<PAGE>
The Fund is a series of PaineWebber Securities Trust ("Trust"). This Prospec-
tus concisely sets forth information about the Fund a prospective investor
should know before investing. Please retain this Prospectus for future refer-
ence. A Statement of Additional Information dated November 14, 1995 (which is
incorporated by reference herein) has been filed with the Securities and Ex-
change 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.
- -------------------------------------------------------------------------------
A professionally managed series of a mutual fund seeking long-term
capital appreciation; it invests primarily in equity securities of small
capitalization companies.
- -------------------------------------------------------------------------------
November 14, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PaineWebber
Small Cap
Value Fund
1285 Avenue of the Americas
New York, New York 10019
- -------------------------------------------------------------------------------
. Long-Term Capital Appreciation
. Professional Management
. Portfolio Diversification
. Dividend and Capital Gain Reinvestment
. Flexible Pricing/SM/
. Low Minimum Investment
. Automatic Investment Plan
. Systematic Withdrawal Plan
. Suitable For Retirement Plans
- -------------------------------------------------------------------------------
A PaineWebber Mutual Fund
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS 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 BY THE DISTRIBU-
TOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
PAINEWEBBER SMALL CAP VALUE FUND
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed
in this summary.
The Fund: This Prospectus describes PaineWebber Small Cap Value
Fund ("Fund"), a diversified series of an open-end,
management investment company.
Investment Objective Long-term capital appreciation; invests primarily in
and Policies: equity securities of small capitalization ("small cap")
companies.
Total Net Assets: $74.2 million at October 31, 1995.
Investment Adviser Mitchell Hutchins Asset Management Inc. ("Mitchell
and Administrator: Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber"), manages over
$44.6 billion in assets. See "Management."
Sub-Adviser: Quest Advisory Corp. ("Sub-Adviser") manages
approximately $3.0 billion in assets at October 31,
1995. See "Management."
Purchases: Shares of beneficial interest are available exclusively
through PaineWebber and its correspondent firms for
investors who are clients of PaineWebber or those firms
("PaineWebber clients") and, for other investors,
through PFPC Inc., the Fund's transfer agent ("Transfer
Agent").
Flexible Pricing Investors may select Class A, Class B or Class C
System: shares, each with a public offering price that reflects
different sales charges and expense levels. See
"Flexible Pricing System," "Purchases," "Redemptions"
and "Conversion of Class B Shares."
Class A Shares Offered at net asset value plus any applicable sales
charge (maximum is 4.5% of public offering price).
Class B Shares Offered at net asset value (a maximum contingent
deferred sales charge of 5.0% is imposed on most
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.
2
<PAGE>
Class C Shares Offered at net asset value without an initial sales
charge (for shares purchased on or after November 10,
1995, a contingent deferred sales charge of 1.0% is
imposed on most redemptions made within one year of
date of purchase). Class C shares pay higher ongoing
expenses than Class A shares and do not convert into
another Class.
Exchanges: Shares may be exchanged for shares of the corresponding
Class of most PaineWebber mutual funds.
Redemptions: PaineWebber clients may redeem through PaineWebber;
other shareholders must redeem through the Transfer
Agent.
Dividends: Declared and paid annually; net capital gain is also
distributed annually. See "Dividends and Taxes."
Reinvestment: All dividends and capital gain distributions are paid
in Fund shares of the same Class at net asset value
unless the shareholder has requested cash.
Minimum Purchase: $1,000 for 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 C Shares Automatic investment plan Systematic withdrawal plan
WHO SHOULD INVEST. The Fund invests primarily in equity securities of a di-
versified group of small cap companies selected on a value basis. Value invest-
ing is based on factors such as balance sheet and cash flow analysis and the
relationships that these factors have to the price of a given security. 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. The Fund is de-
signed for investors seeking long-term growth of capital who are able to bear
the risks inherent in equity investments.
RISK FACTORS. There can be no assurance that the Fund will achieve its in-
vestment objective. The Fund's net asset value fluctuates based upon changes in
the value of its portfolio securities. Investing in securities of small cap
companies entails greater market volatility and risks of adverse financial de-
velopments than is the case for securities of larger companies. The Fund's
ability to invest in U.S. dollar-denominated foreign equity securities also in-
volves special risks.
3
<PAGE>
EXPENSES OF INVESTING IN THE FUND. The following tables are intended to as-
sist investors in understanding the expenses associated with investing in the
Fund.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares (as a
percentage of public offering price)............... 4.5% None None
Sales charge on reinvested dividends................ None None None
Exchange fee........................................ $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a
percentage of net asset value at the time of
purchase or redemption, whichever is lower)........ None(2) 5% 1%(3)
</TABLE>
ANNUAL FUND OPERATING EXPENSES(4)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management fees......................................... 1.00% 1.00% 1.00%
12b-1 fees(5)........................................... 0.25 1.00 1.00
Other expenses.......................................... 0.73 0.74 0.73
---- ---- ----
Total operating expenses................................ 1.98 2.74 2.73
==== ==== ====
</TABLE>
- --------
(1) Sales charge and exchange fee waivers are available for all shares and
reduced sales charge purchase plans are available for Class A shares. The maxi-
mum 5.0% contingent deferred sales charge on Class B shares applies to redemp-
tions during the first year after purchase; the charge generally declines by
1.0% annually thereafter, reaching zero after six years. See "Purchases."
(2) Purchases of Class A shares of $1 million or more are not subject to an
initial sales charge. A contingent deferred sales charge of 1.0% will be ap-
plied to most redemptions of such shares within one year of purchase. See "Pur-
chases."
(3) A contingent deferred sales charge of 1.0% will be applied to most re-
demptions of Class C shares within one year of purchase. See "Purchases."
(4) See "Management" for additional information. All expenses are those actu-
ally incurred for the fiscal year ended July 31, 1995. The management fee paid
by the Fund is higher than that paid by most mutual funds.
(5) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
12b-1 service fees...................................... 0.25% 0.25% 0.25%
12b-1 distribution fees................................. 0.00 0.75 0.75
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges (includ-
ing distribution fees) than the economic equivalent of the maximum front-end
sales charge permitted by the National Association of Securities Dealers, Inc.
4
<PAGE>
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares(1)................. $64 $104 $147 $265
Class B Shares:
Assuming a complete redemption
at end of period(2)(3)......... $78 $115 $165 $272
Assuming no redemption(3)....... $28 $ 85 $145 $272
Class C Shares:
Assuming a complete redemption
at end of period(2)............ $38 $ 85 $144 $306
Assuming no redemption.......... $28 $ 85 $144 $306
</TABLE>
- --------
(1) Assumes deduction at the time of purchase of the maximum 4.5% initial
sales charge.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(3) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.
This Example assumes that all dividends and other distributions are rein-
vested and that the percentage amounts listed under Annual Fund Operating Ex-
penses 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 Securi-
ties and Exchange Commission ("SEC") applicable to all mutual funds; the as-
sumed 5% annual return is not a prediction of, and does not represent, the pro-
jected or actual performance of any Class of the Fund's shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund's actual expenses will depend upon, among other things, the level of
average net assets and the extent to which the Fund incurs variable expenses,
such as transfer agency costs.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one Class A
share, one Class B share and one Class C share for each of the periods shown.
This information is supplemented by the financial statements and accompanying
notes appearing in the Fund's Annual Report to Shareholders for the fiscal
year ended July 31, 1995, which are incorporated by reference into the State-
ment of Additional Information. The financial statements and notes, as well as
the information appearing in the table below, have been audited by Price
Waterhouse LLP, independent accountants, whose report thereon is included in
the Annual Report to Shareholders. Further information about the Fund's per-
formance is also included in the Annual Report to Shareholders, which may be
obtained without charge.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C(2)
---------------------------------- ------------------------------------ ------------------------------------
FOR THE
FOR THE PERIOD FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR FEBRUARY 1, YEAR YEAR PERIOD FOR THE YEAR PERIOD FOR THE
ENDED 1994 THROUGH ENDED ENDED FEBRUARY 1, YEAR ENDED ENDED FEBRUARY 1, YEAR ENDED
JULY 31, JULY 31, JANUARY 31, JULY 31, 1994 THROUGH JANUARY 31, JULY 31, 1994 THROUGH JANUARY 31,
1995 1994 1994 1995 JULY 31, 1994 1994 1995 JULY 31, 1994 1994
-------- ------------ ----------- -------- ------------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 10.27 $10.61 $10.00 $ 10.22 $10.60 $10.00 $ 10.22 $10.59 $10.00
------- ------ ------ ------- ------ ------ ------- ------ ------
Income from in-
vestment opera-
tions:
Net investment
income (loss).. 0.05 0.02 0.13 (0.04) (0.02) 0.06 (0.05) (0.02) 0.06
Net realized and
unrealized
gains (losses)
from investment
transactions... 1.50 (0.36) 0.62 1.49 (0.36) 0.62 1.49 (0.35) 0.62
---- ----- ---- ---- ----- ---- ---- ----- ----
Total income
(loss) from
investment
operations....... 1.55 (0.34) 0.75 1.45 (0.38) 0.68 1.44 (0.37) 0.68
---- ----- ---- ---- ----- ---- ---- ----- ----
Less dividends and
distributions to
shareholders
from:
Net investment
income........... -- -- (0.12) -- -- (0.06) -- -- (0.07)
Net realized gains
on investment
transactions..... (0.52) -- (0.02) (0.52) -- (0.02) (0.52) -- (0.02)
----- --- ----- ----- --- ----- ----- --- -----
Total dividends
and distribu-
tions............ (0.52) -- (0.14) (0.52) -- (0.08) (0.52) -- (0.09)
----- --- ----- ----- --- ----- ----- --- -----
Net asset value,
end of period.... $ 11.30 $10.27 $10.61 $ 11.15 $10.22 $10.60 $ 11.14 $10.22 $10.59
======= ====== ====== ======= ====== ====== ======= ====== ======
Total investment
return (1)....... 15.80% (3.20)% 7.58% 14.86% (3.58)% 6.81% 14.76 % (3.49)% 6.77%
===== ===== ==== ===== ===== ==== ===== ===== ====
Ratios/Supplemental
Data:
Net assets, end of
period (000's) .. $20,494 $22,848 $25,226 $46,142 $52,624 $59,993 $13,263 $16,285 $20,941
Ratio of expenses
to average net
assets........... 1.98% 1.91%* 1.75% 2.74% 2.69%* 2.50% 2.73% 2.69%* 2.50%
Ratio of net
investment income
(loss) to average
net assets....... 0.41% 0.41%* (1.41)% (0.35)% (0.37)%* 0.67% (0.34)% (0.36)%* 0.64%
Portfolio turnover
rate............. 19% 20% 98% 19% 20% 98% 19% 20% 98%
</TABLE>
- -------
* Annualized
(1) Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends and other distributions
at net asset value on the payable date, and a sale at net asset value on the
last day of each period reported. The figures do not include sales charges;
results would be lower if sales charges were included. Total return informa-
tion for periods less than one year is not annualized.
