals as the Board shall determine:
B. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series'
Class B shares, a service fee at the rate of 0.25%, on an annualized basis, of
the average daily net assets of the Series Class B shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as
the Board shall determine.
C. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified above, as agreed upon by
the Board and Mitchell Hutchins and as approved in the manner specified in
Paragraph 4 of this Plan.
2. As Distributor of the Class B shares of each Series, Mitchell
Hutchins may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the Class B shares of the
Series or the servicing and maintenance of shareholder accounts, including,
but not limited to, compensation to employees of Mitchell Hutchins;
compensation to and expenses, including overhead and telephone and other
communication
<PAGE>
expenses, of Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and
other selected dealers who engage in or support the distribution of shares or
who service shareholder accounts; the printing of prospectuses, statements of
additional information, and reports for other than existing shareholders; and
the preparation, printing and distribution of sales literature and advertising
materials.
3. If adopted with respect to Class B shares of a Series after any
public offering of those shares, this Plan shall not take effect with respect
to those shares unless it has first been approved by a majority of the voting
securities of the Class B shares of that Series. This provision does not apply
to adoption as an amended Plan of Distribution where the prior Plan of
Distribution either was approved by a vote of a majority of the voting
securities of the Class B shares of the applicable Series or such approval was
not required under Rule 12b-1.
4. This Plan shall not take effect with respect to the Class B shares
of any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members who approve the Plan's taking effect with respect to
such Series' Class B shares have reached the conclusion required by Rule
12b-1(e) under the 1940 Act.
5. After approval as set forth in Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
for so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class B shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"distribution activities," as defined in this Paragraph 6, to the Board in
support of the distribution fee payable hereunder and shall submit only
information regarding amounts expended for "service activities," as defined in
this Paragraph 6, to the Board in support of the service fee payable
hereunder.
For purposes of this Plan, "distribution activities" shall mean
any activities in connection with Mitchell Hutchins' performance of its
obligations under this Plan or the Contract that are not deemed "service
activities." "Service activities" shall mean activities in connection with the
provision by Mitchell Hutchins or PaineWebber of personal, continuing services
to investors in the Class B shares of the Series; provided, however, that if
the National Association of Securities Dealers, Inc. ("NASD") adopts a
definition of "service fee" for purposes of Section 2830(b)(9) of the NASD
Conduct Rules that differs from the definition of "service activities"
hereunder, or if the NASD adopts a related definition intended to define the
same concept, the definition of "service activities" in this Paragraph shall
be automatically amended, without further action of the parties, to conform to
such NASD definition. Overhead and other expenses
2
<PAGE>
of Mitchell Hutchins and PaineWebber related to their "distribution
activities" or "service activities," including telephone and other
communications expenses, may be included in the information regarding amounts
expended for such activities.
7. This Plan may be terminated with respect to the Class B shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, or by vote of a majority of the outstanding voting
securities of the Class B shares of that Series.
8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in Paragraph 1A or the amount of service fees
provided for in Paragraph 1B hereof unless such amendment is approved by a
majority of the outstanding voting securities of the Class B shares of the
affected Series and no material amendment to the Plan shall be made unless
approved in the manner provided for initial approval in Paragraph 4 hereof.
9. The amount of the distribution and service fees payable by the
Series to Mitchell Hutchins under Paragraphs 1A and 1B hereof and the Contract
is not related directly to expenses incurred by Mitchell Hutchins on behalf of
such Series in serving as Distributor of the Class B shares, and Paragraph 2
hereof and the Contract do not obligate the Series to reimburse Mitchell
Hutchins for such expenses. The distribution and service fees set forth in
Paragraphs 1A and 1B hereof will be paid by the Series to Mitchell Hutchins
until either the Plan or the Contract is terminated or not renewed. If either
the Plan or the Contract is terminated or not renewed with respect to the
Class B shares of any Series, any distribution expenses incurred by Mitchell
Hutchins on behalf of the Class B shares of the Series in excess of payments
of the distribution and service fees specified in Paragraphs 1A and 1B hereof
and the Contract which Mitchell Hutchins has received or accrued through the
termination date are the sole responsibility and liability of Mitchell
Hutchins, and are not obligations of the Series.
10. While this Plan is in effect, the selection and nomination of the
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the
Fund.
11. As used in this Plan, the terms "majority of the outstanding
voting securities" and "interested person" shall have the same meaning as
those terms have in the 1940 Act.
