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PaineWebber Strategic Income Fund
1285 Avenue of the Americas, New York, New York 10019
Prospectus -- June 1, 1995
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PAINEWEBBER STRATEGIC INCOME FUND is a professionally managed mutual fund
seeking a high level of current income and, secondarily, capital appreciation
by strategically allocating its investment portfolio among sectors of the U.S.
and foreign income securities markets.
The Fund is a series of PaineWebber Securities Trust ("Trust"). This Prospectus
concisely sets forth information about the Fund a prospective investor should
know before investing. Please retain this Prospectus for future reference.
The Fund may invest predominantly in lower rated bonds, commonly referred to as
"junk bonds." Bonds of this type are considered to be speculative with respect
to the payment of interest and return of principal. Purchasers should carefully
assess the risks associated with an investment in this Fund.
A Statement of Additional Information dated June 1, 1995, (which is
incorporated by reference herein) has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting the Fund, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
An investment in PaineWebber Strategic Income Fund offers the following
advantages:
. Professional Management
. Dividend and Capital Gain Reinvestment
. Flexible Pricing/SM/
. Low Minimum Investment
. Automatic Investment Plan
. Systematic Withdrawal Plan
. Exchange Privileges
. Suitable For Retirement Plans
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Prospectus Page 1
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PAINEWEBBER STRATEGIC INCOME FUND
Table of Contents
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Financial Highlights....................................................... 7
Flexible Pricing System.................................................... 8
Investment Objectives and Policies......................................... 9
Purchases.................................................................. 21
Exchanges.................................................................. 23
Redemptions................................................................ 24
Conversion of Class B Shares............................................... 25
Other Services and Information............................................. 26
Dividends and Taxes........................................................ 27
Valuation of Shares........................................................ 28
Management................................................................. 28
Performance Information.................................................... 30
General Information........................................................ 31
Appendix A................................................................. 33
Appendix B................................................................. 36
Appendix C................................................................. 39
</TABLE>
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Prospectus Page 2
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PAINEWEBBER STRATEGIC INCOME FUND
Prospectus Summary
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See the body of this Prospectus for more information on the topics discussed in
this summary.
The Fund: PaineWebber Strategic Income Fund ("Fund") is a non-
diversified series of an open-end management invest-
ment company.
Investment Objectives The Fund's primary investment objective is to achieve
and Policies: a high level of current income. As a secondary objec-
tive, the Fund seeks capital appreciation. The Fund
seeks to achieve its investment objectives by invest-
ing in a portfolio of income securities that is stra-
tegically allocated among the following investment
sectors: U.S. government and investment grade securi-
ties, U.S. high yield, high risk securities, and for-
eign and emerging market securities. A portion of the
Fund's assets normally will be invested in each of
these investment sectors, but the Fund has the flexi-
bility at any time to invest all or substantially all
of its assets in any one of these sectors.
Total Net Assets: $74.4 million at April 30, 1995.
Investment Adviser: Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber" or "PW"), man-
ages over $41.5 billion in assets. See "Management."
Purchases: Shares of beneficial interest are available exclu-
sively through PaineWebber and its correspondent firms
for investors who are clients of PaineWebber or those
firms ("PaineWebber clients") and, for other invest-
ors, through PFPC Inc., the Fund's transfer agent
("Transfer Agent").
Flexible Pricing Investors may select Class A, Class B or Class D
System: shares, each with a public offering price that re-
flects different sales charges and expense levels. See
"Flexible Pricing System," "Purchases," "Redemptions"
and "Conversion of Class B Shares."
Class A Shares Offered at net asset value plus any applicable sales
charge (maximum is 4% of public offering price).
Class B Shares Offered at net asset value (a maximum contingent de-
ferred sales charge of 5% of redemption proceeds is
imposed on certain redemptions made within six years
of date of purchase). Class B shares automatically
convert into Class A shares (which pay lower ongoing
expenses) approximately six years after purchase.
Class D Shares Offered at net asset value without an initial or con-
tingent deferred sales charge. Class D shares pay
higher ongoing expenses than Class A shares and do not
convert into another Class.
Exchanges: Shares may be exchanged for shares of the correspond-
ing Class of most PaineWebber and Mitchell
Hutchins/Kidder, Peabody ("MH/KP") mutual funds.
Redemptions: PaineWebber clients may redeem through PaineWebber;
other shareholders must redeem through the Transfer
Agent.
Dividends: Declared and paid monthly; net capital gain is dis-
tributed annually. See "Dividends and Taxes."
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PAINEWEBBER STRATEGIC INCOME FUND
Prospectus Summary
(Continued)
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All dividends and capital gain distributions are paid
in Fund shares of the same Class at net asset value
Reinvestment: unless the shareholder has requested cash.
Minimum Purchase: $1,000 for the first purchase; $100 for subsequent
purchases.
Other Features:
Class A Shares Automatic investment plan Quantity discounts on initial
Systematic withdrawal plan sales charge
Rights of accumulation 365-day reinstatement privilege
Class B Shares Automatic investment plan Systematic withdrawal plan
Class D Shares Automatic investment plan Systematic withdrawal plan
------------------
WHO SHOULD INVEST. The Fund enables investors to participate in investment
opportunities in three distinct sectors of the fixed income market: (1) U.S.
government securities and investment grade income securities of corporate and
other non-governmental U.S. issuers ("U.S. Government and Investment Grade
Securities"); (2) high yield, high risk income securities of U.S. issuers
("U.S. High Yield Securities"); and (3) government, corporate or other income
securities of non-U.S. issuers ("Foreign and Emerging Market Securities").
Each of these sectors generally reacts differently to interest rate changes and
reacts in different ways or at different times to different economic events.
Data from the Lehman Aggregate Bond Index, the Salomon Brothers High Yield
Index, the Merrill Lynch High Yield Index and the Salomon Brothers World
Government Bond Index indicate that these sectors are not closely correlated.
This means that when one sector underperforms the market as a whole, another
sector may perform at roughly the same level as the market, while the third
sector may outperform the market.
The Fund has the flexibility to strategically allocate its assets among these
investment sectors to attempt to realize a high level of current income and,
secondarily, capital appreciation, based upon economic conditions and interest
rate trends both in the U.S. and around the world. However, the Fund is
designed for investors willing to assume additional risk in return for the
potential for such returns. While the Fund is not intended to provide a
complete or balanced investment program, it can serve as one component of an
investor's long-term program to accumulate assets for retirement, college
tuition or other major goals.
RISK FACTORS. There can be no assurance that the Fund will achieve its
investment objectives.
The U.S. High Yield Securities and all or a portion of the Foreign and Emerging
Market Securities in which the Fund invests will be rated below investment
grade (BB or Ba/ba or lower) by Standard & Poor's Ratings Group ("S&P") or
Moody's Investors Service, Inc. ("Moody's"), be comparably rated by another
nationally recognized statistical rating organization ("NRSRO") or, if not
rated, be determined by Mitchell Hutchins to be of comparable quality to such
rated securities. Such securities (commonly known as "junk bonds") are subject
to greater risks of default or price fluctuation than investment grade
securities and are deemed by S&P and Moody's to be predominantly speculative.
High yield, high risk securities are especially subject to adverse changes in
general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price
fluctuations in response to changes in interest rates.
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PAINEWEBBER STRATEGIC INCOME FUND
Prospectus Summary
(Continued)
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Foreign securities, particularly those of issuers located in emerging markets,
involve certain considerations not typically associated with investing in
securities of U.S. companies. These include risks relating to political, social
and economic developments abroad and to the differences between the regulations
to which U.S. and foreign issuers and markets are subject. Individual foreign
economies may differ from the U.S. economy. Investments in sovereign debt of
foreign governments involve special risks. The Fund may invest without limit in
securities denominated in currencies other than the U.S. dollar and may hold
foreign currencies. The value of these investments thus can be adversely
affected by fluctuations in foreign currency values.
Some foreign currencies can be volatile and may be subject to governmental
controls or intervention.
As a "non-diversified" investment company, as defined by the Investment Company
Act of 1940 ("1940 Act"), the Fund may be subject to greater risk with respect
to its portfolio securities than an investment company that is "diversified"
because changes in the financial condition or market assessment of a single
issuer may cause greater fluctuations in the total return and price of the
Fund's shares.
Prospective investors are urged to read "Investment Objectives and Policies"
for more complete information about risk factors.
EXPENSES OF INVESTING IN THE FUND. The following tables are intended to assist
investors in understanding the expenses associated with investing in the Fund.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum sales charge on purchases of shares (as a
percentage of public offering price)................. 4% None None
Sales charge on reinvested dividends.................. None None None
Exchange fee.......................................... $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a
percentage of redemption proceeds)................... None 5% None
Annual Fund Operating Expenses(2)
(as a percentage of average net assets)
Management fees....................................... 0.75% 0.75% 0.75%
12b-1 fees(3)......................................... 0.25 1.00 0.75
Other expenses........................................ 0.49 0.49 0.48
----- ----- -----
Total operating expenses.............................. 1.49% 2.24% 1.98%
===== ===== =====
</TABLE>
Example of Effect of Fund Expenses
An investor would directly or indirectly pay the following expenses on a $1,000
investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares(4).................... $55 $ 85 $118 $211
Class B Shares:
Assuming a complete redemption at
end of period(5).................. $74 $103 $143 $221
Assuming no redemption............. $23 $ 70 $120 $221
Class D Shares....................... $20 $ 62 $107 $231
</TABLE>
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PAINEWEBBER STRATEGIC INCOME FUND
Prospectus Summary
(Continued)
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This Example assumes that all dividends and other distributions are reinvested
and that the percentage amounts listed under Annual Fund Operating Expenses
remain the same in the years shown. The above tables and the assumption in the
Example of a 5% annual return are required by regulations of the Securities and
Exchange Commission ("SEC") applicable to all mutual funds; the assumed 5%
annual return is not a prediction of, and does not represent, the projected or
actual performance of any Class of the Fund's shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The actual expenses attributable to each Class of the Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which the Fund incurs variable expenses, such as transfer agency costs.
- -------
(1) Sales charge waivers are available for Class A and Class B shares, reduced
sales charge purchase plans are available for Class A shares and exchange
fee waivers are available for all three Classes. The maximum 5% contingent
deferred sales charge on Class B shares applies to redemptions during the
first year after purchase; the charge generally declines by 1% annually
thereafter, reaching zero after six years. See "Purchases."
(2) See "Management" for additional information. The management fee payable to
Mitchell Hutchins is greater than the management fee paid by most funds.
"Other expenses" have been annualized based on the actual expenses incurred
from February 7, 1994 (commencement of operations) to January 31, 1995.
(3) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
12b-1 service fees.................................. 0.25% 0.25% 0.25%
12b-1 distribution fees............................. 0.00 0.75 0.50
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class D shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charges permitted by the National Association of Securities
Dealers, Inc.
(4) Assumes deduction at the time of purchase of the maximum 4% initial sales
charge.
(5) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
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PAINEWEBBER STRATEGIC INCOME FUND
Financial Highlights
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The table below provides selected per share data and ratios for one Class A
share, one Class B share and one Class D share for the period shown. This
information is supplemented by the financial statements for such period and the
accompanying notes appearing in the Fund's Annual Report to Shareholders for
the fiscal year ended January 31, 1995, which are incorporated by reference
into the Fund's Statement of Additional Information. The financial statements
and notes and the financial information in the table below have been audited by
Price Waterhouse LLP, independent accountants, whose unqualified report thereon
is included in the Annual Report to Shareholders. Further information about the
Fund's performance also is included in the Annual Report to Shareholders, which
may be obtained without charge.
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 7, 1994#
THROUGH
JANUARY 31, 1995
---------------------------
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of period............. $10.00 $10.00 $10.00
------- ------- -------
Net decrease from investment operations:
Net investment income.......................... 0.74 0.66 0.69
Net realized and unrealized losses from invest-
ment and foreign currency transactions........ (1.49) (1.47) (1.48)
------- ------- -------
Net decrease in net asset value from investment
operations...................................... (0.75) (0.81) (0.79)
------- ------- -------
Less distributions:
Dividends from net investment income........... (0.65) (0.59) (0.61)
------- ------- -------
Net asset value, end of period................... $ 8.60 $ 8.60 $8.60
======= ======= =======
Total investment return (1)...................... (7.61)% (8.22)% (8.02)%
======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000's).............. $11,148 $40,710 $21,208
Ratio of expenses to average net assets*....... 1.49% 2.24% 1.98%
Ratio of net investment income to average net
assets*....................................... 8.06% 7.46% 7.62%
Portfolio turnover rate........................ 116.73% 116.73% 116.73%
</TABLE>
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# Commencement of operations.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period, reinvestment of all dividends and other
distributions at net asset value on the payable dates, and a sale at net
asset value on the last day of the period. The figures do not include sales
charges; results for Class A and Class B would be lower if sales charges
were included. Total investment returns have not been annualized.
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Prospectus Page 7
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PAINEWEBBER STRATEGIC INCOME FUND
Flexible Pricing System
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DIFFERENCES AMONG THE CLASSES
The primary distinctions among the Classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of distribution fees.
These differences are summarized in the table below. Each Class has distinct
advantages and disadvantages for different investors, and investors may choose
the Class that best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------ ------------------------ ----------------------
<C> <S> <C> <C>
Class A Maximum initial sales Service fee of 0.25% Initial sales charge
charge of 4% of the pub- waived or reduced for
lic offering price certain purchases
Class B Maximum contingent de- Service fee of 0.25%; Shares convert to
ferred sales charge of distribution fee of Class A shares
5% of redemption pro- 0.75% approximately six
ceeds; declines to zero years after issuance
after six years
Class D None Service fee of 0.25%; --
distribution fee of
0.50%
</TABLE>
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES
In deciding which Class of shares to purchase, investors should consider the
cost of sales charges together with the cost of the ongoing annual expenses
described below, as well as any other relevant facts and circumstances.
SALES CHARGES. Class A shares are sold at net asset value plus an initial sales
charge of up to 4% of the public offering price. Because of this initial sales
charge, not all of a Class A shareholder's purchase price is invested in the
Fund. Class B shares are sold with no initial sales charge, but a contingent
deferred sales charge of up to 5% of the redemption proceeds applies to
redemptions made within six years of purchase. Class D shareholders pay no
initial or contingent deferred sales charges. Thus, the entire amount of a
Class B or Class D shareholder's purchase price is immediately invested in the
Fund.
WAIVERS AND REDUCTIONS OF CLASS A SALES CHARGES. Class A share purchases over
$100,000 and Class A share purchases made under the Fund's reduced sales charge
plan may be made at a reduced sales charge. In considering the combined cost of
sales charges and ongoing annual expenses, investors should take into account
any reduced sales charges on Class A shares for which they may be eligible.
The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class D shares, investors eligible for complete waivers
should purchase Class A shares.
ONGOING ANNUAL EXPENSES. All three Classes of Fund shares pay an annual 12b-1
service fee of 0.25% of average daily net assets. Class B shares pay an annual
12b-1 distribution fee of 0.75% of average daily net assets. Class D shares pay
an annual 12b-1 distribution fee of 0.50% of average daily net assets. Annual
12b-1 distribution fees are a form of asset-based sales charge. An investor
should consider both ongoing annual expenses and initial or contingent deferred
sales charges in estimating the costs of investing in the
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Prospectus Page 8
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PAINEWEBBER STRATEGIC INCOME FUND
respective Classes of Fund shares over various time periods.
For example, assuming a constant net asset value, the cumulative distribution
fees on the Fund's Class B or Class D shares would approximate the expenses of
the 4% maximum initial sales charge on the Class A shares if the shares were
held for approximately 5 1/2 years in the case of the Class B shares and
approximately 8 years in the case of the Class D shares. Class B shares convert
to Class A shares (which do not bear the expense of ongoing distribution fees)
approximately six years after purchase. The cumulative distribution fees on the
Fund's Class D shares would approximate the cumulative distribution fees on the
Class B shares if the shares were held for 9 years. Thus, an investor who would
be subject to the maximum initial sales charge on Class A shares and who
expects to hold shares of the Fund for less than 8 years generally should
expect to pay the lowest cumulative expenses by purchasing Class D shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net
asset value of Fund shares, which will affect the actual amount of expenses
paid. Expenses borne by Classes may differ slightly because of the allocation
of other Class-specific expenses. The "Example of Effect of Fund Expenses"
under "Prospectus Summary" shows the cumulative expenses an investor would pay
over time on a hypothetical investment in each Class of Fund shares, assuming
an annual return of 5%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of compensation
for selling one particular Class of Fund shares rather than another. Investors
should understand that distribution fees and initial and contingent deferred
sales charges all are intended to compensate Mitchell Hutchins for distribution
services.
See "Purchases," "Redemptions" and "Management" for a more complete description
of the initial and contingent deferred sales charges, service fees and
distribution fees for the three Classes of shares in the Fund. See also
"Conversion of Class B Shares," "Dividends and Taxes," "Valuation of Shares"
and "General Information" for other differences among the three Classes.
- --------------------------------------------------------------------------------
Investment Objectives and Policies
- --------------------------------------------------------------------------------
The Fund's primary investment objective is to achieve a high level of current
income. As a secondary objective, the Fund seeks capital appreciation. The Fund
seeks to achieve its investment objectives by investing in a portfolio of
income securities that is strategically allocated among U.S. Government and
Investment Grade Securities, U.S. High Yield Securities and Foreign and
Emerging Market Securities. Mitchell Hutchins allocates the Fund's assets among
these investment sectors based on its assessment of relative values, currency
and interest rate trends and economic, credit and political conditions.
Mitchell Hutchins believes that the relative investment opportunities and risks
presented by securities in these sectors will vary so that, over time,
securities in one or more of the Fund's three sectors will become undervalued
relative to the risks presented. Accordingly, the relative investment
performance of these investment sectors will change over time, and the best
performing sector frequently will change from year to year.
Mitchell Hutchins seeks to take advantage of these changes in relative
performance by allocating a greater proportion of the Fund's assets in those
investment sectors that it believes are undervalued. A portion of the Fund's
assets normally is invested in each of these investment sectors, which should
reduce the risks associated with investing only in any one sector. However, the
Fund has the flexibility at any time to invest all or substantially all of its
assets in any one sector. If successful, the Fund's strategic allocation should
enable the Fund to achieve a higher level of investment return over time than
if the Fund invested exclusively in any one
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Prospectus Page 9
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PAINEWEBBER STRATEGIC INCOME FUND
investment sector or allocated a fixed proportion of its assets to each
investment sector. The Fund is, however, more dependent on the ability of
Mitchell Hutchins to successfully evaluate the relative values of the Fund's
three investment sectors than is the case with a fund that does not seek to
adjust market sector allocations over time. The Fund is not intended to be a
complete investment program and is designed for investors willing to assume
additional risk in return for the potential for high current income and,
secondarily, capital appreciation.
Allocations among the Fund's three investment sectors and investment decisions
with respect to the assets allocated to each sector are made by an investment
management team comprised of Dennis McCauley, who acts as the Fund's allocation
manager, and the Fund's sector managers, Nirmal Singh, Craig Varrelman, Thomas
J. Libassi and Stuart Waugh. Determinations as to percentage allocations for
each sector are made by Mr. McCauley, based upon advice from each sector
manager as to the market considerations applicable to his respective sector.
Decisions as to investments within each sector are made by the respective
sector managers based on market outlook, investment research, geographic
analysis and forecasts regarding currencies and interest rates.
There can be no assurance that the Fund will achieve its investment objectives.
The Fund's investment objectives and certain investment limitations as
described in the Statement of Additional Information are fundamental policies
that may not be changed without shareholder approval. All other investment
policies may be changed by the Trust's board of trustees without shareholder
approval.
U.S. GOVERNMENT AND INVESTMENT GRADE SECURITIES. The U.S. Government and
Investment Grade Securities in which the Fund may invest include (1) U.S.
Treasury obligations and mortgage-backed and other securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities ("U.S.
government securities") and (2) mortgage-backed and asset-backed securities,
bonds and other fixed and variable rate income securities that are issued by
corporate and other non-governmental U.S. issuers and that at the time of
purchase are rated BBB or higher by S&P or Baa/baa or higher by Moody's, are
comparably rated by another NRSRO or, if not rated, are determined by Mitchell
Hutchins to be comparable to such rated securities. In selecting U.S.
Government and Investment Grade Securities for the Fund's portfolio, Mitchell
Hutchins will consider factors such as the general level of interest rates,
changes in the perceived creditworthiness of the issuers, the prepayment
outlook for the mortgage market and changes in general economic conditions and
business conditions affecting the issuers and their respective industries.
