As filed with the Securities and Exchange Commission on December 27, 2000
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. 32 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 32 [ X ]
(Check appropriate box or boxes.)
PAINEWEBBER INVESTMENT TRUST
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
AMY R. DOBERMAN, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019-6028
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Second 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 December 31, 2000 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: Class A, B, C and Y Shares of Beneficial
Interest of PaineWebber Tactical Allocation Fund.
<PAGE>
PaineWebber
Tactical Allocation Fund
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PROSPECTUS
December 31, 2000
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This prospectus offers Class A, Class B, Class C and Class Y shares in a
PaineWebber asset allocation fund. Each class has different sales charges and
ongoing expenses. You can choose the class that is best for you based on how
much you plan to invest and how long you plan to hold your fund shares. Class Y
shares are available only to certain types of investors.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
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PaineWebber Tactical Allocation Fund
Contents
THE FUND
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What every investor 3 Investment Objective, Strategies and Risks
should know about
the fund 4 Performance
5 Expenses and Fee Tables
6 More About Risks and Investment Strategies
YOUR INVESTMENT
--------------------------------------------------------------------------------
Information for 7 Managings Your Fund Account
managing your fund -- Flexible Pricing
account -- Buying Shares
-- Selling Shares
-- Exchanging Shares
-- Pricing and Valuation
ADDITIONAL INFORMATION
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Additional important 12 Management
information about
the fund 13 Dividends and Taxes
14 Financial Highlights
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Where to learn more Back cover
about PaineWebber
mutual funds
-----------------------------
The fund is not a complete or
balanced investment program.
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Prospectus Page 2
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PaineWebber Tactical Allocation Fund
Tactical Allocation Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
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FUND OBJECTIVE
Total return, consisting of long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES
The fund allocates its assets between
o a stock portion that is designed to track the performance of the Standard &
Poor's 500 Composite Stock Price Index and
o a fixed income portion that consists of either five-year U.S. Treasury
notes or U.S. Treasury bills with remaining maturities of 30 days.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
reallocates the fund's assets in accordance with the recommendations of its own
Tactical Allocation Model on the first business day of each month.
The Tactical Allocation Model attempts to track the performance of the S&P 500
Index in periods of strong market performance. The Model attempts to take a more
defensive posture by reallocating assets to bonds or cash when the Model signals
a potential bear market, prolonged downturn in stock prices or significant loss
in value. The Model can recommend stock allocations of 100%, 75%, 50%, 25% or
0%.
If the Tactical Allocation Model recommends a stock allocation of less than
100%, the Model also recommends a fixed income allocation for the remainder of
the fund's assets. The Model uses a bond risk premium determination to decide
whether to recommend five-year U.S. Treasury notes or 30-day U.S. Treasury
bills.
The fund may (but is not required to) use options and futures and other
derivatives to adjust its exposure to different asset classes or to maintain
exposure to stocks or bonds while maintaining a cash balance for fund management
purposes. Mitchell Hutchins also may use these instruments to reduce the risk of
adverse price movements while investing in cash received when investors buy fund
shares, to facilitate trading and to reduce transaction costs.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The principal risks presented by the fund are:
o Asset Allocation Risk -- The Tactical Allocation Model may not correctly
predict the times to shift the fund's assets from one type of investment to
another.
o Equity Risk -- Stocks and other equity securities generally fluctuate in
value more than bonds. The fund could lose all of its investment in a
company's stock.
o Interest Rate Risk -- The value of the fund's bond investments generally
will fall when interest rates rise.
o Index Tracking Risk -- The fund expects a close correlation between the
performance of the portion of its assets allocated to stocks and that of
the S&P 500 Index in both rising and falling markets. The performance of
the fund's stock investments, however, generally will not be identical to
that of the Index because of the fees and expenses borne by the fund and
investor purchases and sales of fund shares, which can occur daily.
o Foreign Investing Risk -- The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must
be denominated U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
o Derivatives Risk -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about risks of an investment in the fund is provided below in
"More About Risks and Investment Strategies."
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Prospectus Page 3
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PaineWebber Tactical Allocation Fund
PERFORMANCE
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RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class C shares because they have a longer performance history than
any other class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. The table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index. The index is unmanaged and, therefore, does not reflect any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total Return on Class C Shares (1993 is the fund's first full calendar year of
operations)
[REPRESENTATION OF BAR CHART]
CALENDAR YEAR TOTAL RETURN
1993 7.64%
1994 - 1.28%
1995 34.09%
1996 20.66%
1997 31.01%
1998 26.78%
1999 17.62%
Total return January 1 to September 30, 2000: 0.91%
Best quarter during years shown 4th quarter, 1998: 20.82%
Worst quarter during years shown 3rd quarter, 1998: (10.33)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS A CLASS B CLASS C CLASS Y S&P 500
(Inception Date) (5/10/93) (1/30/96) (7/22/92) (5/10/93) Index
---------- ------ ------ ------ ------ ------
One Year............. 13.16% 12.59% 16.62% 18.81% 21.03%
Five Years........... 25.68% N/A 25.88% 27.17% 28.54%
Life of Class........ 19.76% 23.46% 18.69% 20.93% *
------------------
* Average annual total returns for the S&P 500 Index for the life of each
class shown were as follows: Class A -- 22.37%, Class B -- 25.94%, Class C
-- 20.85% and Class Y -- 22.37%.
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Prospectus Page 4
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PaineWebber Tactical Allocation Fund
EXPENSES AND FEE TABLES
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FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price)........................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price)........................................... None 5% 1% None
Exchange Fee........................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
Class A Class B Class C Class Y
------- ------- ------- -------
Management Fees........................................................ 0.45% 0.45% 0.45% 0.45%
Distribution and/or Service (12b-1) Fees .............................. 0.25 1.00 1.00 None
Other Expenses......................................................... 0.14 0.15 0.15 0.11
---- ---- ---- ----
Total Annual Fund Operating Expenses................................... 0.84% 1.60% 1.60% 0.56%
==== ==== ==== ====
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then sell all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class A................................................. $532 $706 $895 $1441
Class B (assuming sale of all shares at end of period).. 663 805 1071 1509
Class B (assuming no sale of shares..................... 163 505 871 1509
Class C (assuming sale of all shares at end of period).. 263 505 871 1900
Class C (assuming no sale of shares).................... 163 505 871 1900
Class Y ................................................ 57 179 313 701
</TABLE>
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Prospectus Page 5
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PaineWebber Tactical Allocation Fund
MORE ABOUT RISKS AND INVESTMENT
STRATEGIES
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PRINCIPAL RISKS
The main risks of investing in the fund are described below. Other risks of
investing in the fund, along with further detail about some of the risks
described below, are discussed in the fund's Statement of Additional Information
("SAI"). Information on how you can obtain the SAI is on the back cover of this
prospectus.
ASSET ALLOCATION RISK. The Mitchell Hutchins Tactical Allocation Model may not
correctly predict the times to shift the fund's assets from one type of
investment to another.
EQUITY RISK. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. The
fund may lose a substantial part, or even all, of its investment in a company's
stock.
INTEREST RATE RISK. The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the risk
that interest rates will rise, so that the value of the fund's investments in
bonds will fall. Because interest rate risk is the primary risk presented by
U.S. government and other very high quality bonds, changes in interest rates may
actually have a larger effect on the value of those bonds than on lower quality
bonds.
INDEX TRACKING RISK. The fund expects a close correlation between the
performance of the portion of its assets allocated to stocks and that of the S&P
500 Index in both rising and falling markets. While the fund attempts to
replicate, before deduction of fees and operating expenses, the investment
results of the Index, the fund's investment results generally will not be
identical to those of the Index. Deviations from the performance of the Index
may result from shareholder purchases and sales of shares that can occur daily.
In addition, the fund must pay fees and expenses that are not borne by the
Index.
FOREIGN INVESTING RISK. The S&P 500 Index includes some U.S. dollar denominated
securities of foreign issuers. Foreign investing involves risks relating to
political, social and economic developments abroad to a greater extent than
investing in the securities of U.S. issuers. In addition, there are differences
between U.S. and foreign regulatory requirements and market practices.
DERIVATIVES RISK. The value of "derivatives" - so-called because their value
"derives" from the value of an underlying asset, reference rate or index - may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for the fund to lose more than the amount it invested in the
derivative. Options and futures contracts are examples of derivatives. The
fund's use of derivatives may not succeed for various reasons, including
unexpected changes in the value of the derivatives or the assets underlying
them. Also, if the fund uses derivatives to adjust or "hedge" the overall risk
of its portfolio, the hedge may not succeed if changes in the value of the
derivatives are not matched by opposite changes in the value of the assets being
hedged.
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself from adverse
market conditions, the fund may take a temporary defensive position that is
different from its normal investment strategy. This means that the fund may
temporarily invest a larger-than-normal part, or even all, of its assets in cash
or money market instruments. Since these investments provide relatively low
income, a defensive or transitional position may not be consistent with
achieving the fund's investment objective. The fund may invest all or any
portion of its total assets in U.S. Treasury bills when recommended by the
Mitchell Hutchins Tactical Allocation Model. The fund normally maintains a
limited amount of cash for liquidity purposes.
PORTFOLIO TURNOVER. The fund may engage in frequent trading to achieve its
investment objective. Frequent trading can result in portfolio turnover in
excess of 100% or more (high portfolio turnover).
Frequent trading may increase the portion of the fund's capital gains that are
realized for tax purposes in any given year. This may increase the fund's
taxable distributions in that year. Frequent trading also may increase the
portion of the fund's realized capital gains that are considered "short-term"
for tax purposes. Shareholders will pay higher taxes on distributions that
represent short-term capital gains than they would pay on distributions that
represent long-
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Prospectus Page 6
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PaineWebber Tactical Allocation Fund
term capital gains. Frequent trading also may result in higher fund expenses due
to transaction costs.
The fund does not restrict the frequency of trading to limit expenses or the tax
effect that the fund's distributions may have on shareholders.
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MANAGING YOUR FUND ACCOUNT
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FLEXIBLE PRICING
The fund offers four classes of shares - Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose the
class that is best for you, based on how much you plan to invest and how long
you plan to hold your fund investment. Class Y shares are only available to
certain types of investors.
The fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service fees for providing services to
shareholders and (for Class B and Class C shares) distribution fees for the sale
of its shares and services provided to shareholders. Because the 12b-1
distribution fees for Class B and Class C shares are paid out of the fund's
assets on an ongoing basis, over time they will increase the cost of your
investment and may cost you more than if you paid a front-end sales charge.
CLASS A SHARES
Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.
The Class A sales charges for the fund are described in the following table.
CLASS A SALES CHARGES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: REALLOWANCE TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF OFFERING PRICE
---------------- ---------- --------------- -----------------------
<S> <C> <C> <C>
Less than $50,000 ........................ 4.50% 4.71% 4.25%
$50,000 to $99,999........................ 4.00 4.17 3.75
$100,000 to $249,999...................... 3.50 3.63 3.25
$250,000 to $499,999...................... 2.50 2.56 2.25
$500,000 to $999,999...................... 1.75 1.78 1.50
$1,000,000 and over (1)................... None None 1.00(2)
</TABLE>
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(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of dividends are not subject
to this 1% charge. Withdrawals in the first year after purchase of up to
12% of the value of the fund account under the fund's Systematic Withdrawal
Plan are not subject to this charge.
(2) Mitchell Hutchins pays 1% to the dealer.
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Prospectus Page 7
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PaineWebber Tactical Allocation Fund
SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber mutual fund. You can combine the
value of Class A shares that you own in other PaineWebber funds and the purchase
amount of the Class A shares of the PaineWebber fund that you are buying.
You may also qualify for a lower sales charge if you combine your purchases with
those of:
o your spouse, parents or children under age 21;
o your Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o a company that you control;
o a trust that you created;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by you or by a group of investors for your children; or
o accounts with the same adviser.
You may qualify for a complete waiver of the sales charge if you:
o Are an employee of PaineWebber or its affiliates or the spouse, parent
or child under age 21 of a PaineWebber employee;
o Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that
was registered as a broker-dealer with the SEC, and
-- you were the Financial Advisor's client at the competing brokerage
firm;
-- within 90 days of buying shares in the fund, you sell shares of one or
more mutual funds that were principally underwritten by the competing
brokerage firm or its affiliates, and you either paid a sales charge
to buy those shares, pay a contingent deferred sales charge when
selling them or held those shares until the contingent deferred sales
charge was waived; and
-- you purchase an amount that does not exceed the total amount of money
you received from the sale of the other mutual fund;
o Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;
o Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets; or
o Are a participant in the PaineWebber Members Only(SM) Program. For investments
made pursuant to this waiver, Mitchell Hutchins may make payments out of its
own resources to PaineWebber and to participating membership
organizations in a total amount not to exceed 1% of the amount invested; or
o Acquire fund shares through a PaineWebber InsightOne(SM) Program brokerage
account.
CLASS B SHARES
Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:
PERCENTAGE BY WHICH THE
IF YOU SELL SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
-------------- -----------------------
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on withdrawals in any year of up to 12% of the
value of your Class B shares under the Systematic Withdrawal Plan.
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Prospectus Page 8
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PaineWebber Tactical Allocation Fund
To minimize your deferred sales charge, we will assume that you are selling:
o First, Class B shares representing reinvested dividends, and
o Second, Class B shares that you have owned the longest.