12. The Fund shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant
to Paragraph 6 hereof for a period of not less than six years from the date of
this Plan, the first two years in an easily accessible place.
13. The Board members of the Fund and the shareholders of each Series
shall not be liable for any obligations of the Fund or any Series under this
Plan, and Mitchell Hutchins or any other person, in asserting any rights or
claims under this Plan, shall look only to the assets and property of the Fund
or such Series in settlement of such right or claim, and not to such Board
members or shareholders.
IN WITNESS WHEREOF, the Fund has executed this Amended Plan of
Distribution on the day and year set forth below in New York, New York.
3
<PAGE>
Date: September 10, 1998
ATTEST: PAINEWEBBER INVESTMENT TRUST
/s/ Cristina Paradiso By: /s/ Dianne E. O'Donnell
- ---------------------------------- -------------------------------
4
<PAGE>
Exhibit No. 13(c)
PAINEWEBBER INVESTMENT TRUST -- CLASS C SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, PaineWebber Investment Trust ("Fund") is registered under
the Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company, and has two distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and
have been designated as PaineWebber Global Equity Fund and PaineWebber
Tactical Allocation Fund; and
WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act with respect to the above-referenced Series and
desires to replace it with this amended Plan of Distribution ("Plan") with
respect to the Class C shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Fund's board of trustees
("Board") and have Class C shares established; and
WHEREAS, the Fund has entered into a Distribution Contract
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") pursuant to which Mitchell Hutchins has agreed to serve as
Distributor of the Class C shares of each such Series;
NOW, THEREFORE, the Fund hereby adopts this Plan with respect to the
Class C shares of each Series in accordance with Rule 12b-1 under the 1940
Act.
1. A. Each Series listed below is authorized to pay to Mitchell
Hutchins, as compensation for Mitchell Hutchins' services as Distributor of
the Series' Class C shares, distribution fees at the rates (on an annualized
basis) set forth below of the average daily net assets of the Series' Class C
shares. Such fees shall be calculated and accrued daily and paid monthly or at
such other intervals as the Board shall determine:
PaineWebber Global Equity Fund 0.75%
PaineWebber Tactical Allocation Fund 0.75%
B. Any Series hereafter established is authorized to pay to
Mitchell Hutchins, as compensation for Mitchell Hutchins' services as
Distributor of the Series Class C shares, a distribution fee in the amount to
be agreed upon in a written distribution fee addendum to this Plan
("Distribution Fee Addendum") executed by the Fund on behalf of such Series.
All such Distribution Fee Addenda shall provide that they are subject to all
terms and conditions of this Plan.
C. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series'
Class C shares, a service fee at the rate of 0.25% on an annualized basis of
the average daily net assets of the Series Class C shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as
the Board shall determine.
<PAGE>
D. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified above, as agreed upon by
the Board and Mitchell Hutchins and as approved in the manner specified in
Paragraph 4 of this Plan.
2. As Distributor of the Class C shares of each Series, Mitchell
Hutchins may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the Class C shares of the
Series or the servicing and maintenance of shareholder accounts, including,
but not limited to, compensation to employees of Mitchell Hutchins;
compensation to and expenses, including overhead and telephone and other
communication expenses, of Mitchell Hutchins, PaineWebber Incorporated
("PaineWebber") and other selected dealers who engage in or support the
distribution of shares or who service shareholder accounts; the printing of
prospectuses, statements of additional information, and reports for other than
existing shareholders; and the preparation, printing and distribution of sales
literature and advertising materials.
3. If adopted with respect to Class C shares of a Series after any
public offering of those shares, this Plan shall not take effect with respect
to those shares unless it has first been approved by a majority of the voting
securities of the Class C shares of that Series. This provision does not apply
to adoption as an amended Plan of Distribution where the prior Plan of
Distribution either was approved by a vote of a majority of the voting
securities of the Class C shares of the applicable Series or such approval was
not required under Rule 12b-1.
4. This Plan shall not take effect with respect to the Class C shares
of any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members who approve the Plan's taking effect with respect to
such Series' Class C shares have reached the conclusion required by Rule
12b-1(e) under the 1940 Act.
5. After approval as set forth in Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
for so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class C shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"distribution activities," as defined in this Paragraph 6, to the Board in
support of the distribution fee payable hereunder and shall submit only
information regarding amounts expended for "service activities," as defined in
this Paragraph 6, to the Board in support of the service fee payable
hereunder.