The Fund may invest in U.S. government securities that are backed by the full
faith and credit of the U.S. government, such as U.S. Treasury obligations,
securities that are supported primarily or solely by the creditworthiness of
the government-related issuer, such as securities issued by the Resolution
Funding Corporation, the Student Loan Marketing Association, the Federal Home
Loan Banks and the Tennessee Valley Authority, and securities that are
supported primarily or solely by specific pools of assets and the
creditworthiness of a U.S. government-related issuer, such as U.S. government
mortgage-backed securities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. For more information concerning the types of mortgage-backed
securities in which the Fund may invest, see Appendix B.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment sale contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Payments or
distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution
unaffiliated with the issuer or other credit enhancements may be present.
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Prospectus Page 10
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PAINEWEBBER STRATEGIC INCOME FUND
The yield characteristics of the mortgage- and asset-backed securities in which
the Fund may invest differ from those of traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently on mortgage- and asset-backed securities, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. See "--Other Investment
Policies and Risk Factors" herein and "Investment Policies and Restrictions" in
the Statement of Additional Information.
U.S. HIGH YIELD SECURITIES. The U.S. High Yield Securities in which the Fund
may invest include bonds, debentures, notes, mortgage- and asset-backed
securities, convertible debt and preferred stock that are issued by corporate
and other non-governmental U.S. issuers and that at the time of purchase are
rated BB or lower by S&P or Ba/ba or lower by Moody's, are comparably rated by
another NRSRO or, if not rated, are determined by Mitchell Hutchins to be
comparable to such rated securities. Such securities are commonly referred to
as "junk bonds" and involve a high degree of risk. The U.S. High Yield
Securities in which the Fund may invest may be rated as low as D by S&P or C by
Moody's or be comparable, unrated securities. Such obligations are highly
speculative and may be in default in the payment of interest and the repayment
of principal. See "--Other Investment Policies and Risk Factors." For further
information regarding S&P and Moody's ratings, see Appendix A.
In selecting U.S. High Yield Securities for the Fund's portfolio, Mitchell
Hutchins seeks to identify issuers and industries that Mitchell Hutchins
believes are more likely to experience stable or improving financial
conditions. Many corporations are in the process of strengthening, or have
recently improved, their financial positions through cost-cutting,
restructuring or refinancing with lower cost debt. Mitchell Hutchins expects
that, at times when the U.S. economy is improving, these factors and others may
lead many issuers to experience financial improvement and possible credit
upgrades. Mitchell Hutchins seeks to identify these issuers through detailed
credit research. Mitchell Hutchins' analysis may include consideration of
general industry trends, the issuer's experience and managerial strength,
changing financial conditions, borrowing requirements or debt maturity
schedules, the issuer's responsiveness to changes in business conditions and
interest rates, and other terms and conditions. Mitchell Hutchins may also
consider relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects.
FOREIGN AND EMERGING MARKET SECURITIES. The Foreign and Emerging Market
Securities in which the Fund may invest include (1) Brady Bonds and other debt
securities issued or guaranteed by governments, their agencies,
instrumentalities or political subdivisions located in foreign countries,
including industrialized countries and emerging market countries, or by central
banks located in such countries (collectively, "Sovereign Debt") and debt
securities issued by multilateral institutions such as the International Bank
for Reconstruction and Development ("World Bank") and the International
Monetary Fund ("IMF"); (2) debt securities and preferred stock issued by
corporations, banks and other business entities located in foreign countries,
including industrialized countries and emerging market countries, or securities
denominated in or indexed to the currencies of foreign countries; and (3)
interests in issuers organized and operated for the purpose of securitizing or
restructuring the investment characteristics of any of the foregoing. The Fund
may invest without limit in securities of issuers located in any country in the
world, including both industrialized and emerging market countries.
Mitchell Hutchins selectively invests the Fund's assets allocated to Foreign
and Emerging Market Securities in securities of issuers in countries where the
combination of income market yields, the price appreciation potential of income
securities and, with respect to non-U.S. dollar-denominated securities,
currency exchange rate movements present opportunities for high current income
and, secondarily, capital appreciation. Determinations as to the foreign
markets in which the Fund invests are based on an evaluation of total debt
levels, currency reserve levels, net exports/imports, overall economic growth,
level of inflation, currency fluctuation, political and social climate and
payment history of the country in which the issuer is located. Particular
securities are selected based upon credit risk analysis of potential issuers,
the characteristics of the security and interest rate sensitivity of the
various issues by a single issuer, analysis of volatility and
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liquidity of these particular instruments, and the tax implications of various
instruments to the Fund. While the Fund generally is not restricted in the
portion of its assets which may be invested in a single country or region,
under normal conditions the Fund's assets will be invested in issuers located
in at least three countries. No more than 25% of the Fund's total assets will
be invested in securities issued or guaranteed by any single foreign
government.
The Foreign and Emerging Market Securities in which the Fund may invest are not
required to meet any minimum credit rating standard and may not be rated by any
NRSRO. All or a substantial portion of the Fund's investments in Foreign and
Emerging Market Securities may be rated below investment grade or may be
unrated securities with credit characteristics that are comparable to
securities that are rated below investment grade. The Fund may invest without
limit in securities of issuers in emerging market countries and in non-U.S.
dollar-denominated income securities, including securities denominated in the
local currencies of emerging market countries. See "--Other Investment Policies
and Risk Factors" herein and "Investment Policies and Restrictions" in the
Statement of Additional Information.
OTHER INVESTMENT POLICIES AND RISK FACTORS
RISKS OF INCOME SECURITIES. The value of the corporate, government and other
income securities held by the Fund, and thus the net asset value of the Fund's
shares, generally fluctuates with (1) movements in interest rates, (2) changes
in the perceived creditworthiness of the issuers of those securities, and (3)
with respect to non-U.S. dollar-denominated securities, changes in the relative
values of the currencies in which the Fund's investments are denominated with
respect to the U.S. dollar. The extent of the fluctuation of the Fund's net
asset value depends on various other factors, such as the average maturity of
the Fund's investments, the extent to which the Fund holds instruments
denominated in foreign currencies and the extent to which the Fund hedges its
interest rate, credit and currency exchange rate risks. There are no
limitations on the maturities of the income securities in which the Fund may
invest or on the average maturity of the Fund's portfolio.
RISKS OF HIGH YIELD, HIGH RISK SECURITIES. The U.S. High Yield Securities and
all or a portion of the Foreign and Emerging Market Securities in which the
Fund invests are high yield, high risk securities that are rated below
investment grade or will be comparable, unrated securities. Debt securities
rated below investment grade are deemed by S&P and Moody's to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal and may involve major risk exposures to adverse conditions.
The high yield, high risk securities in which the Fund may invest include
securities having the lowest ratings assigned by S&P or Moody's and, together
with comparable unrated securities, may include securities that are in default
or that face the risk of default with respect to the payment of principal or
interest. Such securities are generally unsecured and are often subordinated to
other creditors of the issuer. To the extent the Fund is required to seek
recovery upon a default in the payment of principal or interest on its
portfolio holdings, the Fund may incur additional expenses and may have limited
legal recourse in the event of a default.
Ratings of income securities represent the rating agencies' opinions regarding
their quality, are not a guarantee of quality and may be reduced after the Fund
has acquired the security. Mitchell Hutchins will consider such an event in
determining whether the Fund should continue to hold the security but is not
required to dispose of it. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security. Also, NRSROs may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
High yield, high risk income securities generally offer a higher current yield
than that available from higher grade issues, but they involve higher risks in
that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes
in the financial condition of the issuers and to price fluctuations in response
to changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress, which
could adversely affect their ability to make
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payments of principal and interest and increase the possibility of default.
Certain emerging market governments that issue high yield, high risk debt
securities are among the largest debtors to commercial banks, foreign
governments and supranational organizations such as the World Bank and may not
be able or willing to make principal or interest payments as they come due.
The market for high yield, high risk securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many high yield, high risk income securities declined substantially,
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on such securities rose
dramatically. Such higher yields did not reflect the value of the income stream
that holders of such securities expected, but rather the risk that holders of
such securities could lose a substantial portion of their value as a result of
the issuers' financial restructuring or default. There can be no assurance that
such declines will not recur. The market for high yield, high risk securities
generally is thinner and less active than that for higher quality securities,
which may limit the Fund's ability to sell such securities at fair value in
response to changes in the economy or the financial markets. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
also decrease the values and liquidity of high yield, high risk securities,
especially in a thinly traded market.
Although Mitchell Hutchins attempts to minimize the speculative risks
associated with investments in high yield, high risk securities through
securities selection, credit analysis and attention to current trends in
interest rates and other factors, investors should consider their ability to
assume these investment risks before making an investment in the Fund.
As of the end of its 1995 fiscal year, the Fund had 74.3% of its net assets in
debt securities that received a rating from S&P or Moody's or another NRSRO and
25.7% of its net assets in debt securities that were not so rated. The Fund had
the following percentages of its net assets invested in rated securities:
AAA/Aaa (including cash items)--26.9%, AA/Aa--0%, A/A--0%, BBB/Baa--2.0%,
BB/Ba--12.1%, B/B--31.5%, CCC/Caa--1.8%, CC--0%, C--0% and D--0%. It should be
noted that this information reflects the composition of the Fund's assets as of
the end of that fiscal year, and is not necessarily representative of the
Fund's assets as of any other time in the 1995 fiscal year, the current fiscal
year or at any time in the future.
RISKS OF FOREIGN AND EMERGING MARKET SECURITIES. The Foreign and Emerging
Market Securities in which the Fund may invest involve risks relating to
political, social and economic developments abroad, as well as risks resulting
from the differences between the regulations to which U.S. and foreign issuers
and markets are subject. These risks may include nationalization,
expropriation, confiscatory taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of Fund assets and political or
social instability or diplomatic developments, including armed conflict. Such
events have occurred in the past in countries in which the Fund is authorized
to invest and could adversely affect the Fund's assets should these conditions
or events recur. While Mitchell Hutchins intends to manage the Fund's portfolio
in a manner that will reduce the exposure to such risks, there can be no
assurance that such events will not cause the Fund to suffer a loss of interest
or principal on any of its holdings. Investors should consider their ability to
assume these investment risks before making an investment in the Fund.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self- sufficiency and balance of
payments position. Securities of many foreign companies may be less liquid and
their prices more volatile than securities of comparable U.S. companies. While
the Fund generally invests only in securities that are traded on recognized
exchanges or in over-the-counter ("OTC") markets, foreign securities may from
time to time be difficult to liquidate rapidly without significantly depressing
the price of such securities. There may be less publicly available information
concerning foreign issuers of securities held by the Fund than is available
concerning U.S. companies. Transactions in foreign securities may be subject to
less efficient settlement practices. Foreign securities trading practices,
including those involving securities settlement where Fund assets may be
released prior to receipt of payment, may expose the Fund to increased risk in
the event of a failed trade or the insolvency of a foreign broker-dealer. Legal
remedies for defaults and disputes may have to be
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pursued in foreign courts, whose procedures differ substantially from those of
U.S. courts.
The risks of investing in foreign securities may be greater with respect to
securities of issuers in, or denominated in the currencies of, emerging market
countries. The Fund may invest in such securities without limit. The economies
of emerging market countries generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade. Many emerging market countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain emerging market
countries. The securities markets of emerging market countries are
substantially smaller, less developed, less liquid and more volatile than the
securities markets of the United States and other developed countries.
Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the United States and other major markets.
There also may be a lower level of monitoring and regulation of emerging
markets and the activities of investors in such markets, and enforcement of
existing regulations may be extremely limited. Investing in local markets,
particularly in emerging market countries, may require the Fund to adopt
special procedures, seek local government approvals or take other actions, each
of which may involve additional costs to the Fund. Certain emerging market
countries may also restrict investment opportunities in issuers in industries
deemed important to national interests.
Foreign investment in foreign debt securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain securities and increase the costs and expenses of
the Fund. Certain countries require governmental approval prior to investments
by foreign persons, limit the amount of investment by foreign persons in a
particular issuer, limit the investment by foreign persons only to a specific
class of securities of an issuer that may have less advantageous rights than
the classes available for purchase by domiciliaries of the countries and impose
additional taxes on foreign investors. Foreign countries may require
governmental approval for the repatriation of investment income, capital or the
proceeds of sales of securities by foreign investors. In addition, if a
deterioration occurs in a foreign country's balance of payments, the country
could impose temporary restrictions on foreign capital remittances. The Fund
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. Investing in local
markets, particularly in emerging market countries, may require the Fund to
adopt special procedures, seek local government approvals or take other
actions, each of which may involve additional costs to the Fund.
Investments in Sovereign Debt involve special risks. Certain foreign countries,
particularly emerging market countries, have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and
trade difficulties and extreme poverty and unemployment. The issuer of the debt
or the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due in accordance with
the terms of such debt, and the Fund may have limited legal recourse in the
event of default.
Sovereign Debt also includes income securities of "quasi-governmental agencies"
and income securities denominated in multinational currency units of an issuer
(including supranational issuers). An example of a multinational currency unit
is the European Currency Unit, which represents specified amounts of the
currencies of certain member states of the European Union. Income securities of
quasi-governmental agencies are issued by entities owned by either a national,
state or equivalent government or are obligations of a political unit that is
not backed by the national government's full faith and credit and general
taxing powers.
The Fund may invest without limit in non-U.S. dollar-denominated securities.
Accordingly, changes in foreign currency exchange rates will
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affect the Fund's net asset value, the value of dividends and interest earned,
gains and losses realized on the sale of securities and net investment income
to be distributed to shareholders by the Fund. If the value of a foreign
currency rises against the U.S. dollar, the value of Fund assets denominated in
that currency will increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of Fund assets denominated
in that currency will decrease. The exchange rates between the U.S. dollar and
other currencies are determined by factors such as supply and demand in the
currency exchange markets, international balances of payments, speculation and
other economic and political conditions. In addition, some foreign currency
values may be volatile and there is the possibility of governmental controls on
currency exchange or governmental intervention in currency markets. Any of
these factors could adversely affect the Fund.
RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The yield characteristics
of the mortgage-backed and asset-backed securities in which the Fund may invest
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently on mortgage-
and asset-backed securities, usually monthly, and that principal may be prepaid
at any time because the underlying mortgage loans or other assets generally may
be prepaid at any time. As a result, if the Fund purchases these securities at
a premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if the Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. Amounts available for reinvestment by the Fund are likely to be
greater during a period of declining interest rates and, as a result, are
likely to be reinvested at lower interest rates than during a period of rising
interest rates. Accelerated prepayments on securities purchased by the Fund at
a premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is prepaid in full. The
market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
CMO classes may be specially structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
The rate of interest payable on CMO classes may be set at levels that are
either above or below market rates at the time of issuance, so that the
securities will be sold at a substantial premium to, or at a discount from, par
value. In the most extreme case, one class will be entitled to receive all or a
portion of the interest but none of the principal from the underlying mortgage
assets (the interest-only or "IO" class) and one class will be entitled to
receive all or a portion of the principal but none of the interest (the
principal-only or "PO" class). IOs and POs may also be created from mortgage-
backed securities that are not CMOs. The yields on IOs, POs and other mortgage-
backed securities that are purchased at a substantial premium or discount
generally are extremely sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, an
investor may fail to recoup fully his or her initial investment even if the
security is government issued or guaranteed or is rated AAA or the equivalent.
Some CMO classes are structured to pay interest at rates that are adjusted in
accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive
in certain interest rate environments but not in others. For example, an
inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates--i.e., the yield may increase as rates increase and decrease as
rates decrease--but may do so
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more rapidly or to a greater degree. The market value of such securities
generally is more volatile than that of a fixed rate obligation. Such interest
rate formulas may be combined with other CMO characteristics. For example, a
CMO class may be an "inverse IO," on which the holders are entitled to receive
no payments of principal and are entitled to receive interest at a rate that
will vary inversely with a specified index or a multiple thereof.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which the Fund may invest, including IO and PO
classes of mortgage-backed securities and inverse floating rate securities, can
be extremely volatile and these securities may become illiquid. Mitchell
Hutchins seeks to manage the Fund so that the volatility of the Fund's
portfolio, taken as a whole, is consistent with the Fund's investment
objectives. If Mitchell Hutchins incorrectly forecasts interest rate changes or
other factors that may affect the volatility of securities held by the Fund,
the Fund's ability to meet its investment objective may be reduced.
See Appendix B to this Prospectus for more information concerning the types of
mortgage-backed securities in which the Fund may invest.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws (other than
"Rule 144A" securities Mitchell Hutchins has determined to be liquid under
procedures approved by the Trust's board of trustees). Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act of 1933
("1933 Act"). Institutional markets for restricted securities have developed as
a result of Rule 144A, providing both readily ascertainable values for
restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held
by a Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
HEDGING AND RELATED INCOME STRATEGIES. The Fund may use options (both exchange-
traded and OTC) and futures contracts to attempt to enhance income and may use
these instruments and forward currency contracts to reduce the overall risk of
its investments (hedge). Hedging strategies may be used in an attempt to manage
the Fund's average duration, foreign currency exposure and other risks of the
Fund's investments, which can affect fluctuations in the Fund's net asset
value. The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. See Appendix C to this
Prospectus for more information on these strategies.
The Fund may purchase and sell call and put options on securities indices and
on individual securities for hedging purposes or to enhance income. The Fund
also may purchase and sell interest rate and currency futures contracts and
options thereon, may purchase and sell covered straddles on securities, bond
indices or currencies or options on such futures contracts. The Fund may enter
into options, futures contracts and forward currency contracts under which up
to 100% of the Fund's portfolio is at risk.
The Fund may enter into forward currency contracts for the purchase or sale of
a specified currency at a specified future date, either with respect to
specific transactions or with respect to its portfolio positions. For example,
when Mitchell Hutchins anticipates making a currency exchange transaction in
connection with the purchase or sale of a security, the Fund may enter into a
forward contract in order to set the exchange rate at which the transaction
will be made. The Fund also may enter into a forward contract to sell an amount
of a foreign currency approximating the value of some or all of the Fund's
securities positions denominated in such currency. The Fund may use forward
contracts in one currency or a basket of currencies to hedge against
fluctuations in the value of another currency when Mitchell Hutchins
anticipates there will be a correlation between the two and may use forward
currency contracts to shift the Fund's exposure to foreign currency
fluctuations from one country to another. The purpose of entering into these
contracts is to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. and foreign currencies. The
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Fund may also purchase and sell foreign currency futures contracts, options
thereon and options on foreign currencies to hedge against the risk of
fluctuations in market value of foreign securities the Fund holds in its
portfolio, or that it intends to purchase, resulting from changes in foreign
exchange rates. In addition, the Fund may purchase and sell options on foreign
currencies to enhance income.
The Fund may enter into interest rate protection transactions, including
interest rate swaps, caps, collars and floors, to preserve a return or spread
on a particular investment or portion of its portfolio or to protect against
any increase in the price of securities the Fund anticipates purchasing at a
later date. The Fund will enter into interest rate protection transactions only
with banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees.
The Fund might not employ any of the strategies described above, and no
assurance can be given that any strategy used will succeed. If Mitchell
Hutchins incorrectly forecasts interest or currency exchange rates, market
values or other economic factors in utilizing a strategy for the Fund, the Fund
would be in a better position if it had not entered into the transaction. The
use of these strategies involves certain special risks, including (1) the fact
that skills needed to use hedging instruments are different from those needed
to select the Fund's securities, (2) possible imperfect correlation, or even no
correlation, between price movements of hedging instruments and price movements
of the investments being hedged, (3) the fact that, while hedging strategies
can reduce the risk of loss, they can also reduce the opportunity for gain, or
even result in losses, by offsetting favorable priced movements in hedged
investments and (4) the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions and the possible
inability of the Fund to close out or to liquidate its hedged position. Only a
limited market, if any, currently exists for hedging instruments relating to
securities or currencies in most emerging market countries. Accordingly, under
present circumstances, the Fund does not anticipate that it will be able to
effectively hedge its currency exposure or investment in such markets.
New financial products and risk management techniques continue to be developed.
The Fund may use these instruments and techniques to the extent consistent with
its investment objectives and regulatory and tax considerations.