(2) Formerly Class D shares.
6
<PAGE>
FLEXIBLE PRICING SYSTEM
DIFFERENCES AMONG THE CLASSES
The primary distinctions among the Classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of distribution fees.
These differences are summarized in the table below. Each Class has distinct
advantages and disadvantages for different investors, and investors may choose
the Class that best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales Service fee of 0.25% Initial sales charge
charge of 4.5% of the waived or reduced for
public offering price certain purchases
CLASS B Maximum contingent Service fee of 0.25%; Shares convert to Class A
deferred sales charge of distribution fee of 0.75% shares approximately six
5.0% upon redemption; years after issuance
declines to zero after
six years
CLASS C Contingent deferred sales Service fee of 0.25%; --
charge of 1.0% upon distribution fee of 0.75%
redemption; for first
year
</TABLE>
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES
In deciding which Class of shares to purchase, investors should consider the
cost of sales charges together with the cost of the on-going annual expenses
described below, as well as any other relevant facts and circumstances.
SALES CHARGES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.5% of the public offering price. Because of this ini-
tial sales charge, not all of a Class A shareholder's purchase price is in-
vested in the Fund. Class B shares are sold with no initial sales charge, but a
contingent deferred sales charge of up to 5.0% applies to most redemptions made
within six years of purchase. Class C shareholders pay no initial sales
charges, although a contingent deferred sales charge of 1.0% applies to most
redemptions made within one year after purchase. Thus, the entire amount of a
Class B or Class C shareholder's purchase price is immediately invested in the
Fund.
WAIVERS AND REDUCTIONS OF CLASS A SALES CHARGES. Class A share purchases over
$50,000 and Class A share purchases made under the Fund's reduced sales charge
plans may be made at a reduced sales charge. In considering the combined cost
of sales charges and ongoing annual expenses, investors should take into ac-
count any reduced sales charges on Class A shares for which they may be eligi-
ble.
The entire initial sales charge on Class A shares is waived for certain eli-
gible investors. Because Class A shares bear lower ongoing annual expenses than
Class B shares or Class C shares, investors eligible for complete waivers
should purchase Class A shares.
7
<PAGE>
ONGOING ANNUAL EXPENSES. All three Classes of Fund shares pay an annual 12b-1
service fee of 0.25% of average daily net assets. Class B and Class C shares
pay an annual 12b-1 distribution fee of 0.75% of average daily net assets. An-
nual 12b-1 distribution fees are a form of asset-based sales charge. An in-
vestor should consider both ongoing annual expenses and initial or contingent
deferred sales charges in estimating the costs of investing in the respective
Classes of Fund shares over various time periods.
For example, assuming a constant net asset value, the cumulative distribution
fees on the Fund's Class B or Class C shares and the 4.5% maximum initial sales
charge on the Fund's Class A shares would all be approximately equal if the
shares were held for six years. Because Class B shares convert to Class A
shares (which do not bear the expense of ongoing distribution fees) approxi-
mately six years after purchase, an investor expecting to hold Fund shares for
longer than six years would generally pay lower cumulative expenses by purchas-
ing Class A or Class B shares than by purchasing Class C shares. An investor
expecting to hold Fund shares for less than six years would generally pay lower
cumulative expenses by purchasing Class C shares than by purchasing Class A
shares, and due to the contingent deferred sales charges that would become pay-
able on redemption of Class B shares, such an investor would generally pay
lower cumulative expenses by purchasing Class C shares than Class B shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net as-
set value of Fund shares, which will affect the actual amount of expenses paid.
Expenses borne by Classes will 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 an-
nual return of 5.0%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of compensa-
tion for selling one particular Class of Fund shares rather than another. In-
vestors should understand that distribution fees and initial and contingent de-
ferred sales charges all are intended to compensate Mitchell Hutchins for dis-
tribution services.
See "Purchases," "Redemptions" and "Management" for a more complete descrip-
tion of the initial and contingent deferred sales charges, service fees and
distribution fees for the three Classes of shares of the Fund. See also "Con-
version of Class B Shares," "Dividends and Taxes," "Valuation of Shares" and
"General Information" for other differences among the three Classes.
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The Fund's investment objective is to achieve long-term capital appreciation.
Under normal circumstances, at least 65% of the Fund's total assets is invested
in equity securities, including common stocks, convertible preferred stocks,
convertible debt securities, warrants and U.S. dollar-denominated foreign eq-
uity securities, including American Depository Receipts ("ADRs"), of small cap
companies. For purposes of the foregoing, "small cap" companies are companies
that, at the time of purchase, have market capitalizations between $250 million
and $1 billion.
Small cap companies may be more vulnerable than larger companies to adverse
business or economic developments. Small cap companies may also have limited
product lines, mar-
8
<PAGE>
kets or financial resources, and may be dependent on a relatively small manage-
ment group. Securities of such companies may be less liquid and more volatile
than securities of larger companies or the market averages in general and
therefore may involve greater risk than investing in larger companies. In addi-
tion, small cap companies may not be well-known to the investing public, may
not have institutional ownership and may have only cyclical, static or moderate
growth prospects.
In selecting securities for the Fund, the Sub-Adviser uses a value approach
in attempting to identify and invest in securities that it considers to be un-
dervalued based on balance sheet and cash flow analysis and the relationships
these factors have to the price of a given security. The Sub-Adviser's invest-
ment approach is based on its belief that the securities of small cap companies
may sell at a discount from its estimate of such companies' business worth. The
Sub-Adviser invests in such securities with the expectation that this value
discount will narrow over time and thus provide capital appreciation for the
Fund's portfolio. Under normal circumstances, the Fund expects to maintain se-
curities of at least 100 different issuers in its portfolio.
The Fund may invest up to 35% of its total assets in common stocks, convert-
ible preferred stocks, convertible debt securities, warrants and ADRs of compa-
nies that are smaller or larger than small cap companies as defined above, non-
convertible preferred stocks, non-convertible debt securities, U.S. government
securities and high quality money market instruments such as U.S. government
obligations, commercial paper, certificates of deposit and bankers' accept-
ances. U.S. government securities include direct obligations of the U.S. Trea-
sury as well as obligations of U.S. government agencies and instrumentalities
backed by the U.S. Treasury or solely or primarily by the credit of the issuer.
There can be no assurance that the Fund will achieve its investment objec-
tive. The Fund's net asset value fluctuates based on changes in the value of
its portfolio securities.
U.S. DOLLAR-DENOMINATED FOREIGN SECURITIES. The Fund may invest up to 25% of
its total assets in U.S. dollar-denominated equity securities of foreign is-
suers that are traded on recognized U.S. exchanges or in the U.S. over-the-
counter market. These investments may involve special risks, arising both from
political and economic developments abroad and differences between foreign and
U.S. regulatory systems. Foreign economies may differ favorably or unfavorably
from the U.S. economy in various respects, and many foreign securities may be
less liquid and their prices more volatile than comparable U.S. securities.
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 10% of
the total value of its portfolio securities to broker-dealers or institutional
investors that Mitchell Hutchins deems qualified. Lending securities enables
the Fund to earn additional income, but could result in a loss or delay in re-
covering the securities.
OTHER INFORMATION. When the Sub-Adviser believes unusual circumstances war-
rant a defensive posture, the Fund temporarily may commit all or a portion of
its assets to cash or money market instruments, including repurchase agree-
ments. Repurchase agreements are transactions in which the Fund purchases secu-
rities 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 as-
sociated 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 agree- ment becomes insolvent. The Fund
intends to
9
<PAGE>
enter into repurchase agreements only with banks and dealers in transactions
believed by the Sub-Adviser to present minimal credit risks in accordance with
guidelines established by the Trust's board of trustees.
The Fund may borrow money for temporary purposes and may engage in reverse
repurchase agreements, but not in excess of 10% of its total assets, and is
authorized to lend up to 10% of the total value of its portfolio securities to
broker-dealers or institutional lenders.
The Fund will not invest in debt securities rated Ba or lower by Moody's In-
vestors Service, Inc. ("Moody's"), BB or lower by Standard & Poor's, a divi-
sion of the McGraw Hill Companies, Inc. ("S&P"), comparably rated by another
nationally recognized statistical rating organization ("NRSRO") or, if
unrated, determined by the Sub-Adviser to be of comparable quality if, as a
result, more than 5% of the Fund's net assets would be invested in such debt
securities. Debt securities rated Ba or lower by Moody's, BB or lower by S&P
or comparably rated by another NRSRO are below investment grade, are deemed by
those agencies to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal and may involve major risk expo-
sure to adverse conditions. The Fund does not expect to invest any of its as-
sets in debt securities that are rated lower than Caa by Moody's, CCC by S&P,
comparably rated by another NRSRO or, if unrated, determined by the Sub-Ad-
viser to be of comparable quality. In the event that, due to a downgrade of
one or more debt securities, an amount in excess of 5% of the Fund's net as-
sets is held in securities rated below investment grade and comparable unrated
securities, the Sub-Adviser will engage in an orderly disposition of such se-
curities to the extent necessary to ensure that the Fund's holdings of such
securities do not exceed 5% of its net assets.
The Fund's investment objective and certain investment limitations as de-
scribed 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.
PURCHASES
GENERAL. Class A shares are sold to investors subject to an initial sales
charge. Class B shares are sold without an initial sales charge but are sub-
ject to higher ongoing expenses than Class A shares and a contingent deferred
sales charge payable upon most redemptions. Class B shares automatically con-
vert to Class A shares approximately six years after issuance. Class C shares
are sold without an initial sales charge but are subject to higher ongoing ex-
penses than Class A shares and a contingent deferred sales charge of 1.0% pay-
able on most redemptions made within one year of purchase. Class C shares do
not convert into another Class. See "Flexible Pricing System" and "Conversion
of Class B Shares."
Shares of the Fund are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the Trans-
fer Agent. Investors may contact a local PaineWebber office to open a
PaineWebber account. The minimum initial investment is $1,000, and the minimum
for additional purchases is $100. These minimums may be waived or reduced for
investments by employees of PaineWebber or its affiliates, by certain pension
plans and retirement accounts and by participants in the Fund's automatic in-
vestment 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 appli-
cable sales charge for the Class A shares. The Fund and Mitchell Hutchins re-
serve the right to reject any purchase order and to suspend the offering of
the Fund's shares for a period of time.
When placing purchase orders, investors should specify whether the order is
for Class A, Class B or Class C shares. All share purchase
10
<PAGE>
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 corre- spondent firms may be made in per-
son or by mail, telephone or wire; the minimum wire purchase is $1 million. In-
vestment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for a purchase with checks drawn on U.S. banks or with funds held in bro-
kerage accounts at PaineWebber or its correspondent firms. Payment is due on
the third Business Day after the order is received at PaineWebber's New York
City offices. A "Business Day" is any day, Monday through Friday, on which the
New York Stock Exchange, Inc. ("NYSE") is open for business.
PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber cli-
ents may purchase shares of the Fund through the Transfer Agent. Shares of the
Fund may be purchased, and an account with the Fund established, by completing
and signing the purchase application at the end of this Prospectus and mailing
it, together with a check to cover the purchase, to the Transfer Agent: PFPC
Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. Subsequent investments need not be accompanied by an application.
INITIAL SALES CHARGE--CLASS A SHARES. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the following
table:
INITIAL SALES CHARGE SCHEDULE--CLASS A SHARES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF DISCOUNT TO SELECTED
---------------------------------- DEALERS AS A PERCENTAGE
OFFERING NET AMOUNT INVESTED OF
AMOUNT OF PURCHASE PRICE (NET ASSET VALUE) OFFERING PRICE
- ----------------------- -------------- -------------------- -----------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.50 3.63 3.25
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00
</TABLE>
- --------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own re-
sources. Most redemptions of these shares within one year of purchase will be
subject to a contingent deferred sales charge of 1.0%. See "Contingent Deferred
Sales Charge--Class A Shares."
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for 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.
REDUCED SALES CHARGE PLANS--CLASS A SHARES. If an investor or eligible group
of related Fund investors purchases Class A shares of the Fund concurrently
with Class A shares of other PaineWebber mutual funds, the purchases may be
combined to take advantage of the reduced sales charge applicable to larger
11
<PAGE>
purchases. In addition, the right of accumulation permits a Fund investor or
eligible group of related Fund investors to pay the lower sales charge applica-
ble 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 in-
vestor's or group's total existing Class A shareholdings in other PaineWebber
mutual funds.
An "eligible group of related Fund investors" includes an individual, the in-
dividual'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 eli-
gible group of individuals for the benefit of the individual and/or the indi-
vidual's spouse, parents or children. The term also includes an employer or
group of related employers and one or more qualified retirement plans of such
employer or employers. For more information, an investor should consult the
Statement of Additional Information or contact a PaineWebber investment execu-
tive or correspondent firm or the Transfer Agent.
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares are available without a
sales charge through exchanges for Class A shares of most other PaineWebber mu-
tual funds. See "Exchanges." In addition, Class A shares may be purchased with-
out 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 affil-
iates, directors or trustees and officers of any PaineWebber mutual funds,
their spouses, parents and children and advisory clients of Mitchell Hutchins.
Class A shares may also be purchased without a sales charge by employee benefit
plans qualified under section 401 or 403(b) of the Internal Revenue Code (the
"Code"), including salary reduction plans qualified under section 401(k) of the
Code, subject to minimum requirements established by Mitchell Hutchins with re-
spect to number of employees or amount of purchase. Currently, the employers
establishing the plan must have 100 or more eligible employees or the amount
invested or to be invested during the subsequent 13-month period in the Fund or
any other PaineWebber mutual fund must total at least $1 million. If invest-
ments by an employee benefit plan without a sales charge are made through a
dealer (including PaineWebber) who has executed a dealer agreement with Mitch-
ell Hutchins, Mitchell Hutchins may make a payment, out of its own resources,
to the dealer in an amount not to exceed 1.0% of the amount invested.
Class A shares also may be purchased without a sales charge if the purchase
is made through a PaineWebber investment executive who formerly was employed as
a broker with another firm registered as a broker-dealer with the SEC, provided
(1) the purchaser was the investment executive's client at the competing bro-
kerage firm, (2) within 90 days of the purchase of Class A shares the purchaser
redeemed shares of one or more mutual funds for which that competing firm or
its affiliates was principal underwriter, provided the purchaser either paid a
sales charge to invest in those funds, paid a contingent deferred sales charge
upon redemption or held shares of those funds for the period required not to
pay the otherwise applicable contingent deferred sales charge and (3) the total
amount of shares of all PaineWebber mutual funds purchased under this sales
charge waiver does not exceed the amount of the purchaser's redemption proceeds
from the competing firm's funds. To take advantage of this waiver, an investor
must provide satisfactory evidence that all the above-noted conditions are met.
Qualifying investors should contact their PaineWebber investment executives for
more information.
12
<PAGE>
Certificate holders of unit investment trusts ("UITs") sponsored by
PaineWebber may acquire Class A shares of the Fund without regard to minimum
investment requirements and without sales charges by electing to have dividends
and other distributions from their UIT investment automatically invested in
Class A shares.
Class A shares may be acquired without a sales charge if issued by the Fund
in connection with a reorganization pursuant to which the Fund acquires sub-
stantially all of the assets and liabilities of another investment company in
exchange solely for shares of the Fund.
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES. Class A shares purchased
without an initial sales charge due to the sales charge waiver for purchases of
$1 million or more and held less than one year are subject to a contingent de-
ferred sales charge upon redemption equal to 1.0% of the lower of (a) the net
asset value of the shares at the time of purchase or (b) the net asset value of
the shares at the time of redemption. The holding period of Class A shares ac-
quired through an exchange with another PaineWebber mutual fund is calculated
from the date the Class A shares of the other PaineWebber mutual fund were ini-
tially purchased without a sales charge, and Class A shares acquired through an
exchange will be considered to represent, as applicable, dividend and capital
gain distribution reinvestments in such other funds. Redemption order will be
determined as described for Class B shares (see "Contingent Deferred Sales
Charge--Class B Shares"). Class A shares held one year or longer and Class A
shares acquired through reinvestment of dividends or capital gains distribu-
tions are not subject to this contingent deferred sales charge. The contingent
deferred sales charge is waived for exchanges, as described below, and for most
redemptions in connection with the systematic withdrawal plan. THIS CONTINGENT
DEFERRED SALES CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS A SHARES PURCHASED
PRIOR TO NOVEMBER 10, 1995. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, realized on the redemption. The amount of any contingent de-
ferred sales charge will be paid to Mitchell Hutchins.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The public offering price
of the Class B shares is the next determined net asset value, and no initial
sales charge is imposed. A contingent deferred sales charge, however, is im-
posed upon most redemptions of Class B shares.
The maximum contingent deferred sales charge for Class B shares equals 5.0%
of the lower of (a) the net asset value of the shares at the time of purchase
or (b) the net asset value of the shares at the time of redemption. Class B
shares held six years or longer and Class B shares acquired through reinvest-
ment of dividends or capital gains distributions are not subject to the contin-
gent deferred sales charge. The following table shows the contingent deferred
sales charge percentages charged in each year following purchase:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- -----------------
<S> <C>
1st Year Since Purchase....................................... 5%
2nd Year Since Purchase....................................... 4
3rd Year Since Purchase....................................... 3
4th Year Since Purchase....................................... 2
5th Year Since Purchase....................................... 2
6th Year Since Purchase....................................... 1
7th Year Since Purchase....................................... None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of
13
<PAGE>
Class B shares representing the reinvestment of dividends and capital gains
distributions and then of other shares held by the shareholder for the longest
period of time. The holding period of Class B shares acquired through an ex-
change 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
mutual funds, and Class B shares being redeemed will be considered to repre-
sent, as applicable, dividend and capital gains distribution reinvestments in
such other funds. This will result in any contingent deferred sales charge be-
ing imposed at the lowest possible rate. For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or increase
the loss, as the case may be, realized on redemption. The amount of any contin-
gent deferred sales charge will be paid to Mitchell Hutchins.
SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge
will be waived for exchanges, as described below, and for most redemptions in
connection with the Fund's systematic withdrawal plan. In addition, the contin-
gent 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 share-
holder 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 con-
nection with a lump-sum or other distribution in the case of an IRA, a self-em-
ployed individual retirement plan (so-called "Keogh Plan") or a custodial ac-
count under Section 403(b) of the Internal Revenue Code following attainment of
age 59 1/2; any total or partial redemption resulting from any distribution
following retirement in the case of a tax-qualified retirement plan; and a re-
demption resulting from a tax-free return of an excess contribution to an IRA.
Contingent deferred sales charge waivers will be granted subject to confirma-
tion (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 sharehold-
er's status or holdings, as the case may be.
PURCHASES OF CLASS C SHARES. The public offering price of the Class C shares
is the next determined net asset value. No initial sales charge is imposed.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. Class C shares held less
than one year will be subject to a contingent deferred sales charge on redemp-
tions in an amount equal to 1.0% of the lower of (a) the net asset value of the
shares at the time of purchase or (b) the net asset value of the shares at the
time of redemption. The holding period of Class C shares acquired through an
exchange with another PaineWebber mutual fund is calculated from the date the
Class C shares of the other PaineWebber mutual fund were initially purchased
without a sales charge, and Class C shares will be considered to represent, as
applicable, dividend and capital gain distribution reinvestments in such other
funds. Redemption order will be determined as described for Class B shares (see
"Contingent Deferred Sales Charge--Class B Shares"). Redemptions of Class C
shares acquired through an exchange and held less than one year will be subject
to the same contingent deferred sales charge that would have been imposed on
Class C shares of the PaineWebber mutual fund originally purchased that were
subsequently exchanged into Class C shares of the Fund. Class C shares held one
year or longer and Class C shares acquired through reinvestment of dividends or
capital gains distributions are not subject to this contingent deferred sales
charge. The contingent
14
<PAGE>
deferred sales charge is waived for exchanges, as described below, and for most
redemptions in connection with the systematic withdrawal plan. THIS CONTINGENT
DEFERRED SALES CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS C SHARES PURCHASED
PRIOR TO NOVEMBER 10, 1995. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, realized on the redemption. The amount of any contingent de-
ferred sales charge will be paid to Mitchell Hutchins.
EXCHANGES
Shares of the Fund may be exchanged for shares of the corresponding Class of
other PaineWebber mutual funds or may be acquired through an exchange of shares
of the corre-sponding Class of those funds. No initial sales charge is imposed
on the shares being acquired, and no contingent deferred sales charge is im-
posed on the shares being disposed of, through an exchange. However, contingent
deferred sales charges may apply to redemptions of shares acquired through an
exchange. A $5.00 exchange fee is charged for each exchange, and exchanges may
be subject to minimum investment requirements of the fund into which exchanges
are made.