SALES CHARGE WAIVERS. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:
o You participate in the Systematic Withdrawal Plan;
o You are older than 59 1/2 and are selling shares to take a distribution from
certain types of retirement plans;
o You receive a tax-free return of an excess IRA contribution;
o You receive a tax-qualified retirement plan distribution following retirement;
o The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint
tenant with the right of survivorship;
o The shares are held in trust and the death of the trustee requires
liquidation of the trust; or
o The shares are sold in connection with a transfer from an existing
PaineWebber mutual funds SIMPLE IRA plan to another fund group's SIMPLE
IRA plan.
CLASS C SHARES
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 1.00% by the lesser of the net asset value of the Class C
shares at the time of purchase or the net asset value at the time of sale. We
will not impose the deferred sales charge on Class C shares representing
reinvestment of dividends or on withdrawals in the first year after purchase, of
up to 12% of the value of your Class C shares under the Systematic Withdrawal
Plan.
SALES CHARGE WAIVERS. You may be eligible to sell your Class C shares without
paying a contingent deferred sales charge if:
o You are a 401(k) or 403(b) qualified employee benefit plan with fewer than 100
eligible employees or less than $1 million in assets; or
o The shares are sold in connection with a transfer from an existing PaineWebber
mutual funds SIMPLE IRA plan to another fund group's SIMPLE IRA plan.
NOTE ON SALES CHARGE WAIVERS FOR CLASS A, CLASS B AND CLASS C SHARES
If you think you qualify for any of these sales charge waivers, you will need to
provide documentation to PaineWebber or the fund. For more information, you
should contact your PaineWebber Financial Advisor or correspondent firm or call
1-800-647-1568. If you want information on the fund's Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
o Buy shares through PaineWebber's PACE(SM) Multi Advisor Program;
o Buy $10 million or more of PaineWebber fund shares at any one time;
o Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or
o Are a corporation, bank, trust company, insurance company, pension fund,
employee benefit plan, professional firm, trust, estate or
educational, religious or charitable organization with 5,000 or more
employees or with over $50 million in investable assets.
The trustee of PaineWebber's 401(k) Plus Plan for its employees is also eligible
to purchase Class Y shares.
Class Y shares do not pay ongoing distribution or service fees or sales charges.
The ongoing expenses for Class Y shares are the lowest for all the classes.
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PaineWebber Tactical Allocation Fund
BUYING SHARES
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the fund through the fund's transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must complete and sign the
application and mail it, along with a check, to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you wish to invest in other PaineWebber Funds, you can do so by:
o Contacting your Financial Advisor (if you have an account at PaineWebber or
at a PaineWebber correspondent firm);
o Mailing an application with a check; or
o Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional investments
in the same fund.
The fund and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.
MINIMUM INVESTMENTS
-------------------
To open an account............................. $1,000
To add to an account........................... $ 100
The fund may waive or reduce these amounts for:
o Employees of PaineWebber or its affiliates; or
o Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the fund's automatic investment plans.
FREQUENT TRADING. The interests of the fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as "market timing." When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on the fund's ability to manage its
investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. The fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.
SELLING SHARES
You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent firm, you
can sell shares by contacting your Financial Advisor.
If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:
o Your name and address;
o The fund's name;
o The fund account number;
o The dollar amount or number of shares you want to sell; and
o A guarantee of each registered owner's signature. A signature guarantee may be
obtained from a financial institution, broker, dealer or clearing agency that
is a participant in one of the medallion programs recognized by the Securities
Transfer Agents Association. These are: Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York
Stock Exchange Medallion Signature Program (MSP). The fund will not accept
signature guarantees that are not a part of these programs.
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PaineWebber Tactical Allocation Fund
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
It costs the fund money to maintain shareholder accounts. Therefore, the fund
reserves the right to repurchase all shares in any account that has a net asset
value of less than $500. If the fund elects to do this with your account, it
will notify you that you can increase the amount invested to $500 or more within
60 days. The fund will not repurchase shares in accounts that fall below $500
solely because of a decrease in the fund's net asset value.
EXCHANGING SHARES
You may exchange Class A, Class B or Class C shares of the fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.
You will not pay either a front-end sales charge or a deferred sales charge when
you exchange shares. However, you may have to pay a deferred sales charge if you
later sell the shares you acquired in the exchange. The fund will use the date
that you purchased the shares in the first fund to determine whether you must
pay a deferred sales charge when you sell the shares in the acquired fund.
Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.
You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.
PAINEWEBBER AND CORRESPONDENT FIRM CLIENTS. If you bought your shares through
PaineWebber or a correspondent firm, you may exchange your shares by placing an
order with your Financial Advisor.
OTHER INVESTORS. If you are not a PaineWebber or correspondent firm client, you
may exchange your shares by writing to the fund's transfer agent. You must
include:
o Your name and address;
o The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;
o Your account number;
o How much you are exchanging (by dollar amount or by number of shares to be
sold); and
o A guarantee of your signature. (See "Selling Shares" for information on
obtaining a signature guarantee.)
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
The fund may modify or terminate the exchange privilege at any time.
PRICING AND VALUATION
The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. The fund calculates net asset value on days that the New
York Stock Exchange is open. The fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the fund does not price its
shares, on most national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the fund's net asset value
per share will be calculated as of the time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the fund.You
should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.
The fund calculates its net asset value based on the current market value for
its portfolio securities. The fund normally obtains market values for its
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security, that
security is valued at a fair value determined by or under the
-------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
-------------------------------------------------------------------------------
PaineWebber Tactical Allocation Fund
direction of the fund's board. The fund normally uses the amortized cost method
to value bonds that will mature in 60 days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.
-------------------------------------------------------------------------------
MANAGEMENT
-------------------------------------------------------------------------------
INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the fund. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114, and is a wholly owned asset management subsidiary
of PaineWebber Incorporated, which is a wholly owned indirect subsidiary of UBS
AG, an internationally diversified organization with headquarters in Zurich,
Switzerland and operations in many areas of the financial services industry. On
November 30, 2000, Mitchell Hutchins was adviser or sub-adviser of 31 investment
companies with 75 separate portfolios and aggregate assets of approximately
$59.5 billion.
PORTFOLIO MANAGER
T. Kirkham Barneby is responsible for the asset allocation decisions for the
Fund. He has been responsible for the day-to-day management of the Fund since
February 1995. Mr. Barneby is a managing director and chief investment officer
of quantitative investments of Mitchell Hutchins. Mr. Barneby rejoined Mitchell
Hutchins in 1994, after being with Vantage Global Management for one year.
During the eight years that Mr. Barneby was previously with Mitchell Hutchins,
he was a senior vice president responsible for quantitative management and asset
allocation models.
ADVISORY FEES
The fund paid fees to Mitchell Hutchins for advisory and administrative services
during the last fiscal year at the annual rate of 0.45% of average daily net
assets.
OTHER INFORMATION
The fund has received an exemptive order from the SEC that permits its board to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval. The fund's shareholders must approve this policy
before its board may implement it. As of the date of this prospectus, the
shareholders of the fund have not been asked to do so.
-------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
-------------------------------------------------------------------------------
PaineWebber Tactical Allocation Fund
-------------------------------------------------------------------------------
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS
The Fund normally declares and pays dividends and distributes any gains
annually.
Classes with higher expenses are expected to have lower dividends. For example,
Class B and Class C shares are expected to have the lowest dividends of any
class of the fund's shares, while Class Y shares are expected to have the
highest.
You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its correspondent firms if you prefer to receive dividends in cash.
TAXES
The dividends that you receive from the fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) plan, dividends on your shares generally will not be subject to
tax.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange the fund's shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the fund's
shares, and any gain will be subject to federal income tax.
The fund expects that its dividends will include capital gain distributions. The
fund may also distribute dividends that are taxed as ordinary income. A
distribution of capital gains will be taxed at a lower rate than ordinary income
if the fund held the assets that generated the gains for more than 12 months.
The fund will tell you annually how you should treat its dividends for tax
purposes.
-------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
-------------------------------------------------------------------------------
PaineWebber Tactical Allocation Fund
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years. Shorter periods are shown for
classes of fund shares that have existed for less than 5 years. Certain
information reflects financial results for a single fund share. In the tables,
"total investment return" represents the rate that an investor would have earned
(or lost) on an investment in the fund (assuming reinvestment of all dividends).
This information in the financial highlights has been audited by Ernst & Young
LLP, independent auditors, whose report, along with the fund's financial
statements, is included in the fund's Annual Reports to Shareholders. The Annual
Report may be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....... $ 31.79 $ 23.55 $ 22.23 $ 16.15 $ 14.86
------------- ------------- ------------- ------------ ------------
Net investment income
(loss) ..................................... 0.60@ 0.15 0.15 0.18@ 0.18
Net realized and unrealized gains
from investments ........................... 3.92@ 8.84 1.47 6.12@ 2.31
------------ ------------- ------------- ------------ ------------
Net increase from investment operations 4.52 8.99 1.62 6.30 2.49
------------ ------------- ------------- ------------ ------------
Dividends from net investment income ....... (0.02) (0.17) (0.12) (0.14) (0.14)
Distributions from net realized gains
from investment transactions ............... (0.70) (0.58) (0.18) (0.08) (1.06)
------------ ------------- ------------- ------------ -----------
Total dividends and distributions
to shareholders ............................ (0.72) (0.75) (0.30) (0.22) (1.20)
------------ ------------- ------------- ------------ -----------
Net asset value, end of period ............. $ 35.59 $ 31.79 $ 23.55 $ 22.23 $ 16.15
============= ============= ============= ============ ============
Total investment return(1) ................. 14.37% 38.65% 7.31% 39.26% 17.35%
============= ============= ============= ============ ============
Ratios/supplemental data:
Net assets, end of period (000's) .......... $ 866,956 $ 702,580 $ 340,245 $ 170,759 $ 23,551
Expenses to average net assets,
net of waivers from adviser(2) ............. 0.84% 0.84% 0.95% 0.99% 1.17%
Net investment income (loss) to average net
assets, net of waivers from adviser(2) ..... 1.77% 0.56% 0.74% 0.88% 1.12%
Portfolio turnover rate .................... 122% 6% 33% 6% 6%
CLASS B
------------------------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED JANUARY 30,
AUGUST 31, 1996+ TO
---------------------------------------------------------------- AUGUST 31,
2000 1999 1998 1997 1996
--------------- ------------- ------------- ------------- --------------
$ 31.41 $ 23.32 $ 22.08 $ 16.13 $ 15.54
--------------- ------------- ------------- ------------- --------------
0.33@ (0.04) 0.00 0.03@ 0.02
3.88@ 8.73 1.43 6.09@ 0.57
--------------- ------------- ------------- ------------ -------------
4.21 8.69 1.43 6.12 0.59
--------------- ------------- ------------- ------------ -------------
-- (0.02) (0.01) (0.09) --
(0.70) (0.58) (0.18) (0.08) --
--------------- ------------- ------------- ------------- --------------
(0.70) (0.60) (0.19) (0.17) 0.00
--------------- ------------- ------------- ------------- -------------
$ 34.92 $ 31.41 $ 23.32 $ 22.08 $ 16.13
=============== ============= ============= ============ =============
13.54% 37.61% 6.49% 38.14% 3.80%
=============== ============= ============= ============ =============
$ 1,091,107 $ 964,933 $ 483,068 $ 239,836 $ 28,495
1.60% 1.59% 1.71% 1.74% 1.84%*
1.00% (0.20)% (0.02)% 0.13% 0.47%*
122% 6% 33% 6% 6%
</TABLE>
------------------
+ Commencement of issuance of shares.
* Annualized.
@ Calculated using the average shares outstanding for the year.
(1) Total investment return is calculated assuming a $10,000 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 any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for periods of less
than one year has not been annualized.
(2) During the years ended August 31, 2000 and August 31,1999, Mitchell
Hutchins waived a portion of its advisory and administration fees. The
ratios excluding the waiver would be the same since the fee waiver
represented less than 0.005%.