REPURCHASE AGREEMENTS. The Fund may use repurchase agreements. Repurchase
agreements are transactions in which the Fund purchases securities from a bank
or recognized securities dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed-upon date and price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. Repurchase agreements carry certain risks not associated
with direct investments in securities, including possible decline in the market
value of the underlying securities and delays and costs to the Fund if the
other party to the repurchase agreement becomes insolvent. The Fund intends to
enter into repurchase agreements only with banks and dealers in transactions
believed by Mitchell Hutchins to present minimum credit risks in accordance
with guidelines established by the Trust's board of trustees.
ARBITRAGED DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. The Fund may enter
into dollar rolls, in which the Fund sells mortgage-backed or other securities
for delivery in the current month and simultaneously contracts to purchase
substantially similar securities on a specified future date. In the case of
dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate and maturity as those sold, but will be supported by different
pools of mortgages. The Fund forgoes principal and interest paid during the
roll period on the securities sold, but the Fund is compensated by the
difference between the current sales price and the lower price for the future
purchase as well as by any interest earned on the proceeds of the securities
sold. The Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price.
The Fund may also enter into reverse repurchase agreements in which the Fund
sells securities to a bank or dealer and agrees to repurchase them at a
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mutually agreed date and price. The market value of securities sold under
reverse repurchase agreements typically is greater than the proceeds of the
sale, and, accordingly, the market value of the securities sold is likely to be
greater than the value of the securities in which the Fund invests those
proceeds. Thus, reverse repurchase agreements involve the risk that the buyer
of the securities sold by the Fund might be unable to deliver them when the
Fund seeks to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its 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.
The dollar rolls and reverse repurchase agreements entered into by the Fund
normally will be arbitrage transactions in which the Fund will maintain an
offsetting position in U.S. Government and Investment Grade Securities or
repurchase agreements involving U.S. Government and Investment Grade Securities
that mature on or before the settlement date of the related dollar roll or
reverse repurchase agreement. Since the Fund will receive interest on the
securities or repurchase agreements in which it invests the transaction
proceeds, such transactions may involve leverage. However, since such U.S.
Government and Investment Grade Securities or repurchase agreements will mature
on or before the settlement date of the dollar roll or reverse repurchase
agreement, Mitchell Hutchins believes that such arbitrage transactions do not
present the risks to the Fund that are associated with other types of leverage.
Dollar rolls and reverse repurchase agreements will be considered to be
borrowings and, accordingly, will be subject to the Fund's limitations on
borrowings, which will restrict the aggregate of such transactions to 33 1/3%
of the Fund's total assets. The Fund will not enter into dollar rolls or
reverse repurchase agreements, other than in arbitrage transactions as
described above, in an aggregate amount in excess of 5% of the Fund's total
assets. The Fund has no present intention to enter into dollar rolls other than
in such arbitrage transactions, and it has no present intention to enter into
reverse repurchase agreements other than in such arbitrage transactions or for
temporary or emergency purposes. The Fund may borrow money for temporary
purposes, but not in excess of 10% of its total assets.
ZERO COUPON, OTHER ORIGINAL ISSUE DISCOUNT AND PAYMENT-IN-KIND SECURITIES. The
Fund may invest up to 35% of its total assets in zero coupon securities. It
also may invest without limit in other securities that are issued with original
issue discount ("OID") and in payment-in-kind ("PIK") securities. Federal tax
law requires that a holder of a security with OID accrue a portion of the OID
on the security as income each year, even though the holder may receive no
interest payment on the security during the year. Accordingly, although the
Fund will receive no payments on its zero coupon securities prior to their
maturity or disposition, it will have income attributable to such securities.
Similarly, while PIK securities may pay interest in the form of additional
securities rather than cash, that interest must be included in the Fund's
annual income.
Federal tax law requires that companies such as the Fund, which seek to qualify
for pass-through federal income tax treatment as regulated investment
companies, distribute substantially all of their net investment income each
year, including non-cash income. Accordingly, the Fund will be required, in
order to maintain the desired tax treatment, to include in its dividends an
amount equal to the income attributable to its zero coupon, other OID and PIK
securities. See "Taxes" in the Statement of Additional Information. Those
dividends will be paid from the cash assets of the Fund or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise would not
have done so. Zero coupon and PIK securities usually trade at a substantial
discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest in cash.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a U.S. or
foreign borrower and one or more financial institutions ("Lenders"). The Fund's
investments in Loans are expected in most instances to be in the form of
participations in Loans ("Participations") and assignments of all or
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Prospectus Page 18
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
a portion of Loans ("Assignments") from third parties. Participations typically
will result in the Fund's having a contractual relationship only with the
Lender, not with the borrower. The Fund will have the right to receive payments
of principal, interest and any fees to which it is entitled only from the
Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Fund generally has no direct right to enforce compliance by the borrower with
the terms of the loan agreement relating to the Loan ("Loan Agreement"), nor
any rights of set-off against the borrower, and the Fund may not directly
benefit from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Fund will acquire Participations only if the
Lender interpositioned between the Fund and the borrower is determined by
Mitchell Hutchins to be creditworthy. When the Fund purchases Assignments from
Lenders, the Fund will acquire direct rights against the borrower on the Loan.
However, since Assignments are arranged through private negotiations between
potential assignees and assignors, the rights and obligations acquired by the
Fund as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities
on a "when-issued" basis or may purchase or sell securities on a "delayed
delivery" basis, i.e., for issuance or delivery to the Fund later than the
normal settlement date for such securities at a stated price and yield. 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 risk 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 a loss 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 the Fund, exceed its net assets.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price
or formula. A convertible security entitles the holder to receive interest
normally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently
are issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
OTHER SECURITIES. The Fund may invest up to 10% of its total assets in
preferred stock of U.S. and foreign companies. Preferred stock generally has a
preference as to dividends and upon liquidation over an issuer's common stock
but ranks junior to debt securities in an issuer's capital structure. Preferred
stock generally pays dividends in cash (or other shares of preferred stock) at
a defined rate but, unlike interest payments on debt securities, preferred
stock dividends are payable only if declared by the issuer's board of
directors. Dividends on preferred stock may be cumulative, meaning that, in the
event the issuer fails to make one or more dividend payments on the preferred
stock, no dividends may be paid on the issuer's common stock until all unpaid
preferred stock dividends have been paid. Preferred stock also may provide
that, in the event the issuer fails to make a specified number of dividend
payments, the holders of the preferred stock will have the right
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Prospectus Page 19
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
to elect a specified number of directors to the issuer's board. Preferred stock
also may be subject to optional or mandatory redemption provisions.
The Fund may invest in debt securities issued by banks and other business
entities that are indexed to specific foreign currency exchange rates. The
terms of such securities provide that their principal amount is adjusted
upwards or downwards (but not below zero) at maturity to reflect changes in the
exchange rate between two currencies while the obligations are outstanding.
While such securities offer the potential for an attractive rate of return,
they also entail the risk of loss of principal. New forms of such securities
continue to be developed. The Fund may invest in such securities to the extent
consistent with its investment objectives. The Fund may acquire equity
securities (including common stocks, rights and warrants for equity securities,
debt securities and commodities) when attached to fixed income securities or as
part of a unit including fixed income securities, or in connection with a
conversion or exchange of fixed income securities. The Fund also may invest in
certificates of deposit issued by banks and savings associations and in
banker's acceptances. Under normal circumstances, the Fund will invest at least
65% of its total assets in income producing securities, including zero coupon
and payment-in-kind securities.
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 33 1/3%
of the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains with the Fund's custodian bank collateral either in cash
or money market instruments, marked to market daily, in an amount at least
equal to the market value of the securities loaned, plus accrued interest and
dividends. In determining whether to lend securities to a particular broker-
dealer or institutional investor, Mitchell Hutchins will consider, and during
the period of the loan will monitor, relevant facts and circumstances,
including the creditworthiness of the borrower. The Fund will retain authority
to terminate any loans at any time. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or money market instruments held as
collateral to the borrower or placing broker. The Fund will receive interest on
the loan or a flat fee from the borrower and amounts equivalent to any
dividends, interest or other distributions on the securities loaned. The Fund
will regain record ownership of loaned securities to exercise beneficial
rights, such as voting and subscription rights and rights to dividends,
interest or other distributions, when regaining such rights is considered to be
in the Fund's interest.
OTHER INFORMATION. The Fund may implement various temporary defensive
strategies at times when Mitchell Hutchins determines that conditions in the
markets make pursuing the Fund's basic investment strategy inconsistent with
the best interests of its shareholders. The Fund may commit all or any portion
of its assets to cash, denominated in U.S. dollars or foreign currencies, or
money market instruments of U.S. or foreign issuers, including repurchase
agreements, for such temporary, defensive purposes or for liquidity purposes,
such as clearance of portfolio transactions, the payment of dividends and
expenses and redemptions. The Fund also may engage in short sales of securities
"against the box" to defer realization of gains or losses for tax purposes.
The Fund is "non-diversified," as defined in the 1940 Act, but intends to
continue to qualify as a regulated investment company for federal income tax
purposes. See "Taxes" in the Statement of Additional Information. This means,
in general, that more than 5% of the Fund's total assets may be invested in
securities of one issuer but only if, at the close of each quarter of the
Fund's taxable year, the aggregate amount of such holdings does not exceed 50%
of the value of its total assets and no more than 25% of the value of its total
assets is invested in the securities of a single issuer. To the extent that the
Fund's portfolio at times may include the securities of a smaller number of
issuers than if it were "diversified" (as defined in the 1940 Act), the Fund
will at such times be subject to greater risk with respect to its portfolio
securities than an investment company that invests in a broader range of
securities, because changes in the financial condition or market assessment of
a single issuer may cause greater fluctuations in the net asset value of the
Fund's shares.
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Prospectus Page 20
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
Purchases
- --------------------------------------------------------------------------------
GENERAL. Class A shares of the Fund are sold to investors subject to an initial
sales charge. Class B shares of the Fund are sold without an initial sales
charge but are subject to higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares approximately six years after
issuance. Class D shares are sold without an initial or a contingent deferred
sales charge but are subject to higher ongoing expenses than Class A shares and
do not convert into another Class. See "Flexible Pricing System" and
"Conversion of Class B Shares."
Shares of the Fund are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the
Transfer Agent. Investors may contact a local PaineWebber office to open an
account. The minimum initial investment for the Fund is $1,000 and the minimum
for additional purchases is $100. These minimums may be waived or reduced for
investments by employees of PaineWebber or its affiliates, certain pension
plans and retirement accounts and participants in the Fund's automatic
investment plan. Purchase orders will be priced at the net asset value per
share next determined (see "Valuation of Shares") after the order is received
by PaineWebber's New York City offices or by the Transfer Agent, plus any
applicable sales charge for Class A shares. The Fund and Mitchell Hutchins
reserve the right to reject any purchase order and to suspend the offering of
Fund shares for a period of time.
When placing purchase orders, investors should specify whether the order is for
Class A, Class B or Class D shares. All share purchase orders that fail to
specify a Class will automatically be invested in Class A shares.
PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. For orders
received on or before June 2, 1995, payment is due on the fifth Business Day
after the order is received at PaineWebber's New York City offices. For orders
received on June 5, 1995 and June 6, 1995, payment is due on the fourth
Business Day after the order is received. For orders received on or after June
7, 1995, payment is due on the third Business Day after the order is received.
A "Business Day" is any day, Monday through Friday, on which the New York Stock
Exchange, Inc. ("NYSE") is open for business.
PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber clients
may purchase shares of the Fund through the Transfer Agent. Shares of the Fund
may be purchased, and an account with the Fund established, by completing and
signing the purchase application at the end of this Prospectus and mailing it,
together with a check to cover the purchase, to the Transfer Agent: PFPC Inc.,
Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899.
Subsequent investments need not be accompanied by an application.
INITIAL SALES CHARGE--CLASS A SHARES. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the following
table:
INITIAL SALES CHARGE SCHEDULE--CLASS A SHARES
<TABLE>
<CAPTION>
SALES CHARGES AS A
PERCENTAGE OF DISCOUNT TO
---------------------------------------- SELECTED
NET AMOUNT DEALERS AS A
INVESTED PERCENTAGE
OFFERING (NET ASSET OF OFFERING
AMOUNT OF PURCHASE PRICE VALUE) PRICE
------------------ -------- ---------- ------------
<S> <C> <C> <C>
Less than $100,000 4.00% 4.17% 3.75%
$100,000 to$249,999 3.00 3.09 2.75
$250,000 to$499,999 2.25 2.30 2.00
$500,000 to$999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00
</TABLE>
- -------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources.
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Prospectus Page 21
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for the Fund's shares, than those shown above.
To the extent PaineWebber or any dealer receives 90% or more of the sales
charge, it may be deemed an "underwriter" under the Securities Act of 1933.
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares of the Fund are available
without a sales charge through exchanges for Class A shares of most other
PaineWebber and MH/KP mutual funds. See "Exchanges." In addition, Class A
shares may be purchased without a sales charge, and exchanges of any Class of
shares made without the $5.00 exchange fee, by employees, directors and
officers of PaineWebber or its affiliates, directors or trustees and officers
of any PaineWebber or MH/KP mutual funds, their spouses, parents and children
and advisory clients of Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the purchase is
made through a PaineWebber investment executive who formerly was employed as a
broker with another firm registered as a broker-dealer with the SEC, provided
(1) the purchaser was the investment executive's client at the competing
brokerage firm, (2) within 90 days of the purchase of Class A shares the
purchaser redeemed shares of one or more mutual funds for which that competing
firm or its affiliates was principal underwriter, provided the purchaser either
paid a sales charge to invest in those funds, paid a contingent deferred sales
charge upon redemption or held shares of those funds for the period required
not to pay the otherwise applicable contingent deferred sales charge and (3)
the total amount of shares of all PaineWebber funds purchased under this sales
charge waiver does not exceed the amount of the purchaser's redemption proceeds
from the competing firm's funds. To take advantage of this waiver, an investor
must provide satisfactory evidence that all the above-noted conditions are met.
Qualifying investors should contact their PaineWebber investment executives for
more information.
Certificate holders of unit investment trusts ("UITs") sponsored by PaineWebber
may acquire Class A shares of the Fund without regard to minimum investment
requirements and without sales charges by electing to have dividends and other
distributions from their UIT investment automatically invested in Class A
shares.
REDUCED SALES CHARGE PLANS--CLASS A SHARES. If an investor or eligible group of
related Fund investors purchases Class A shares of the Fund concurrently with
Class A shares of other PaineWebber or MH/KP mutual funds, the purchases may be
combined to take advantage of the reduced sales charge applicable to larger
purchases. In addition, the right of accumulation permits a Fund investor or
eligible group of related Fund investors to pay the lower sales charge
applicable to larger purchases by basing the sales charge on the dollar amount
of Class A shares currently being purchased, plus the net asset value of the
investor's or group's total existing Class A shareholdings in other PaineWebber
or MH/KP mutual funds.
An "eligible group of related Fund investors" includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ("IRA"), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to
Minors Act/Uniform Transfers to Minors Act accounts created by the individual
or eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes a group of
related employers and one or more qualified retirement plans of such employers.
For more information, an investor should consult the Statement of Additional
Information or contact a PaineWebber investment executive or correspondent firm
or the Transfer Agent.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The public offering price of
the Class B shares of the Fund is the next determined net asset value, and no
initial sales charge is imposed. A contingent deferred sales charge, however,
is imposed upon certain redemptions of Class B shares.
Class B shares that are redeemed will not be subject to a contingent deferred
sales charge to the extent that the value of such shares represents (1) capital
appreciation of Fund assets, (2) reinvestment of dividends or capital gain
distributions or (3) shares redeemed more than six years after their purchase.
Otherwise, redemption of Class B shares of the Fund will be subject to a
contingent deferred sales charge. The amount of any applicable contingent
deferred sales charge will be calculated by multiplying the net asset value of
such shares at the time of
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Prospectus Page 22
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
redemption by the applicable percentage shown in the table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF NET
REDEMPTION ASSET VALUE AT
DURING REDEMPTION
---------- -------------------
<S> <C>
1st Year Since Purchase..................................... 5%
2nd Year Since Purchase..................................... 4
3rd Year Since Purchase..................................... 3
4th Year Since Purchase..................................... 2
5th Year Since Purchase..................................... 2
6th Year Since Purchase..................................... 1
7th Year Since Purchase..................................... None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of Class B shares
representing capital appreciation, next of shares representing the reinvestment
of dividends and capital gain distributions and finally of other shares held by
the shareholder for the longest period of time. The holding period of Class B
shares acquired through an exchange with another PaineWebber mutual fund will
be calculated from the date that the Class B shares were initially acquired in
one of the other PaineWebber funds, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gain distribution reinvestments in such other funds. This will result
in any contingent deferred sales charge being imposed at the lowest possible
rate. The amount of any contingent deferred sales charge will be paid to
Mitchell Hutchins.
SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge will
be waived for exchanges, as described below, and for redemptions in connection
with the Fund's systematic withdrawal plan. The contingent deferred sales
charge will be waived for a total or partial redemption made within one year of
the death of the shareholder. The contingent deferred sales charge waiver is
available where the decedent is either the sole shareholder or owns the shares
with his or her spouse as a joint tenant with right of survivorship. This
waiver applies only to redemption of shares held at the time of death. The
contingent deferred sales charge will also be waived in connection with a lump-
sum or other distribution in the case of an IRA, a self-employed individual
retirement plan (so-called "Keogh Plan") or a custodial account under Section
403(b) of the Internal Revenue Code following attainment of age 59 1/2; a total
or partial redemption resulting from a distribution following retirement in the
case of a tax-qualified retirement plan; and a redemption resulting from a tax-
free return of an excess contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation (by PaineWebber in the case of shareholders who are PaineWebber
clients or by the Transfer Agent in the case of all other shareholders) of the
shareholders' status or holdings, as the case may be.
PURCHASE OF CLASS D SHARES. The public offering price of the Class D shares of
the Fund is the next determined net asset value. No initial or contingent
deferred sales charge is imposed.
- --------------------------------------------------------------------------------
Exchanges
- --------------------------------------------------------------------------------
Shares of the Fund may be exchanged for shares of the corresponding Class of
the PaineWebber and MH/KP mutual funds listed below, or may be acquired through
an exchange of shares of the corresponding Class of those funds. No initial
sales charge is imposed on the shares acquired, and no contingent deferred
sales charge is imposed on the shares being disposed of, through an exchange.
However, contingent deferred sales charges may apply to redemptions of Class B
shares of PaineWebber mutual funds acquired through an exchange. Class B shares
of MH/KP mutual funds differ from those of PaineWebber mutual funds. Class B
shares of MH/KP mutual funds are equivalent to Class D shares of PaineWebber
mutual funds. A $5.00 exchange fee is charged for each exchange, and exchanges
may be subject to minimum investment requirements of the fund into which
exchanges are made.
Exchanges are permitted among the other PaineWebber and MH/KP mutual funds,
including:
INCOME FUNDS
. MH/KP Adjustable Rate Government Fund
. MH/KP Global Fixed Income Fund
. MH/KP Government Income Fund
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Prospectus Page 23
<PAGE>
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PAINEWEBBER STRATEGIC INCOME FUND
. MH/KP Intermediate Fixed Income Fund
. PW Global Income Fund
. PW High Income Fund
. PW Investment Grade Income Fund
. PW Short-Term U.S. Government Income Fund
. PW Short-Term U.S. Government Income Fund for Credit Unions
. PW U.S. Government Income Fund
TAX-FREE INCOME FUNDS
. MH/KP Municipal Bond Fund
. PW California Tax-Free Income Fund
. PW Municipal High Income Fund
. PW National Tax-Free Income Fund
. PW New York Tax-Free Income Fund
GROWTH FUNDS
. MH/KP Emerging Markets Equity Fund
. MH/KP Global Equity Fund
. MH/KP Small Cap Growth Fund
. PW Atlas Global Growth Fund
. PW Blue Chip Growth Fund
. PW Capital Appreciation Fund
. PW Communications & Technology Growth Fund
. PW Europe Growth Fund
. PW Growth Fund
. PW Regional Financial Growth Fund
. PW Small Cap Value Fund
GROWTH AND INCOME FUNDS
. MH/KP Asset Allocation Fund
. MH/KP Equity Income Fund
. PW Asset Allocation Fund
. PW Global Energy Fund
. PW Global Growth and Income Fund
. PW Growth and Income Fund
. PW Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms. Shareholders who are not
PaineWebber clients must place exchange orders in writing with the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. All exchanges will be effected based on the relative net asset
values per share next determined after the exchange order is received at
PaineWebber's New York City offices or by the Transfer Agent. See "Valuation of
Shares." Shares of the Fund purchased through PaineWebber or its correspondent
firms may be exchanged only after the settlement date has passed and payment
for such shares has been made.