The other PaineWebber mutual funds with which Fund shares may be exchanged
include:
PaineWebber Income Funds
. GLOBAL INCOME FUND
. HIGH INCOME FUND
. INVESTMENT GRADE INCOME FUND
. LOW DURATION U.S. GOVERNMENT INCOME FUND
. STRATEGIC INCOME FUND
. U.S. GOVERNMENT INCOME FUND
PaineWebber Tax-Free Income Funds
. CALIFORNIA TAX-FREE INCOME FUND
. MUNICIPAL HIGH INCOME FUND
. NATIONAL TAX-FREE INCOME FUND
. NEW YORK TAX-FREE INCOME FUND
PaineWebber Growth Funds
. CAPITAL APPRECIATION FUND
. EMERGING MARKETS EQUITY FUND
. GLOBAL EQUITY FUND
. GROWTH FUND
. REGIONAL FINANCIAL GROWTH FUND
. SMALL CAP GROWTH FUND
PaineWebber Growth and Income Funds
. BALANCED FUND
. GROWTH AND INCOME FUND
. TACTICAL ALLOCATION FUND
. UTILITY INCOME FUND
PaineWebber Money Market Fund
PaineWebber clients must place exchange orders through their PaineWebber in-
vestment 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 termi-
nated at any time, upon at least 60 days' notice when such notice is required
by SEC rules. This exchange privilege is available only in those jurisdictions
where the sale of the PaineWebber mutual fund shares to be acquired may be le-
gally made. Before making any exchange, shareholders should contact their
PaineWebber investment executives or correspon
15
<PAGE>
dent firms or the Transfer Agent to obtain more information and prospectuses of
PaineWebber mutual funds to be acquired through the exchange.
REDEMPTIONS
Fund shares may be redeemed at their net asset value (subject to any applica-
ble contingent deferred sales charge) and redemption proceeds will be paid af-
ter 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 follow-
ing order unless the shareholder specifically requests otherwise: Class A
shares, then Class C shares and finally Class B shares.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. Within three Business Days af-
ter 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 re-
demption requests to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor a 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" and redemption proceeds will
be paid within seven days of receipt of the request. "Good order" means that
the request must be accompanied by the following: (1) a letter of instruction
or a stock assignment specifying the number of shares or amount of investment
to be redeemed (or that all shares credited to a Fund account be redeemed),
signed by all registered owners of the shares in the exact names in which they
are registered, (2) a guarantee of the signature of each registered owner by an
eligible institution acceptable to the Transfer Agent and in accordance with
SEC rules, such as a commercial bank, trust company or member of a recognized
stock exchange, 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 or-
der."
ADDITIONAL INFORMATION ON REDEMPTIONS. Redemption proceeds of $1 million or
more may be wired to the shareholder's PaineWebber brokerage account or a com-
mercial bank account designated by the shareholder. Questions about this op-
tion, or redemption requirements generally, should be referred to the share-
holder's PaineWebber investment executive or correspondent firm, or to the
Transfer Agent if the
16
<PAGE>
shares are not held in a PaineWebber brokerage account. If a shareholder re-
quests redemption of shares which were purchased recently, the Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.
Because the Fund incurs certain fixed costs in maintaining shareholder ac-
counts, it reserves the right to redeem all Fund shares in any shareholder ac-
count 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 ac-
count 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
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 conver-
sion will be effected at the relative net asset values per share of the two
Classes on the first Business Day of the month in which the sixth anniversary
of the issuance of the Class B shares occurs. 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 aver-
aging." 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 pe-
riods of low price levels.
17
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own Class A or Class C shares
with a value of $5,000 or more or Class B shares with a value of $20,000 or
more may have PaineWebber redeem a portion of their shares monthly, quarterly
or semi-annually under the systematic withdrawal plan. Shareholders who partic-
ipate in the systematic withdrawal plan must elect to have all dividends rein-
vested in additional shares of the same Class. The minimum amount for all with-
drawals of Class A or Class C shares is $100, and minimum monthly, quarterly
and semi-annual withdrawal amounts for Class B shares are $200, $400 and $600,
respectively. Quarterly withdrawals are made in March, June, September and De-
cember, and semi-annual withdrawals are made in June and December. Provided
that the shareholder does not withdraw an amount exceeding 12% (in the first
year after purchase for Class A and Class C shares, annually for Class B
shares) of his or her "Initial Account Balance," a term that means the value of
the Fund account at the time the shareholder elects to participate in the sys-
tematic withdrawal plan, no contingent deferred sales charge is imposed on such
withdrawals. A shareholder's participation in the systematic withdrawal plan
will terminate automatically if the Initial Account Balance (plus the net asset
value on the date of purchase of Fund shares acquired after the election to
participate in the systematic withdrawal plan), less aggregate redemptions made
other than pursuant to the systematic withdrawal plan, is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional shares concurrent with withdrawals are ordinarily disadvantageous
to shareholders because of tax liabilities and, for Class A shares, sales
charges.
INDIVIDUAL RETIREMENT ACCOUNTS. Fund shares 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 es-
tablishing an IRA should review applicable tax laws and should consult their
tax advisers.
TRANSFER OF ACCOUNTS. If a shareholder holding Fund shares in a PaineWebber
brokerage account transfers his 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.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund pays an annual dividend from its net investment income
and net short-term capital gain, if any. The Fund also distributes substan-
tially all of its net capital gain (the excess of net long-term capital gain
over net short-term capital loss) with the regular annual dividend. The Fund
may make additional distributions if necessary to avoid a 4.0% excise tax on
certain undistributed income and capital gain. Dividends and other distribu-
tions on all Classes of Fund shares are calculated at the same time and in the
same manner. Dividends on Class B and Class C shares of the Fund are expected
to be lower than those on its Class A shares because of the higher expenses re-
sulting from distribution fees borne by the Class B and Class C shares. Divi-
dends on each Class also might be affected differently by the allocation of
other class-specific expenses. See "Valuation of Shares."
Dividends and capital gain distributions are paid in additional Fund shares
of the same Class at net asset value unless the shareholder
18
<PAGE>
has requested cash payments. Shareholders who wish to receive dividends and/or
capital gain 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 appro-
priate section of the application form.
TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of net investment income and net short-term capital gain)
and net capital gain that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) generally are taxable to shareholders as or-
dinary income. Distributions of the Fund's net capital gain (whether paid in
cash or in additional Fund shares) are taxable to shareholders as long-term
capital gain, regardless of how long they have held their Fund shares. Share-
holders 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 distribu-
tions 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 those shareholders who otherwise are
subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the redeem-
ing shareholder, depending upon whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares (which nor-
mally includes any initial sales charge paid on Class A shares). An exchange of
Fund shares for shares of another PaineWebber mutual fund generally will have
similar tax consequences. However, special tax rules apply when a shareholder
(1) disposes of Class A shares through a redemption or exchange within 90 days
of purchase and (2) subsequently acquires Class A shares of a PaineWebber mu-
tual fund without paying a sales charge due to the 365-day reinstatement privi-
lege or exchange privilege. In these cases, any gain on the disposition of the
original Class A shares will be increased, or loss decreased, by the amount of
the sales charge paid when the shares were acquired, and that amount will in-
crease the basis of the PaineWebber mutual fund shares subsequently acquired.
In addition, if Fund shares are purchased within 30 days before or after re-
deeming other Fund shares (regardless of Class) at a loss, all or a portion of
that loss will not be deductible and will increase the basis of the newly pur-
chased shares.
No gain or loss will be recognized to a shareholder as a result of a conver-
sion of Class B shares into Class A shares.
The foregoing is only a summary of some of the important federal tax consid-
erations 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. Prospec-
tive shareholders are therefore urged to consult their tax advisers.
19
<PAGE>
VALUATION OF SHARES
The net asset value of the Fund's shares fluctuates and is determined sepa-
rately for each Class as of the close of regular trading on the NYSE (cur-
rently 4:00 p.m., Eastern time) each Business Day. Net asset value per share
is determined by dividing the value of the securities held by the Fund plus
any cash or other assets minus all liabilities by the total number of Fund
shares outstanding.
The Fund values its assets based on their current market value where 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 gen-
erally is used to value debt obligations with 60 days or less remaining until
maturity, unless the board of trustees determines that this does not represent
fair value.
MANAGEMENT
The Trust's board of trustees, as part of its overall management responsi-
bility, oversees various organizations responsible for the Fund's day-to-day
management. Mitchell Hutchins, the Fund's investment adviser and administra-
tor, supervises the activities of the Sub-Adviser and all other aspects of the
Fund's operations. Quest Advisory Corp., as Sub-Adviser, makes and implements
all investment decisions. Brokerage transactions for the Fund may be conducted
through PaineWebber or its affiliates in accordance with procedures adopted by
the Trust's board of trustees.
Mitchell Hutchins receives a monthly fee for its services, computed daily
and payable monthly, at an annual rate of 1.0% of the Fund's average daily net
assets. This fee is higher than that paid by most other mutual funds, although
it is not higher than that paid by many funds whose investment objective is
similar to that of the Fund.
Mitchell Hutchins (not the Fund) pays the Sub-Adviser a fee for its sub-in-
vestment advisory services, in an amount equal to 50% of the fee received by
Mitchell Hutchins from the Fund for advisory and administrative services.
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. The Fund incurs other expenses and, for the fiscal year ended July 31,
1995, the Fund's total expenses for its Class A, Class B and Class C shares,
stated as a percentage of average net assets (annualized), were 1.98%, 2.74%
and 2.73%, 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 a
wholly owned subsidiary of Paine Webber Group Inc., a publicly owned financial
services holding company. As of October 31, 1995, Mitchell Hutchins was ad-
viser or sub-adviser of 38 investment companies with 75 separate portfolios
and aggregate assets of over 29 billion.
The Sub-Adviser is located at 1414 Avenue of the Americas, New York, New
York 10019. The Sub-Adviser is one of the largest and most experienced invest-
ment advisers dedicated to investing in securities of small cap companies. The
Sub-Adviser has managed client accounts investing primarily in equity securi-
ties of small cap companies since 1972. As of October 31, 1995, the Sub-Ad-
viser managed approximately $3.0 billion of assets.
20
<PAGE>
The Fund's portfolio has been managed since its inception by the Sub-Advis-
er's senior investment staff, including Charles M. Royce, the Sub-Adviser's
Chief Investment Officer, who is primarily responsible for supervising the Sub-
Adviser's investment management activities. Mr. Royce is assisted by W. Whitney
George and Jack E. Fockler, both of whom are Vice Presidents of the Sub-Adviser
and participate in the Sub-Adviser's investment management activities, with
their specific responsibilities varying from time to time.
Mr. Royce is the President, Secretary and Treasurer and the sole director and
sole voting shareholder of the Sub-Adviser. He has been a director of the Sub-
Adviser since 1967.
Mr. George has been employed as a securities analyst by the Sub-Adviser since
1991. Prior thereto he was a securities analyst with Dominick and Dominick,
Inc. (1989 to 1991) and WR Lazard, Laidlaw & Mead Incorporated (1988 to 1989).
Mr. Fockler has been employed as a securities analyst and senior associate by
the Sub-Adviser since 1989. Prior thereto he was Regional Vice President of J.
& W. Seligman, Inc.
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, Class B shares and Class C shares ("Class A Plan," "Class B Plan" and
"Class C Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins a
monthly service fee at the annual rate of 0.25% of the average daily net assets
of each Class of Fund shares and a monthly distribution fee at the annual rate
of 0.75% of the average daily net assets of the Class B and Class C shares.