# Actual amount is less than $0.005.
--------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
-------------------------------------------------------------------------------
PaineWebber Tactical Allocation Fund
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
$ 31.60 $ 23.45 $ 22.18 $ 16.12 $ 14.87
------------- ------------- ------------ ------------ -----------
0.34@ (0.06) (0.01) 0.03@ 0.06
3.90@ 8.79 1.45 6.11@ 2.32
------------ ------------- ------------ ------------ -----------
4.24 8.73 1.44 6.14 2.38
------------ ------------- ------------ ------------ -----------
-- (0.00)# -- -- (0.07)
(0.70) (0.58) (0.17) (0.08) (1.06)
------------ ------------- ------------ ------------ -----------
(0.70) (0.58) (0.17) (0.08) (1.13)
------------ ------------- ------------ ------------ -----------
$ 35.14 $ 31.60 $ 23.45 $ 22.18 $ 16.12
============ ============= ============ ============ ===========
13.55% 37.58% 6.49% 38.20% 16.52%
============ ============= ============ ============ ===========
$ 868,545 $ 738,781 $ 397,767 $ 233,044 $ 73,630
1.60% 1.60% 1.70% 1.75% 1.95%
1.01% (0.20)% (0.01)% 0.14% 1.35%
122% 6 % 33 % 6% 6%
CLASS Y
---------------------------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- -------------- ------------- ------------- -----------
<C> <C> <C> <C> <C>
$ 31.99 $ 23.68 $ 22.33 $ 16.20 $ 14.88
------------- ------------- ------------ ------------ -----------
0.71@ 0.22 0.21 0.23@ 0.30
3.95@ 8.91 1.49 6.13@ 2.24
------------ ------------- ------------ ------------ -----------
4.66 9.13 1.70 6.36 2.54
------------ ------------- ------------ ------------ -----------
(0.03) (0.24) (0.17) (0.15) (0.16)
(0.70) (0.58) (0.18) (0.08) (1.06)
------------ ------------- ------------ ------------ -----------
(0.73) (0.82) (0.35) (0.23) (1.22)
------------ ------------- ------------ ------------ -----------
$ 35.92 $ 31.99 $ 23.68 $ 22.33 $ 16.20
============ ============= ============ ============ ===========
14.72% 39.03% 7.62% 39.55% 17.70%
============ ============= ============ ============ ===========
$ 199,095 $ 129,893 $ 74,872 $ 36,467 $ 12,803
0.56% 0.58% 0.67% 0.74% 0.95%
2.09% 0.82% 1.03% 1.16% 1.38%
122% 6% 33% 6% 6%
</TABLE>
--------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
--------------------------------------------------------------------------------
PaineWebber Tactical Allocation Fund
TICKER SYMBOL: Tactical Allocation Fund Class: A: PWTAX
B: PWTBX
C: KPAAX
Y: None
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the fund's investments is available in the fund's
annual and semi-annual reports to shareholders. In the fund's annual reports,
you will find a discussion of the market conditions and investment strategies
that significantly affected the fund's performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the fund and is incorporated by
reference into this prospectus.
You may discuss your questions about the fund by contacting your Financial
Advisor. You may obtain free copies of the fund's annual and semi-annual reports
and its SAI by contacting the fund directly at 1-800-647-1568.
You may review and copy information about the fund, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You may obtain information about the operations of the SEC's Public
Reference Room by calling the SEC at 1-202-942-8090. You may get copies of
reports and other information about the fund:
o For a fee, by electronic request at [email protected] or by writing the
SEC's Public Reference Section, Washington, D.C. 20549-0102; or
o Free, from the EDGARDatabase on the SEC's Internet website at:
http://www.sec.gov
Paine Webber Investment Trust
- Paine Webber Tactical Allocation Fund Investment
Company Act File No. 811-6292
(C)2000 PaineWebber Incorporated. All rights reserved.
-------------------------------------------------------------------------------
<PAGE>
PAINEWEBBER TACTICAL ALLOCATION FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Tactical Allocation Fund is a diversified series of
PaineWebber Investment Trust, ("Trust"), a professionally, managed, open-end
management investment company organized as a Massachusetts business trust.
The investment adviser, administrator and distributor for the fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the fund, Mitchell Hutchins has appointed PaineWebber to serve
as dealer for the sale of fund shares.
Portions of the fund's Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information ("SAI"). The Annual
Report accompanies this SAI. You may obtain an additional copy of the fund's
Annual Report without charge by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction
with the fund's current Prospectus, dated December 31, 2000. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or
correspondent firm or by calling toll-free 1-800-647-1568. This SAI is dated
December 31, 2000.
TABLE OF CONTENTS
Page
----
The Fund and Its Investment Policies...................................... 2
The Fund's Investments, Related Risks and Limitations..................... 3
Strategies Using Derivative Instruments................................... 10
Organization of the Trust; Board Members and Officers; Principal Holders and
Management Ownership of Securities....................................... 17
Investment Advisory, Administration and Distribution Arrangements......... 24
Portfolio Transactions.................................................... 29
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 31
Conversion of Class B Shares.............................................. 37
Valuation of Shares....................................................... 37
Performance Information................................................... 38
Taxes..................................................................... 40
Other Information......................................................... 43
Financial Statements...................................................... 44
<PAGE>
THE FUND AND ITS INVESTMENT POLICIES
The fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of the fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.
The 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 the Tactical Allocation Model, a systematic investment
strategy that allocates its investments between an equity portion designed to
track the performance of the S&P 500 Composite Stock Price Index ("S&P 500
Index") and a fixed income portion that generally will be comprised of either
five-year U.S. Treasury notes or 30-day U.S. Treasury bills.
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.
Mitchell Hutchins allocates the fund's assets based on the Tactical Allocation
Model's quantitative assessment of the projected rates of return for each asset
class. The Model attempts to track the S&P 500 Index in periods of strongly
positive market performance but attempts to take a more defensive posture by
reallocating assets to bonds or cash when the Model signals a potential bear
market, prolonged downtown in stock prices or significant loss in value.
The basic premise of the Tactical Allocation Model is that investors
accept the risk of owning stocks, measured as volatility of return, because they
expect a return advantage. This expected return advantage of owning stocks is
called the equity risk premium ("ERP"). The Model projects the stock market's
expected ERP based on several factors, including the current price of stocks and
their expected future dividends and the yield-to-maturity of the one-year U.S.
Treasury bill. When the stock market's ERP is high, the Model signals the fund
to invest 100% in stocks. Conversely, when the ERP decreases below certain
threshold levels, the Model signals the fund to reduce its exposure to stocks.
The Model can recommend stock allocations of 100%, 75%, 50%, 25% or 0%.
If the Tactical Allocation Model recommends a stock allocation of less
than 100%, the Model also recommends a fixed income allocation for the remainder
of the fund's assets. The Model will recommend either bonds (five-year U.S.
Treasury notes) or cash (30-day U.S. Treasury bills), but not both. To make this
determination, the Model calculates the risk premium available for the notes.
This bond risk premium ("BRP") is calculated based on the yield-to-maturity of
the five-year U.S. Treasury note and the one-year U.S. Treasury bill.
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 redemptions of shares.
In its stock portion, the fund attempts to duplicate, before the
deduction of operating expenses, the investment results of the S&P 500 Index.
Securities in the S&P 500 Index are selected, and may change from time to time,
based on a statistical analysis of such factors as the issuer's market
capitalization (the S&P 500 Index emphasizes large capitalization stocks), the
security's trading activity and its adequacy as a representative of stocks in a
particular industry section. The fund's investment results for its stock portion
will not be identical to those of the S&P 500 Index. Deviations from the
performance of the S&P 500 Index may result from purchases and redemptions of
fund shares that may occur daily, as well as from expenses borne by the fund.
Instead, the fund attempts to achieve a correlation of at least 0.95 between the
performance of the fund's stock portion, before the deduction of operating
expenses, and that of the S&P 500 Index (a correlation of 1.00 would mean that
the net asset value of the stock portion increased or decreased in exactly the
same proportion as changes in the S&P 500 Index). The S&P 500 Index can include
U.S. dollar-denominated equity securities of foreign issuers, and the fund
invests in those securities to the extent needed to track the performance of the
S&P 500 Index.
For its bond investments, the fund seeks to invest in U.S. Treasury
notes having five years remaining until maturity at the beginning of the
calendar year when the investment is made. However, if those instruments are not
2
<PAGE>
available at favorable prices, the fund may invest in U.S. Treasury notes with
either remaining maturities as close as possible to five years or overall
durations that are as close as possible to the duration of five-year U.S.
Treasury notes.
Similarly, for its cash investments, the fund seeks to invest in U.S.
Treasury bills with remaining maturities of 30 days. However, if those
instruments are not available at favorable prices, the fund may invest in U.S.
Treasury bills that have either remaining maturities as close as possible to 30
days or overall durations that are as close as possible to the duration of
30-day U.S. Treasury bills. The fund may hold U.S. Treasury bills that mature
prior to the first business day of the following month when Mitchell Huchins
determines the monthly asset allocation of the fund's assets based on Tactical
Allocation Model's recommendation. If, in Mitchell Hutchins' judgment, it is not
practicable to reinvest the proceeds in U.S. Treasury bills, Mitchell Hutchins
may invest the fund's cash assets in securities with remaining maturities of 30
days or less that are issued or guaranteed by U.S. government agencies or
instrumentalities and in repurchase agreements collateralized by securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
Asset reallocations are made, if required, on the first business day of
each month. In addition to any reallocation of assets directed by the Tactical
Allocation Model, any material amounts resulting from appreciation or receipt of
dividends, other distributions, interest payments and proceeds from securities
maturing in each of the asset classes are reallocated (or "rebalanced") to the
extent practicable to establish the Model's recommended asset mix. Any cash
maintained to pay fund operating expenses, pay dividends and other distributions
and to meet share redemptions is invested on a daily basis. The fund may (but is
not required to) use options and futures and other derivatives to effect all or
part of an asset reallocation by adjusting the fund's exposure to the different
asset classes.
The fund may invest up to 10% of its net assets in illiquid securities.
The fund may purchase securities on a when-issued or delayed delivery basis. The
fund may lend its portfolio securities to qualified broker-dealers or
institutional investors in an amount up to 33 1/3% of its total assets. The fund
may borrow from banks or through reverse repurchase agreements for temporary or
emergency purposes, but not in excess of 20% of its total assets. The fund may
invest in the securities of other investment companies and may sell short
"against the box."
THE FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
and above concerning the fund's investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or this SAI, the fund has
established no policy limitations on its ability to use the investments or
techniques discussed in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,
joint ventures or similar enterprises and depositary receipts. Common stocks,
the most familiar type, represent an equity (ownership) interest in a
corporation.
Preferred stock has certain fixed income features, like a bond, but is
actually equity that is senior to a company's common stock. Convertible bonds
may include debentures and notes that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. Some stock also may
be converted into or exchanged for common stock. Depositary receipts typically
are issued by banks or trust companies and evidence ownership of underlying
equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, 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. While this is possible with
bonds, it is less likely.
3
<PAGE>
BONDS are fixed or variable rate debt obligations, including bills,
notes, debentures, money market instruments and similar instruments and
securities. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations and governments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and normally must repay the amount
borrowed on or before maturity. Many preferred stocks and some bonds are
"perpetual" in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Credit risk is the risk that an
issuer may be unable or unwilling to pay interest and/or principal on the bond.
Credit risk can be affected by many factors, including adverse changes in the
issuer's own financial condition or in economic conditions.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the U.S.
government, its agencies or its instrumentalities. U.S. government securities
include mortgage-backed securities issued or guaranteed by government agencies
or government-sponsored enterprises. Other U.S. government securities may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer or,
in the case of mortgage-backed securities, by pools of assets.
DURATION. Duration is a measure of the expected life of a bond on a
present value basis. Duration incorporates the bond's yield, coupon interest
payments, final maturity and call features into one measures and is one of the
fundamental tools used by Mitchell Hutchins in portfolio selection and yield
curve positioning of the fund's investments in debt securities. Duration was
developed as a more precise alternative to the concept "term to maturity."
Traditionally, a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until the scheduled final payment on the bond,
taking no account of the pattern of payments prior to maturity.
Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable debt security, expected to be made, and weights them by
the present values of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a Treasury note with a remaining maturity
of five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.
Duration allows Mitchell Hutchins to make certain predictions as to the
effect that changes in the level of interest rates will have on the value of the
fund's portfolio of debt securities. For example, when the level of interest
rates increases by 1%, a debt security having a positive duration of three years
generally will decrease by approximately 3%. Thus, if Mitchell Hutchins
calculates the duration of the fund's portfolio of bonds as three years, it
normally would expect the portfolio to change in value by approximately 3% for
every 1% change in the level of interest rates. However, various factors, such
as changes in anticipated prepayment rates, qualitative considerations and
market supply and demand, can cause particular securities to respond somewhat
differently to changes in interest rates than indicated in the above example.
Moreover, in the case of mortgage-backed and other complex securities, duration
calculations are estimates and are not precise. This is particularly true during
periods of market volatility. Accordingly, the net asset value of a fund's
portfolio of bonds may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
Futures, options and options on futures have durations that, in
general, are closely related to the duration of the securities that underlie
them. Holding long futures or call option positions will lengthen portfolio
duration
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by approximately the same amount as would holding an equivalent amount of the
underlying securities. Short futures or put options have durations roughly equal
to the negative duration of the securities that underlie these positions, and
have the effect of reducing portfolio duration by approximately the same amount
as would selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
will use more sophisticated analytical techniques that incorporate the economic
life of a security into the determination of its duration and, therefore, its
interest rate exposure.
INVESTING IN FOREIGN SECURITIES. The fund may invest in U.S.
dollar-denominated securities of foreign issuers that are traded on recognized
U.S. exchanges or in the U.S. over-the-counter market. Securities of foreign
issuers may not be registered with the Securities and Exchange Commission
("SEC"), and the issuers thereof may not be subject to its reporting
requirements. Accordingly, there may be less publicly available information
concerning foreign issuers of securities held by the 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 fund may invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank
or trust company evidencing ownership of the underlying securities. They
generally are in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. For purposes of the fund's
investment policies, ADRs generally are deemed to have the same classification
as the underlying securities they represent. Thus, an ADR representing ownership
of common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
Investment income and gains on certain foreign securities in which the
fund may invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United States
and certain foreign countries, however, may reduce or eliminate the amount of
foreign taxes to which the fund would be subject.