OTHER EXCHANGE INFORMATION. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is available only in those jurisdictions where
the sale of the PaineWebber and MH/KP mutual fund shares to be acquired may be
legally made. Before making any exchange, shareholders should contact their
PaineWebber investment executives or correspondent firms or the Transfer Agent
to obtain more information and prospectuses of the PaineWebber and MH/KP mutual
funds to be acquired through the exchange.
- --------------------------------------------------------------------------------
Redemptions
- --------------------------------------------------------------------------------
Fund shares may be redeemed at their net asset value (subject to any applicable
contingent deferred sales charge) and redemption proceeds will be paid after
receipt of a redemption request as described below. PaineWebber clients may
redeem shares through PaineWebber or its correspondent firms; all other
shareholders must redeem through the Transfer Agent. If a redeeming shareholder
owns shares of more than one Class, the shares will be redeemed in the
following order unless the shareholder specifically requests otherwise: Class D
shares, then Class A shares, and finally Class B shares.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients may
submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the
-------------
Prospectus Page 24
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
shares' net asset value next determined after receipt of the request by
PaineWebber's New York City offices. For requests made on June 5, 1995 and June
6, 1995, repurchase proceeds will be paid within four Business Days after
receipt of the request. For requests made on or after June 7, 1995, repurchase
proceeds will be paid within three Business Days after receipt of the request.
Repurchase proceeds (less any applicable contingent deferred sales charge) will
be paid by check or credited to the shareholder's brokerage account at the
election of the shareholder. PaineWebber investment executives and
correspondent firms are responsible for promptly forwarding redemption requests
to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients must redeem their shares through the Transfer Agent by
mail; other shareholders also may redeem Fund shares through the Transfer
Agent. Shareholders should mail redemption requests directly to the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. A redemption request will be executed at the net asset value
next computed after it is received in "good order." "Good order" means that the
request must be accompanied by the following: (1) a letter of instruction or a
stock assignment specifying number of shares or amount of investment to be
redeemed (or that all shares credited to the Fund account be redeemed), signed
by all registered owners of the shares in the exact names in which they are
registered, (2) a guarantee of the signature of each registered owner by an
eligible institution acceptable to the Transfer Agent and in accordance with
SEC rules, such as a commercial bank, trust company or member of a recognized
stock exchange and (3) other supporting legal documents for estates, trusts,
guardianships, custodianships, partnerships and corporations. Shareholders are
responsible for ensuring that a request for redemption is received in "good
order."
ADDITIONAL INFORMATION ON REDEMPTIONS. Redemption proceeds of $1 million or
more may be wired to the shareholder's PaineWebber brokerage account or a
commercial bank account designated by the shareholder. Questions about this
option, or redemption requirements generally, should be referred to the
shareholder's PaineWebber investment executive or correspondent firm, or to the
Transfer Agent if the shares are not held in a PaineWebber brokerage account.
If a shareholder requests redemption of shares that were purchased recently,
the Fund may delay payment until it is assured that good payment has been
received. In the case of purchases by check, this can take up to 15 days.
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, the Fund reserves the right to redeem all Fund shares in any
shareholder account of less than $500 net asset value. If the Fund elects to do
so, it will notify the shareholder and provide the shareholder the opportunity
to increase the amount invested to $500 or more within 60 days of the notice.
The Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount redeemed by purchasing Class A
shares within 365 days after the redemption. To take advantage of this
reinstatement privilege, shareholders must notify their PaineWebber investment
executive or correspondent firm at the time the privilege is exercised.
- --------------------------------------------------------------------------------
Conversion of Class B Shares
- --------------------------------------------------------------------------------
A shareholder's Class B shares will automatically convert to Class A shares in
the Fund approximately six years after the date of issuance, together with a
pro rata portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares. The Class B shares so
converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net asset values per
share of the two
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Prospectus Page 25
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
Classes on the first Business Day of the month in which the sixth anniversary
of the issuance of the Class B shares occurs. See "Valuation of Shares." If a
shareholder effects one or more exchanges among Class B shares of the
PaineWebber mutual funds during the six-year period the holding periods for the
shares so exchanged will be counted toward the six-year period.
- --------------------------------------------------------------------------------
Other Services and Information
- --------------------------------------------------------------------------------
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll-free at 1-800-647-1568.
AUTOMATIC INVESTMENT PLAN. Shareholders may purchase shares of the Fund through
an automatic investment plan, under which an amount specified by the
shareholder of $50 or more each month will be sent to the Transfer Agent from
the shareholder's bank for investment in the Fund. In addition to providing a
convenient and disciplined manner of investing, participation in the automatic
investment plan enables the investor to use the technique of "dollar cost
averaging." When under the plan a shareholder invests the same dollar amount
each month, the shareholder will purchase more shares when the Fund's net asset
value per share is low and fewer shares when the net asset value per share is
high. Using this technique, a shareholder's average purchase price per share
over any given period will be lower than if the shareholder purchased a fixed
number of shares on a monthly basis during the period. Of course, investing
through the automatic investment plan does not assure a profit or protect
against loss in declining markets. Additionally, since the automatic investment
plan involves continuous investing regardless of price levels, an investor
should consider his or her financial ability to continue purchases through the
periods of low price levels.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own Class A or Class D shares of
the Fund with a value of $5,000 or more or Class B shares of the Fund with a
value of $20,000 or more may have PaineWebber redeem a portion of their shares
monthly, quarterly or semi-annually under the systematic withdrawal plan. No
contingent deferred sales charge will be imposed on such withdrawals for Class
B shares. The minimum amount for all withdrawals of Class A or Class D shares
is $100, and minimum monthly, quarterly and semi-annual withdrawal amounts for
Class B shares are $200, $400 and $600, respectively. Quarterly withdrawals are
made in March, June, September and December. A Class B shareholder of the Fund
may not withdraw an amount exceeding 12% annually of his or her "Initial
Account Balance," a term that means the value of the Fund account at the time
the shareholder elects to participate in the systematic withdrawal plan. A
Class B shareholder's participation in the systematic withdrawal plan will
terminate automatically if the Initial Account Balance (plus the net asset
value on the date of purchase of Fund shares acquired after the election to
participate in the systematic withdrawal plan), less aggregate redemptions made
other than pursuant to the systematic withdrawal plan, is less than $20,000.
Shareholders who receive dividends or other distributions in cash may not
participate in the systematic withdrawal plan. Purchases of additional shares
of the Fund concurrent with withdrawals are ordinarily disadvantageous to
shareholders because of tax liabilities and, for Class A shares, sales charges.
INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Fund may be purchased through
IRAs available through the Fund. In addition, a Self-Directed IRA is available
through PaineWebber under which investments may be made in the Fund as well as
in other investments available through PaineWebber. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.
TRANSFER OF ACCOUNTS. If a shareholder holding shares of the Fund in a
PaineWebber brokerage account transfers his or her brokerage account to another
firm, the Fund shares normally will be transferred to an account with the
Transfer Agent. However, if the other firm has entered into a selected dealer
agreement with Mitchell Hutchins relating to the Fund, the shareholder may be
able to hold Fund shares in an account with the other firm.
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PAINEWEBBER STRATEGIC INCOME FUND
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Dividends and Taxes
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DIVIDENDS. Dividends from the Fund's net investment income are declared and
paid monthly. In addition, the Fund may (but is not required to) distribute
with its monthly dividends all or a portion of any net realized gains from
foreign currency transactions and net short-term capital gain, if any. The Fund
distributes annually substantially all of its net capital gain (the excess of
net long-term capital gain over net short-term capital loss) and any
undistributed net realized gains from foreign currency transactions and net
short term capital gains. The Fund may make additional distributions if
necessary to avoid a 4% excise tax on certain undistributed income and capital
gain.
The Fund anticipates that a monthly dividend may, from time to time, represent
more or less than the amount of net investment income earned by the Fund in the
period to which the dividend relates. Any undistributed net investment income,
net short-term capital gain and net realized gains from foreign currency
transactions ("undistributed income") would be available to supplement future
dividends, which might otherwise have been reduced by reason of a decrease in
the Fund's monthly net income. Undistributed income will be reflected in the
Fund's net asset value, and correspondingly, distributions from undistributed
income will reduce the Fund's net asset value. The dividend rate on Fund shares
will be adjusted from time to time and will vary as a result of the performance
of the Fund.
If the Fund's dividends exceed its taxable income in any year, which may result
from currency-related losses, all or a portion of its dividends may be treated
as a return of capital to shareholders for tax purposes.
Dividends and other distributions paid on all Classes of Fund shares are
calculated at the same time and in the same manner. Dividends on Class B and
Class D shares of the Fund are expected to be lower than those for its Class A
shares because of the higher expenses resulting from distribution fees borne by
the Class B and Class D shares. For the same reason, dividends on Class B
shares are expected to be lower than those for Class D shares. Dividends on
each Class also might be affected differently by the allocation of Class-
specific expenses. See "Valuation of Shares."
Dividends and other distributions are paid in additional Fund shares of the
same Class at net asset value unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and/or other distributions
in cash, either mailed to the shareholder by check or credited to the
shareholder's PaineWebber account, should contact their PaineWebber investment
executives or correspondent firms or complete the appropriate section of the
application form.
TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain and
net gains from certain foreign currency transactions) and net capital gain that
is distributed to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or in additional shares) generally are taxable to its shareholders as
ordinary income. Distributions of the Fund's net capital gain (whether paid in
cash or in additional shares) are taxable to its shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Shareholders not subject to tax on their income generally will not be required
to pay tax on amounts distributed to them.
The Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to such shareholders who
otherwise are subject to backup withholding.
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PAINEWEBBER STRATEGIC INCOME FUND
A redemption of Fund shares may result in taxable gain or loss to the redeeming
shareholder, depending upon whether the redemption proceeds payable to the
shareholder are more or less than the shareholder's adjusted basis for the
redeemed shares (which normally includes any initial sales charge paid on Class
A shares). An exchange of Fund shares for shares of another PaineWebber or
MH/KP mutual fund generally will have similar tax consequences. However,
special tax rules apply when a shareholder (1) disposes of Class A shares
through a redemption or exchange within 90 days of purchase and (2)
subsequently acquires Class A shares of a PaineWebber or MH/KP mutual fund
without paying a sales charge due to the 365-day reinstatement privilege or
exchange privilege. In these cases, any gain on the disposition of the Fund's
Class A shares would be increased, or loss decreased, by the amount of the
sales charge paid when the shares were acquired, and that amount will increase
the basis of the PaineWebber or MH/KP mutual fund shares subsequently acquired.
In addition, if shares of the Fund are purchased within 30 days before or after
redeeming other Fund shares (regardless of Class) at a loss, that loss will not
be deductible to the extent the redemption proceeds are reinvested and instead
will increase the basis of the newly purchased shares.
No gain or loss will be recognized by a shareholder as a result of a conversion
of Class B shares into Class A shares.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be
other federal, state or local tax considerations applicable to a particular
investor. Prospective shareholders are therefore urged to consult their tax
advisers.
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Valuation of Shares
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The net asset value of the Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the NYSE
(currently 4:00 p.m., eastern time) each Business Day. The Fund's net asset
value per share is determined by dividing the value of the securities held by
the Fund plus any cash or other assets minus all liabilities by the total
number of Fund shares outstanding.
The Fund values its assets based on their current market value when market
quotations are readily available. If such value cannot be established, assets
are valued at fair value as determined in good faith by or under the direction
of the Trust's board of trustees. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board of trustees determines that this does not represent
fair value. All investments denominated in foreign currencies are valued daily
in U.S. dollars based on the then-prevailing exchange rate. It should be
recognized that judgment plays a greater role in valuing foreign or high yield,
high risk income securities because there is less reliable, objective data
available.
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Management
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The Trust's board of trustees, as part of its overall management
responsibility, oversees various organizations responsible for the Fund's day-
to-day management. Mitchell Hutchins, investment adviser and administrator of
the Fund, makes and implements all investment decisions and supervises all
aspects of the Fund's operations. Mitchell Hutchins receives a monthly fee for
these services at the annual rate of 0.75% of the average daily net assets of
the Fund. The Fund's advisory fee is higher than those paid by most funds, but
Mitchell Hutchins believes the fee is justified by the global nature of the
Fund's investment activities. Brokerage transactions for the Fund may be
conducted through PaineWebber in accordance with procedures adopted by the
Trust's board of trustees.
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PAINEWEBBER STRATEGIC INCOME FUND
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. The Fund also incurs other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its shares, taxes and governmental fees, fees and expenses of the trustees,
costs of obtaining insurance, expenses of printing and distributing shareholder
materials, organizational expenses and extraordinary expenses, including costs
and losses in any litigation. For the fiscal period February 7, 1994
(commencement of operations) to January 31, 1995, the Fund's total expenses for
its Class A, Class B and Class D shares, stated as an annualized percentage of
net assets, were 1.49%, 2.24% and 1.98%, respectively.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New York
10019. It is a wholly owned subsidiary of PaineWebber, which is in turn wholly
owned by Paine Webber Group Inc., a publicly owned financial services holding
company. As of April 30, 1995, Mitchell Hutchins was adviser or subadviser of
42 investment companies with 77 separate portfolios and aggregate assets of
over $26.7 billion.
Dennis McCauley, a managing director and chief investment officer of fixed
income of Mitchell Hutchins, has been the Fund's allocation manager since March
1995. Mr. McCauley has been employed by Mitchell Hutchins since December 1994
and is responsible for overseeing all active fixed income investments,
including domestic and global taxable and tax-exempt mutual funds. Prior to
joining Mitchell Hutchins, Mr. McCauley worked for IBM Corporation, where he
was Director of Fixed Income Investments responsible for developing and
managing investment strategy for all fixed income and cash management
investments of IBM's pension fund and self-insured medical funds. Mr. McCauley
also served as Vice President of IBM Credit Corporation's mutual funds and as a
member of the Retirement Fund Investment Committee.
Nirmal Singh, a vice president of Mitchell Hutchins, and Craig M. Varrelman,
CFA, a first vice president of Mitchell Hutchins, have been responsible for the
day-to-day management of the U.S. Government and Investment Grade Securities
sector of the Fund since December 1994. Prior to joining Mitchell Hutchins in
1993, Mr. Singh was with Merrill Lynch Asset Management, Inc., where he was a
member of the portfolio management team responsible for managing several
diversified funds, including mortgage-backed securities funds with assets
totaling $8 billion. From 1990 to 1993, Mr. Singh was a senior portfolio
manager at Nomura Mortgage Fund Management Corporation, where he was
responsible for managing $3 billion in mortgage assets. From 1987 to 1990, Mr.
Singh was a vice president of Lehman Brothers. Mr. Varrelman has been with
Mitchell Hutchins as a portfolio manager since 1988 and manages fixed income
portfolios with assets totaling approximately $1.5 billion, with an emphasis on
U.S. government securities.
Thomas J. Libassi, a senior vice president and portfolio manager of Mitchell
Hutchins, is the sector manager responsible for the day-to-day management of
the Fund's U.S. High Yield Securities. Mr. Libassi has been employed by
Mitchell Hutchins since May 1994. He is portfolio manager for PaineWebber High
Income Fund, PaineWebber Offshore High Income Fund, PaineWebber Premier High
Income Trust Inc., and the high yield portions of All-American Term Trust Inc.
with aggregate assets as of April 30, 1995 of approximately $962 million. Prior
to May 1994 Mr. Libassi was a vice president and portfolio manager of Keystone
Custodian Funds Inc.
Stuart Waugh, a managing director and portfolio manager of Mitchell Hutchins
responsible for global fixed income and currency trading, is the sector manager
responsible for the day-to-day management of the Fund's Foreign and Emerging
Market Securities. Mr. Waugh has been employed by Mitchell Hutchins since 1984.
He is a portfolio manager of Strategic Global Income Fund, Inc., Global Income
Plus Fund, Inc., PaineWebber Global Income Fund, Global High Income Dollar Fund
Inc. and PaineWebber Series Trust - Global Income Portfolio with aggregate
assets as of April 30, 1995 of approximately $2 billion.
Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics that establishes procedures
for personal investing and restricts certain transactions.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins is the distributor of the Fund's
shares and has appointed PaineWebber as the exclusive dealer for the sale of
those shares. Under separate plans of distribution pertaining to the Class A
shares, the Class B shares and Class D shares ("Class A Plan," "Class B Plan"
and "Class D Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins
monthly service fees at the annual rate of 0.25% of the average daily net
assets of each
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PAINEWEBBER STRATEGIC INCOME FUND
Class of shares and monthly distribution fees at the annual rate of 0.75% of
the average daily net assets of the Class B shares and 0.50% of the average
daily net assets of the Class D shares.
Under all three Plans, Mitchell Hutchins uses the service fees primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in the Fund by PaineWebber clients.
PaineWebber passes on a portion of these fees to its investment executives to
compensate them for shareholder servicing that they perform and retains the
remainder to offset its own expenses in servicing and maintaining shareholder
accounts. These expenses may include costs of the PaineWebber branch office in
which the investment executive is based, such as rent, communications
equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class D
Plans to offset the commissions it pays to PaineWebber for selling the Fund's
Class B and Class D shares. PaineWebber passes on to its investment executives
a portion of these commissions and retains the remainder to offset its expenses
in selling Class B and Class D shares. These expenses may include the branch
office costs noted above. In addition, Mitchell Hutchins uses the distribution
fees under the Class B and Class D Plans to offset the Fund's marketing costs
attributable to such Classes, such as preparation of sales literature,
advertising and printing and distributing prospectuses and other shareholder
materials to prospective investors. Mitchell Hutchins also may use the
distribution fees to pay additional compensation to PaineWebber and other costs
allocated to Mitchell Hutchins' and PaineWebber's distribution activities,
including employee salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives
at the time of sale of Class D shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class D shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class D shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and the contingent deferred sales charge paid
upon certain redemptions, and may use these proceeds for any of the
distribution expenses described above. See "Purchases."
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ("Distribution Contracts")
obligate the Fund to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. Thus, even if Mitchell Hutchins' expenses
exceed its service or distribution fees for the Fund, it will not be obligated
to pay more than those fees and, if Mitchell Hutchins' expenses are less than
such fees, it will retain its full fees and realize a profit. The Fund will pay
the service and distribution fees to Mitchell Hutchins until either the
applicable Plan or Distribution Contract for the Fund is terminated or not
renewed. In that event, Mitchell Hutchins' expenses in excess of service and
distribution fees received or accrued through the termination date will be
Mitchell Hutchins' sole responsibility and not obligations of the Fund. In
their annual consideration of the continuation of the Fund's Plans, the
trustees will review the Plan and Mitchell Hutchins' corresponding expenses for
each Class separately from the Plans and corresponding expenses for the other
two Classes.
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Performance Information
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The Fund performs a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for the Class
A shares of the Fund reflects deduction of the Fund's maximum initial sales
charge at the time of purchase, and standardized return for the Class B shares
of the Fund reflects deduction of
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PAINEWEBBER STRATEGIC INCOME FUND
the applicable contingent deferred sales charge imposed on a redemption of
shares held for the period. One-, five- and ten-year periods will be shown,
unless the Class has been in existence for a shorter period. Total return
calculations assume reinvestment of dividends and other distributions.
The Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were included.
The Fund also may advertise its yield. Yield reflects investment income net of
expenses over a 30-day (or one-month) period on a Fund share, expressed as an
annualized percentage of the maximum offering price per share for Class A
shares and net asset value per share for Class B shares and Class D shares at
the end of the period. Yield computations differ from other accounting methods
and therefore may differ from dividends actually paid or reported net income.
The Fund will include performance data for all three Classes of Fund shares in
any advertisements or promotional materials including Fund performance data.
Total return information reflects past performance and does not necessarily
indicate future results. Investment return and principal values will fluctuate,
and proceeds upon redemption may be more or less than a shareholder's cost.
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General Information
- --------------------------------------------------------------------------------
ORGANIZATION. PaineWebber Securities Trust is a Massachusetts business trust
that is registered with the SEC as an open-end management investment company.
The Trust was organized under a Declaration of Trust dated December 3, 1992.
The trustees have authority to issue an unlimited number of shares of
beneficial interest of separate series, par value $.001 per share, of the
Trust. In addition to the Fund, shares of one other series have been
authorized.