Under all three Plans, Mitchell Hutchins uses the service fee 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 execu-
tives to compensate them for shareholder servicing that they perform and re-
tains the remainder to offset its expenses in servicing and maintaining share-
holder accounts. These expenses may include costs of the PaineWebber branch of-
fice in which the investment executive is based, such as rent, communications
equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fee under the Class B and Class C
Plans to offset the commissions it pays to PaineWebber for selling Class B and
Class C shares. PaineWebber passes on to its investment executives a portion of
these commissions and retains the remainder to offset its expenses in selling
Class B and Class C shares. These expenses may include the branch office costs
noted above. Mitchell Hutchins may also use the distribution fees under the
Class B and Class C Plans to offset the Fund's marketing costs attributable to
such Classes, such as preparation of sales literature, advertising and printing
and distributing prospectuses and other shareholder materials to prospective
investors. Mitchell Hutchins also may use the distribution fees to pay other
costs allocated to Mitchell Hutchins' and PaineWebber's distribution activi-
ties, includ-ing employee salaries, bonuses and other overhead expenses.
21
<PAGE>
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder ser-vicing fees and sales commissions to its investment executives
at the time of sale of Class C shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class C shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class C shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and the contingent deferred sales charge paid
upon certain redemptions of shares, and may use these proceeds for any of the
distribution expenses described above. See "Purchases."
During the period they are in effect, the Plans and related distribution con-
tracts pertaining to each Class of Fund shares ("Distribution Contracts") obli-
gate the Fund to pay service and distribution fees to Mitchell Hutchins as com-
pensation for its service and distribution activities, not as reimbursement for
specific expenses incurred. Thus, even if Mitchell Hutchins' expenses exceed
its service or distribution fees, the Fund will not be obligated to pay more
than those fees and, if Mitchell Hutchins' expenses are less than such fees, it
will retain its full fees and realize a profit. The Fund will pay the service
and distribution fees to Mitchell Hutchins until either the applicable Plan or
Distribution Contract is terminated or not renewed. In that event, Mitchell
Hutchins' distribution expenses in excess of service and distribution fees re-
ceived 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 each Plan, the trustees will review the Plan and Mitch-
ell Hutchins' corresponding expenses for each Class separately from the Plans
and corresponding expenses for the other two Classes.
PERFORMANCE INFORMATION
The Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional
materials. Standardized return shows the change in value of an investment in
the Fund as a steady compounded annual rate of return. Actual year-by-year re-
turns fluctuate and may be higher or lower than standardized return. Standard-
ized return for the Class A shares reflects deduction of the Fund's maximum
initial sales charge at the time of purchase, and standardized return for the
Class B and Class C shares reflects deduction of the applicable contingent de-
ferred 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 exist-
ence 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 stan-
dardized 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.
Total return information reflects past performance and does not necessarily
indicate future results. Investment return and principal values will fluctuate,
and proceeds upon redemption may be more or less than a shareholder's cost.
GENERAL INFORMATION
ORGANIZATION. PaineWebber Securities Trust is registered with the SEC as an
open-end management investment company and was or-
22
<PAGE>
ganized as a business trust under the laws of the Commonwealth of Massachu-
setts by Declaration of Trust dated December 3, 1992. The trustees have au-
thority to issue an unlimited number of shares of beneficial interest of sepa-
rate series, par value $.001 per share. In addition to the Fund, shares of one
other series have been authorized.
The shares of beneficial interest in the Fund are divided into three Clas-
ses, designated Class A shares, Class B shares and Class C shares. Each Class
represents interests in the same assets of the Fund. The Classes differ as
follows: (1) each Class 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 automati-
cally convert to Class A shares approximately six years after issuance, (4)
Class C shares are not subject to an initial sales charge, but are subject to
a contingent deferred sales charge if redeemed within one year of purchase
bear ongoing distribution fees and do not convert into another Class and (5)
each Class may bear differing amounts of certain Class-specific expenses. The
board of trustees of the Trust does not anticipate that there will be any con-
flicts among the interests of the holders of the different Classes of shares
of the Fund. 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 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 re-
quested 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 liquida-
tion, except that, due to the differing expenses borne by the three Classes,
dividends and liquidation proceeds on Class B and Class C shares are likely to
be lower than on Class A shares.
To avoid additional operating costs and for investor convenience, the Fund
does not issue share certificates. Ownership of the Fund's shares is recorded
on a share 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, One Heri-
tage Drive, North Quincy, Massachusetts 02171, is the custodian of the Fund's
assets. PFPC Inc., a subsidiary of PNC Bank, National Association, whose prin-
cipal 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 pur-
chases and redemptions of Fund shares. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Fund.
23
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Application Form
THE PAINEWEBBER [ ][ ] -[ ][ ][ ][ ][ ]-[ ][ ]
MUTUAL FUNDS PaineWebber Account No.
- --------------------------------------------------------------------------------
INSTRUCTIONS DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED
THROUGH PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT
EXECUTIVE (OR YOUR LOCAL PAINEWEBBER OFFICE TO OPEN AN ACCOUNT).
Return this completed
ALSO, DO NOT USE THIS FORM TO OPEN form to:
A RETIREMENT PLAN ACCOUNT. FOR PFPC Inc.
RETIREMENT PLAN FORMS OR FOR P.O. Box 8950
ASSISTANCE IN COMPLETING THIS FORM Wilmington, Delaware 19899
CONTACT PFPC INC. AT 1-800-647-1568. ATTN: PaineWebber
Mutual Funds
PLEASE PRINT
- --------------------------------------------------------------------------------
[1] INITIAL INVESTMENT ($1,000 MINIMUM)
ENCLOSED IS A CHECK FOR $ (payable to "PaineWebber
----
Small Cap Value Fund") to purchase Class A [_] Class B [_]
or Class C [_] shares
(Check one Class; if no Class is specified Class A will be
purchased)
[2] ACCOUNT REGISTRATION
Not valid 1. Individual
without / /
signature and ------------ ---------------- ---------------
Soc. Sec. or First Name Last Name MI Soc. Sec. No.
Tax ID #
- --As joint
tenants, use 2. Joint Tenancy
Lines 1 and 2 / /
- --As custodian ---------- ---------------- ---------------
for a minor, First Name Last Name MI Soc. Sec. No.
use Lines 1 and 3 ("Joint Tenants with Rights of Survivorship"
- --In the name unless otherwise specified)
of a
corporation,
trust or other 3. Gifts to Minors
organization or / /
any fiduciary -------------------------- ---------------
capacity, use Minor's Name Soc. Sec. No.
Line 4
Under the
-------------------------- Uniform Gifts to
State of Residence of Minor Minors Act /
Uniform Transfers
to Minors Act
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 gains distributions to my
address above
[ ] Reinvest dividends and pay capital gain distributions in
cash to my address above
NOTE: If a selection is not made, both dividends and
capital gain distributions will be paid in additional
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 and have received and read a current Prospectus of the Fund and
agree to its terms. The Fund and its Transfer Agent will not be liable for
acting upon instructions or inquiries believed genuine. Under penalties of
perjury, I certify that (1) my taxpayer identification number provided in
this application is correct and (2) I am not subject to backup withholding
because (i) I have not been notified that I am subject to backup
withholding as a result of failure to report interest or dividends or (ii)
the IRS has notified me that I am no longer subject to backup withholding
(STRIKE OUT CLAUSE (2) IF INCORRECT).
------------------------------------ ------------------------ --------
Individual (or Custodian) Joint Registrant (if any) Date
------------------------------------ ------------------------ --------
Corporate Officer, Partner, Trustee, Title Date
etc.
[9] INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed By Investment
Executive Only)
---------------------------- ----------------------------
Broker No./Name Branch Wire Code
( )
---------------------------- ----------------------------
Branch Address Telephone
[10] CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Correspondent
Firm Only)
---------------------------- ----------------------------
Name Address
----------------------------
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE OR
CORRESPONDENT FIRM OR TO: PFPC INC., P.O. BOX 8950, WILMINGTON, DELAWARE
19899.
<PAGE>
Shares of the Fund can be exchanged for shares
of the following PaineWebber Mutual Funds:
PAINEWEBBER INCOME FUNDS
. Global Income Fund
. High Income Fund
. Investment Grade Income Fund
. Low Duration U.S. Government Income Fund
. Strategic Income Fund
. U.S. Government Income Fund
PAINEWEBBER TAX-FREE INCOME FUNDS
. California Tax-Free Income Fund
. Municipal High Income Fund
. National Tax-Free Income Fund
. New York Tax-Free Income Fund
PAINEWEBBER GROWTH FUNDS
. Capital Appreciation Fund
. Emerging Markets Equity Fund
. Global Equity Fund
. Growth Fund
. Regional Financial Growth Fund
. Small Cap Growth Fund
PAINEWEBBER GROWTH AND INCOME FUNDS
. Balanced Fund
. Growth and Income Fund
. Tactical Allocation Fund
. 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 cor-
respondent firm. Read it carefully before investing.
(C) 1995 PaineWebber Incorporated
[LOGO] Recycled Paper
PAINEWEBBER
SMALL CAP
VALUE FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................... 2
Financial Highlights..................................... 6
Flexible Pricing System.................................. 7
Investment Objective, Policies and Risk Considerations... 8
Purchases................................................ 10
Exchanges................................................ 15
Redemptions.............................................. 16
Conversion of Class B Shares............................. 17
Other Services and Information........................... 17
Dividends and Taxes...................................... 18
Valuation of Shares...................................... 20
Management............................................... 20
Performance Information.................................. 22
General Information...................................... 22
</TABLE>
PROSPECTUS
November 14, 1995
<PAGE>
PAINEWEBBER SMALL CAP VALUE FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Small Cap Value Fund ("Fund") is a diversified series of a
professionally managed, open-end management investment company organized as a
Massachusetts business trust ("Trust"). The Fund seeks long-term capital
appreciation; it invests primarily in equity securities of small capitalization
("small cap") companies. The Fund's investment adviser, administrator and
distributor is Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a
wholly owned subsidiary of PaineWebber Incorporated ("PaineWebber"). The Fund's
sub-adviser is Quest Advisory Corp. ("Sub-Adviser"). 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 November 14, 1995. A copy of the Prospectus may be obtained
by calling any PaineWebber investment executive or correspondent firm or by
calling toll-free 1-800-647-1568. This Statement of Additional Information is
dated November 14, 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. The Fund may invest in
foreign securities by purchasing American Depository Receipts ("ADRs").
Generally, ADRs, in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. ADRs are receipts typically
issued by a U.S. bank or trust company evidencing ownership of the underlying
securities. For purposes of the Fund's investment policies, ADRs are deemed to
have the same classification as the underlying securities they represent. Thus,
an ADR representing ownership of common stock will be treated as common stock.
Investment income on certain foreign securities in which the Fund may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject.