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 the fund is called for redemption,
the fund will be required to permit the issuer to redeem the security, convert
it into underlying common stock or sell it to a third party.
WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
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TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Other
than its investments in U.S. Treasury bills as indicated by the Tactical
Allocation Model, Tactical Allocation Fund may invest to a limited extent in
money market instruments for cash management purposes. Its investments are
limited to 1) securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities, 2) repurchase agreements and 3) other
investment companies that invest exclusively in money market instruments.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The fund may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act of 1940, as amended ("Investment Company Act"), which at
present restrict investments in registered investment companies to no more than
10% of the fund's total assets. The shares of other investment companies are
subject to the management fees and other expenses of those funds. At the same
time, the fund would continue to pay its own management fees and expenses with
respect to all its investments, including the securities of other investment
companies.
ILLIQUID SECURITIES. The term "illiquid securities" means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the fund has valued the securities and
includes, among other things, purchased over-the-counter options, repurchase
agreements maturing in more than seven days and restricted securities other than
those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the board. The assets used as cover for over-the-counter options
written by the fund will be considered illiquid unless the over-the-counter
options are sold to qualified dealers who agree that the fund may repurchase any
over-the-counter options it writes at a maximum price to be calculated by a
formula set forth in the option agreements. The cover for an over-the-counter
option written subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. Under current SEC guidelines, interest-only and
principal-only classes of mortgage-backed securities generally are considered
illiquid. However, interest only and principal only classes of fixed-rate
mortgage-backed securities issued by the U.S. government or one of its agencies
or instrumentalities will not be considered illiquid if Mitchell Hutchins has
determined that they are liquid pursuant to guidelines established by the board.
The fund may not be able to readily liquidate its investments in illiquid
securities and may have to sell other investments if necessary to raise cash to
meet its obligations. The lack of a liquid secondary market for illiquid
securities may make it more difficult for the fund to assign a value to those
securities for purposes of valuing its portfolio and calculating its net asset
value.
Restricted securities are not registered under the Securities Act of
1933, as amended ("Securities Act"), and may be sold only in privately
negotiated or other exempted transactions or after a Securities Act registration
statement has become effective. Where registration is required, the fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the fund
might obtain a less favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the Securities Act. Institutional investors generally will not
seek to sell these instruments to the general public but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as
a result of Rule 144A under the Securities Act, which establishes a "safe
harbor" from the registration requirements of the Securities Act for resales of
certain securities to qualified institutional buyers. Such markets include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by the fund, however, could affect adversely the
marketability of such portfolio securities, and the fund might be unable to
dispose of them promptly or at favorable prices.
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The board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins pursuant to guidelines approved
by the board. Mitchell Hutchins takes into account a number of factors in
reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how bids are
solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of restricted securities in each fund's portfolio and reports
periodically on such decisions to the board.
Mitchell Hutchins also monitors the fund's overall holdings of illiquid
securities. If the fund's holdings of illiquid securities exceed its limitation
on investments in illiquid securities for any reason (such as a particular
security becoming illiquid, changes in the relative market values of liquid and
illiquid portfolio securities or shareholder redemptions), Mitchell Hutchins
will consider what action would be in the best interests of the fund and its
shareholders. Such action may include engaging in an orderly disposition of
securities to reduce the fund's holdings of illiquid securities. However, the
fund is not required to dispose of illiquid securities under these
circumstances.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which
the fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased obligations. The fund maintains custody of the underlying obligations
prior to their repurchase, either through its regular custodian or through a
special "tri-party" custodian or sub-custodian that maintains separate accounts
for both the fund and its counterparty. Thus, the obligation of the counterparty
to pay the repurchase price on the date agreed to or upon demand is, in effect,
secured by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by a fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. The fund intends to
enter into repurchase agreements only in transactions with counterparties
believed by Mitchell Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve
the sale of securities held by the fund subject to its agreement to repurchase
the securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to the fund's
limitation on borrowings and may be entered into only with banks or securities
dealers or their affiliates. While a reverse repurchase agreement is
outstanding, the fund will maintain, in a segregated account with its custodian,
cash or liquid securities, marked to market daily, in an amount at least equal
to its obligations under the reverse repurchase agreement. See "The Fund's
Investments, Related Risks and Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may
receive an extension of time to determine whether to enforce the fund's
obligation to repurchase the securities, and the fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, i.e., for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield. When
issued securities include TBA ("to be announced") securities. TBA securities,
which are usually mortgage-backed securities, are purchased on a forward
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commitment basis with an approximate principal amount and no defined maturity
date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. The fund generally
would not pay for such securities or start earning interest on them until they
are received. However, when the fund undertakes a when-issued or
delayed-delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the fund on a when-issued or delayed-delivery basis may
result in the fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, the fund's when-issued and
delayed-delivery purchase commitments could cause its net asset value per share
to be more volatile, because such securities may increase the amount by which
the fund's total assets, including the value of when-issued and delayed-delivery
securities held by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect the fund's net asset value. When the fund commits to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
assets to cover the amount of the commitment. See "The Fund's Investments,
Related Risks and Limitations -- Segregated Accounts." The fund's when-issued
and delayed delivery purchase commitments could cause its net asset value per
share to be more volatile. The fund may sell the right to acquire the security
prior to delivery if Mitchell Hutchins deems it advantageous to do so, which may
result in a gain or loss to the fund.
LENDING OF PORTFOLIO SECURITIES. The fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables the fund to earn additional
income but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The fund may reinvest any cash collateral in money market
investments or other short-term liquid investments, including other investment
companies. The fund also may reinvestment cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The fund will
retain authority to terminate any of its loans at any time. The fund may pay
reasonable fees in connection with a loan and may pay the borrower or placing
broker a negotiated portion of the interest earned on the reinvestment of cash
held as collateral. The fund will receive amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights, when regaining such rights is considered to be
in the fund's interest.
Pursuant to procedures adopted by the boards governing the fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for the fund. The board also has authorized the payment of fees (including
fees calculated as a percentage of invested cash collateral) to PaineWebber for
these services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber acted as lending agent. PaineWebber also has
been approved as a borrower under the fund's securities lending program.
SHORT SALES "AGAINST THE BOX." Short sales of securities the fund owns
or has the right to acquire at no added cost through conversion or exchange of
other securities it owns are known as short sales "against the box". To make
delivery to the purchaser in a short sale, the executing broker borrows the
securities being sold short on behalf of the fund, and the fund is obligated to
replace the securities borrowed at a date in the future. When the fund sells
short, it establishes a margin account with the broker effecting the short sale
and deposits collateral with the broker. In addition, the fund maintains, in a
segregated account with its custodian, the securities that could be used to
cover the short sale. The fund incurs transaction costs, including interest
expense, in connection with opening, maintaining and closing short sales
"against the box."
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The fund might make a short sale "against the box" to hedge against
market risks when Mitchell Hutchins believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the fund
or a security convertible into or exchangeable for a security owned by the fund.
In such case, any loss in the fund's long position after the short sale should
be reduced by a corresponding gain in the short position. Conversely, any gain
in the long position after the short sale should be reduced by a corresponding
loss in the short position. The extent to which gains or losses in the long
position are reduced will depend upon the amount of the securities sold short
relative to the amount of the securities a fund owns, either directly or
indirectly, and in the case where the fund owns convertible securities, changes
in the investment values or conversion premiums of such securities.
SEGREGATED ACCOUNTS. When the fund enters into certain transactions
that involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, or reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or swaps.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for the fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares or (b) 67% or more of the
shares present at a shareholders' meeting if more than 50% of its outstanding
shares are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from changing values of portfolio
securities or amount of total assets will not be considered a violation of any
of the following limitations. With regard to the borrowing limitation in
fundamental limitation number 3, the fund will comply with the applicable
restrictions of Section 18 of the Investment Company Act.
The fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of
the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
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 and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
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(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without shareholder
approval. If a percentage restriction is adhered to at the time of an investment
or transaction, a later increase or decrease in percentage resulting from
changing in values of portfolio securities or amount of total assets will not be
considered a violation of any of the following limitations.
The fund will not:
(1) invest more than 10% of its net assets in illiquid securities.
(2) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger.
(5) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may
use a variety of financial instruments ("Derivative Instruments"), including
certain options, futures contracts (sometimes referred to as "futures"), options
on futures contracts and swap transactions. The fund may enter into transactions
involving one or more types of Derivative Instruments under which the full value
of its portfolio is at risk. Under normal circumstances, however, the fund's use
of these instruments will place at risk a much smaller portion of its assets.
The Fund is limited to stock index options and futures, futures on U.S. Treasury
notes and bills and options on these permitted futures contracts. The particular
Derivative Instruments that may be used by the fund is described below.
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The fund might not use any Derivative Instruments or derivative
strategies, and there can be no assurance that using any strategy will succeed.
If Mitchell Hutchins is incorrect in its judgment on market values, interest
rates or other economic factors in using a Derivative Instrument or strategy,
the fund may have lower net income and a net loss on the investment.
OPTIONS ON EQUITY AND DEBT SECURITIES -- A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to buy the underlying security at the
exercise price.
OPTIONS ON SECURITIES INDICES -- A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS -- A securities index futures
contract is a bilateral agreement pursuant to which one party agrees to accept,
and the other party agrees to make, delivery of an amount of cash equal to a
specified dollar amount times the difference between the securities index value
at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the securities comprising
the index is made. Generally, contracts are closed out prior to the expiration
date of the contract.
INTEREST RATE FUTURES CONTRACTS -- Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of bonds, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are
similar to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term.
Upon exercise of the option, the delivery of the futures position to the holder
of the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will assume
a short position in the case of a call and a long position in the case of a put.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The
fund may use Derivative Instruments to attempt to hedge its portfolio and also
to attempt to enhance income or return or realize gains and to manage the
duration of its bond portfolio. In addition, the fund may use Derivative
Instruments to adjust its exposure to different asset classes or to maintain
exposure to stocks or bonds while maintaining a cash balance for fund management
purposes (such as to provide liquidity to meet anticipated shareholder sales of
fund shares and for fund operating expenses). Tactical Allocation Fund, in
particular, may use Derivative Instruments to reallocate its exposure to
different asset classes when the Tactical Allocation Model's recommends asset
allocation mix changes. The fund also may use Derivative Instruments to
facilitate trading and to reduce transaction costs.
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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 the fund's portfolio. Thus, in a short hedge the 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,
the fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus 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, the 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, the fund might purchase a call
option on a security it intends to purchase in order to hedge against an
increase in the cost of the security. If the price of the security increased
above the exercise price of the call, the fund could exercise the call and thus
limit its acquisition cost to the exercise price plus the premium paid and
transaction costs. Alternatively, the fund might be able to offset the price
increase by closing out an appreciated call option and realizing a gain.
The 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. The fund might enter into a short straddle
when Mitchell Hutchins believes it unlikely that the prices of the securities
will be as volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge
against price movements in one or more particular securities positions that the
fund owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad stock
market sectors in which the fund has invested or expects to invest. Derivative
Instruments on bonds may be used to hedge either individual securities or broad
fixed income market sectors.
Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Return or gain
strategies may include using Derivative Instruments to increase or decrease the
fund's exposure to different asset classes without buying or selling the
underlying instruments. The fund also may use derivatives to simulate full
investment by the fund while maintaining a cash balance for fund management
purposes (such as to provide liquidity to meet anticipated shareholder sales of
fund shares and for fund operating expenses).
The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, the fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and
in the Prospectus, Mitchell Hutchins may discover additional opportunities in
connection with Derivative Instruments and with hedging, income, return and gain
strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may use these
opportunities for the fund to the extent that they are consistent with the
fund's investment objective and permitted by its investment limitations and
applicable regulatory authorities. The fund's Prospectus or this SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
12
<PAGE>
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of Mitchell Hutchins to predict movements of the overall securities or interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Derivative Instruments, there can be no assurance that any particular
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Derivative Instrument. Moreover, if the price of the
Derivative Instrument declined by more than the increase in the price of the
security, the fund could suffer a loss. In either such case, the fund would have
been in a better position had it not hedged at all.
(4) As described below, the fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair the
fund's ability to sell a portfolio security or make an investment at a time when
it would otherwise be favorable to do so, or require that the fund sell a
portfolio security at a disadvantageous time. The fund's ability to close out a
position in a Derivative Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a counterparty to enter into a transaction
closing out the position. Therefore, there is no assurance that any hedging
position can be closed out at a time and price that is favorable to the fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. The fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities or
other options or futures contracts or (2) cash or liquid securities with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. The fund will comply with SEC guidelines
regarding cover for such transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of the 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 fund may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. The fund may also use
options to attempt to enhance return or
13
<PAGE>
realize gains by increasing or reducing its exposure to an asset class without
purchasing or selling the underlying securities. Writing covered put or call
options can enable a fund to enhance income by reason of the premiums paid by
the purchasers of such options. Writing covered call options serves as a limited
short hedge, because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the fund will
be obligated to sell the security at less than its market value. Writing covered
put options serves as a limited long hedge, because increases in the value of
the hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security depreciates to a price lower than
the exercise price of the put option, it can be expected that the put option
will be exercised and the fund will be obligated to purchase the security at
more than its market value. The securities or other assets used as cover for
over-the-counter options written by the fund would be considered illiquid to the
extent described under "The Fund's Investments, Related Risks and Limitations --
Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contract to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. Options that
expire unexercised have no value.
The fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
The fund may purchase and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities (stocks)
are exchange-traded. Exchange markets for options on bonds exist but are
relatively new, and these instruments are primarily traded on the
over-the-counter market. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed that, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between the
fund and its counterparty (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when the fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the fund
as well as the loss of any expected benefit of the transaction.
The fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for over-the-counter options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the fund will enter into over-the-counter options only with
counterparties that are expected to be capable of entering into closing
transactions with the fund, there is no assurance that the fund will in fact be
able to close out an over-the-counter option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, the fund might be
unable to close out an over-the-counter option position at any time prior to its
expiration.
If the fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered put or
call option written by the fund could cause material losses because the fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
14
<PAGE>
The fund may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The fund's use of options is
governed by the following guidelines, which can be changed by its board without
shareholder vote:
(1) The fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums on
all other options held by the fund, does not exceed 5% of its total assets.
(2) The aggregate value of securities underlying put options written by
the fund, determined as of the date the put options are written, will not exceed
50% of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities and stock or bond indices and options on futures contracts) purchased
by the fund that are held at any time will not exceed 20% of its net assets.
FUTURES. The fund may purchase and sell securities index futures
contracts or interest rate futures contracts. The fund may purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices. In addition, the fund
may purchase or sell futures contracts or purchase options thereon to increase
or reduce its exposure to an asset class without purchasing or selling the
underlying securities, either as a hedge or to enhance return or realize gains.
Futures strategies also can be used to manage the average duration of
the fund's bond portfolio. If Mitchell Hutchins wishes to shorten the average
duration of the fund's bond portfolio, the fund may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the fund's bond
portfolio, the fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
The fund may also write put options on futures contracts while at the
same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. The fund will engage in this
strategy only when it is more advantageous to the fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, 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, the fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but
15
<PAGE>
rather represents a daily settlement of each fund's obligations to or from a
futures broker. When the fund purchases an option on a futures contract, the
premium paid plus transaction costs is all that is at risk. In contrast, when
the fund purchases or sells a futures contract or writes a call option thereon,
it is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If the fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case 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 fund's use
of futures and related options is governed by the following guidelines, which
can be changed by its board without shareholder vote:
(1) The aggregate initial margin and premiums on futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), excluding the amount by which options are "in-the-money,"
may not exceed 5% of the fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by the 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 the fund will not exceed 5% of its total assets.
16
<PAGE>
ORGANIZATION OF THE TRUST; BOARD MEMBERS AND OFFICERS; PRINCIPAL HOLDERS
AND MANAGEMENT OWNERSHIP OF SECURITIES
The Trust was formed on March 28, 1991, as a business trust under the
laws of the Commonwealth of Massachusetts and has two operating series. The
Trust is authorized to issue an unlimited number of shares of beneficial
interest, par value of $0.001 per share.
The Trust is governed by a board of trustees, which oversees its
operations. The trustees ("board members") and executive officers of the Trust,
their ages, business addresses and principal occupations during the past five
years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- TRUST ----------------------------------------
-----------------
<S> <C> <C>
Margo N. Alexander*+; 53 Trustee Mrs. Alexander is Chairman (since
March 1999), and a director of
Mitchell Hutchins (since January
1995) and an executive vice
president and a director of
PaineWebber (since March 1984). She
was chief executive officer of
Mitchell Hutchins from January 1995
to October 2000. Mrs. Alexander is
a director or trustee of 30
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Richard Q. Armstrong; 65 Trustee Mr. Armstrong is chairman and
R.Q.A Enterprises principal of R.Q.A. Enterprises
One Old Church Road (management consulting firm) (since
Unit #6 April 1991 and principal occupation
Greenwich, CT 06830 since March 1995). He is also a
director of AlFresh Foods Beverages
Canada, Inc. (a Canadian Beverage
subsidary of AlFresh Foods Inc.)
(since October 2000). Mr. Armstrong
was chairman of the board, chief
executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a partner
of The New England Consulting Group
(management consulting firm)
(December 1992-September 1993). He
was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the
French luxury goods conglomerate,
Louis Vuitton Moet Hennessey
Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong
is a director or trustee of 29
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- TRUST ----------------------------------------
-----------------
<S> <C> <C>
E. Garrett Bewkes, Trustee and Chairman Mr. Bewkes serves as a consultant
Jr.**+; 74 of the Board of to PaineWebber (since May 1999).
Trustees Prior to November 2000, he was a
director of Paine Webber Group Inc.
("PW Group", formerly the holding
company of PaineWebber and Mitchell
Hutchins) and prior to 1996, 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 40 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP
1275 Pennsylvania Ave., NW Advisors, LLP (international
Washington, DC 20004 investments and consulting 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.
(agricultural commodities),
Hollinger International Co.
(publishing) and Homestake Mining
Corp. (gold mining), six investment
companies in the Deutsche Bank
family of funds, nine investment
companies in the Flag Investors
family of funds, The Central
European Fund, Inc. and The Germany
Fund Inc., vice chairman of Anchor
Gaming (provides technology to
gaming and wagering industry)
(since July 1999) and chairman of
Weirton Steel Corp. (makes and
finishes steel products) (since
April 1996). He was the chief
negotiator in the Strategic Arms
Reduction Talks with the former
Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is a director or trustee
of 29 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Meyer Feldberg; 58 Trustee Mr.Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia
New York, NY 10027 University. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of Primedia, Inc.
(publishing), Federated Department
Stores, Inc. (operator of
department stores) and Revlon, Inc.
(cosmetics). Dean Feldberg is a
director or trustee of 37
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- TRUST ----------------------------------------
-----------------
<S> <C> <C>
George W. Gowen; 71 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, NY 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a
director or trustee of 37
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Frederic V. Malek; 64 Trustee Mr. Malek is chairman of Thayer
1455 Pennsylvania Ave., Capital Partners (merchant bank)
N.W. Suite 350 and chairman of Thayer Hotel
Washington, DC 20004 Investors II and Lodging
Opportunities Fund (hotel investing
partnerships). From January 1992 to
November 1992, he was campaign
manager of Bush-Quayle `92. From
1990 to 1992, he was vice chairman
and, from 1989 to 1990, he was
president of Northwest Airlines
Inc. and NWA Inc. (holding company
of Northwest Airlines Inc.). Prior
to 1989, he was employed by the
Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is
also a director of Aegis
Communications, Inc.
(tele-services), American
Management Systems, Inc.
(management consulting and computer
related services), Automatic Data
Processing, Inc. (computing), CB
Richard Ellis, Inc. (real estate
services), FPL Group, Inc.
(electric services), Global
Vacation Group (packaged
vacations), HCR/Manor Care, Inc.
(health care), SAGA Systems, Inc.
(software company) and Northwest
Airlines Inc. Mr. Malek is a
director or trustee of 29
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- TRUST ----------------------------------------
-----------------
<S> <C> <C>
Carl W. Schafer; 64 Trustee Mr. Schafer is president of the
66 Witherspoon Street, Atlantic Foundation (charitable
#1100 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He is a director of
Labor Ready, Inc. (temporary
employment), Roadway Express, Inc.
(trucking), The Guardian Group of
Mutual Funds, the Harding, Loevner
Funds, E.I.I. Realty Trust
(investment company), Evans
Systems, Inc. (motor fuels,
convenience store and diversified
company), Electronic Clearing
House, Inc. (financial transactions
processing), Frontier Oil
Corporation and Nutraceutix, Inc.
(bio-technology company). Prior to
January 1993, he was chairman of
the Investment Advisory Committee
of the Howard Hughes Medical
Institute. Mr. Schafer is a
director or trustee of 29
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Brian M. Storms*+; 46 Trustee and Mr. Storms is chief executive
President officer (since October 2000) and
president of Mitchell Hutchins
(since March 1999). Mr. Storms was
president of Prudential Investments
(1996-1999). Prior to joining
Prudential, he was a managing
director at Fidelity Investments.
Mr. Storms is president and a
director or trustee of 30
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
T. Kirkham Barneby*; 54 Vice President Mr. Barneby is a managing director
and chief investment
officer-quantitative investments of
Mitchell Hutchins. Mr. Barneby is a
vice president of 14 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Thomas Disbrow***;34 Vice President Mr. Disbrow is a first vice
and Assistant president and a senior manager of
Treasurer the mutual fund finance department
of Mitchell Hutchins. Prior to
November 1999, he was a vice
president of Zweig/Glaser Advisers.
Mr. Disbrow is a vice president
and assistant treasurer of 30
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- TRUST ----------------------------------------
-----------------
<S> <C> <C>
Amy R. Doberman**; 38 Vice President Ms. Doberman is a senior vice
president and general counsel of
Mitchell Hutchins. From December
1996 through July 2000, she was
general counsel of Aeltus
Investment Management, Inc. Prior
to working at Aeltus, Ms. Doberman
was a Division of Investment
Management Assistant Chief Counsel
at the SEC. Ms. Doberman is a vice
president of 29 investment
companies and a vice president and
secretary of one investment company
for which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
John J. Lee***; 32 Vice President Mr. Lee is a vice president and a
and Assistant manager of the mutual fund finance
Treasurer 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 30
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Kevin J. Mahoney***;35 Vice President Mr. Mahoney is a first vice
and Assistant president and a senior manager of
Treasurer the mutual fund finance department
of Mitchell Hutchins. From August
1996 through March 1999, he was the
manager of the mutual fund internal
control group of Salomon Smith
Barney. Prior to August 1996, he
was an associate and assistant
treasurer for BlackRock Financial
Management L.P. Mr. Mahoney is a
vice president and assistant
treasurer of 30 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Ann E. Moran***; 43 Vice President Ms. Moran is a vice president and a
and Assistant manager of the mutual fund finance
Treasurer department of Mitchell Hutchins.
Ms. Moran is a vice president and
assistant treasurer of 30
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Dianne E. O'Donnell**; Vice President Ms. O'Donnell is a senior vice
48 and Secretary president and deputy general
counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and
secretary of 29 investment
companies and a vice president and
assistant secretary of one
investment company for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Paul H. Schubert***; 37 Vice President Mr. Schubert is a senior vice
and Treasurer president and the director of the
mutual fund finance department of
Mitchell Hutchins. Mr. Schubert is
a vice president and treasurer of
30 investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- TRUST ----------------------------------------
-----------------
<S> <C> <C>
Barney A. Taglialatela Vice President Mr. Taglialatela is a vice
***; 39 Assistant president and a manager of the
Treasurer mutual fund finance department of
Mitchell Hutchins. Mr. Taglialatela
is a vice president and assistant
treasurer of 30 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Keith A. Weller**; 39 Vice President Mr. Weller is a first vice
and Assistant president and senior associate
Secretary general counsel of Mitchell
Hutchins. Mr. Weller is a vice
president and assistant secretary
of 30 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
</TABLE>
-------------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York,
New York 10019-6028.
*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
+ Mrs. Alexander, Mr. Bewkes and Mr. Storms are "interested persons" of the
fund as defined in the Investment Company Act by virtue of their positions
with Mitchell Hutchins and/or PaineWebber.
The Trust pays board members who are not "interested persons" of the
Trust ("disinterested trustees") $1,500 annually for the Fund, an additional
$1,000 for the Trust's second series and up to $150 per series for each board
meeting and each separate meeting of a board committee. The Trust thus pays an
independent board member $2,500 annually plus any additional annual amounts due
for board or committee meetings. Each chairman of the audit and contract review
committees of individual funds within the PaineWebber fund complex receives
additional compensation, aggregating $15,000 annually from the relevant funds.
All board members are reimbursed for any expenses incurred in attending
meetings. Because Mitchell Hutchins and PaineWebber perform substantially all of
the services necessary for the operation of the Trust and the fund, the Trust
requires no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trust for acting as a
board member or officer.
The table below includes certain information relating to the
compensation of the Trust's current board members from the Trust and the
compensation of those board members from all PaineWebber funds during the
periods indicated.
22
<PAGE>
COMPENSATION TABLE+
TOTAL COMPENSATION
AGGREGATE FROM THE
COMPENSATION TRUST AND THE
NAME OF PERSON, POSITION FROM THE TRUST(1) FUND COMPLEX(2)
------------------------ ---------------- -------------------
Richard Q. Armstrong, Trustee..... $4,060 $104,650
Richard R. Burt, Trustee.......... 4,060 102,850
Meyer Feldberg, Trustee........... 5,410 143,650
George W. Gowen, Trustee.......... 4,060 138,400
Frederic V. Malek, Trustee........ 4,060 104,650
Carl W. Schafer, Trustee.......... 4,000 104,650
--------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation from the
PaineWebber funds.
(1) Represents total fees paid by the Trust to each board member indicated for
the fiscal year ended August 31, 2000. These fees are allocated in part to
the fund and in part to the other series of the Trust.
(2) Represents total compensation paid during the calendar year ended December
31, 1999 to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of November 30, 2000, trustees and officers of the Trust owned in
the aggregate less than 1% of the outstanding shares of any class of the fund.