2
<PAGE>
For purposes of this Plan, "distribution activities" shall mean
any activities in connection with Mitchell Hutchins' performance of its
obligations under this Plan or the Contract that are not deemed "service
activities." "Service activities" shall mean activities in connection with the
provision by Mitchell Hutchins or PaineWebber of personal, continuing services
to investors in the Class C shares of the Series; provided, however, that if
the National Association of Securities Dealers, Inc. ("NASD") adopts a
definition of "service fee" for purposes of Section 2830(b)(9) of the NASD
Conduct Rules that differs from the definition of "service activities"
hereunder, or if the NASD adopts a related definition intended to define the
same concept, the definition of "service activities" in this Paragraph shall
be automatically amended, without further action of the parties, to conform to
such NASD definition. Overhead and other expenses of Mitchell Hutchins and
PaineWebber related to their "distribution activities" or "service
activities," including telephone and other communications expenses, may be
included in the information regarding amounts expended for such activities.
7. This Plan may be terminated with respect to the Class C shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, or by vote of a majority of the outstanding voting
securities of the Class B shares of that Series.
8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in Paragraph 1A or Paragraph 1B hereof or the
amount of service fees provided for in Paragraph 1C hereof unless such
amendment is approved by a majority of the outstanding voting securities of
the Class C shares of the affected Series and no material amendment to the
Plan shall be made unless approved in the manner provided for initial approval
in Paragraph 4 hereof.
9. The amount of the distribution and service fees payable by the
Series to Mitchell Hutchins under Paragraphs 1A, 1B and 1C hereof and the
Contract is not related directly to expenses incurred by Mitchell Hutchins on
behalf of such Series in serving as Distributor of the Class C shares, and
Paragraph 2 hereof and the Contract do not obligate the Series to reimburse
Mitchell Hutchins for such expenses. The distribution and service fees set
forth in Paragraphs 1A, 1B and 1C hereof will be paid by the Series to
Mitchell Hutchins until either the Plan or the Contract is terminated or not
renewed. If either the Plan or the Contract is terminated or not renewed with
respect to the Class C shares of any Series, any distribution expenses
incurred by Mitchell Hutchins on behalf of the Class C shares of the Series in
excess of payments of the distribution and service fees specified in
Paragraphs 1A, 1B and 1B hereof and the Contract which Mitchell Hutchins has
received or accrued through the termination date are the sole responsibility
and liability of Mitchell Hutchins, and are not obligations of the Series.
10. While this Plan is in effect, the selection and nomination of the
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the
Fund.
11. As used in this Plan, the terms "majority of the outstanding
voting securities" and "interested person" shall have the same meaning as
those terms have in the 1940 Act.
3
<PAGE>
12. The Fund shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant
to Paragraph 6 hereof for a period of not less than six years from the date of
this Plan, the first two years in an easily accessible place.
13. The Board members of the Fund and the shareholders of each Series
shall not be liable for any obligations of the Fund or any Series under this
Plan, and Mitchell Hutchins or any other person, in asserting any rights or
claims under this Plan, shall look only to the assets and property of the Fund
or such Series in settlement of such right or claim, and not to such Board
members or shareholders.
IN WITNESS WHEREOF, the Fund has executed this Amended Plan of
Distribution on the day and year set forth below in New York, New York.