The shares of beneficial interest of the Fund are divided into three Classes,
designated Class A shares, Class B shares and Class D shares. Each Class
represents interests in the same assets of the Fund. The Classes differ as
follows: (1) each Class of shares has exclusive voting rights on matters
pertaining to its plan of distribution, (2) Class A shares are subject to an
initial sales charge, (3) Class B shares bear ongoing distribution fees, are
subject to a contingent deferred sales charge upon certain redemptions and will
automatically convert to Class A shares approximately six years after issuance,
(4) Class D shares are subject to neither an initial nor a contingent deferred
sales charge, bear ongoing distribution fees and do not convert into another
Class and (5) each Class may bear differing amounts of certain Class-specific
expenses. The Trust's board of trustees does not anticipate that there will be
any conflicts among the interests of the holders of the different Classes of
Fund shares. On an ongoing basis, the board of trustees will consider whether
any such conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be no
meetings of shareholders to elect trustees unless fewer than a majority of the
trustees of the Trust holding office have been elected by shareholders.
Shareholders of record holding at least two-thirds of the outstanding shares of
the Trust may remove a trustee by votes cast in person or by proxy at a meeting
called for that purpose. The trustees are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee when so requested in writing by shareholders of record holding at least
10% of the Trust's outstanding shares. Each share of the Fund has equal voting
rights, except as noted above. Each share of the Fund is entitled to
participate equally in dividends and other distributions and the proceeds of
any liquidation, except that, due to the differing expenses borne by the three
Classes, such dividends and liquidation proceeds of Class B and Class D shares
are likely to be lower than for the Class A shares. The shares of each series
of the Trust will be voted separately except when an aggregate vote of all
series is required by the 1940 Act.
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PAINEWEBBER STRATEGIC INCOME FUND
To avoid additional operating costs and for investor convenience, the Fund does
not issue share certificates. Ownership of shares of the Fund is recorded on a
stock register by the Transfer Agent and shareholders have the same rights of
ownership with respect to such shares as if certificates had been issued.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, Massachusetts 02171 is custodian for the Fund.
PFPC, Inc., a subsidiary of PNC Bank, National Association, whose business
address is 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Fund's
transfer and dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of shares of the Fund. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Fund.
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PAINEWEBBER STRATEGIC INCOME FUND
Appendix A
Ratings
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DESCRIPTION OF MOODY'S RATINGS FOR CORPORATE AND CONVERTIBLE BONDS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Aaa. An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks; AA. An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well-maintained in the foreseeable future; A. An issue which
is rated a is considered to be an upper-medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings
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PAINEWEBBER STRATEGIC INCOME FUND
and asset protection are, nevertheless, expected to be maintained at adequate
levels; baa. An issue which is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time; ba. An issue which is rated ba is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class; b. An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small; caa. An issue which is
rated caa is likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status of payment; CA. An
issue which is rated ca is speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payments; C. This is
the lowest rated class of preferred or preference stock. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa/aa to B/b. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the company
ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P RATINGS FOR CORPORATE AND CONVERTIBLE DEBT SECURITIES
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B. Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
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PAINEWEBBER STRATEGIC INCOME FUND
CC. The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C. The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
DESCRIPTION OF S&P PREFERRED STOCK RATINGS
AAA. This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations; AA. A preferred stock issue rated AA also qualifies as a
high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA; A. An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions; BBB. An issue rated
BBB is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to make payments for a preferred stock in this category
than for issues in the A category; BBB, B, CCC. Preferred stocks rated BB, B,
and CCC are regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay preferred stock obligations. BB indicates the
lowest degree of speculation and CCC the highest degree of speculation. While
such issues will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions; CC. The rating CC is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is currently paying;
C. A preferred stock rated C is a non-paying issue; D. A preferred stock rated
D is a non-paying issue with issuer in default on debt instruments.
NR. NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-). The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
-------------
Prospectus Page 35
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
Appendix B
Mortgage-Backed Securities
- --------------------------------------------------------------------------------
The U.S. government securities in which the Fund may invest include mortgage-
backed securities issued or guaranteed as to payment of principal and interest
(but not as to market value) by the Government National Mortgage Association
("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae"), or
the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Other mortgage-
backed securities in which the Fund may invest are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively, "Private Mortgage Lenders"). Payments
of principal and interest (but not the market value) of such private mortgage-
backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. New types of mortgage-
backed securities are developed and marketed from time to time and, consistent
with its investment limitations, the Fund expects to invest in those new types
of mortgage-backed securities that Mitchell Hutchins believes may assist the
Fund in achieving its investment objectives. Similarly, the Fund may invest in
mortgage-backed securities issued by new or existing governmental or private
issuers other than those identified herein.
GINNIE MAE CERTIFICATES
Ginnie Mae guarantees certain mortgage pass-through certificates ("Ginnie Mae
certificates") that are issued by Private Mortgage Lenders and that represent
ownership interests in individual pools of residential mortgage loans. These
securities are designed to provide monthly payments of interest and principal
to the investor. Timely payment of interest and principal is backed by the full
faith and credit of the U.S. government. Each mortgagor's monthly payments to
his lending institution on his residential mortgage are "passed through" to
certificateholders such as the Fund. Mortgage pools consist of whole mortgage
loans or participations in loans. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools.
Lending institutions that originate mortgages for the pools are subject to
certain standards, including credit and other underwriting criteria for
individual mortgages included in the pools.
FANNIE MAE CERTIFICATES
Fannie Mae facilitates a national secondary market in residential mortgage
loans insured or guaranteed by U.S. government agencies and in privately
insured or uninsured residential mortgage loans (sometimes referred to as
"conventional mortgage loans" or "conventional loans") through its mortgage
purchase and mortgage-backed securities sales activities. Fannie Mae issues
guaranteed mortgage pass-through certificates ("Fannie Mae certificates"),
which represent pro rata shares of all interest and principal payments made and
owed on the underlying pools. Fannie Mae guarantees timely payment of interest
and principal on Fannie Mae certificates. The Fannie Mae guarantee is not
backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES
Freddie Mac also facilitates a national secondary market for conventional
residential and U.S. government-insured mortgage loans through its mortgage
purchase and mortgage-backed securities sales activities. Freddie Mac issues
two types of mortgage pass-through securities: mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC
represents a pro rata share of all interest and principal payments made and
owed on the underlying pool. Freddie Mac generally guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal, but it also
has a PC program under which it guarantees timely payment of both principal and
interest. GMCs also represent a pro rata
-------------
Prospectus Page 36
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
interest in a pool of mortgages. These instruments, however, pay interest semi-
annually and return principal once a year in guaranteed minimum payments. The
Freddie Mac guarantee is not backed by the full faith and credit of the U.S.
government.
PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES
Mortgage-backed securities issued by Private Mortgage Lenders are structured
similarly to the pass-through certificates and collateralized mortgage
obligations ("CMOs") issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie
Mac. Such mortgage-backed securities may be supported by pools of U.S.
government or agency insured or guaranteed mortgage loans or by other mortgage-
backed securities issued by a government agency or instrumentality, but they
generally are supported by pools of conventional (i.e., non-government
guaranteed or insured) mortgage loans. Since such mortgage-backed securities
normally are not guaranteed by an entity having the credit standing of Ginnie
Mae, Fannie Mae or Freddie Mac, they normally are structured with one or more
types of credit enhancement. See "--Types of Credit Enhancement."
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquires such assets in its corporate capacity. These
assets include, among other things, single family and multifamily mortgage
loans, as well as commercial mortgage loans. In order to dispose of such assets
in an orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and are supported by one or more of
the types of private credit enhancements used by Private Mortgage Lenders.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS
CMOs are debt obligations that are collateralized either by mortgage loans or
mortgage pass-through securities (such collateral collectively being called
"Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by
government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage
pass-through securities are interests in trusts that are comprised of Mortgage
Assets and that have multiple classes similar to those in CMOs. Unless the
context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal and interest on the
Mortgage Assets (and, in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMO, also referred to as a "tranche," is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any principal
only ("PO") class) on a monthly, quarterly or semiannual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO
until all other classes having an earlier stated maturity or final distribution
date have been paid in full. In some CMO structures, all or a portion of the
interest attributable to one or more of the CMO classes may be added to the
principal amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES
ARM mortgage-backed securities are mortgage-backed securities that represent a
right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of mortgage loans bearing variable
-------------
Prospectus Page 37
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
or adjustable rates of interest (such mortgage loans are referred to as
"ARMs"). Floating rate mortgage-backed securities are classes of mortgage-
backed securities that have been structured to represent the right to receive
interest payments at rates that fluctuate in accordance with an index but that
generally are supported by pools comprised of fixed-rate mortgage loans.
Because the interest rates on ARM and floating rate mortgage-backed securities
are reset in response to changes in a specified market index, the values of
such securities tend to be less sensitive to interest rate fluctuations than
the values of fixed-rate securities.
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on Mortgage Assets to make
payments, mortgage-backed securities may contain elements of credit
enhancement. Such credit enhancement falls into two categories; (1) liquidity
protection and (2) protection against losses resulting after default by an
obligor on the underlying assets and collection of all amounts recoverable
directly from the obligor and through liquidation of the collateral. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets (usually the bank, savings association or
mortgage banker that transferred the underlying loans to the issuer of the
security), to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting after default and
liquidation ensures ultimate payment of the obligations on at least a portion
of the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor, from
third parties, through various means of structuring the transaction or through
a combination of such approaches. The Fund will not pay any additional fees for
such credit enhancement, although the existence of credit enhancement may
increase the price of a security. Credit enhancements do not provide protection
against changes in the market value of the security.
Examples of credit enhancement arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held in
reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
-------------
Prospectus Page 38
<PAGE>
-----------------------------
PAINEWEBBER STRATEGIC INCOME FUND
Appendix C
- --------------------------------------------------------------------------------
The Fund may use the following Hedging Instruments:
OPTIONS ON DEBT SECURITIES AND CURRENCIES--A call option is a contract pursuant
to which the purchaser of the option, in return for a premium, has the right to
buy the security or currency underlying the option at a specified price at any
time during the term, or upon the expiration, of the option. The writer of a
call option, who receives the premium, has the obligation, upon exercise of the
option, to deliver the underlying security or currency against payment of the
exercise price. A put option is a similar contract that gives its purchaser, in
return for a premium, the right to sell the underlying security or currency at
a specified price during the option term or upon expiration. The writer of a
put option, who receives the premium, has the obligation, upon exercise, to buy
the underlying security or currency at the exercise price.
OPTIONS ON INDICES OF DEBT SECURITIES--An index assigns relative values to the
securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payment and do not involve delivery of securities. Thus, upon exercise of
an 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
index.
DEBT AND EQUITY SECURITY INDEX FUTURES CONTRACTS--An 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 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.
DEBT SECURITY AND CURRENCY FUTURES CONTRACTS--A debt security or currency
futures contract is a bilateral agreement pursuant to which one party agrees to
accept and the other party agrees to make delivery of the specific type of debt
security or currency called for in the contract at a specified future time and
at a specified price.
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 accomplished 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.
FORWARD CURRENCY CONTRACTs--A forward currency contract involves an obligation
to purchase or sell a specific currency at a specified future date, which may
be any fixed number of days from the contract date agreed upon by the parties,
at a price set at the time the contract is entered into.
-------------
Prospectus Page 39
<PAGE>
Application Form
THE PAINEWEBBER PAINEWEBBER STRATEGIC [_][_]- [_][_][_][_][_] - [_][_]
MUTUAL FUNDS INCOME FUND PaineWebber Account No.
- --------------------------------------------------------------------------------
INSTRUCTIONS DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED
THROUGH PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT
EXECUTIVE (OR YOUR LOCAL PAINEWEBBER OFFICE TO OPEN AN
ACCOUNT).
ALSO, DO NOT USE THIS FORM TO OPEN A Return this completed
RETIREMENT PLAN ACCOUNT. FOR form to:
RETIREMENT PLAN FORMS OR FOR PFPC Inc.
ASSISTANCE IN COMPLETING THIS FORM P.O. Box 8950
CONTACT PFPC INC. AT 1-800-647-1568. Wilmington, Delaware
19899
ATTN: PaineWebber Mutual
Funds
PLEASE PRINT
- --------------------------------------------------------------------------------
1 INITIAL INVESTMENT ($1,000 MINIMUM)
ENCLOSED IS A CHECK FOR $ (payable to "PaineWebber Stra-
tegic Income Fund") to purchase
Class A [_] Class B [_] or Class D [_] shares.
(Check one Class; if no Class is specified Class A shares will
be purchased)
2 ACCOUNT REGISTRATION
Not valid
without
signature and
Soc. Sec. or 1. Individual
Tax ID # on ------------- --------------- / /
accompanying ------------
Form W-9. First Name Last Name MI Soc. Sec. No.
2. Joint Tenancy
----------- --------------- / /
------------
- --As joint First Name Last Name MI Soc. Sec. No.
tenants use ("Joint Tenants with Rights of Survivorship"
Lines 1 and 2. unless otherwise specified)
- --As custodian
for a minor,
use Lines 1
and 3.
3. Gifts to Minors -------------------------- / /
------------
Minor's Name Soc. Sec. No.
- --In the name Under the ______________________ Uniform Gifts Uniform Trans-
of a State of Residence to Minors Act/ fers to Minors
corporation, of Minor Act
trust or other
organization or
any fiduciary
capacity, use
Line 4.
4. Other Registrations
------------------------ ------------
Name Tax Ident. No.
5. If Trust, Date of Trust Instrument: _____________________
3 ADDRESS
---------------------------- U.S. Citizen
Street [_] YES [_] NO*
---------------------------- -------------------
City State Zip Code *Country of Citizenship
4 DISTRIBUTION OPTIONS (See Prospectus)
Please select one of the following:
[_] Reinvest both dividends and capital gain distributions in
additional shares.
[_] Pay dividends to my address above; reinvest capital gain
distributions.
[_] Pay both dividends and capital gain distributions in cash
to my address above.
[_] Reinvest dividends and pay capital gain distributions in
cash to my address above.
NOTE: If a selection is not made, both dividends and capi-
tal gain distributions will be paid in additional Fund
shares of the same Class.
<PAGE>
5 SPECIAL OPTIONS (For More Information--Check Appropriate Box)
[_] Automatic Investment Plan
[_] Prototype IRA Application
[_] Systematic Withdrawal Plan
6 RIGHTS OF ACCUMULATION--CLASS A SHARES (See Prospectus)
Indicate here any other account(s) in the group of funds that would
qualify for the cumulative quantity discount as outlined in the
Prospectus.
--------------------- ----------- ---------------------
Fund Name Account No. Registered Owner
--------------------- ----------- ---------------------
Fund Name Account No. Registered Owner
--------------------- ----------- ---------------------
Fund Name Account No. Registered Owner
7 PLEASE INDICATE BELOW IF YOU ARE AFFILIATED WITH PAINEWEBBER
"Affiliated" persons are defined as officers, directors/trustees and
employees of the PaineWebber funds, PaineWebber or its affiliates,
and their parents, spouses and children.
-------------------------------------------------
Nature of Relationship
8 SIGNATURE(S) AND TAX CERTIFICATION(S)
I warrant that I have full authority and am of legal age to purchase
shares of the Fund(s) specified and have received and read a current
Prospectus of the Fund and agree to its terms. The Fund and its
Transfer Agent will not be liable for acting upon instructions or
inquiries believed genuine. Under penalties of perjury, I certify
that (1) my taxpayer identification number provided in this
application is correct and (2) I am not subject to backup withholding
because (i) I have not been notified that I am subject to backup
withholding as a result of failure to report interest or dividends or
(ii) the IRS has notified me that I am no longer subject to backup
withholding (strike out clause (2) if incorrect).
---------------------- ---------------------- ----------
Individual Joint Registrant Date
or Custodian) (if any)
---------------------- ---------------------- ----------
Corporate Officer, Title Date
Partner, Trustee, etc.
9 INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed By Invest-
ment Executive Only)
---------------------------- ----------------------------
Broker No./Name Branch Wire Code
( )
---------------------------- ----------------------------
Branch Address Telephone
10 CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Correspon-
dent Firm Only)
---------------------------- ----------------------------
Name Address
---------------------------- ----------------------------
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE
OR CORRESPONDENT FIRM OR TO PFPC INC., P.O. BOX 8950,
WILMINGTON, DELAWARE 19899.
<PAGE>
Shares of the Fund can be exchanged for shares of the following PaineWebber
("PW") and Mitchell Hutchins/Kidder Peabody ("MH/KP") Mutual Funds:
INCOME FUNDS
. MH/KP Adjustable Rate Government Fund
. MH/KP Global Fixed Income Fund
. MH/KP Government Income Fund
. MH/KP Intermediate Fixed Income Fund
. PW Global Income Fund
. PW High Income Fund
. PW Investment Grade Income Fund
. PW Short-Term U.S. Government Income Fund
. PW Short-Term U.S. Government Income Fund for Credit Unions
. PW U.S. Government Income Fund
TAX-FREE INCOME FUNDS
. MH/KP Municipal Bond Fund
. PW California Tax-Free Income Fund
. PW Municipal High Income Fund
. PW National Tax-Free Income Fund
. PW New York Tax-Free Income Fund
GROWTH FUNDS
. MH/KP Emerging Markets Equity Fund
. MH/KP Global Equity Fund
. MH/KP Small Cap Growth Fund
. PW Atlas Global Growth Fund
. PW Blue Chip Growth Fund
. PW Capital Appreciation Fund
. PW Communications & Technology Growth Fund
. PW Europe Growth Fund
. PW Growth Fund
. PW Regional Financial Growth Fund
. PW Small Cap Value Fund
GROWTH AND INCOME FUNDS
. MH/KP Asset Allocation Fund
. MH/KP Equity Income Fund
. PW Asset Allocation Fund
. PW Global Energy Fund
. PW Global Growth and Income Fund
. PW Growth and Income Fund
. PW Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
---------------
A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read it carefully before investing.
(C) 1995 PaineWebber Incorporated
[LOGO] Recycled
Paper
PaineWebber
Strategic Income
Fund
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND
OR ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
PROSPECTUS
June 1, 1995
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Strategic Income Fund ("Fund") is a non-diversified series of
PaineWebber Securities Trust ("Trust"), a professionally managed, open-end
investment company organized as a Massachusetts business trust. The Fund's
primary investment objective is to achieve a high level of current income and,
secondarily, capital appreciation. The Fund seeks to achieve its investment
objectives by investing in a portfolio of income securities that is
strategically allocated among U.S. Government and Investment Grade Securities,
U.S. High Yield Securities and Foreign and Emerging Market Securities. The
Fund's investment adviser, administrator and distributor is Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of
PaineWebber Incorporated ("PaineWebber"). As distributor for the Fund, Mitchell
Hutchins has appointed PaineWebber to serve as the exclusive dealer for the
sale of Fund shares. This Statement of Additional Information is not a
prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated June 1, 1995. All capitalized terms not otherwise defined
herein have the same meanings as in the Prospectus. A copy of the Prospectus
may be obtained by calling any PaineWebber investment executive or
correspondent firm or by calling toll-free 1-800-647-1568. This Statement of
Additional Information is dated June 1, 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a
pool of mortgage loans are influenced by a variety of economic, geographic,
social, and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are less likely to
experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities
<PAGE>
may commence at an earlier date. Mortgage and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because
of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool due to the annual
fees paid to the servicer of the mortgage pool for passing through monthly
payments to certificateholders and to any guarantor, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages as well as changes in interest rates. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. In the past, a common industry practice has
been to assume that prepayments on pools of fixed rate 30-year mortgages would
result in a 12-year average life for the pool. At present, mortgage pools,
particularly those with loans with other maturities or different
characteristics, are priced on an assumption of average life determined for
each pool. In periods of declining interest rates, the rate of prepayment tends
to increase, thereby shortening the actual average life of a pool of mortgage-
related securities. Conversely, in periods of rising interest rates, the rate
of prepayment tends to decrease, thereby lengthening the actual average life of
the pool. However, these effects may not be present, or may differ in degree,
if the mortgage loans in the pools have adjustable interest rates or other
special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at lower
interest rates than the original investment, thus adversely affecting the yield
of the Fund.