As of November 30, 2000, the fund's records showed the following
shareholders as owning 5% or more of any class of the fund's shares.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS Y SHARES
NAME AND ADDRESS* BENEFICIALLY OWNED AS OF NOVEMBER 30, 2000
---------------------------------------------------- -------------------------------------------
<S> <C>
Michael S. Reese and Pamela W. Reese, Tenants in Common 4.79%
Ernest J. Boch, Global Account, c/o Robert Wakely 7.88%
Boch Business Trust, Ernest Boch Trustee Global Account 13.64%
Northern Trust Company as Trustee, FBO PaineWebber 401 K Plan 36.45%
</TABLE>
--------------------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
23
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
Investment Advisory and Administration Arrangements. Mitchell Hutchins
acts as the investment adviser and administrator of the fund pursuant to a
contract ("Advisory Contract") with the Trust. Under the Advisory Contract, the
fund pays Mitchell Hutchins an annual fee, computed daily and paid monthly, as
set forth below:
ANNUAL
AVERAGE DAILY NET ASSETS RATE
------------------------ ------
Up to $250 million.................0.500%
Over $250 million..................0.450
During the fiscal years ended August 31, 2000, August 31, 1999 and
August 31, 1998, Mitchell Hutchins earned (or accrued) advisory and
administration fees of $12,616,827, $9,214,743 and $4,895,190, respectively.
Under the terms of the Advisory Contract, the fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
a specific series are allocated among series by or under the direction of the
board in such manner as the board deems fair and equitable. Expenses borne by
the fund include the following: (1) the cost (including brokerage commissions,
if any) of securities purchased or sold by the fund and any losses incurred in
connection therewith; (2) fees payable to and expenses incurred on behalf of the
fund by Mitchell Hutchins; (3) organizational expenses; (4) filing fees and
expenses relating to the registration and qualification of the fund's shares
under federal and state securities laws and maintenance of such registrations
and qualifications; (5) fees and salaries payable to board members who are not
interested persons of the Trust or Mitchell Hutchins; (6) all expenses incurred
in connection with the board members' services, including travel expenses; (7)
taxes (including any income or franchise taxes) and governmental fees; (8) costs
of any liability, uncollectible items of deposit and other insurance or fidelity
bonds; (9) any costs, expenses or losses arising out of a liability of or claim
for damages or other relief asserted against the fund for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the independent board members; (11) charges of custodians, transfer
agents and other agents; (12) costs of preparing share certificates; (13)
expenses of setting in type and printing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials for existing shareholders and costs of mailing such materials to
existing shareholders; (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the fund; (15) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for
any error of judgment or mistake of law or for any loss suffered by a fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of the fund's outstanding
voting securities, on 60 days' written notice to Mitchell Hutchins or by
Mitchell Hutchins on 60 days' written notice to the fund.
SECURITIES LENDING. During the fiscal years ended August 31, 2000 and
August 31, 1999, the fund paid (or accrued) $692,987 and $176,811, respectively,
to PaineWebber for its services as securities lending agent.
24
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
November 30, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser. An investment company
may fall into more than one of the categories below.
INVESTMENT CATEGORY NET ASSETS
------------------- ($MIL)
----------
Domestic (excluding Money Market) ... $ 7,949
Global .............................. 4,526
Equity/Balanced ..................... 8,456
Fixed Income (excluding Money Market) 4,019
Taxable Fixed Income ................ 2,631
Tax-Free Fixed Income ............... 1,387
Money Market Funds .................. 47,003
PERSONAL TRADING POLICIES. The fund and Mitchell Hutchins each have
adopted a code of ethics under rule 17f-1 of the Investment Company Act, which
permits personnel covered by the rule to invest in securities that may be
purchased or held by the fund but prohibits fradulent, deceptive or manipulative
conduct in connection with that personal investing.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of the fund under a distribution contract with the fund
("Distribution Contract"). The Distribution Contract requires Mitchell Hutchins
to use its best efforts, consistent with its other businesses, to sell shares of
the fund. Shares of the fund are offered continuously. Under a dealer agreement
between Mitchell Hutchins and PaineWebber relating to each class of shares of
the fund ("PW Dealer Agreement"), PaineWebber and its correspondent firms sell
the fund's shares. Mitchell Hutchins is located at 51 West 52nd Street, New
York, New York 10019-6114 and PaineWebber is located at 1285 Avenue of the
Americas, New York, New York 10019-6028.
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of the fund adopted by the Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a "Class
A Plan," "Class B Plan" and "Class C Plan," and, collectively, "Plans"), the
fund pays Mitchell Hutchins a service fee, accrued daily and payable monthly, at
the annual rate of 0.25% of the average daily net assets of the class of shares.
Under the Class B Plan and the Class C Plan, the fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.75%
of the average daily net assets of the Class B and Class C shares, respectively.
There is no distribution plan with respect to the fund's Class Y shares, and the
fund pays no service or distribution fees with respect to its Class Y shares.
Mitchell Hutchins uses the service fees under the Plans for Class A,
Class B and Class C shares primarily to pay PaineWebber for shareholder
servicing, currently at the annual rate of 0.25% of the aggregate investment
amounts maintained in each fund by PaineWebber clients. PaineWebber then
compensates its Financial Advisors for shareholder servicing that they perform
and offsets its own expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and
Class C Plans to:
o Offset the commissions it pays to PaineWebber for selling the fund's Class
B and Class C shares, respectively.
o Offset the 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.
25
<PAGE>
PaineWebber compensates Financial Advisors when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors at
the time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge
paid when Class A shares are bought and of the contingent deferred sales charge
paid upon sales of shares. These proceeds may be used to cover distribution
expenses.
The Plans and the related Distribution Contract for Class A, Class B
and Class C shares specify that the fund must pay service and distribution fees
to Mitchell Hutchins for its service- and distribution-related activities, not
as reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the fund
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 fund. Annually, the board
reviews the Plans and Mitchell Hutchins' corresponding expenses for each class
separately from the Plans and expenses of the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the 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 board, including board members who are not "interested persons"
of the 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 the fund under the Plan shall
not be materially increased without the affirmative vote of the holders of a
majority of the outstanding shares of the relevant class and (4) while the Plan
remains in effect, the selection and nomination of board members who are not
"interested persons" of the Trust shall be committed to the discretion of the
board members who are not "interested persons" of the Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of
the fund's shares to such class based on the ratio of sales of shares of such
class to the sales of all three classes of shares. The fees paid by one class of
the fund's shares will not be used to subsidize the sale of any other class of
fund shares.
The fund paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Class A, Class B and Class C Plans during
the fiscal year ended August 31, 2000:
Class A........... $ 1,967,523
Class B........... $10,199,321
Class C........... $ 8,091,186
26
<PAGE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the fund during the fiscal year
ended August 31, 2000:
CLASS A
Marketing and advertising.....................$1,156,898
Amortization of commissions................... -0-
Printing of prospectuses and SAIs............. 4,054
Branch network costs allocated and
interest expense.............................. 1,560,233
Service fees paid to PaineWebber
Financial Advisors............................ 757,021
CLASS B
Marketing and advertising.....................$1,518,136
Amortization of commissions................... 4,021,133
Printing of prospectuses and SAIs............. 5,320
Branch network costs allocated and
interest expense.............................. 2,599,574
Service fees paid to PaineWebber
Financial Advisors............................ 981,355
CLASS C
Marketing and advertising.....................$1,198,890
Amortization of commissions................... 2,335,298
Printing of prospectuses and SAIs............. 4,202
Branch network costs allocated and
interest expense ............................. 1,641,339
Service fees paid to PaineWebber
Financial Advisors............................ 778,432
"Marketing and advertising" includes various internal costs allocated
by Mitchell Hutchins to its efforts at distributing the fund's shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the fund's shares, including the PaineWebber retail branch system.
In approving the fund's overall Flexible Pricing(SM) system of
distribution, the board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
27
<PAGE>
In approving the Class A Plan, the board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber Financial Advisors and correspondent firms, resulting
in greater growth of the fund than might otherwise be the case, (3) the
advantages to the shareholders of economies of scale resulting from growth in
the fund's assets and potential continued growth, (4) the services provided to
the fund and its shareholders by Mitchell Hutchins, (5) the services provided by
PaineWebber pursuant to its PW Dealer Agreement with Mitchell Hutchins and (6)
Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, the board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber Financial Advisors and correspondent firms to receive
sales commissions when Class B shares are sold and continuing service fees
thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the Financial Advisors
and correspondent firms, resulting in greater growth of the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its PW Dealer Agreement
with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The board members also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges, was conditioned upon its expectation of being compensated under the
Class B Plan.
In approving the Class C Plan, the board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber Financial Advisors and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the Financial Advisors and
correspondent firms, resulting in greater growth to the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its PW Dealer Agreement
with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The board members also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption after one year
following purchase was conditioned upon its expectation of being compensated
under the Class C Plan.
With respect to each Plan, the board 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 board also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of the fund, which
fees would increase if the Plan were successful and the fund attained and
maintained significant asset levels.
28
<PAGE>
Under the Distribution Contract for Class A shares, for the fiscal
years set forth below, Mitchell Hutchins earned the following approximate
amounts of sales charges and retained the following approximate amounts, net of
reallowances to PaineWebber as dealer.
FISCAL YEARS ENDED AUGUST 31,
------------------------------
2000 1999 1998
---- ---- ----
Earned .......... $2,244,889 $4,648,952 $3,764,774
Retained......... 147,280 245,303 243,663
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
August 31, 2000:
Class A............... $ 0
Class B............... 3,757,807
Class C............... 280,329
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Mitchell Hutchins is
responsible for the execution of the fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the fund, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While Mitchell Hutchins generally seeks
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The fund may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker. During the fiscal years
ended August 31, 2000, August 31, 1999 and August 31, 1998, the fund paid
$741,440, $363,697 and $440,215, respectively, in brokerage commissions.
The fund has no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board has adopted procedures in conformity with Rule
17e-1 under the Investment Company Act to ensure that all brokerage commissions
paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the 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. During the fiscal years
ended August 31, 2000, August 31, 1999 and August 31, 1998, the fund paid $0,
$3,571 and $5,496, respectively, in brokerage commissions to PaineWebber.
During the fiscal year ended August 31, 2000, Mitchell Hutchins
directed no transactions to brokers chosen because they provided research
services.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"), who receive brokerage commissions for their
services. The fund's procedures in selecting FCMs to execute its 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.
29
<PAGE>
In selecting brokers, Mitchell Hutchins will consider the full range
and quality of a broker's services. Consistent with the interests of the fund
and subject to the review of the board, Mitchell Hutchins may cause the fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins with brokerage or research services. The fund may pay those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that the commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to the fund and its other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions, it
will not purchase securities at a higher price or sell securities at a lower
price than would otherwise be paid if no weight was attributed to the services
provided by the executing dealer. Mitchell Hutchins may engage in agency
transactions in over-the-counter equity and debt securities in return for
research and execution services. These transactions are entered into only
pursuant to procedures that are designed to ensure that the transaction
(including commissions) is at least as favorable as it would have been if
effected directly with a market-maker that did not provide research or execution
services.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which the 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 it advises may be used in advising
the fund.
Investment decisions for the fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for the fund and one or more accounts. In
those cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between that fund and the other
account(s) in a manner deemed equitable to the fund and the other account(s).
While in some cases this practice could have a detrimental effect upon the price
or value of the security as far as the fund is concerned, or upon its ability to
complete its entire order, in other cases it is believed that simultaneous
transactions and the ability to participate in volume transactions will benefit
the fund.
The fund will not purchase securities that are offered in underwritings
in which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by each board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the funds.
PORTFOLIO TURNOVER. The fund's annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of the fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. The fund's
portfolio turnover rates for the fiscal years ended August 31, 2000, and August
31, 1999 were 122% and 6%, respectively. The increase in portfolio turnover for
the fiscal year ended August 31, 2000 was attributable to changes in portfolio
composition as dictated by the Tactical Allocation Model.
30
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through a variable annuity offered only to qualified plans.
For investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to the variable
annuity's sponsor, adviser or distributor in a total amount not to exceed
l% of the amount invested;
o Acquire shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of shares at net
asset value to that program. For investments made pursuant to this waiver,
Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to implement a rebalancing feature
of such an investment program, the minimum subsequent investment
requirement is also waived;
o Acquire shares in connection with a reorganization pursuant to which the
fund acquires substantially all of the assets and liabilities of another
fund in exchange solely for shares of the acquiring fund; or
o Acquire shares in connection with the disposition of proceeds from the sale
of shares of Managed High Yield Plus Fund Inc. that were acquired during
that fund's initial public offering of shares and that meet certain other
conditions described in its prospectus.
In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed.
COMBINED PURCHASE PRIVILEGE -- CLASS A SHARES. Investors and eligible
groups of related fund investors may combine purchases of Class A shares of the
fund with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges indicated in the table
of sales charges for Class A shares in the Prospectus. The sales charge payable
on the purchase of Class A shares of the funds and Class A shares of such other
funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her individual retirement account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that
holds 25% or more of the outstanding voting securities of a
corporation will be deemed to control the corporation, and a
partnership will be deemed to be controlled by each of its general
partners);
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(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the fund among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of the fund may reinstate their account without a sales
charge by notifying the transfer agent of such desire and forwarding a check for
the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised, although a loss arising out of a
redemption might not be deductible under certain circumstances. See "Taxes"
below.