<PAGE>
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such securities. If the value of these securities
is less than the repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral so that at all
times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the securities and the price that was paid by the
Fund upon acquisition is accrued as interest and included in the Fund's net
investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party
to a repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
the Sub-Adviser to present minimal credit risks in accordance with guidelines
established by the Trust's board of trustees. The Sub-Adviser will review and
monitor the creditworthiness of those institutions under the board's and
Mitchell Hutchins' general supervision.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with banks or dealers up to an aggregate value of not more than 10%
of the Fund's total assets, provided that the Fund will not purchase securities
while borrowings in excess of 5% of the Fund's total assets are outstanding.
Such agreements involve the sale of securities held by the Fund subject to the
Fund's agreement to repurchase the securities at an agreed-upon date and price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary purposes. While a reverse
repurchase agreement is outstanding, the Fund will maintain with its custodian,
in a segregated account, cash, U.S. government securities or other liquid,
high-grade debt obligations, marked to market daily, in an amount at least
equal to the Fund's obligations under the reverse repurchase agreement.
LENDING OF PORTFOLIO SECURITIES. Although the Sub-Adviser has not previously
done so for its other accounts, the Fund is authorized to lend up to 10% of the
total value of its portfolio securities to broker-dealers or institutional
investors that the Sub-Adviser deems qualified, but only when the borrower
maintains with the Fund's custodian collateral either in cash or money market
instruments in an amount, marked to market daily, 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, the Sub-Adviser would consider, and during the period
of the loan would monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The Fund will regain
record ownership of loaned securities
2
<PAGE>
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.
INVESTMENT LIMITATIONS
The Fund may not (1) purchase securities of any one issuer (except U.S.
government securities) if as a result more than 5% of the Fund's total assets
would be invested in such issuer or the Fund would own or hold more than 10% of
the outstanding voting securities of that issuer, provided, however, that up to
25% of the value of the Fund's total assets may be invested without regard to
these limitations; (2) purchase securities on margin, except for short-term
credit necessary for clearance of portfolio transactions and except that the
Fund may make margin deposits in connection with its use of options, futures
contracts and options on futures contracts; (3) underwrite securities of other
issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under the federal
securities laws; (4) make short sales of securities or maintain a short
position, except that the Fund may make short sales and maintain short
positions in connection with its use of options, futures contracts and options
on futures contracts; (5) purchase or sell real estate, provided that the Fund
may invest in securities secured by real estate or interests therein or issued
by companies which invest in real estate or interests therein; (6) purchase or
sell commodities or commodity contracts, except that the Fund may purchase or
sell financial futures contracts, such as stock index, interest rate and bond
index futures contracts and options thereon; (7) invest in oil, gas or mineral-
related programs or leases; (8) make loans, except through loans of portfolio
securities as described herein and except through repurchase agreements;
provided that for purposes of this restriction the acquisition of bonds,
debentures, or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed to be the making of loans; (9) purchase any
securities issued by any other investment company, except in connection with
the merger, consolidation or acquisition of all or substantially all the
securities or assets of such an issuer; (10) issue senior securities or borrow
money, except from banks for temporary purposes and for reverse repurchase
agreements, and then in an aggregate amount not in excess of 10% of the Fund's
total assets; provided further that the Fund will not purchase securities while
borrowings in excess of 5% of the Fund's assets are outstanding; or (11) make
an investment in any one industry if the investment would cause the aggregate
value of the Fund's investments in such industry to equal or exceed 25% of the
Fund's total assets. The Fund will interpret fundamental investment limitation
(5) to prohibit investment in real estate limited partnerships.
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 the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.
The following investment limitations 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
3
<PAGE>
knowledge of the Fund's management, the officers and trustees of the Trust and
the officers and directors of Mitchell Hutchins and the Sub-Adviser (each
owning beneficially as principal for its own account more than 0.5% of the
outstanding securities of an issuer) beneficially so 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 and in equity securities of issuers that
are not readily marketable; (3) invest more than 5% of its net assets in
securities of issuers that the Fund is restricted from selling to the public
without registration under the Securities Act of 1933; (4) invest 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
or American Stock Exchange, 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; or (5) invest more than 35% of its total
assets in non-convertible debt securities rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's"), BB or lower by Standard & Poor's ("S&P")
or comparably rated by another nationally recognized statistical rating
organization ("NRSRO") (or, if unrated, determined by the Sub-Adviser to be of
comparable quality). See the Appendix to this Statement of Additional
Information for more information regarding Moody's and S&P's ratings. This non-
fundamental policy (5) can be changed only upon 60 days' advance notice to
shareholders.
4
<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 TRUST OTHER DIRECTORSHIPS
- ----------------- ---------- --------------------
<S> <C> <C>
Richard Q. Armstrong; 59 Trustee Mr. Armstrong is chairman and principal
78 West Brother Drive of RQA Enterprises (management con-
Greenwich, CT 06830 sulting firm) (since April 1991 and
principal occupation since March
1995). Mr. Armstrong is also a direc-
tor of Hi Lo Automotive, Inc. He was
chairman of the board, chief executive
officer and co-owner of Adirondack
Beverages (producer and distributor of
soft drinks and sparkling/still wa-
ters) (October 1993-March 1995). He
was a partner of the New England Con-
sulting Group (management consulting
firm) (December 1992-September 1993).
He was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the
French luxury goods conglomerate, 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 or trustee
of six other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment
adviser.
E. Garrett Bewkes, Jr; Trustee and Mr. Bewkes is a director of Paine Web-
69** Chairman of the ber Group Inc. ("PW Group") (holding
Board of 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 Bio Therapeutics, Inc. and a di-
rector or trustee of 25 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment
adviser.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ----------------- ---------- --------------------
<S> <C> <C>
Richard R. Burt; 47 Trustee Mr. Burt is chairman of International
1101 Connecticut Avenue Equity Partners (international invest-
N.W. ments and consulting firm) (since
Washington, D.C. 20036 March 1994) and a partner of McKinsey
& Company (management consulting form)
(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 Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is also
a director or trustee of 7 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
John R. Torell III; 56 Trustee Mr. Torell is chairman of Torell Man-
767 Fifth Avenue agement, Inc. (financial advisory
Suite 4605 firm) (since 1989), Chairman of
New York, NY 10153 Telesphere Corporation (financial in-
formation) and a partner of Zilkha &
Company (merchant bank and investment
company). Mr. Torell is also a direc-
tor of American Home Products Corp.,
COLT's Manufacturing Company and Volt
Information Sciences Inc. He is the
former chairman and chief executive
officer of Fortune Bancorp (1990-1991,
and 1991-1994, respectively). He is
the former chairman, president and
chief executive officer of CalFed,
Inc. (savings association holding com-
pany) (1988 to 1989) and former presi-
dent of Manufacturers Hanover Corp.
(bank) (prior to 1988). Mr. Torell is
a director of eight other investment
companies for which Mitchell Hutchins
serves as investment adviser.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ----------------- ---------- --------------------
<S> <C> <C>
William D. White; 61 Trustee Mr. White is retired. From February
P.O. Box 199 1989 through March 1994, he was pres-
Upper Black Eddy, PA ident of the National League of Pro-
18972 fessional Baseball Clubs. Prior to
1989, he was a television sports-
caster for WPIX-TV, New York. Mr.
White is also a director of eight
other investment companies for which
Mitchell Hutchins serves as invest-
ment adviser.
Margo N. Alexander; 48 President Ms. Alexander is president, chief ex-
ecutive officer and a director of
Mitchell Hutchins. Prior to January
1995, Ms. Alexander was an executive
vice president of PaineWebber. Ms.
Alexander is also a director or
trustee of two investment companies
and president of 37 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president
and manager--advisory administration
of Mitchell Hutchins. Prior to Novem-
ber 1993, she was compliance manager
of Hyperion Capital Management, Inc.,
an investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice
president and manager--legal adminis-
tration of Mitchell Hutchins. Ms.
Boyle is also a vice president of 37
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment
adviser.
Joan L. Cohen; 31 Vice President and Ms. Cohen is a vice president and at-
Assistant torney of Mitchell Hutchins. Prior to
Secretary December 1993, she was an associate
at the law firm of Seward & Kissel.
Ms. Cohen is also a vice president
and assistant secretary of 25 other
investment companies for which Mitch-
ell Hutchins or PaineWebber serves as
investment
adviser.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ----------------- ---------- --------------------
<S> <C> <C>
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
three other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice president
Assistant and a senior manager of the mutual
Treasurer fund finance division of Mitchell
Hutchins. Mr. Maher is also a vice
president and assistant treasurer of
37 other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director
and Chief Investment Officer--Fixed
Income of Mitchell Hutchins. Prior to
December 1994, he was Director of
Fixed Income Investments of IBM Cor-
poration. Mr. McCauley is also a vice
president of 20 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Mitchell Hutchins. Ms. Moran is also
Treasurer a vice president and assistant trea-
surer of 37 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice presi-
Secretary dent and senior deputy general coun-
sel of Mitchell Hutchins. Ms.
O'Donnell is also a vice president
and secretary of 37 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ----------------- ---------- --------------------
<S> <C> <C>
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
45 and general counsel of Mitchell
Hutchins. From April 1990 to May 1994,
she was a partner in the law firm of
Arnold & Porter. Prior to April 1990,
she was a partner in the law firm of
Shereff, Friedman, Hoffman & Goodman.
Ms. Schonfeld is also a vice president
of 37 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Nirmal Singh; 38 Vice President Mr. Singh is a vice president of Mitch-
ell Hutchins. Prior to September 1993,
he was a member of the portfolio man-
agement team at Merrill Lynch Asset
Management, Inc. Mr. Singh is also
vice president of five other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Paul H. Schubert; 32 Vice President and Mr. Schubert is a first vice president
Assistant and a senior manager of the mutual
Treasurer fund finance division of 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 37 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Julian F. Sluyters; 35 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 and
treasurer of 37 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ----------------- ---------- --------------------
<S> <C> <C>
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director and
chief investment officer--U.S. equity
investments of Mitchell Hutchins.
Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas
of Chase Manhattan Private Bank. Mr.
Tincher
is also vice president of ten other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president and
Assistant associate general counsel of Mitchell
Secretary Hutchins. Prior to 1993, he was a
partner in the law firm of Shereff,
Freidman, Hoffman & Goodman. Mr. Todd
is also a vice president and assistant
secretary of 37 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Craig M. Varrelman; 36 Vice President Mr. Varrelman is a first vice president
of Mitchell Hutchins. Mr. Varrelman is
also vice president of four other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Stuart Waugh; 39 Vice President Mr. Waugh is a first vice president and
a portfolio manager of Mitchell
Hutchins responsible for global fixed
income investments and currency
trading. Mr. Waugh is also a vice
president of four other investment
companies for which Mitchell Hutchins
serves as investment adviser.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ----------------- ---------- --------------------
<S> <C> <C>
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant and associate general counsel of
Secretary Mitchell Hutchins. From September 1987
to March 1995, he was an attorney in
private practice. Mr. Weller is also a
vice president and assistant secretary
of 24 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an "interested person" of the Trust, as defined in the
Investment Company Act of 1940 ("1940 Act"), by virtue of his position with
PW Group.