The Fund may invest in adjustable rate mortgage ("ARM") and floating rate
mortgage-backed securities. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities. As a
result, during periods of rising interest rates, ARMs generally do not decrease
in value as much as fixed rate securities. Conversely, during periods of
declining rates, ARMs generally do not increase in value as much as fixed rate
securities. ARM mortgage-backed securities represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on
a pool of ARMs. ARMs generally provide that the borrower's mortgage interest
rate may not be adjusted above a specified lifetime maximum rate or, in some
cases, below a minimum lifetime rate. In addition, certain ARMs provide for
limitations on the maximum amount by which the mortgage interest rate may
adjust for any single adjustment period. ARMs also may provide for limitations
on changes in the maximum amount by which the borrower's monthly payment may
adjust for any single adjustment period. In the event that a monthly payment is
not sufficient to pay the interest accruing on the ARM, any such excess
interest is added to the mortgage loan ("negative amortization"), which is
repaid through future payments. If the monthly payment exceeds the sum of the
interest accrued at the applicable mortgage interest rate and the principal
payment that would have been necessary to amortize the outstanding principal
balance over the remaining
2
<PAGE>
term of the loan, the excess reduces the principal balance of the ARM.
Borrowers under ARMs experiencing negative amortization may take longer to
build up their equity in the underlying property and may be more likely to
default.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds index ("COFI"), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust
based on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive
to interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on Floating Rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES
EMERGING MARKET SECURITIES. Many of the Foreign and Emerging Market
Securities held by the Fund will not be registered with the SEC, nor will the
issuers thereof be subject to SEC 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.
Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets, and enforcement of existing
regulations may be extremely limited. Foreign companies, and in particular,
companies in smaller and emerging capital markets 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's net investment income and capital gains from its foreign investment
activities may be subject to non-U.S. withholding taxes.
The costs attributable to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities. Tax
treaties between the United States and foreign countries, however, may reduce
or eliminate the amount of foreign tax to which the Fund would be subject.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making
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it difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines
in the value of such portfolio security or, if the Fund has entered into a
contract to sell the security, could result in possible liability to the
purchaser.
SOVEREIGN DEBT. Sovereign Debt differs from debt obligations issued by
private entities in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party. Legal recourse is therefore limited.
Political conditions, especially a sovereign entity's willingness to meet the
terms of its debt obligations, are of considerable significance. Also, there
can be no assurance that the holders of commercial bank loans to the same
sovereign entity may not contest payments to the holders of Sovereign Debt in
the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to pay interest and repay
principal in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints to
which a sovereign debtor may be subject. A country whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international price of such commodities. Increased protectionism on the part of
a country's trading partners, or political changes in those countries, could
also adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local
government or agency. Another factor bearing on the ability of a country to
repay Sovereign Debt is the level of the country's international reserves.
Fluctuations in the level of these reserves can affect the amount of foreign
exchange readily available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments on its Sovereign Debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are adjusted
periodically based upon international rates.
With respect to Sovereign Debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors
to commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin American
countries.
Certain emerging market countries have experienced difficulty in servicing
their Sovereign Debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
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Holders of Sovereign Debt, including the Fund, may be requested to participate
in the rescheduling of such debt and to extend further loans to sovereign
debtors. The interests of holders of Sovereign Debt could be adversely affected
in the course of restructuring arrangements or by certain other factors
referred to below. Furthermore, some of the participants in the secondary
market for Sovereign Debt may also be directly involved in negotiating the
terms of these arrangements and may therefore have access to information not
available to other market participants. Obligations arising from past
restructuring agreements may affect the economic performance and political and
social stability of certain issuers of Sovereign Debt. There is no bankruptcy
proceeding by which Sovereign Debt on which a sovereign has defaulted may be
collected in whole or in part.
Foreign investment in certain Sovereign Debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in such Sovereign Debt and increase the costs and expenses
of the Fund. Certain countries in which the Fund will invest require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment
by foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on foreign capital
remittances. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation of capital, as well
as by the application to the Fund of any restrictions on investments. Investing
in local markets may require the Fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve
additional costs to the Fund.
BRADY BONDS. The Fund may invest in Brady Bonds and other Sovereign Debt of
countries that have restructured or are in the process of restructuring
Sovereign Debt pursuant to the Brady Plan. Brady Bonds are Sovereign Debt
securities issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the
Brady Plan framework, a debtor nation negotiates with its existing bank lenders
as well as multilateral institutions such as the IMF. The Brady Plan framework,
as it has developed, contemplates the exchange of commercial bank debt for
newly issued Brady Bonds. Brady Bonds may also be issued in respect of new
money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.
Brady Plan debt restructurings totalling more than $80 billion have been
implemented to date in Mexico, Costa Rica, Venezuela, Uruguay, Nigeria,
Argentina and the Philippines and, in addition, Brazil has announced intentions
to issue Brady Bonds. There can be no assurance that the circumstances
regarding the issuance of Brady Bonds by these countries will not change.
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly do not have a long payment history. Agreements implemented under
the Brady Plan to date are designed to achieve debt and debt-service reduction
through specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, which carry a below-market
stated rate of interest
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(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest
rate which increases over time and bonds issued in exchange for the advancement
of new money by existing lenders. Regardless of the stated face amount and
stated interest rate of the various types of Brady Bonds, the Fund will
purchase Brady Bonds in secondary markets, as described below, in which the
price and yield to the investor reflect market conditions at the time of
purchase.
Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have
then been due on the Brady Bonds in the normal course. In addition, interest
payments on certain types of Brady Bonds may be collateralized by cash or high
grade securities in amounts that typically represent between 12 and 18 months
of interest accruals on these instruments with the balance of the interest
accruals being uncollateralized. Brady Bonds are often viewed as having several
valuation components: (1) the collateralized repayment of principal, if any, at
final maturity, (2) the collateralized interest payments, if any, (3) the
uncollateralized interest payments and (4) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk"). In light of the residual risk of Brady Bonds and, among other factors,
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds, investments in Brady Bonds
are to be viewed as speculative. The Fund may purchase Brady Bonds with no or
limited collateralization, and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) repayment of
principal primarily on the willingness and ability of the foreign government to
make payment in accordance with the terms of the Brady Bonds. Brady Bonds
issued to date are purchased and sold in secondary markets through U.S.
securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories.
STRUCTURED FOREIGN INVESTMENTS. The Fund may invest a portion of its assets
in interests in U.S. and foreign entities organized and operated solely for the
purpose of securitizing or restructuring the investment characteristics of
foreign securities. This type of securitization or restructuring involves the
deposit with or purchase by a U.S. or foreign entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities
("Structured Foreign Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Foreign Investments to create
securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Foreign Investments is dependent
on the extent of the cash flow on the underlying instruments.
The Structured Foreign Investments of the type in which the Fund typically
will invest will involve no credit enhancement. Accordingly, their credit risk
generally will be equivalent to that of the underlying instruments. The Fund is
permitted, however, to invest in classes of Structured Foreign Investments that
are subordinated to the right of payment of another class. Subordinated
Structured Foreign Investments typically
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have higher yields and present greater risks than unsubordinated Structured
Foreign Investments. Structured Foreign Investments are typically sold in
private placement transactions, and there currently is no active trading market
for Structured Foreign Investments.
YIELD FACTORS AND RATINGS
S&P, Moody's and other NRSROs are private services that provide ratings of
the credit quality of income securities. A description of the range of ratings
assigned to income securities by S&P and Moody's is included in Appendix A to
the Prospectus. The Fund may use these ratings in determining whether to
purchase, sell or hold a security. Mitchell Hutchins will assess securities on
the basis of the highest rating assigned by any NRSRO. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, income securities with the same maturity, interest rate and
rating may have different market prices. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate. The rating assigned to a security by
Moody's or S&P does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.
Changes by NRSROs in their ratings of any income security and in the ability
of an issuer to make payments of interest and principal may also affect the
value of these investments. Changes in the value of portfolio securities
generally will not affect cash income derived from such securities, but will
affect the Fund's net asset value. The Fund will not necessarily dispose of a
security when its rating is reduced below the rating at the time of purchase,
although Mitchell Hutchins will monitor all investments to determine whether
continued investment is consistent with the Fund's investment objectives.
In addition to ratings assigned to individual security issues, Mitchell
Hutchins will analyze interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and
credit quality. With respect to its investments in Foreign and Emerging Market
Securities, the Fund also will analyze factors such as currency exchange rate
movements, credit risks of the foreign countries and issuers, and political and
social climate. The yields on income securities are dependent on a variety of
factors, including general money market conditions, general conditions in the
bond market, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and its rating. There is a wide variation in the
quality of income securities, both within a particular classification and
between classifications. The obligations of an issuer of income securities are
subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of bond holders or other creditors of an
issuer; litigation or other conditions may also adversely affect the power or
ability of issuers to meet their obligations for the payment of interest and
repayment of principal.
ILLIQUID SECURITIES
As indicated in the Prospectus, the Fund may invest up to 15% of its net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased OTC options, repurchase
agreements maturing in more than seven days and restricted securities other
than those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the Trust's board of trustees. The assets used as cover for OTC
options written by the Fund will be considered illiquid unless the OTC options
are sold to qualified dealers who agree that the
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Fund may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an OTC
option written subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. Illiquid restricted securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933
("1933 Act"). Such securities include those that are subject to restrictions
contained in the securities laws of other countries. However, securities that
are freely marketable in the country where they are principally traded, but
would not be freely marketable in the United States, will not be considered
illiquid. Where registration is required, the Fund may be obligated to pay all
or part of the registration expenses, and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years, a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders or for other purposes. 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 buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities, and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The board of trustees has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins pursuant to guidelines
approved by the board. Mitchell Hutchins will take 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 for the security 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 will monitor the liquidity of restricted securities in the
Fund's portfolio and report periodically on such decisions to the board of
trustees.
CONVERTIBLE SECURITIES
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a
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conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates,
with investment value declining as interest rates increase and increasing as
interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. Generally, the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price
of the convertible security will be increasingly influenced by its conversion
value. A convertible security generally will sell at a premium over its
conversion value by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security might 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 the underlying common stock or sell it to a third
party. Any of these actions could have an adverse effect on the Fund's ability
to achieve its investment objectives.
WARRANTS
The Fund may acquire warrants for equity securities, debt securities and
commodities that are acquired as units with income securities. Warrants are
securities permitting, but not obligating, their holder to subscribe for other
securities or commodities. 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. The Fund does not intend to retain in its portfolio any common stock or
commodity received upon the exercise of a warrant and will sell the common
stock or commodity as promptly as practicable and in a manner that it believes
will reduce its risk of a loss in connection with the sale.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund purchases securities
from a bank or recognized securities dealer and simultaneously commits to
resell those securities to the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon rate or maturity
of the purchased securities. The Fund will maintain custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or
securities dealer to pay the repurchase price on the date agreed to will, in
effect, be secured by such securities. If the value of such securities is less
than the repurchase price, plus any agreed-upon additional amount, the other
party to the agreement will be required to 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 securities and the price which was paid
by the Fund upon acquisition will be accrued as interest and included in the
Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the
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other party to the repurchase agreement becomes bankrupt. The Fund intends to
enter into repurchase agreements only with banks and dealers in transactions
believed by Mitchell Hutchins to present minimal credit risks in accordance
with guidelines established by the Trust's board of trustees. Mitchell Hutchins
will review and monitor the creditworthiness of such institutions under the
board's general supervision.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus, the
Fund may purchase securities on a "when-issued" or delayed delivery basis. A
security purchased on a when-issued or delayed delivery basis is recorded as an
asset on the commitment date and is subject to changes in market value
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When the Fund agrees to purchase securities on a
when-issued basis, its custodian segregates assets to cover the amount of the
commitment. See "Investment Policies and Restrictions--Segregated Accounts."
The Fund purchases when-issued securities only with the intention of taking
delivery, but may sell the right to acquire the security prior to delivery if
Mitchell Hutchins deems it advantageous to do so, which may result in capital
gain or loss to the Fund.
SEGREGATED ACCOUNTS. When the Fund enters into certain transactions that
involve obligations to make future payments to third parties, including dollar
rolls, reverse repurchase agreements or the purchase of securities on a when-
issued or delayed delivery basis, the Fund will maintain with an approved
custodian in a segregated account cash, U.S. government securities or other
liquid high-grade debt securities, marked to market daily, in an amount at
least equal to the Fund's obligation or commitment under such transactions. As
described below under "Hedging and Related Income Strategies," segregated
accounts may also be required in connection with certain transactions involving
options or futures contracts, interest rate protection transactions or forward
currency contracts.
SHORT SALES "AGAINST THE BOX." As indicated in the prospectus, the Fund may
engage in short sales of securities it owns or has the right to acquire at no
added cost through conversion or exchange of other securities it owns (short
sales "against the box") to defer realization of gains or losses for tax or
other purposes. To make delivery to the purchaser in a short sale, the
executing broker borrows the securities being sold short on behalf of the Fund,
and the Fund is obligated to replace the securities borrowed at a date in the
future. When the Fund sells short, it will establish a margin account with the
broker effecting the short sale, and will deposit collateral with the broker.
In addition, the Fund will maintain with its custodian, in a segregated
account, the securities that could be used to cover the short sale. The Fund
will incur transaction costs, including interest expense, in connection with
opening, maintaining and closing short sales against the box. The Fund
currently does not intend to have obligations under short-sales that at any
time during the coming year exceed 5% of the Fund's net assets.
The Fund might make a short sale "against the box" in order to hedge against
market risks when Mitchell Hutchins believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the Fund
or a security convertible into or exchangeable for a security owned by the
Fund, or when Mitchell Hutchins wants to sell a security that the Fund owns at
a current price, but also wishes to defer recognition of gain or loss for
federal income tax purposes. In such case, any loss in the Fund's long position
after the short sale should be reduced by a gain in the short position.
Conversely, any gain in the long position should be reduced by a loss in the
short position. The extent to which gains or losses in the long position are
reduced will depend upon the amount of the securities sold short relative to
the amount of the securities the Fund owns, either directly or indirectly, and
in the case where the Fund owns convertible securities, changes in the
investment values or conversion premiums of such securities.
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INVESTMENT LIMITATIONS OF THE FUND. The Fund may not:
(1) issue senior securities (including borrowing money from banks and
other entities and through reverse repurchase agreements) in excess of 33
1/3% of its total assets (including the amount of senior securities issued,
but reduced by any liabilities and indebtedness not constituting senior
securities), 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;
(2) make an investment in any one industry if the investment would cause
the aggregate value of all investments in such industry to equal 25% or
more of the Fund's total assets; provided, that this limitation does not
apply to investments in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities;
(3) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions and except that the Fund
may make margin deposits in connection with its use of options, futures
contracts, options on futures contracts, forward currency contracts and
other financial instruments;
(4) engage in the business of underwriting securities of other issuers,
except to the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed an underwriter under federal securities
laws and except that the Fund may write options;
(5) make short sales of securities or maintain a short position, except
that the Fund may maintain short positions in connection with its use of
options, futures contracts, options on futures contracts and forward
currency contracts;
(6) purchase or sell real estate (including real estate limited
partnership interests), provided that the Fund may invest in securities
secured by real estate or interests therein or issued by entities that
invest in real estate or interests therein, and provided further that the
Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and to liquidate real
estate acquired as a result of such enforcement;
(7) purchase or sell commodities or commodity contracts, except that the
Fund may sell commodities received upon the exercise of warrants, may
purchase or sell financial and currency futures contracts and options
thereon, may purchase and sell forward contracts, may engage in
transactions in foreign currencies and may purchase or sell options on
foreign currencies;
(8) invest in oil, gas or mineral-related programs or leases; or
(9) make loans, except through loans of portfolio instruments and
repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests
therein and investment in loan assignments and participations, government
obligations, short-term commercial paper, certificates of deposit and
bankers' acceptances shall not be deemed to be the making of a loan.
The foregoing fundamental investment limitations cannot be changed without the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares
of the Fund or (b) 67% or more of such shares present at a stockholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or the
amount of total assets will not be considered a violation of any of the Fund's
investment limitations or policies.
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The following investment restrictions may be changed by the Trust's board of
trustees without shareholder approval: the Fund may not (1) purchase or retain
the securities of any issuer if, to the knowledge of the Fund's management, the
officers and trustees of the Trust and the officers and directors of Mitchell
Hutchins (each owning beneficially more than 0.5% of the outstanding securities
of the issuer) own in the aggregate more than 5% of the securities of the
issuer; (2) purchase any security if as a result more than 5% of the Fund's
total assets would be invested in securities of companies that together with
any predecessors have been in continuous operation for less than three years,
provided, however, that this shall not apply to mortgage-and asset-backed
securities and Structured Foreign Investments; (3) invest more than 15% of its
net assets in illiquid securities, a term that means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, repurchase agreements maturing in more than seven
days; (4) purchase securities of any one issuer if as a result the Fund would
own or hold 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 or (5) make investments in warrants, valued at the lower of
cost or market, in excess of 5% of the value of its net assets, which amount
may include warrants that are not listed on the New York Stock Exchange, Inc.
("NYSE") or the American Stock Exchange, Inc. provided that such unlisted
warrants, valued at the lower of cost or market, do not exceed 2% of the Fund's
net assets, and further provided that this restriction does not apply to
warrants attached to, or sold as a unit with, other securities. For purposes of
this restriction, the term "warrants" does not include options on securities,
currencies, stock or bond indices, or futures contracts. In addition, for so
long as required by applicable state securities regulation, the Fund will not
(a) invest more than 15% of its total assets in securities of issuers that are
restricted as to disposition or (b) invest more than 10% of its total assets in
restricted securities (other than Rule 144A securities determined to be liquid
by the Trust's board of trustees).
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HEDGING AND RELATED INCOME STRATEGIES
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ("Hedging Instruments"), including options, futures
contracts (sometimes referred to as "futures") and options on futures contracts
to attempt to hedge the Fund's portfolio and to enhance income. Mitchell
Hutchins also may attempt to hedge the Fund's portfolio through the use of
foreign currency forward contracts and interest rate protection transactions.
Further information regarding certain of the Hedging Instruments that may be
used by the Fund is contained in Appendix C to the Fund's Prospectus.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
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 Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example,
the Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus 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 Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on
a security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition 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 debt 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 less than or equal to the exercise price
of the call. The Fund might enter into a long straddle when Mitchell Hutchins
believes that it is likely that interest rates 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 less than or equal to the exercise price of the call. The
Fund might enter into a short straddle when Mitchell Hutchins believes that it
is unlikely that interest rates will be as volatile during the term of the
option as the option pricing implies.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded and
the Commodity Futures Trading Commission ("CFTC"). In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes."
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In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities to
develop in connection with options, futures contracts, forward currency
contracts and other hedging techniques. These new opportunities may become
available as Mitchell Hutchins develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts, forward currency contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Fund's investment objectives and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special considerations and risks, as
described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities, currencies
and interest rate markets, which requires different skills than predicting
changes in the prices of individual securities. While Mitchell Hutchins is
experienced in the use of Hedging Instruments, there can be no assurance that
any particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the investments 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 Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would
have been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts to make such payments until the
position 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
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close out a position in a Hedging Instrument prior to expiration or maturity
depends on the existence of a liquid secondary market or, in the absence of
such a market, the ability and willingness of the other party to the
transaction ("contra party") 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 HEDGING STRATEGIES
Transactions using Hedging Instruments, other than purchased options, expose
the Fund to an obligation to another party. The Fund will not enter into any
such transactions unless it owns either (1) an offsetting ("covered") position
in securities, currencies or other options, futures contracts or forward
currency contracts or (2) cash and short-term debt securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. The Fund will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so
require, set aside cash, U.S. government securities or other liquid, high-grade
debt securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS
The Fund may purchase put and call options, and write covered put and call
options, on debt securities, on indices of debt securities and foreign
currencies. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing covered put or call
options can enable the Fund to enhance income by reason of the premiums paid by
the purchasers of such options. Writing covered put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the market price of the security underlying a put option the Fund has
written declines to less than the exercise price of the option, minus the
premium received, the Fund would expect to suffer a loss. Writing covered call
options serves as a limited short hedge because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher than
the exercise price of the call option, it can be expected that the option will
be exercised and the Fund will be obligated to sell the security at less than
its market value. All or a portion of the assets used as cover for OTC options
written by the Fund would be considered illiquid to the extent described under
"Investment Policies and Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Generally, the OTC debt and foreign currency options
used by the Fund are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option. Options that expire unexercised have no value.
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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 the
profit or limit the loss on an option position prior to its exercise or
expiration.
The Fund may purchase or write both exchange-traded and OTC options. Exchange
markets for options on debt securities and foreign currencies exist but are
relatively new, and these instruments are primarily traded on the OTC market.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Fund purchases or writes an OTC option, it relies on
the contra party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party to do so would result in
the loss of any premium paid by the Fund as well as the loss of any expected
benefit of the transaction. The Fund will enter into OTC option transactions
only with contra parties that have a net worth of at least $20 million.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the contra
party, the Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would
be able to sell the investment used as cover for the written option until the
option expires or is exercised.