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- Class B Shares. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.
PURCHASES OF CLASS Y SHARES THROUGH THE PACE(SM) MULTI ADVISOR
PROGRAM. An investor who participates in the PACE(SM) Multi Advisor Program is
eligible to purchase Class Y shares. The PACE(SM) Multi Advisor Program is an
advisory program sponsored by PaineWebber that provides comprehensive investment
services, including investor profiling, a personalized asset allocation strategy
using an appropriate combination of funds, and a quarterly investment
performance review. Participation in the PACE(SM) Multi Advisor Program is
subject to payment of an advisory fee at the effective maximum annual rate of
1.5% of assets. Employees of PaineWebber and its affiliates are entitled to a
waiver of this fee. Please contact your PaineWebber Financial Advisor or
PaineWebber's correspondent firms for more information concerning mutual funds
that are available through the PACE(SM) Multi Advisor Program.
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PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONE(SM)
PROGRAM. Investors who purchase shares through the PaineWebber InsightOne(SM)
Program are eligible to purchase Class A shares without a sales load. The
PaineWebber InsightOne(SM) Program offers a nondiscretionary brokerage account
to PaineWebber clients for an asset-based fee at an annual rate of up to 1.50%
of the assets in the account. Account holders may purchase or sell certain
investment products without paying commissions on other markups/markdowns.
PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(k)
PLUS PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
for employees of PaineWebber and certain of its affiliates, buys and sells Class
Y shares of the funds that are included as investment options under the Plan to
implement the investment choices of individual participants with respect to
their Plan contributions. Individual Plan participants should consult the
Summary Plan Description and other plan material of the PW 401(k) Plus Plan
(collectively, "Plan Documents") for a description of the procedures and
limitations applicable to making and changing investment choices. Copies of the
Plan Documents are available from the Benefits Connection, 100 Halfday Road,
Lincolnshire, IL 60069 or by calling 1-888-Pwebber (1-888-793-2237). As
described in the Plan Documents, the price at which Class Y shares are bought
and sold by the trustee of PW 401(k) Plus Plan might be more or less than the
price per share at the time the participants made their investment choices.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the fund may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or a fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the fund's investment objective, policies and
restrictions.
If conditions exist that make cash payments undesirable, the fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The fund may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the fund's portfolio at the time.
SERVICE ORGANIZATIONS. The fund may authorize service organizations,
and their agents, to accept on its behalf purchase and redemption orders that
are in "good form" in accordance with the policies of those service
organizations. The fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment
plan with a minimum initial investment of $1,000 through which the fund will
deduct $50 or more on a monthly, quarterly, semi-annual or annual basis from the
investor's bank account to invest directly in the fund. Participation in the
automatic investment plan enables an investor to use the technique of "dollar
cost averaging." When an investor invests the same
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<PAGE>
dollar amount each month under the plan, the investor will purchase more shares
when the fund's net asset value per share is low and fewer shares when the net
asset value per share is high. Using this technique, 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. An
investor should also consider whether a large, single investment would qualify
for sales load reductions.
SYSTEMATIC WITHDRAWAL PLAN. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber mutual fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $100,
$200, $300 and $400, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to
a contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of the fund concurrent with withdrawals
are ordinarily disadvantageous to shareholders because of tax liabilities and,
for Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the fund of sufficient fund shares to provide the withdrawal
payments specified by participants in the fund's systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. Instructions to
participate in the plan, change the withdrawal amount or terminate participation
in the plan will not be effective until five days after written instructions
with signatures guaranteed are received by PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available
through PaineWebber in which purchases of PaineWebber mutual funds and other
investments may be made. Investors considering establishing an IRA should review
applicable tax laws and should consult their tax advisers.
TRANSFER OF ACCOUNTS. If investors holding shares of the fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.
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<PAGE>
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SM);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA)(R)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
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. In deciding whether to use
dollar cost averaging, an investor should also consider whether a large, single
investment would qualify for sales load reductions.
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 Platinum
MasterCard(R) transactions during the period, and provide unrealized
and realized gain and loss estimates for most securities held in the
account;
o comprehensive year-end summary statements that provide information on
account activity for use in tax planning and tax return preparation;
o automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds - RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New
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<PAGE>
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 Platinum MasterCard(R), 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
Platinum MasterCard(R) are debited to the RMA account once monthly,
permitting accountholders to remain invested for a longer period of
time;
o 24-hour access to account information through toll-free numbers, and
more detailed personal assistance during business hours from the RMA
Service Center;
o unlimited electronic funds transfers and bill payment service for an
additional fee;
o expanded account protection for the net equity securities balance in
the event of the liquidation of PaineWebber. This protection does not
apply to shares of funds that are held at PFPC and not through
PaineWebber; and
o automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the
Platinum MasterCard(R), with an additional fee of $40 if the investor selects an
optional line of credit with the Platinum MasterCard(R).
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<PAGE>
CONVERSION OF CLASS B SHARES
Class B shares of the fund will automatically convert to Class A
shares, based on the relative net asset values per share of the two classes, as
of the close of business on the first Business Day (as defined under "Valuation
of Shares") of the month in which the sixth anniversary of the initial issuance
of such Class B shares occurs. For the purpose of calculating the holding period
required for conversion of Class B shares, the date of initial issuance shall
mean (1) the date on which such Class B shares were issued or (2) for Class B
shares obtained through an exchange, or a series of exchanges, the date on which
the original Class B shares were issued. For purposes of conversion to Class A
shares, Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A shares, a pro rata
portion of the Class B shares in the sub-account will also convert to Class A
shares. The portion will be determined by the ratio that the shareholder's Class
B shares converting to Class A shares bears to the shareholder's total Class B
shares not acquired through dividends and other distributions.
The conversion feature is subject to the continuing availability of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential dividends" under
the Internal Revenue Code and that the conversion of shares does not constitute
a taxable event. If the conversion feature ceased to be available, the Class B
shares would not be converted and would continue to be subject to the higher
ongoing expenses of the Class B shares beyond six years from the date of
purchase. Mitchell Hutchins has no reason to believe that this condition will
not continue to be met.
VALUATION OF SHARES
The fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities and other assets are valued based upon market quotations
when those quotations are readily available unless, in Mitchell Hutchins'
judgment, those quotations do not adequately reflect the fair value of the
security. Securities that are listed on exchanges normally are valued at the
last sale price on the day the securities are valued or, lacking any sales on
such day, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
over-the-counter market and listed on the Nasdaq Stock Market ("Nasdaq")
normally are valued at the last available sale price on Nasdaq prior to
valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation (other than short-term investments that mature in
60 days or less, which are valued as described further below). Securities and
assets for which market quotations are not readily available may be valued based
upon appraisals received from a pricing service using a computerized matrix
system or based upon appraisals derived from information concerning the security
or similar securities received from recognized dealers in those securities. All
other securities and assets are valued at fair value as determined in good faith
by or under the direction of the board. It should be recognized that judgment
often plays a greater role in valuing thinly traded securities, including many
lower rated bonds, than is the case with respect to securities for which a
broader range of dealer quotations and last-sale information is available. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining until maturity, unless the board determines that
this does not represent fair value.
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PERFORMANCE INFORMATION
The fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in the fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge is deducted from the initial $1,000 payment and, for
Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
The fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following tables show performance information for each class of the
fund's shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average annual return.
<TABLE>
<CAPTION>
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (5/10/93) (1/30/96) (7/22/92) (5/10/93)
------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year ended August 31, 2000:
Standardized Return*................. 9.22% 8.54% 12.55% 14.72%
Non-Standardized Return.............. 14.37% 13.54% 13.55% 14.72%
Five Years ended August 31, 2000
Standardized Return*................. 21.57% N/A 21.79% 23.04%
Non-Standardized Return.............. 22.70% N/A 21.79% 23.04%
Inception to August 31, 2000:
Standardized Return*................. 18.43% 20.62% 17.51% 19.51%
Non-Standardized Return.............. 19.18% 20.85% 17.51% 19.51%
</TABLE>
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----------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period. Class Y shares do not impose an initial or contingent deferred
sales charge; therefore, the performance information is the same for both
standardized return and non-standardized return for the periods indicated.
OTHER INFORMATION. In Performance Advertisements, the fund may compare
its Standardized Return and/or their Non-Standardized Return with data published
by Lipper Inc. ("Lipper") CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), with the
performance of recognized stock, bond and other indices, including the Standard
& Poor's 500 Composite Stock Price Index ("S&P 500"), the Dow Jones Industrial
Average, the International Finance Corporation Global Total Return Index, the
Nasdaq Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the
Lehman Bond Index, the Morgan Stanley Capital International Perspective Indices,
the Morgan Stanley Capital International Energy Sources Index, the Standard &
Poor's Oil Composite Index, the Morgan Stanley Capital International World
Index, the Lehman Brothers 20+ Year Treasury Bond Index, the Lehman Brothers
Government/Corporate Bond Index, other similar Lehman Brothers indices or
components thereof, the Salomon Smith Barney Non-U.S. World Government Bond
Index, and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The 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, SMART MONEY, MUTUAL FUNDS, FORBES, BUSINESS
WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO
TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in
Performance Advertisements may be in graphic form.
The fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the fund investment are reinvested
in additional fund shares, any future income or capital appreciation of the fund
would increase the value, not only of the original fund investment, but also of
the additional fund shares received through reinvestment. As a result, the value
of the fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(R) Money Markets. In comparing the fund's
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the fund are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The debt securities
held by the fund generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in any
fund involves greater risks than an investment in either a money market fund or
a CD.
The fund may also compare its performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.
39
<PAGE>
[REPRESENTATION OF CHART]
IBBOTSON CHART PLOT POINTS
CHART SHOWING PERFORMANCE OF S&P 500, LONG-TERM U.S. GOVERNMENT BONDS,
TREASURY BILLS AND INFLATION FROM 1925 THROUGH 1999
<TABLE>
<CAPTION>
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
1999 $28,456,286 $402,177 $93,998 $156,414
</TABLE>
Source: STOCKS, BONDS, BILLS AND INFLATION 1999 YEARBOOK(TM), Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not
represent any fund's performance. These returns consist of income and capital
appreciation (or depreciation) and should not be considered an indication or
guarantee of future investment results. Year-to-year fluctuations in certain
markets have been significant and negative returns have been experienced in
certain markets from time to time. Stocks are measured by the S&P 500, an
unmanaged weighted index comprising 500 widely held common stocks and varying in
composition. Unlike investors in bonds and U.S. Treasury bills, common stock
investors do not receive fixed income payments and are not entitled to repayment
of principal. These differences contribute to investment risk. Returns shown for
long-term government bonds are based on U.S. Treasury bonds with 20-year
maturities. Inflation is measured by the Consumer Price Index. The indexes are
unmanaged and are not available for investment.
Over time, although subject to greater risks and higher volatility,
stocks have outperformed all other investments by a wide margin, offering a
solid hedge against inflation. From January 1, 1926 to December 31, 1999, stocks
beat all other traditional asset classes. A $10,000 investment in the S&P 500
grew to $28,456,286, significantly more than any other investment.
TAXES
BACKUP WITHHOLDING. The fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
fund shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of the fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if the 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.
40
<PAGE>
SPECIAL RULE FOR CLASS A SHAREHOLDERS. A special tax rule applies when
a shareholder sells or exchanges Class A shares of the fund within 90 days of
purchase and subsequently acquires Class A shares of the same fund or another
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount would increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or
loss as a result of a conversion of Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. The fund intends to
continue to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code. To qualify, the fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain) ("Distribution Requirement") and must meet several additional
requirements. For the fund, these requirements include the following: (1) the
fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities, or other income (including gains
from options or futures) derived with respect to its business of investing in
securities ("Income Requirement"); (2) at the close of each quarter of the
fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If the fund failed to qualify for treatment as a RIC for any taxable
year, (1) it would be taxed as an ordinary corporation on its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and (2) the shareholders would treat all those distributions,
including distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), as dividends (that is, ordinary income)
to the extent of the fund's earnings and profits. In addition, the fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for RIC treatment.
OTHER INFORMATION. Dividends and other distributions declared by the
fund in December of any year that are payable to shareholders of record on a
date in that month will be deemed to have been paid by the fund and received by
the shareholders on December 31 if the distributions are paid by the fund during
the following January.
A portion of the dividends (whether paid in cash or in additional
shares) from the fund's investment company taxable income may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
for the fund may not exceed the aggregate dividends received by the fund from
U.S. corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax.
If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received thereon. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or capital gain distribution, the shareholder will pay full price for
the shares and receive some portion of the price back as a taxable distribution.
The fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for the calendar year and capital gain
net income for the one-year period ending on October 31 of that year, plus
certain other amounts.
The use of hedging strategies involving Derivative Instruments, such as
writing (selling) and purchasing options and futures contracts, involves complex
rules that will determine for income tax purposes the amount, char-
41
<PAGE>
acter and timing of recognition of the gains and losses the fund realizes in
connection therewith. Gains from options and futures derived by the fund with
respect to its business of investing in securities will qualify as permissible
income under the Income Requirement.