Date: September 10, 1998
ATTEST: PAINEWEBBER INVESTMENT TRUST
/s/ Cristina Paradiso By: /s/ Dianne E. O'Donnell
- --------------------------------- ------------------------------------
4
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> TACTICAL ALLOCATION FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 323103
<INVESTMENTS-AT-VALUE> 340305
<RECEIVABLES> 3958
<ASSETS-OTHER> 152
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 344415
<PAYABLE-FOR-SECURITIES> 1126
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3044
<TOTAL-LIABILITIES> 4170
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 316302
<SHARES-COMMON-STOCK> 14450
<SHARES-COMMON-PRIOR> 7682
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6740
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17203
<NET-ASSETS> 340245
<DIVIDEND-INCOME> 4707
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (2640)
<NET-INVESTMENT-INCOME> 2067
<REALIZED-GAINS-CURRENT> 6340
<APPREC-INCREASE-CURRENT> (9819)
<NET-CHANGE-FROM-OPS> (1411)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1100)
<DISTRIBUTIONS-OF-GAINS> (1617)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8395
<NUMBER-OF-SHARES-REDEEMED> (2197)
<SHARES-REINVESTED> 25
<NET-CHANGE-IN-ASSETS> 161017
<ACCUMULATED-NII-PRIOR> 272
<ACCUMULATED-GAINS-PRIOR> 1421
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1285
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2640
<AVERAGE-NET-ASSETS> 85527
<PER-SHARE-NAV-BEGIN> 16.15
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> 6.12
<PER-SHARE-DIVIDEND> (0.14)
<PER-SHARE-DISTRIBUTIONS> (0.08)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.23
<EXPENSE-RATIO> 0.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> TACTICAL ALLOCATION FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 458729
<INVESTMENTS-AT-VALUE> 483153
<RECEIVABLES> 5620
<ASSETS-OTHER> 215
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 488988
<PAYABLE-FOR-SECURITIES> 1598
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4322
<TOTAL-LIABILITIES> 5920
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 449074
<SHARES-COMMON-STOCK> 20713
<SHARES-COMMON-PRIOR> 10860
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9570
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24424
<NET-ASSETS> 483068
<DIVIDEND-INCOME> 6683
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (6615)
<NET-INVESTMENT-INCOME> 68
<REALIZED-GAINS-CURRENT> 9002
<APPREC-INCREASE-CURRENT> (13940)
<NET-CHANGE-FROM-OPS> (4871)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (150)
<DISTRIBUTIONS-OF-GAINS> (2281)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10195
<NUMBER-OF-SHARES-REDEEMED> (1127)
<SHARES-REINVESTED> 25
<NET-CHANGE-IN-ASSETS> 230032
<ACCUMULATED-NII-PRIOR> 383
<ACCUMULATED-GAINS-PRIOR> 1995
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1825
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6615
<AVERAGE-NET-ASSETS> 107196
<PER-SHARE-NAV-BEGIN> 16.13
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 6.09
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> (0.08)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.08
<EXPENSE-RATIO> 1.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> TACTICAL ALLOCATION FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 377727
<INVESTMENTS-AT-VALUE> 397838
<RECEIVABLES> 4628
<ASSETS-OTHER> 177
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 402643
<PAYABLE-FOR-SECURITIES> 1316
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3559
<TOTAL-LIABILITIES> 4875
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 369776
<SHARES-COMMON-STOCK> 16964
<SHARES-COMMON-PRIOR> 10507
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7880
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20111
<NET-ASSETS> 397768
<DIVIDEND-INCOME> 5503
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (5677)
<NET-INVESTMENT-INCOME> (174)
<REALIZED-GAINS-CURRENT> 7412
<APPREC-INCREASE-CURRENT> (11479)
<NET-CHANGE-FROM-OPS> (4240)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1956)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7474
<NUMBER-OF-SHARES-REDEEMED> (1560)
<SHARES-REINVESTED> 24
<NET-CHANGE-IN-ASSETS> 189459
<ACCUMULATED-NII-PRIOR> 372
<ACCUMULATED-GAINS-PRIOR> 1939
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1502
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5677
<AVERAGE-NET-ASSETS> 140369
<PER-SHARE-NAV-BEGIN> 16.12
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 6.11
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.08)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.18
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> TACTICAL ALLOCATION FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 71100
<INVESTMENTS-AT-VALUE> 74886
<RECEIVABLES> 871
<ASSETS-OTHER> 33
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 75790
<PAYABLE-FOR-SECURITIES> 248
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 670
<TOTAL-LIABILITIES> 918
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69604
<SHARES-COMMON-STOCK> 3162
<SHARES-COMMON-PRIOR> 1633
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1483
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3786
<NET-ASSETS> 74872
<DIVIDEND-INCOME> 1036
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (429)
<NET-INVESTMENT-INCOME> 607
<REALIZED-GAINS-CURRENT> 1395
<APPREC-INCREASE-CURRENT> (2161)
<NET-CHANGE-FROM-OPS> (159)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (334)
<DISTRIBUTIONS-OF-GAINS> (357)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1018
<NUMBER-OF-SHARES-REDEEMED> (185)
<SHARES-REINVESTED> 10
<NET-CHANGE-IN-ASSETS> 35339
<ACCUMULATED-NII-PRIOR> 58
<ACCUMULATED-GAINS-PRIOR> 303
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 283
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 429
<AVERAGE-NET-ASSETS> 18137
<PER-SHARE-NAV-BEGIN> 16.20
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 6.13
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (0.08)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.33
<EXPENSE-RATIO> 0.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