The Fund may purchase and write put and call options on indices of debt
securities in much the same manner as the more traditional options discussed
above, except the index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
GUIDELINES FOR OPTIONS
The Fund's use of options is governed by the following guidelines, which can
be changed by the Trust's board of trustees without shareholder vote:
1. The Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums on
all other options purchased by the Fund, does not exceed 5% of the Fund's total
assets.
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2. The aggregate value of securities underlying put options written by the
Fund determined as of the date the put options are written, will not exceed 50%
of the Fund's net assets.
3. The aggregate premiums paid on all options (including options on
securities, foreign currencies and indices of securities and options on futures
contracts) purchased by the Fund that are held at any time will not exceed 20%
of the Fund's net assets.
FUTURES
The Fund may purchase and sell interest rate futures contracts, debt and
equity index futures contracts and foreign currency futures contracts. The Fund
may also purchase put and call options, and write covered put and call options,
on futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered options in
securities on indices.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of the Fund, the Fund may sell an interest rate or debt security index 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, the Fund may buy an interest rate or debt security index futures contract
or a call option thereon or sell a put option thereon.
The Fund may also write put options on interest rate futures contracts while
at the same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. 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,
U.S. government securities or other liquid, high-grade debt securities, in an
amount generally equal to 10% or less of the contract value. Margin must also
be deposited when writing an option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in
the nature of a performance bond or good-faith deposit that is returned to the
Fund at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high
volatility, the Fund may be required by an exchange to increase the level of
its initial margin payment. Initial margin requirements might be increased
generally by future regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures or written option position varies, a
process known as "marking to market." Variation margin does not involve
borrowing, but rather represents a daily settlement of the Fund's obligations
with respect to an open futures or options position. When the Fund purchases an
option on a future, the premium paid plus transaction costs is all that is at
risk. In contrast, when the Fund purchases or sells a futures contract or
writes an 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.
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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 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 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 related options and the investments being hedged. Also, because
initial margin deposit requirements in the futures market are less onerous than
margin requirements in the securities markets, there might be increased
participation by speculators in the futures markets. This participation also
might cause temporary price distortions. In addition, activities of large
traders in both the futures and securities markets involving arbitrage,
"program trading" and other investment strategies might result in temporary
price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS
The Fund's use of futures and related options is governed by the following
guidelines which can be changed by the Trust's board of trustees without
shareholder vote:
1. To the extent the Fund enters into futures contracts and options on
futures positions including options on foreign currencies traded on a
commodities exchange, that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities, foreign currencies and indices of debt securities and options on
futures contracts) purchased by the Fund that are held at any time will not
exceed 20% of the Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options thereon
held at any time by the Fund will not exceed 5% of the Fund's total assets.
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FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS
The Fund may use options and futures on foreign currencies, as described
above, and foreign currency forward contracts, as described below, to hedge
against movements in the values of the foreign currencies in which the Fund's
securities are denominated. Such currency hedges can protect against price
movements in a security that the Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in
the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on another foreign
currency or basket of currencies, the values of which Mitchell Hutchins
believes will have a positive correlation to the value of the currency being
hedged. The risk that movements in the price of the Hedging Instrument will not
correlate perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the Hedging Instruments until they
reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. Such transactions may serve as long hedges--for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges--for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
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As noted above, the Fund may seek to hedge against changes in the value of a
particular currency by using forward contracts on another foreign currency or a
basket of currencies, the value of which Mitchell Hutchins believes will have a
positive correlation to the values of the currency being hedged. In addition,
the Fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if the Fund
owned securities denominated in a foreign currency and Mitchell Hutchins
believed that currency would decline relative to another currency, it might
enter into a forward contract to sell an appropriate amount of the first
foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as
"cross hedging." Use of a different foreign currency magnifies the risk that
movements in the price of the Hedging Instrument will not correlate or will
correlate unfavorably with the foreign currency being hedged.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of
the contract. Failure by the contra party to do so would result in the loss of
any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at
a favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position and would
continue to be required to maintain a position in securities denominated in the
foreign currency that is the subject of the hedge or to maintain cash or
securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, the Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward currency contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts or maintain a net exposure
to such contracts only if: (1) the consummation of the contracts would not
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the position being hedged by such contracts; or (2) the Fund maintains
cash, U.S. government securities or liquid, high-grade debt securities in a
segregated account in an amount not less than the value of its total assets
committed to the consummation of the contract and not covered as provided in
(1) above, as marked to market daily.
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INTEREST RATE PROTECTION TRANSACTIONS
The Fund may enter into interest rate protection transactions, including
interest rate swaps and interest rate caps, collars and floors. Interest rate
swap transactions involve an agreement between two parties to exchange payments
that are based, respectively, on variable and fixed rates of interest and that
are calculated on the basis of a specified amount of principal (the "notional
principal amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an agreement between two parties in
which payments are made when a designated market interest rate either goes
above a designated ceiling level or goes below a designated floor on
predetermined dates or during a specified time period. The Fund intends to use
these transactions as a hedge and not as a speculative investment. Interest
rate protection transactions are subject to risks comparable to those described
above with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate protection transactions are entered
into for good faith hedging purposes, and inasmuch as segregated accounts will
be established with respect to such transactions, Mitchell Hutchins and the
Fund believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis and an amount of cash, U.S. government securities or other
liquid, high-grade debt obligations having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
a custodian that satisfies the requirements of the 1940 Act. The Fund also will
establish and maintain such segregated accounts with respect to its total
obligations under any interest rate swaps that are not entered into on a net
basis and with respect to any interest rate caps, collars and floors that are
written by the Fund.
The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
21
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their business addresses
and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH THE TRUST OTHER DIRECTORSHIPS
----------------- -------------- --------------------
<S> <C> <C>
Richard Q. Armstrong; 59 Trustee Mr. Armstrong is chairman of RQA Enter-
78 West Brother Drive prises (management consulting firm)
Greenwich, CT 06830 (since April 1991 and principal occu-
pation since March 1995). Mr. Arm-
strong is also a director of HiLo Au-
tomotive Inc. He was chairman of the
board, chief executive officer and co-
owner of Adirondack Beverages (pro-
ducer and distributor of soft drinks
and sparkling/still waters) (October
1993-March 1995). Mr. Armstrong was a
partner of The New England Consulting
Group (management consulting firm)
(December 1992-September 1993). He was
managing director of LVMH U.S. Corpo-
ration (U.S. subsidiary of the French
luxury goods conglomerate, Luis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine
and spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr. Arm-
strong is also a director of four
other investment companies for which
Mitchell Hutchins or Paine Webber
serves as investment adviser.
E. Garrett Bewkes, Jr.; 68** Trustee and Chairman Mr. Bewkes is a director of Paine Web-
of the Board of ber Group Inc. ("PW Group") (holding
Trustees company of PaineWebber and Mitchell
Hutchins) and a consultant to PW
Group. Prior to 1988, he was chairman
of the board, president and chief ex-
ecutive officer of American Bakeries
Company. Mr. Bewkes is also a director
of Interstate Bakeries Corporation and
NaPro BioTherapeutics, Inc. and a di-
rector or trustee of 26 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Richard R. Burt; 47 Trustee Mr. Burt is chairman of International
1101 Connecticut Avenue N.W. Equity Partners (international invest-
Washington, D.C. 20036 ments and consulting firm) (since
March 1994) and a partner of McKinsey
& Company (management consulting firm)
(since 1991). He is also a director of
American Publishing Company. He was
the chief negotiator in the Strategic
Arms Reduction talks with the former
Soviet
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH THE TRUST OTHER DIRECTORSHIPS
----------------- -------------- --------------------
<S> <C> <C>
Union (1989-1991) and the U.S. ambas-
sador to the Federal Republic of Ger-
many (1985-1989). Mr. Burt is also a
director of five other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
John R. Torell III; 55 Trustee Mr. Torell is chairman of Torell Man-
767 Fifth Avenue agement, Inc. (financial advisory
Suite 4605 firm) (since 1989). He is the former
New York, NY 10153 chairman and chief executive officer
of Fortune Bancorp (1990-1994); He is
the former chairman, president and
chief executive officer of CalFed,
Inc. (savings association) (1988 to
1989) and former president of Manufac-
turers Hanover Corp. (bank) (prior to
1988). Mr. Torell is also a director
of American Home Products Corp., Volt
Information Sciences Inc. and a direc-
tor or trustee of nine other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
William D. White; 60 Trustee Mr. White is retired. From February
P.O. Box 199 1989 through March 1994, he was presi-
Upper Black Eddy, dent of the National League of Profes-
PA 18972 sional Baseball Clubs. Prior to 1989,
he was a television sportscaster for
WPIX-TV, New York. Mr. White is also a
director or trustee of nine other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Margo N. Alexander; 48 President Ms. Alexander is president, chief exec-
utive officer and a director of Mitch-
ell Hutchins. Prior to January 1995,
Ms. Alexander was an executive vice
president of PaineWebber. Ms. Alexan-
der is also president of 26 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president of
Mitchell Hutchins. Prior to November
1993, she was compliance manager of
Hyperion Capital Management, Inc., an
investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice pres-
ident and manager-legal administration
of Mitchell Hutchins. Ms. Boyle is
also a vice president of 39 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH THE TRUST OTHER DIRECTORSHIPS
----------------- -------------- --------------------
<C> <C> <S>
Joan L. Cohen; 30 Vice President and Ms. Cohen is a vice president and at-
Assistant Secretary torney of Mitchell Hutchins. Prior to
December 1993, she was an associate at
the law firm of Steward & Kissel. Ms.
Cohen is also a vice president and as-
sistant secretary of 26 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Thomas J. Libassi; 36 Vice President Mr. Libassi is a senior vice president
of Mitchell Hutchins. Prior to May
1994, he was a vice president of Key-
stone Custodian Funds Inc. with port-
folio management responsibility. Mr.
Libassi is also a vice president of
two other investment companies for
which Mitchell Hutchins serves as in-
vestment adviser.
Ann E. Moran; 37 Vice President and Ms. Moran is a vice president of Mitch-
Assistant Treasurer ell Hutchins. Ms. Moran is also a vice
president and assistant treasurer of
39 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 42 Vice President and Ms. O'Donnell is a senior vice presi-
Secretary dent and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
also a vice president and secretary of
39 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 43 Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. From April 1990 to May 1994,
she was a partner in the law firm of
Arnold & Porter. Prior to April 1990,
she was a partner in the law firm
of Shereff, Friedman, Hoffman &
Goodman. Ms. Schonfeld is also a vice
president of 39 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Paul H. Schubert; 32 Vice President and Mr. Schubert is a vice president of
Assistant Treasurer Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president
at BlackRock Financial Management,
L.P. Prior to August 1992, he was an
audit manager with Ernst & Young LLP.
Mr. Schubert is also a vice president
and assistant treasurer of 39 other
investment companies for which Mitch-
ell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH THE TRUST OTHER DIRECTORSHIPS
----------------- -------------- --------------------
<C> <C> <S>
Martha J. Slezak; 32 Vice President and Ms. Slezak is a vice president of
Assistant Treasurer Mitchell Hutchins. From September 1991
to April 1992, she was a fundraising
director for a U.S. Senate campaign.
Prior to September 1991, she was a tax
manager with Arthur Andersen & Co.
LLP. Ms. Slezak is also a vice presi-
dent and assistant treasurer of 39
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Julian F. Sluyters; 34 Vice President and Mr. Sluyters is a senior vice president
Treasurer and the director of the mutual fund
finance division of Mitchell Hutchins.
Prior to 1991, he was an audit senior
manager with Ernst & Young LLP. Mr.
Sluyters is also a vice president ad
treasurer of 39 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to 1993, he was a
partner in the law firm of Shereff,
Friedman, Hoffman & Goodman. Mr. Todd
is also a vice president and assistant
secretary of 39 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Stuart Waugh; 39 Vice President Mr. Waugh is a managing director and a
portfolio manager of Mitchell Hutchins
responsible for global fixed income
investments and currency trading. Mr.
Waugh is also a vice president of five
other investment companies for which
Mitchell Hutchins serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an "interested person" of the Trust as defined in the 1940 Act
by virtue of his position with PW Group, the parent company of PaineWebber
and Mitchell Hutchins.
25
<PAGE>
The Trust pays trustees who are not "interested persons" of the Trust $1,500
annually and $250 per meeting of the board or any committee thereof. Trustees
also are reimbursed for any expenses incurred in attending meetings. Trustees
and officers of the Trust own in the aggregate less than 1% of the shares of
the Fund. 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 trustee or officer. The table below includes certain information
relating to the compensation of the Trust's trustees who held office during the
fiscal year ended January 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM THE
RETIREMENT TRUST AND
BENEFITS THE
AGGREGATE ACCRUED AS ESTIMATED TRUST
COMPENSATION PART OF ANNUAL COMPLEX
FROM THE TRUST'S BENEFITS UPON PAID TO
NAME OF PERSON, POSITION THE TRUST* EXPENSES RETIREMENT TRUSTEES**
------------------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.,
Director and Chairman of
the Board of Trustees...... -- -- -- --
John R. Torell III,
Trustee.................... $2,875 -- -- $39,750
William D. White,
Trustee.................... 2,375 -- -- 33,250
</TABLE>
*Represents fees paid to each trustee during the fiscal year ended January 31,
1995.
**Represents total compensation paid to each trustee during the calendar year
ended December 31, 1994.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract dated January 28,
1993, as supplemented by a Fee Agreement dated January 28, 1994, with the Trust
("Advisory Contract"). Under the Advisory Contract, the Fund pays Mitchell
Hutchins a fee of 0.75%, computed daily and paid monthly. For the fiscal period
February 7, 1994 (commencement of operations) through January 31, 1995, the
Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $603,811.
Under a service agreement with the Trust, PaineWebber provides certain
services not otherwise provided by the Fund's transfer agent. The agreement is
reviewed by the Trust's board of trustees annually. During the fiscal period
February 7, 1994 (commencement of operations) through January 31, 1995, the
Fund paid (or accrued) to PaineWebber service fees of $21,998.
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred
26
<PAGE>
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 trustees and officers who
are not interested persons (as defined in the 1940 Act) of the Fund or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectable items of
deposit and other insurance or fidelity bonds; (9) any costs, expenses or
losses arising out of a liability of or claim for damages or other relief
asserted against the Trust or the Fund for violation of any law; (10) legal,
accounting and auditing expenses, including legal fees of special counsel for
the independent trustees; (11) charges of custodians, transfer agents and other
agents; (12) costs of preparing share certificates; (13) expenses of setting in
type and printing prospectuses, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders, and
costs of mailing such materials to shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Fund;
(15) fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to trustees and officers and (18) costs of mailing,
stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees, certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. No reimbursement
pursuant to this limitation was required for the period February 7, 1994
(commencement of operations) to January 31, 1995.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the board of trustees or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.
The following table shows the approximate net assets as of April 30, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
INVESTMENT
CATEGORY NET
---------- ASSETS
($ MIL)
---------
<S> <C>
Domestic (excluding Money Market)............................... $ 5,702.3
Global.......................................................... 3,370.5
Equity/Balanced................................................. 2,745.4
Fixed Income (excluding Money Market)........................... 6,327.4
Taxable Fixed Income.......................................... 4,557.2
Tax-Free Fixed Income......................................... 1,770.2
Money Market Funds.............................................. 17,716.5
</TABLE>
27
<PAGE>
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber and Mitchell Hutchins/Kidder, Peabody ("MH/KP")
mutual funds and other Mitchell Hutchins' advisory accounts by all Mitchell
Hutchins' directors, officers and employees, establishes procedures for
personal investing and restricts certain transactions. For example, employee
accounts generally must be maintained at PaineWebber, personal trades in most
securities require pre-clearance and short-term trading and participation in
initial public offerings generally are prohibited. In addition, the code of
ethics puts restrictions on the timing of personal investing in relation to
trades by PaineWebber and MH/KP mutual funds and other Mitchell Hutchins
advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class D shares of the Fund under separate distributions
contracts with the Trust dated January 28, 1993 (collectively, "Distribution
Contracts") that require Mitchell Hutchins to use its best efforts, consistent
with its other businesses, to sell shares of the Fund. Shares of the Fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber dated January 28, 1993 relating to the Class
A, Class B and Class D shares of the Fund (collectively, "Exclusive Dealer
Agreements"), PaineWebber and its correspondent firms sell the Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class D shares of the Fund adopted by the Trust in the manner prescribed under
Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class D
Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of shares. Under the Class B Plan, the Fund also
pays Mitchell Hutchins a distribution fee, accrued daily and payable monthly,
at the annual rate of 0.75% of the average daily net assets of the Class B
shares. Under the Class D Plan, the Fund pays Mitchell Hutchins a distribution
fee, accrued daily and payable monthly, at the annual rate of 0.50% of the
average daily net assets of the Class D shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the Trust's board of trustees at least quarterly, and the trustees 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 Trust's board of trustees, including those trustees
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 trustees who are not "interested persons" of the Trust shall be
committed to the discretion of the trustees who are not "interested persons" of
the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
shares to such Class based on the ratio of sales of shares of such Class to the
sales of all three Classes of shares. The fees paid by one Class of Fund shares
will not be used to subsidize the sale of any other Class of Fund shares.
For the fiscal period February 7, 1994 (commencement of operations) through
January 31, 1995, the Fund paid (or accrued) the following fees under Mitchell
Hutchins under the Plans.
<TABLE>
<S> <C>
Class A......................................................... $ 33,110
Class B......................................................... $ 420,185
Class D......................................................... $ 189,340
</TABLE>
28
<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 period February 7, 1994
(commencement of operations) through January 31, 1995:
CLASS A
<TABLE>
<S> <C>
Marketing and advertising....................................... $ 22,088
Printing of prospectuses and statements of additional
information.................................................... 462
Branch network costs allocated and interest expense............. 121,967
Service fees paid to PaineWebber investment executives.......... 14,900
</TABLE>
CLASS B
<TABLE>
<S> <C>
Marketing and advertising....................................... $ 69,004
Amortization of commissions..................................... 150,551
Printing of prospectuses and statements of additional
information.................................................... 1,284
Branch network costs allocated and interest expense............. 410,592
Service fees paid to PaineWebber investment executives.......... 47,271
</TABLE>
CLASS D
<TABLE>
<S> <C>
Marketing and advertising....................................... $ 37,362
Amortization of commissions..................................... 55,239
Printing of prospectuses and statements of additional
information.................................................... 800
Branch network costs allocated and interest expense............. 208,264
Service fees paid to PaineWebber investment executives.......... 21,301
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. "Branch network
costs allocated and interest expense" consist of an allocated portion of the
expenses of various PaineWebber departments involved in the distribution of
the Fund's shares, including the PaineWebber retail branch system.
In approving the Fund's overall Flexible Pricing SM system of distribution,
the Trust's board of trustees considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in the Fund
and attracting new investors and assets to the Fund to the benefit of the Fund
and its shareholders, (2) facilitate distribution of the Fund's shares and (3)
maintain the competitive position of the Fund in relation to other funds that
have implemented or are seeking to implement similar distribution
arrangements.
In approving the Class A Plan for the Fund, the trustees 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 load combined with a service
fee would be
29
<PAGE>
attractive to PaineWebber investment executives and correspondent firms,
resulting in a greater growth of the Fund than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in the Fund's assets and potential continued growth, (4) the services provided
to the Fund and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with
Mitchell Hutchins and (6) Mitchell Hutchins' shareholder service-related
expenses and costs.
In approving the Class B Plan for the Fund, the trustees considered all the
features of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from Fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive
to the investment executives and correspondent firms, resulting in greater
growth of the Fund than might otherwise be the case; (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class D Plan for the Fund, the trustees 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 and paying for distribution
on an ongoing basis, (3) Mitchell Hutchins' belief that the ability of
PaineWebber investment executives and correspondent firms to receive sales
compensation for their sales of Class D shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class D shares without facing contingent deferred sales
charges, would prove attractive to the investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (5) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (6)
the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement
with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives, without the concomitant receipt by Mitchell Hutchins of initial
sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class D Plan.
With respect to each Plan, the trustees considered all compensation that
Michell 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 trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that
Mitchell Hutchins would receive service, distribution
30
<PAGE>
and advisory fees that are calculated based upon a percentage of the average
net assets of the Fund, which fees would increase if the Plan were successful
and the Fund attained and maintained significant asset levels.