Certain futures contracts in which the fund may invest may be subject
to section 1256 of the Internal Revenue Code ("section 1256 contracts"). Any
section 1256 contracts a fund holds at the end of each taxable year generally
must be "marked-to-market" (that is, treated as having been sold at that time
for their fair market value) for federal income tax purposes, with the result
that unrealized gains or losses will be treated as though they were realized.
Sixty percent of any net gain or loss recognized on these deemed sales, and 60%
of any net realized gain or loss from any actual sales of section 1256
contracts, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that the fund must distribute to satisfy the Distribution
Requirement (i.e., with respect to the portion treated as short-term capital
gain), which will be taxable to its shareholders as ordinary income, and to
increase the net capital gain a fund recognizes, without in either case
increasing the cash available to the fund. The fund may elect not to have the
foregoing rules apply to any "mixed straddle" (that is, a straddle, clearly
identified by the fund in accordance with the regulations, at least one (but not
all) of the positions of which are section 1256 contracts), although doing so
may have the effect of increasing the relative proportion of net short-term
capital gain (taxable as ordinary income) and thus increasing the amount of
dividends that must be distributed.
Offsetting positions in any actively traded security, option or futures
contract entered into or held by the fund may constitute a "straddle" for
federal income tax purposes. Straddles are subject to certain rules that may
affect the amount, character and timing of the fund's gains and losses with
respect to positions of the straddle by requiring, among other things, that (1)
loss realized on disposition of one position of a straddle be deferred to the
extent of any unrealized gain in an offsetting position until the latter
position is disposed of, (2) the fund's holding period in certain straddle
positions not begin until the straddle is terminated (possibly resulting in gain
being treated as short-term rather than long-term capital gain) and (3) losses
recognized with respect to certain straddle positions, that otherwise would
constitute short-term capital losses, be treated as long-term capital losses.
Applicable regulations also provide certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and "short sale" rules applicable to
straddles. Different elections are available to the funds, which may mitigate
the effects of the straddle rules, particularly with respect to mixed straddles.
When a covered call option written (sold) by the fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When the fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by the fund is exercised, the fund will be treated
as having sold the underlying security, producing long-term or short-term
capital gain or loss, depending on the holding period of the underlying security
and whether the sum of the option price received on the exercise plus the
premium received when it wrote the option is more or less than the basis of the
underlying security.
If the fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option or futures contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
-- and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or a futures contract entered into by
the fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to the fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to sub-
42
<PAGE>
stantially identical or related property, such as having an option to sell,
being contractually obligated to sell, making a short sale or granting an option
to buy substantially identical stock or securities).
If the fund acquires zero coupon or other securities issued with
original issue discount ("OID") and/or Treasury inflation-protected securities
("TIPS"), on which principal is adjusted based on changes in the Consumer Price
Index, it must include in its gross income the OID that accrues on those
securities and the amount of any principal increases on TIPS during the taxable
year, even if it receives no corresponding payment on them during the year.
Similar treatment applies with respect to securities purchased at a discount
from their face value ("market discount"). Because the fund annually must
distribute substantially all of its investment company taxable income, including
any accrued OID, market discount and other non-cash income, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
would have to be made from the fund's cash assets or from the proceeds of sales
of portfolio securities, if necessary. The fund might realize capital gains or
losses from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain.
The foregoing is only a general summary of some of the important
federal tax considerations generally affecting the fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the fund's activities, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes applicable to the fund and to
dividends and other distributions therefrom.
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of the fund could, under certain circumstances, be held personally
liable for the obligations of the fund or the Trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust or the fund and requires that notice of such disclaimer be given in
each contract, instrument, certificate or undertaking made or issued by the
board members or by any officers or officer by or on behalf of the Trust or the
fund, the board members or any of them in connection with the Trust. The
Declaration of Trust provides for indemnification from the fund's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the fund itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. The board members intend
to conduct the fund's operations in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the fund.
Classes of Shares. A share of each class of the fund represents an
identical interest in the fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, if any. The different sales
charges and other expenses applicable to the different classes of shares of the
fund will affect the performance of those classes. Each share of the fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.
VOTING RIGHTS. Shareholders of the fund are entitled to one vote for
each full share held and fractional votes for fractional shares held. Voting
rights are not cumulative and, as a result, the holders of more than 50% of all
the shares of the Trust may elect all its board members. The shares of the fund
will be voted together, except that only the shareholders of a particular class
of the fund may vote on matters affecting only that class, such as the terms of
a Rule 12b-1 Plan as it relates to the class. The shares of each series of the
Trust will be voted separately, except when an aggregate vote of all the series
is required by law.
43
<PAGE>
The fund does not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of 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
outstanding shares of the Trust.
CLASS-SPECIFIC EXPENSES. The fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the transfer agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
PRIOR NAMES. Prior to November 1, 1995, the 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, the fund's Class C shares were called "Class B" shares.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at 1776 Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for the fund.
PFPC Inc., a subsidiary of PNC Bank, N.A, serves as the fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800
Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to
the fund. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and
Mitchell Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as the fund's independent auditors.
FINANCIAL STATEMENTS
The fund's Annual Report to Shareholders for its last fiscal year ended
August 31, 2000 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors or independent
accountants appearing therein are incorporated herein by this reference.
44
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
Investors should rely only on the
information contained in the Prospectus
and this Statement of Additional
Information. The fund and its
distributor has not authorized anyone to
provide you with information that is
different. The Prospectus and this
Statement of Additional Information are
not an offer to sell shares of the fund
in any jurisdiction where the fund or
its distributor may not lawfully sell
those shares. PAINEWEBBER
TACTICAL ALLOCATION FUND
-----------------------------------
Statement of Additional Information
December 31, 2000
-----------------------------------
(C)2000 PaineWebber Incorporated. All rights reserved.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(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) Interim Investment Management and Administration Contract
applicable to PaineWebber Global Equity Fund (filed herewith)
(c) Interim Sub-Advisory Contract with Martin Currie Inc.
applicable to PaineWebber Global Equity Fund (filed herewith)
(5) (a) Distribution Contract (filed herewith)
(b) Dealer Agreement (filed herewith)
(6) Bonus, profit sharing or pension plans - none
(7) Custody Contract(1)
(8) Transfer Agency Services and Shareholder Services Agreement(4)
(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(5)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares(5)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C shares(5)
(14) Multiple Class Plan pursuant to Rule 18f-3 (filed herewith)
(15) (a) Code of Ethics for Registrant, its investment adviser and its
principal distributor(6)
(b) Code of Ethics for Martin Currie Inc.(7)
---------
(1) Incorporated by reference from Post-Effective Amendment No. 22 to the
registration statement, SEC File No. 33-39659, filed - on February 27,
1998.
(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, SEC File No. 33-39659, filed on December 29,
1995.
C-1
<PAGE>
(4) Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 33-39659, filed on September 1,
1998.
(5) Incorporated by reference from Post-Effective Amendment No. 25 to the
registration statement, SEC File No. 33-39659, filed on November 23,
1998.
(6) Incorporated by reference from Post-Effective Amendment No. 29 to the
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed June 27, 2000.
(7) Incorporated by reference from Post-Effective Amendment No. 10 to the
registration statement of PaineWebber PACE Select Advisors Trust, SEC
File No. 33-87254, filed November 9, 2000.
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 the Investment Advisory and Administration Contract or the
Interim Investment Management and Administration Contract (each an "Advisory
Contract") between Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins")
and the Trust 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 each Advisory 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 Advisory
Contract. Each Advisory Contract also provides that the Trustees shall not be
liable for any obligations of the Trust or any series under the Advisory
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 Interim Sub-Advisory Contract between Mitchell Hutchins
and Martin Currie Inc. provides that Martin Currie Inc. 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 such Contract relates, except for a loss
resulting from the willful misfeasance, bad faith, or gross negligence of Martin
Currie Inc. in the performance of its duties or from its reckless disregard of
its obligations and duties under the Contract.
Section 9 of the 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, as amended ("1933 Act"). Section 9 of the 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 Distribution Contract.
Section 10 of the Distribution Contract contains provisions similar to that
of the section of each Advisory Contract limiting the liability of the Trust's
trustees.
Section 9 of the Dealer Agreement contains provisions similar to Section 9
of the Distribution Contract with respect to PaineWebber Incorporated
("PaineWebber").
Insofar as indemnification for liabilities arising under the 1933 Act, 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 an indirect wholly
C-3
<PAGE>
owned subsidiary of UBS AG. 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.
(b) Martin Currie Inc. Martin Currie Inc. serves as sub-adviser for
PaineWebber Global Equity Fund. Martin Currie Inc. is primarily
engaged in the investment management business. Information on the
offices and directors of Martin Currie Inc. is included in its Form
ADV filed with the Securities and Exchange Commission (registration
number 801-14261) 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.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
MITCHELL HUTCHINS SECURITIES TRUST
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 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.
<TABLE>
<CAPTION>
Positions and Offices With Underwriter or
Name Positions and Offices With Registrant Dealer
---- ------------------------------------- ------------------------
<S> <C> <C>
Margo N. Alexander* Trustee Chairman and a Director of Mitchell
Hutchins and an Executive Vice President
and a Director of PaineWebber
Brian M. Storms* Trustee and President Chief Executive Officer and President of
Mitchell Hutchins
T. Kirkham Barneby* Vice President Managing Director and Chief Investment
Officer-Quantitative Investments of
Mitchell Hutchins
Thomas Disbrow*** Vice President and Assistant Treasurer First Vice President and a Senior Manager
of the Mutual Fund Finance Department of
Mitchell Hutchins
Amy R. Doberman** Vice President Senior Vice President and General Counsel
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
Kevin J. Mahoney*** Vice President and Assistant Treasurer First Vice President and a Senior 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
Paul H. Schubert*** Vice President and Treasurer Senior Vice President and the 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
Keith A. Weller** Vice President and Assistant Secretary First Vice President and Senior Associate
General Counsel of Mitchell Hutchins
</TABLE>
--------------
*This person's business address of this person is 51 West 52nd Street, New York,
New York 10019-6114.
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<PAGE>
** This person's business address of this person is 1285 Avenue of the
Americas, New York, New York 10019-6028.
*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
(c) None.
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 10019-6028
and Mitchell Hutchins, 51 West 52nd Street, New York, New York 10019-6114. 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
None.
C-5
<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 27th day of December, 2000.
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/ Brian M. Storms President and Trustee December 27, 2000
--------------------------- (Chief Executive Officer)
Brian M. Storms*
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman December 27, 2000
--------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. **
/s/ Margo N. Alexander Trustee December 27, 2000
---------------------------
Margo N. Alexander **
/s/ Richard Q. Armstrong Trustee December 27, 2000
---------------------------
Richard Q. Armstrong **
/s/ Richard R Burt Trustee December 27, 2000
---------------------------
Richard R. Burt **
/s/ Meyer Feldberg Trustee December 27, 2000
---------------------------
Meyer Feldberg **
/s/ George W. Gowen Trustee December 27, 2000
---------------------------
George W. Gowen **
/s/ Frederic V. Malek Trustee December 27, 2000
---------------------------
Frederic V. Malek **
/s/ Carl W. Schafer Trustee December 27, 2000
---------------------------
Carl W. Schafer **
/s/ Paul H. Schubert Vice President and Treasurer (Chief December 27, 2000
--------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
November 13, 2000 and incorporated by reference from Exhibit No. 16 to
Post-Effective Amendment No. 28 to the registration statement of
PaineWebber Securities Trust, SEC File 33-55374, filed November 30, 2000.
** 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
Exhibit
Number
-------
(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) Interim Investment Management and Administration Contract
applicable to PaineWebber Global Equity Fund (filed
herewith)
(c) Interim Sub-Advisory Contract with Martin Currie Inc.
applicable to PaineWebber Global Equity Fund (filed herewith)
(5) (a) Distribution Contract (filed herewith)
(b) Dealer Agreement (filed herewith)
(6) Bonus, profit sharing or pension plans - none
(7) Custody Contract(1)
(8) Transfer Agency Services and Shareholder Services Agreement(4)
(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(5)
(b) Plan of Distribution pursuant to Rule 12b-1 with respec
to Class B shares(5)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class C shares(5)
(14) Multiple Class Plan pursuant to Rule 18f-3 (filed herewith)
(15) (a) Code of Ethics for Registrant, its investment adviser and its
principal distributor(6)
(b) Code of Ethics for Martin Currie Inc.(7)
------------------------------
(1) Incorporated by reference from Post-Effective Amendment No. 22 to the
registration statement, SEC File No. 33-39659, filed on February 27, 1998.
(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, SEC File No. 33-39659, filed on December 29,
1995.
<PAGE>
(4) Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 33-39659, filed on September 1, 1998.
(5) Incorporated by reference from Post-Effective Amendment No. 25 to the
registration statement, SEC File No. 33-39659, filed on November 23, 1998.
(6) Incorporated by reference from Post-Effective Amendment No. 29 to the
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed June 27, 2000.
(7) Incorporated by reference from Post-Effective Amendment No. 10 to the
registration statement of PaineWebber PACE Select Advisors Trust, SEC File
No. 33-87254, filed November 9, 2000.