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, 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 Fund's fiscal year ended July
31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM THE
AGGREGATE ACCRUED AS ESTIMATED TRUST AND THE
COMPENSATION PART OF A ANNUAL FUND COMPLEX
FROM FUND'S BENEFITS UPON PAID TO
NAME OF PERSON, POSITION THE TRUST* EXPENSES RETIREMENT TRUSTEES**
------------------------ ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.,
Trustee and chairman of
the board of trustees..... -- -- -- --
Richard Q. Armstrong,
Trustee................... $1,000 -- -- --
Richard R. Burt,
Trustee................... $ 563 -- -- --
John R. Torell III,
Trustee................... $1,563 -- -- $39,750
William D. White,
Trustee................... $1,563 -- -- $33,250
</TABLE>
- --------
* Represents fees paid to each trustee during the fiscal year ended July 31,
1995.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1994.
11
<PAGE>
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 with the Trust ("Advisory Contract"). Under the Advisory Contract, the
Fund pays Mitchell Hutchins an annual fee of 1.00% of the Fund's average net
assets, computed daily and paid monthly. For the fiscal year ended July 31,
1995, the six months ended July 31, 1994 and the fiscal year ended January 31,
1994, the Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administrative fees of $829,906, $491,757 and $939,774, respectively.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more sub-
advisers, but does not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into a separate contract with the Sub-Adviser, dated January 28,
1993 ("Sub-Advisory Contract"), pursuant to which the Sub-Adviser will
determine what securities will be purchased, sold or held by the Fund. Under
the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays the Sub-
Adviser a monthly fee of 50% of the fee paid by the Fund to Mitchell Hutchins
under the Advisory Contract. For the fiscal year ended July 31, 1995, the six
months ended July 31, 1994 and the fiscal year ended January 31, 1994, Mitchell
Hutchins (not the Fund) paid or accrued to the Sub-Adviser $414,953, $245,878
and $469,887, respectively in investment sub-advisory fees.
Pursuant to a service agreement with the Fund, PaineWebber provides certain
services to the Fund not otherwise provided by its transfer agent. The
agreement is reviewed by the Trust's board of trustees annually. For the fiscal
year ended July 31, 1995, the six months ended July 31, 1994 and the fiscal
year ended January 31, 1994, PaineWebber earned fees under the service
agreement in the amount of $72,929, $26,353 and $47,661, respectively.
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to trustees and officers who are not interested
persons (as defined in the 1940 Act) of the Trust 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
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
12
<PAGE>
publications provided to trustees and officers; and (18) costs of mailing,
stationery and communications equipment. The Sub-Adviser will bear all expenses
incurred by it in connection with its services under the Sub-Advisory Contract.
As required by state regulation, Mitchell Hutchins will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees and extraordinary items, are excluded from this limitation. For the fiscal
year ended July 31, 1995, the six months ended July 31, 1994 and the fiscal
year ended January 31, 1994, no reimbursements were required to the Fund
pursuant to such limitations.
Under the Advisory Contract, neither Mitchell Hutchins nor the Sub-Adviser
will be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust, the Fund or any of its shareholders in connection with
the performance of the Advisory Contract or the Sub-Advisory Contract, except
to the extent that such loss results from willful misfeasance, bad faith or
gross negligence on the part of Mitchell Hutchins or the Sub-Adviser in the
performance of its duties or from reckless disregard of its obligations and
duties thereunder. Under the Sub-Advisory Contract, the Sub-Adviser will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust, the Fund, its shareholders or Mitchell Hutchins in connection with
the performance of the Sub-Advisory Contract, except to the extent that such a
loss results from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Sub-Advisory Contract.
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 Sub-Advisory Contract terminates automatically
upon its assignment or the termination of the Advisory Contract 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 the Sub-Adviser, by Mitchell Hutchins on 120 days'
written notice to the Sub-Adviser or by the Sub-Adviser on 120 days' written
notice to Mitchell Hutchins.
The following table shows the approximate net assets as of October 31, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET
INVESTMENT ASSETS
CATEGORY ($ MIL)
---------- ---------
<S> <C>
Domestic (excluding Money Market).............................. $ 5,680.0
Global......................................................... 2,893.3
Equity/Balanced................................................ 2,748.3
Fixed Income (excluding Money Market).......................... 5,825.0
Taxable Fixed Income......................................... 4,083.1
Tax-Free Fixed Income........................................ 1,741.9
Money Market Funds............................................. 20,479.4
</TABLE>
13
<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 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 other Mitchell
Hutchins advisory clients. Personnel of the Sub-Adviser also may invest in
securities for their own accounts pursuant to a code of ethics that imposes
similar procedures and restrictions.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Fund's Class A, Class B and Class C shares under separate distribution
contracts with the Trust dated July 7, 1993 and November 10, 1995
(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 July 7, 1993
and November 10, 1995 relating to the Class A, Class B and Class C shares of
the Fund (collectively, "Exclusive Dealer Agreements"), PaineWebber and its
correspondent firms sell the Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares 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 C
Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of Fund shares. Under the Class B Plan and the
Class C Plan, the Fund also pays Mitchell Hutchins a monthly distribution fee
at the annual rate of 0.75% of the average daily net assets of the Class B and
Class C shares, respectively.
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 Fund's outstanding
voting securities 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.
14
<PAGE>
The Fund paid (or accrued) the following fees to Mitchell Hutchins under the
Plans during the fiscal year ended July 31, 1995:
<TABLE>
<S> <C>
Class A................................................................ $ 52,327
Class B................................................................ $477,586
Class C................................................................ $143,010
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Fund during the fiscal year ended July 31, 1995:
<TABLE>
<S> <C> <C> <C>
Class A Class B Class C
------- -------- -------
Marketing and advertising............................. $14,837 $ 30,560 $16,471
Amortization of commissions........................... $ N/A $275,572 $19,563
Printing of prospectuses and statements of additional
information.......................................... $ 752 $ 1,534 $ 846
Branch network costs allocated and interest expense... $73,877 $182,972 $82,384
Service fees paid to PaineWebber investment execu-
tives................................................ $23,548 $ 53,729 $16,089
</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 existing 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)
improve 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 attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (4) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (5)
the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder
service-related expenses and costs.
In approving the Class B Plan 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 the 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
15
<PAGE>
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 C 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 the Fund's purchase payments
and instead having the entire amount of their purchase payments immediately
invested in Fund shares, (2) the advantage to investors in being free from
contingent deferred sales charges upon redemption for shares held more than one
year and paying for distribution on an ongoing basis, (3) Mitchell Hutchins'
belief that the ability of PaineWebber investment executives and correspondent
firms to receive sales compensation for their sales of Class C shares on an
ongoing basis, along with continuing service fees, while their customers invest
their entire purchase payments immediately in Class C shares and generally do
not face contingent deferred sales charges, would prove attractive to the
investment executives and correspondent firms, resulting in greater growth to
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The 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 C Plan.
With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that
Mitchell Hutchins would receive service, distribution and advisory fees which
are calculated based upon a percentage of the average net assets of the Fund,
which fees would increase if the Plan were successful and the Fund attained and
maintained significant asset levels.
Under the Distribution Contract between the Trust and Mitchell Hutchins for
the Class A shares, for the fiscal year ended July 31, 1995, the six months
ended July 31, 1994 and the fiscal year ended January 31, 1994, Mitchell
Hutchins earned approximately $41,750, $32,208 and $815,987, respectively, in
sales charges and retained approximately $23,505, $1,845 and $49,325,
respectively, net of concessions to PaineWebber as exclusive dealer.
For the fiscal year ended July 31, 1995, the six months ended July 31, 1994
and the fiscal year ended January 31, 1994, Mitchell Hutchins earned and
retained approximately $344,638, $191,211
16
<PAGE>
and $232,538, respectively in contingent deferred sales charges paid upon
certain redemptions of Class B shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of trustees of the Trust, the
Sub-Adviser is responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, the Sub-Adviser seeks to obtain the best net results
for the Fund, taking into account such factors as the price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved. Prices paid to
dealers in principal transactions, through which most debt securities and some
equity securities are traded, generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The Fund may invest in securities traded
in the over-the-counter ("OTC") market and will engage primarily in
transactions directly with the dealers who make markets in such securities,
unless a better price or execution could be obtained by using a broker. While
the Sub-Adviser generally seeks reasonably competitive commission rates and
dealer spreads, payment of the lowest commission or spread is not necessarily
consistent with obtaining the best net results. For the fiscal year ended July
31, 1995, the six months ended July 31, 1994 and the fiscal year ended January
31, 1994, the Fund paid approximately $121,061, $113,315 and $349,051
respectively in brokerage commissions.
The Sub-Adviser has no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions for the Fund. The Sub-Adviser
contemplates that, consistent with the policy of obtaining the best net
results, brokerage transactions for the Fund may be conducted through Mitchell
Hutchins or 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 its
affiliates are reasonable and fair. Specific provisions in the Advisory
Contract authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the Fund
on such exchange and authorize Mitchell Hutchins and any of its affiliates to
retain compensation in connection with such transactions. Any such transactions
will be effected and related compensation paid only in accordance with
applicable regulations of the SEC. For the fiscal year ended July 31, 1995, the
Fund paid $665 in commissions to PaineWebber, which represented 0.5% of the
total brokerage commissions paid by the Fund and 0.4% of the total dollar
amount of transactions involving payment of commissions. For the six months
ended July 31, 1994 and the fiscal year ended January 31, 1994, the Fund paid
no brokerage commissions to PaineWebber or any other affiliate of Mitchell
Hutchins.
Consistent with the interests of the Fund and subject to the review of the
Trust's board of trustees, the Sub-Adviser may cause the Fund to purchase and
sell portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund
may pay to those brokers a higher commission than may be charged by other
brokers, provided that the Sub-Adviser determines in good faith that such
commission is reasonable in terms either of the particular transaction or of
the overall responsibility of the Sub-Adviser to the Fund and its other clients
and that the total commissions paid by the Fund will be reasonable in relation
to the benefits to the Fund over the long term. For the fiscal year ended July
31, 1995, the Fund directed no portfolio transactions to brokers chosen because
they provided research services.
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<PAGE>
For purchases or sales with broker-dealer firms which act as principal, the
Sub-Adviser seeks best execution. Although the Sub-Adviser may receive certain
research or execution services in connection with these transactions, the Sub-
Adviser 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, the Sub-Adviser will not
enter into any explicit soft dollar arrangements relating to the principal
transactions and will not receive in principal transactions the types of
services which could be purchased for hard dollars. The Sub-Adviser 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 or the Sub-Adviser
receiving multiple quotes from dealers before executing the transactions on an
agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Fund effects securities transactions may be used by
the Sub-Adviser in advising other funds or accounts and, conversely, research
services furnished to the Sub-Adviser in connection with these other funds or
accounts may be used in advising the Fund. Information and research received
from brokers or dealers will be in addition to, and not in lieu of, the
services required to be performed by the Sub-Adviser under the Sub-Advisory
Contract.