Under the Distribution Contract for the Class A shares, for the fiscal period
February 7, 1994 (commencement of operations) through January 31, 1995,
Mitchell Hutchins earned the following approximate amounts of sales charges and
retained the following approximate amounts, net of concessions to PaineWebber
as exclusive dealer.
<TABLE>
<S> <C>
Earned.................................................. $469,876
Retained................................................ $ 32,555
</TABLE>
For the fiscal period February 7, 1994 (commencement of operations) through
January 31, 1995, Mitchell Hutchins earned and retained $81,869 in contingent
deferred sales charges paid upon certain redemptions of Class B shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of trustees, 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 the order, difficulty of execution and
operational facilities of the firm involved. Generally, income securities are
traded on the OTC market on a "net" basis without a stated commission through
dealers acting for their own account and not as brokers. Prices paid to dealers
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. During the fiscal period February 7, 1994 (commencement of operations)
through January 31, 1995, the Fund paid no 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 obtaining the best net results, brokerage transactions may be conducted
through Mitchell Hutchins or any of its affiliates, including PaineWebber. The
Trust's board of trustees has adopted procedures in conformity with Rule 17e-1
under the 1940 Act to ensure that all brokerage commissions paid to Mitchell
Hutchins or any of its affiliates are reasonable and fair. Specific provisions
in the Advisory Contract authorize Mitchell Hutchins and any affiliate thereof
which 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.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"). The Fund's procedures in selecting FCMs to execute the
Fund's transactions in futures contracts, including procedures permitting the
use of Mitchell Hutchins and its affiliates, are similar to those in effect
with respect to brokerage transactions in securities.
Consistent with the Fund's interests and subject to the review of the board
of trustees, Mitchell Hutchins may cause the Fund to purchase and sell
portfolio securities from and to dealers, or through brokers, which provide the
Fund with research, analysis, advice and similar services. In return for such
services, the Fund may pay to those brokers a higher commission than may be
charged by other brokers, provided that Mitchell Hutchins determines in good
faith that such commission is reasonable in terms either of that particular
31
<PAGE>
transaction or of the overall responsibility of Mitchell Hutchins to the Fund
and its other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term.
Portfolio transactions will not be directed by the Fund to dealers solely on
the basis of research services provided. For purchases or sales with broker-
dealer firms which act as principal, Mitchell Hutchins seeks best execution.
Although Mitchell Hutchins may receive certain research or execution services
in connection with these transactions, Mitchell Hutchins will not purchase
securities at a higher price or sell securities at a lower price than would
otherwise be paid if no weight was attributed to the services provided by the
executing dealer. Moreover, Mitchell Hutchins will not enter into any explicit
soft dollar arrangements relating to principal transactions and will not
receive in principal transactions the types of services which could be
purchased for hard dollars. Mitchell Hutchins may engage in agency transactions
in OTC equity and debt securities in return for research and execution
services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins receiving multiple quotes from dealers before executing the
transactions on an agency basis.
Research services furnished by dealers or brokers with or through 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 dealers or brokers in connection with other funds or
accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in advising
the Fund. Information and research received from such brokers or dealers will
be in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Advisory Contract.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins will be made independently of each other in the light of
differing considerations for the various accounts. The same investment
decision, however, may occasionally be made for the Fund and one or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between the Fund
and such other account(s) as to amount according to a formula deemed equitable
to the Fund and such account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Fund
is concerned or upon its ability to complete its entire order, in other cases
it is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the
underwriting or selling group except pursuant to the procedures adopted by the
Trust's board of trustees in conformity with Rule 10f-3 under the 1940 Act.
Among other things, these procedures require that the commission or spread paid
in connection with such a purchase be reasonable and fair, that the purchase be
at not more than the public offering price prior to the end of the first
business day after the date of the public offering and that Mitchell Hutchins
and its affiliates not participate in or benefit from the sale to the Fund.
PORTFOLIO TURNOVER
Portfolio turnover may vary greatly from year to year and will not be a
limiting factor when Mitchell Hutchins deems portfolio changes appropriate. A
higher turnover rate may involve correspondingly greater transaction costs,
which will be borne directly by the Fund. The Fund's annual portfolio turnover
rate will be calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive
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<PAGE>
of purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of the long-term securities
in the portfolio during the year. During the fiscal period February 7, 1994
(commencement of operations) through January 31, 1995, the portfolio turnover
rate was 116.73%.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Fund with
concurrent purchases of Class A shares of any other PaineWebber or MH/KP mutual
fund and thus take advantage of the reduced sales charges indicated in the
table of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Fund and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse; or
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed
related to that other employer).
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Fund among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber or MH/KP
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order
is subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the
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<PAGE>
death of the shareholder. The contingent deferred sales charge waiver is
available where the decedent is either the individual shareholder or owns the
shares with his or her spouse as a joint tenant with right of survivorship.
This waiver applies only to redemption of shares held at the time of death.
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing System
on July 1, 1991 ("CDSC Funds"). The contingent deferred sales charge is waived
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 by officers, directors (trustees) or employees of the CDSC Funds,
Mitchell Hutchins or their affiliates (or their spouses and children under age
21). In addition, the contingent deferred sales charge will be reduced by 50%
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 with a net asset value at the time of purchase of at least $1
million. If Class B shares of a CDSC Fund purchased prior to July 1, 1991 are
exchanged for Class B shares of the Fund, any waiver or reduction of the
contingent deferred sales charge that applied to the Class B Shares of the CDSC
Fund will apply to the Class B shares of the Fund acquired through the
exchange.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Fund may be exchanged for shares of the
corresponding Class of most other PaineWebber or MH/KP mutual funds.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or the Fund temporarily
delays or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the Fund's investment objectives, 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. If payment is
made in securities, a shareholder may incur brokerage expenses in converting
these securities into cash. The Trust has elected, however, to be governed by
Rule 18f-1 under the 1940 Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for one shareholder. This election is
irrevocable unless the SEC permits its withdrawal. The Fund may suspend
redemption privileges or postpone the date of payment during any period (1)
when the NYSE is closed or trading on the NYSE is restricted as determined by
the SEC, (2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for the Fund to dispose of securities owned by it or
fairly to determine the value of its assets or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of the Fund's portfolio at the time.
SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or semi-
annual plans, PaineWebber will arrange for redemption by the Fund of sufficient
Fund shares to provide the withdrawal payment specified by participants in the
Fund's systematic withdrawal plan. The payment generally is mailed
approximately five business days after the redemption date. Withdrawal payments
should not be considered dividends, but redemption proceeds, with the tax
consequences described under "Dividends and Taxes" in the Prospectus. If
periodic withdrawals continually exceed reinvested dividends, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to
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<PAGE>
PaineWebber or the Transfer Agent. Instructions to participate in the plan,
change the withdrawal amount or terminate participation in the plan will not be
effective until five days after written instructions with signatures guaranteed
are received by the Transfer Agent. Shareholders may request the forms needed
to establish a systematic withdrawal plan from their PaineWebber investment
executives, correspondent firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in the Fund without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption.
The reinstatement will be made at the net asset value per share next computed
after the notice of reinstatement and check are received. The amount of a
purchase under this reinstatement privilege cannot exceed the amount of the
redemption proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested within 30 days after redemption, and an adjustment will be made to
the shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal
income tax purposes by the amount of any sales charge paid on Class A shares,
under the circumstances and to the extent described in "Dividends and Taxes" in
the Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN SM
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT (R)(RMA (R))
Shares of the PaineWebber and MH/KP mutual funds (each a "PW Fund" and,
collectively, the "PW Funds") are available for purchase through the RMA
Resource Accumulation Plan ("Plan") by customers of PaineWebber and its
correspondent firms who maintain Resource Management Accounts ("RMA
accountholders"). The Plan allows an RMA accountholder to continually invest in
one or more of the PW Funds at regular intervals, with payment for shares
purchased automatically deducted from the client's RMA account. The client may
elect to invest at monthly or quarterly intervals and may elect either to
invest a fixed dollar amount (minimum $100 per period) or to purchase a fixed
number of shares. A client can elect to have Plan purchases executed on the
first or fifteenth day of the month. Settlement occurs three business days
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.
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<PAGE>
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of low share
prices. However, over time, dollar cost averaging generally results in a lower
average original investment cost than if an investor invested a larger dollar
amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. 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:
.monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard (R) transactions during the period, and provide unrealized and
realized gain and loss estimates for most securities held in the account;
.comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
.automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the five RMA money market funds--RMA Money Market Portfolio,
RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California
Municipal Money Fund and RMA New York Municipal Money Fund. Each money
market fund attempts to maintain a stable price per share of $1.00,
although there can be no assurance that it will be able to do so.
Investments in the money market funds are not insured or guaranteed by
the U.S. government;
.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;
.Gold MasterCard, with or without a line of credit,which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
.24-hour access to account information through toll-free numbers and more
detailed personal assistance during business hours from the RMA Service
Center;
.expanded account protection to $25 million in the event of the liquidation
of PaineWebber. This protection does not apply to shares of the RMA money
market funds or the PW Funds because those shares are held at the
transfer agent and not through PaineWebber; and
.automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
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<PAGE>
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Fund will automatically convert to Class A shares,
based on the relative net asset values per share of the two Classes, as of the
close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversary of the initial issuance of
such Class B shares of the Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (1) the date on which such Class B shares were issued, or
(2) for Class B shares obtained through an exchange, or a series of exchanges,
the date on which the original Class B shares were issued. If the shareholder
acquired Class B shares of the Fund through an exchange of Class B shares of a
CDSC Fund that were acquired prior to July 1, 1991, the shareholder's holding
period for purposes of conversion will be determined based on the date the CDSC
Fund shares were initially issued. For purposes of conversion into Class A,
Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate sub-
account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A, a pro rata portion of
the Class B shares in the sub-account will also convert to Class A. The portion
will be determined by the ratio that the shareholder's Class B shares
converting to Class A bears to the shareholder's total Class B shares not
acquired through dividends and other distributions.
The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends
and other distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and (2) the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the Class B shares
beyond six years from the date of purchase. Mitchell Hutchins has no reason to
believe that these conditions for the availability of the conversion feature
will not continue to be met.
VALUATION OF SHARES
The Fund determines the net asset value per share separately for each Class
of shares as of the close of regular trading (currently 4:00 p.m., eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently the NYSE is closed on the observance of
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the date the securities are valued or, lacking any sales
on such day, at the last available bid price. In cases where securities are
traded on more than one exchange, the securities are generally valued on the
exchange considered by Mitchell Hutchins as the primary market. Securities
traded in the OTC market and listed on Nasdaq are valued at the last trade
price on Nasdaq at 4:00 p.m., eastern time; other OTC securities are valued at
the last bid price available prior to valuation. Futures contracts, forward
contracts and options are valued on the basis of market quotations, if any.
Securities and assets for which market quotations are not
37
<PAGE>
readily available are valued at fair value as determined in good faith by or
under the direction of the Trust's board of trustees. All investments quoted in
foreign currency are valued daily in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the Fund's custodian.
Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of the Fund's net asset value on that day. If events
materially affecting the value of such investments or currency exchange rates
occur during such time period, the investments will be valued at their fair
value as determined in good faith by or under the direction of the Trust's
board of trustees. The foreign currency exchange transactions of the Fund
conducted on a spot (that is, cash) basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than one-tenth of one percent due to the costs of
converting from one currency to another.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents 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) to the power of 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 4.0% sales charge is deducted from the initial $1,000 payment and, for
Class B shares, the applicable contingent deferred sales charge imposed on a
redemption of Class B shares held for the period is deducted. All dividends and
other distributions are assumed to have been reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Fund 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
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<PAGE>
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 will reflect conversion of the Class B shares to
Class A shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B
and Class D shares of the Fund for the period indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Inception** to January 31, 1995:
Standardized Return*.......................... (11.34)% (12.52)% (8.02)%
Non-Standardized Return....................... (7.61)% (8.22)% (8.02)%
</TABLE>
- --------
* Standardized Return for Class A shares reflects deduction of the current
maximum sales charge of 4.0%. Standardized Return for Class B shares reflects
deduction of the applicable contingent deferred sales charges imposed on a
redemption of shares held for the period. Class D shares do not impose an
initial or a contingent deferred sales charge; therefore, Non-Standardized
Return is identical to Standardized Return.
** The inception date for each Class of the Fund is February 7, 1994.
YIELD. Yields used in the Fund's Performance Advertisements are calculated by
dividing the Fund's interest income attributable to a Class of shares for a 30-
day period ("Period"), net of expenses attributable to such Class, by the
average number of shares of such Class entitled to receive dividends during the
Period and expressing the result as an annualized percentage (assuming
semiannual compounding) of the maximum offering price per share (in the case of
Class A shares) or the net asset value per share (in the case of Class B and
Class D shares) at the end of the Period. Yield quotations are calculated
according to the following formula:
<TABLE>
<S> <C> <C>
(a - b ) to the power of 6
YIELD = 2[ (----- + 1) - 1 ]
( cd )
where: a = interest earned during the Period attributable to a Class of shares
expenses accrued for the Period attributable to a Class of shares (net of
b = reimbursements)
the average daily number of shares of a Class outstanding during the Period
c = that were entitled to receive dividends
the maximum offering price per share (in the case of Class A shares) or the
net asset value per share (in the case of Class B and Class D shares) on the
d = last day of the Period.
</TABLE>
Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), the Fund calculates interest earned
on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totalling the interest
earned on all debt obligations. For purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next date on
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<PAGE>
which the obligation reasonably can be expected to be called or, if none, the
maturity date. With respect to Class A shares, in calculating the maximum
offering price per share at the end of the Period (variable "d" in the above
formula) the Fund's current maximum 4% initial sales charge on Class A shares
is included. For the 30-day period ended January 31, 1995, the yields for its
Class A shares, Class B shares and Class D shares were 10.61%, 10.31% and
10.57%, respectively.
OTHER INFORMATION. In Performance Advertisements, the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("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 and other indices, including (but not
limited to) the Standard & Poor's 500 Composite Stock Price Index, the Dow
Jones Industrial Average, the Russell 2000 Index, the Wilshire 5000 Index, the
Lehman Aggregate Bond Index, the Salomon Brothers High Yield Index, the Salomon
Brothers World Government Bond Index, the Merrill Lynch High Yield Index, 30-
year and 10-year U.S. Treasury bonds, the Morgan Stanley Capital International
World Index and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The Fund also may refer in such materials to mutual
fund performance rankings and other data, such as comparative asset, expense
and fee levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar.
Performance Advertisements also may refer to discussions of the Fund and
comparative mutual fund data and ratings reported in independent periodicals,
including (but not limited to) The Wall Street Journal, Money Magazine, Forbes,
Business Week, Financial World, Barron's, Fortune, The New York Times, The
Chicago Tribune, The Washington Post and The Kiplinger Letters. Comparisons in
Performance Advertisements may be in graphic form.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
The Fund may also compare its performance with the performance of bank
certificates of deposit ("CDs") as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote (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
value will fluctuate. The securities held by the Fund generally have longer
maturities than most CDs and may reflect interest rate fluctuations for longer
term securities.
40
<PAGE>
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition
of securities or foreign currencies, or other income (including gains from
options, futures or forward currency contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) the Fund must derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities, or any of the following, that
were held for less than three months--options, futures or forward contracts
(other than those on foreign currencies), or foreign currencies (or options,
futures or forward contracts thereon) that are not directly related to the
Fund's principal business of investing in securities (or options and futures
with respect to securities) ("Short-Short Limitation"); (3) at the close of
each quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that, if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the investor 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 that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
Interest and dividends on foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions that would reduce the yield on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors. If more than 50%
of the value of the Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, it will be eligible to, and
may, file an election with the Internal Revenue Service that will enable its
shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign and U.S. possessions income taxes paid by it for that
year. Pursuant to the election, the Fund
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would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by him, his proportionate share of those taxes, (2) treat his share of those
taxes and of any dividend paid by the Fund that represents income from foreign
or U.S. possessions sources as his own income from those sources and (3) either
deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. The Fund will report to its shareholders
within 60 days after each taxable year their respective shares of the income
from sources within, and taxes paid to, foreign countries and U.S. possessions
if it makes this election. Potential investors should note, however, that the
Fund expects that it normally will not satisfy the above-referenced 50%-of-
assets test and that, as a result, it normally will be unable to make the
election, with the consequence that foreign and U.S. possessions taxes imposed
on the Fund would not be deductible or creditable by its shareholders.
The Fund may invest a portion of its assets in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is a foreign corporation that, in
general, meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances,
the Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition of
that stock (collectively "PFIC income"), plus interest thereon, even if the
Fund distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then, in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital
gain over net short-term capital loss), even if they are not distributed to the
Fund; those amounts most likely would have to be distributed to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to "mark-to-market" their stock in certain PFICs. "Marking-
to-market," in this context, means recognizing as gain for each taxable year
the excess, as of the end of that year, of the fair market value of each such
PFIC's stock over the owner's adjusted basis in that stock (including mark-to-
market gain for each prior year for which an election was in effect).
The Fund may acquire zero coupon or other securities issued with OID. As a
holder of such securities, the Fund would have to include in its gross income
the OID that accrues on the securities during the taxable year, even if it
receives no corresponding payment on the securities during the year. Similarly,
the Fund must include in its gross income securities it receives as "interest"
on payment-in-kind securities. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement
and avoid imposition of the Excise Tax, the Fund may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions will be made
from the Fund's cash assets or from the proceeds of sales of portfolio
securities, if necessary. The Fund may realize capital gains or losses from
those sales, which would increase or decrease its investment company taxable
income and/or net capital gain. In addition, any such gains may be realized on
the disposition of securities held for less than three months. Because of the
Short-Short Limitation, any such gains would reduce the Fund's ability to sell
42
<PAGE>
other securities, or certain options, futures or forward currency contracts,
held for less than three months that it might wish to sell in the ordinary
course of its portfolio management.
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses the Fund
realizes in connection therewith. Income from the disposition of foreign
currencies, and income from transactions in options, futures and forward
currency contracts derived by the Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures contracts (other than those on foreign currencies) will be
subject to the Short-Short Limitation if they are held for less than three
months. Income from the disposition of foreign currencies, and options, futures
and forward contracts on foreign currencies, that are not directly related to
the Fund's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options,
futures and forward currency contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to qualify as a RIC.
OTHER INFORMATION
The name of the Trust is "PaineWebber Securities 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 Trust or the Fund.
However, the 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 note, bond, contract, instrument, certificate or
undertaking made or issued by the trustees or by any officers or officer by or
on behalf of the Trust or the Fund, the trustees 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's
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. Upon
payment of any liability incurred by a shareholder solely by reason of being or
having been a shareholder, the shareholder paying such liability will be
entitled to reimbursement from the general assets of the Fund. The trustees
intend to conduct the operations of the Fund in such a way as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Fund.
The Fund is authorized to issue Class C shares in addition to Class A, Class
B and Class D shares, but the Trust's board of trustees has no current
intention of doing so. Class C shares, if issued, would bear no
43
<PAGE>
service or distribution fees, would be sold with no initial sales charge and
would be redeemable at net asset value without the imposition of a contingent
deferred sales charge. Class C shares would be offered only to a limited class
of institutional purchasers.
CLASS-SPECIFIC EXPENSES. The Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares of the Fund bear higher transfer agency fees per shareholder account
than those borne by Class A or Class D shares. The higher fee is imposed due to
the higher costs incurred by the Transfer Agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C., 20036-5891, counsel to the Trust, has passed upon the
legality of the shares offered by the Prospectus. Kirkpatrick & Lockhart LLP
also acts as counsel to PaineWebber and Mitchell Hutchins in connection with
other matters.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, NY 10038, serves as independent accountants for the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended January
31, 1995 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent accountants appearing therein are incorporated herein by this
reference.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL IN-
FORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND THIS STATE-
MENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions...................................... 1
Hedging and Related Income Strategies..................................... 13
Trustees and Officers..................................................... 22
Investment Advisory and Distribution Arrangements......................... 26
Portfolio Transactions.................................................... 31
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 33
Conversion of Class B Shares.............................................. 37
Valuation of Shares....................................................... 37
Performance Information................................................... 38
Taxes..................................................................... 41
Other Information......................................................... 43
</TABLE>
(C) 1995 PaineWebber Incorporated
LOGO Recycled Paper
PAINEWEBBER
STRATEGIC
INCOME FUND
-----------------------------------
STATEMENT OF ADDITIONAL INFORMATION
JUNE 1, 1995
-----------------------------------
PAINEWEBBER