Investment decisions for the Fund and for other investment accounts managed
by the Sub-Adviser and its affiliates are made independently of each other in
light of differing considerations for the various accounts. However, the same
investment decision may 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 in a manner that is deemed equitable to the Fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Fund is
concerned, or upon its ability to complete its entire order, in other cases it
is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the
underwriting or selling group, except pursuant to procedures adopted by the
Trust's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among
other things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, 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, the Sub-
Adviser or any affiliate thereof not participate in or benefit from the sale
to the Fund.
PORTFOLIO TURNOVER. The Fund's portfolio turnover rate may vary greatly from
year to year but it will not be a limiting factor when management deems
portfolio changes appropriate. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
such securities in the portfolio during the year. For the year fiscal ended
July 31, 1995, the six months ended July 31, 1994 and the fiscal year ended
January 31, 1994, the portfolio turnover rates for the Fund were 19%, 20% and
98%, respectively.
18
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION AND
OTHER SERVICES
COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Fund
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges indicated in the
table of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Fund and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
(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).
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Fund among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber mutual
fund. The purchaser must provide sufficient information to permit confirmation
of his or her holdings, and the acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at
any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where
the decedent is either the individual shareholder or owns the shares with his
or her spouse as a joint tenant with right of survivorship. This waiver
applies only to redemption of shares held at the time of death.
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<PAGE>
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 mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce the exchange fee and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or the Fund temporarily delays or ceases the
sales of its shares because it is unable to invest amounts effectively in
accordance with the Fund's investment objective, policies and restrictions.
If conditions exist 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 New York Stock Exchange, Inc. ("NYSE") is closed or trading on the
NYSE is restricted as determined by the SEC, (2) when an emergency exists, as
defined by the SEC, that makes it not reasonably practicable for the Fund to
dispose of securities owned by it or fairly to determine the value of its
assets or (3) as the SEC may otherwise permit. The redemption price may be more
or less than the shareholder's cost, depending on the market value of the
Fund's portfolio at the time.
SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or semi-
annual plans, PaineWebber will arrange for redemption by the Fund of sufficient
Fund shares to provide the withdrawal payment specified by participants in the
Fund's systematic withdrawal plan. The payment generally is mailed
approximately five Business Days (defined under "Valuation of Shares") after
the redemption date. Withdrawal payments should not be considered dividends,
but redemption proceeds, with the tax consequences described under "Dividends
and Taxes" in the Prospectus. If periodic withdrawals continually exceed
reinvested dividends, a shareholder's investment may be correspondingly
reduced. A shareholder may change the amount of the systematic withdrawal or
terminate participation in the systematic withdrawal plan at any time without
charge or penalty by written
20
<PAGE>
instructions with signatures guaranteed to PaineWebber or PFPC Inc. ("Transfer
Agent"). Instructions to participate in the plan, change the withdrawal amount
or terminate participation in the plan will not be effective until five days
after written instructions with signatures guaranteed are received by the
Transfer Agent. Shareholders may request the forms needed to establish a
systematic withdrawal plan from their PaineWebber investment executives,
correspondent firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
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 reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to
the shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal
income tax purposes by the amount of any sales charge paid on Class A shares,
under the circumstances and to the extent described in "Dividends and Taxes" in
the Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN/SM/;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA(R))
Shares of the PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource
Accumulation Plan ("Plan") by customers of PaineWebber and its correspondent
firms who maintain Resource Management Accounts ("RMA accountholders"). The
Plan allows an RMA accountholder to continually invest in one or more of the PW
Funds at regular intervals, with payment for shares purchased automatically
deducted from the client's RMA account. The client may elect to invest at
monthly or quarterly intervals and may elect either to invest a fixed dollar
amount (minimum $100 per period) or to purchase a fixed number of shares. A
client can elect to have Plan purchases executed on the first or fifteenth day
of the month. Settlement occurs three Business Days (defined under "Valuation
of Shares") after the trade date, and the purchase price of the shares is
withdrawn from the investor's RMA account on the settlement date from the
following sources and in the following order: uninvested cash balances,
balances in RMA money market funds, or margin borrowing power, if applicable to
the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to enrolling
in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may take
up to two weeks to become effective.
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<PAGE>
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
Periodic investing in the PW Funds or other mutual funds, whether through the
Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of "dollar cost averaging." By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of low share prices. However, over time, dollar cost averaging
generally results in a lower average original investment cost than if an
investor invested a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.
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 seven RMA money market funds--RMA Money Market Portfolio,
RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA Connecticut Municipal Money Fund, RMA New Jersey Municipal
Money Fund and RMA New York Municipal Money Fund. Each 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;
22
<PAGE>
. 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.
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
shares, Class B shares purchased through the reinvestment of dividends and
other distributions paid in respect of Class B shares will be held in a
separate sub-account. Each time any Class B shares in the shareholder's regular
account (other than those in the sub-account) convert to Class A shares, a pro
rata portion of the Class B shares in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The 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.
23
<PAGE>
VALUATION OF SHARES
The Fund determines its 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. exchanges are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day,
at the last available bid price. In cases where securities are traded on more
than one exchange, the securities are generally valued on the exchange
considered by the Sub-Adviser as the primary market. Securities traded in the
OTC market and listed on the 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.
Where market quotations are readily available, debt securities are valued
based upon those quotations, provided such quotations adequately reflect, in
Mitchell Hutchins' judgment, fair value of the security. Where such market
quotations are not readily available, such securities are valued based upon
appraisals received from a pricing service using a computerized matrix system,
or based upon appraisals derived from information concerning the security or
similar securities received from recognized dealers in those securities. All
other securities or assets will be 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 Trust's board of trustees
determines that this does not represent fair value.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in the Fund's Performance Advertisements are calculated according
to the following formula:
P(1 + T)/n/ = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a
specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is
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<PAGE>
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, for
Class A shares, the maximum 4.5% sales charge is deducted from the initial
$1,000 payment and, for Class B and Class C shares, the applicable contingent
deferred sales charge imposed on a redemption of Class B or Class C shares held
for the period is deducted. All dividends and other distributions are assumed
to have been reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of those charges
would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to
Class A shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B
and Class C shares of the Fund for the period indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
One year ended July 31, 1995
Standardized Return*............................... 10.63% 9.86% 13.60%
Non-Standardized Return............................ 15.80% 14.86% 14.76%
Inception** to July 31, 1995
Standardized Return*............................... 5.82% 5.50% 6.95%
Non-Standardized Return............................ 7.79% 6.96% 6.95%
</TABLE>
- --------
* Standardized Return for Class A shares reflects deduction of the current
maximum sales charge of 4.5%. All Standardized Return figures for Class B and
Class C shares reflect deduction of the applicable contingent deferred sales
charges imposed on a redemption of shares held for the period.
** The inception date for the Fund is February 1, 1993.
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 the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), the Standard & Poor's
Industrials, the Dow Jones Industrial Average, the Nasdaq Composite Index, the
Russell 2000 Index, the Russell 1000 Index, the Wilshire Small Cap Index, PSI
Small Cap Index, the Lehman Bond Index, 30-year and 10-year U.S. Treasury bonds
and changes in the Consumer Price Index as published by the U.S.
25
<PAGE>
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 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.
Over the past sixty-five years, the total return of equity investments, as
measured by the S&P 500 exceeded the inflation rate, as measured by the
Consumer Price Index, as well as the total return on long-term Treasury bonds
and short-term Treasury bills. However, there can be no assurance that these
relationships will continue or that the Fund's performance will be comparable
to any of these indices. Furthermore, year-to-year fluctuations in each of
these indices and instruments have been significant and total return for the
S&P 500 for some periods has been negative.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA. Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquote (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. An
investment in the Fund involves greater risks than an investment in either a
money market fund or a CD.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-
term capital gain) ("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 other income derived with
respect
26
<PAGE>
to its business of investing in securities; (2) the Fund must derive less than
30% of its gross income each taxable year from the sale or other disposition of
securities that were held for less than three months; (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.
A portion of the dividends from the Fund's investment company taxable income
(whether paid in cash or in additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by the Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
The Fund will be subject to a nondeductible 4% 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.
Dividends and other distributions declared by the Fund in October, November
and December of any year and payable to shareholders of record on a date in
that month will be deemed to have been paid by the Fund and received by the
shareholders on December 31 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.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of
the following tests: (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 the 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 would be required to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net capital
27
<PAGE>
gain (the excess of net long-term capital gain over net short-term capital
loss) -- which likely would have to be distributed to satisfy the Distribution
Requirement and avoid imposition of the 4% excise tax-- even if those earnings
and gain were not received by the Fund. 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 such a
PFIC's stock over the adjusted basis in that stock (including mark-to-market
gain for each prior year for which an election was in effect).
OTHER INFORMATION
The Trust, PaineWebber Securities 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 Fund. However, the Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust or the Fund and requires that notice of such disclaimer be given in
each 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.
Prior to November 10, 1995, the Fund's Class C shares were known as "Class D"
shares.
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 C shares. The higher fee is imposed due to
the higher costs incurred by the transfer agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the transfer
agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
28
<PAGE>
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C., 20036-5891, counsel to the Fund, has passed upon the legality
of the shares offered by the Prospectus. Kirkpatrick & Lockhart LLP also acts
as counsel to PaineWebber and Mitchell Hutchins in connection with other
matters.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, N.Y. 10036, serves as independent accountants for the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended July 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 by reference in this
Statement of Additional Information.
29
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; AA. Bonds which are
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities; A. Bonds which are
rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future; BAA. Bonds which are rated
Baa are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; 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.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree; A. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated BBB is
regarded as having adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest
A-1
<PAGE>
and repay principal for debt in this category than for debt in higher rated
categories: BB, B, CCC. Debt rated BB, B and CCC 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 a lower
degree of speculation than B and CCC. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: "NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as matter of policy.
A-2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND THIS
STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE FUND
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAW-
FULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Statement of Additional Information....................................... 1
Investment Policies and Restrictions...................................... 1
Trustees and Officers..................................................... 5
Investment Advisory and Distribution Arrangements......................... 12
Portfolio Transactions.................................................... 17
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 19
Conversion of Class B Shares.............................................. 23
Valuation of Shares....................................................... 24
Performance Information................................................... 24
Taxes..................................................................... 26
Other Information......................................................... 28
Financial Statements...................................................... 29
Appendix.................................................................. A-1
</TABLE>
(C) 1995 PaineWebber Incorporated
[LOGO] Recycled Paper
PAINEWEBBER
SMALL CAP
VALUE FUND
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Statement of Additional Information
November 14, 1995
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PaineWebber
