As filed with the Securities and Exchange Commission on June 28, 1996
1933 Act Registration No. 33-55374
1940 Act Registration No. 811-7374
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
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Pre-Effective Amendment No. [ ]
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Post-Effective Amendment No. 14 [ X ]
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
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Amendment No. 14
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PAINEWEBBER SECURITIES TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
SUSAN M. CASEY, Esq.
BRIAN F. MCNALLY, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
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[ ] On pursuant to Rule 485(b)
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[ X ] 60 days after filing pursuant to Rule 485(a)(i)
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[ ] On pursuant to Rule 485(a)(i)
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[ ] 75 days after filing pursuant to Rule 485(a)(ii)
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[ ] On pursuant to Rule 485(a)(ii)
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If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
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previously filed post-effective amendment
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for the most
recent fiscal year of the series designated as PaineWebber Small Cap Value Fund,
which is the subject of this post-effective amendment, on September 28, 1995.
<PAGE>
PaineWebber Securities Trust
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Class Y shares of:
PaineWebber Small Cap Value Fund
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Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
This filing is made to add a separate prospectus and statement of
additional information for the Class Y shares of PaineWebber Small Cap Value
Fund. No changes are hereby made to the Prospectus or Statement of Additional
Information of for the Class A, B and C Shares of PaineWebber Small Cap Value
Fund or to the Prospectuses or Statements of Additional Information for
PaineWebber Strategic Income Fund, the second series of PaineWebber Securities
Trust.
<PAGE>
PaineWebber Securities Trust:
PaineWebber Small Cap Value Fund
(Class Y Shares)
Form N-1A Cross Reference Sheet
Part A Item No. and Caption Prospectus Caption
--------------------------- ------------------
1. Cover Page . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . Expense Table
3. Condensed Financial
Information . . . . . . . . Performance
4. General Description of
Registrant . . . . . . . . The Funds at a Glance; Investment Objective
& Policies; Investment Philosophy &
Process; The Funds' Investments; General
Information
5. Management of the Fund . . Management; General Information
6. Capital Stock and Other Cover Page; Dividends and Taxes; General
Securities . . . . . . . . Information
7. Purchase of Securities How to Buy Shares; Determining the Shares'
Being Offered . . . . . . . Net Asset Value
8. Redemption of Repurchase . How to Sell Shares; Other Services
9. Pending Legal Proceedings . Not Applicable
Part B Item No. and Caption Statement of Additional Information Caption
--------------------------- -------------------------------------------
10. Cover page . . . . . . . . Cover Page
11. Table of Contents . . . . . Table of Contents
12. General Information and
History . . . . . . . . . . Not Applicable
13. Investment Objective and
Policies . . . . . . . . . Investment Policies and Restrictions;
Hedging Strategies; Portfolio Transactions
14. Management of the Fund . . Trustees and Officers
15. Control Persons and
Principal Holders of
Securities . . . . . . . . Trustees and Officers
16. Investment Advisory and
Other Services . . . . . . Investment Advisory and Distribution
Arrangements; Other Information
17. Brokerage Allocation . . . Portfolio Transactions
18. Capital Stock and Other
Securities . . . . . . . . Other Information
19. Purchase, Redemption and
Pricing of Securities Being
Offered . . . . . . . . . . Valuation of Shares
20. Tax Status . . . . . . . . Taxes
21. Underwriters . . . . . . . Investment Advisory and Distribution
Arrangements
22. Calculation of Performance
Data . . . . . . . . . . . Performance Information
23. Financial Statements . . . Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PAINEWEBBER
GROWTH AND INCOME FUND
GROWTH FUND
PROSPECTUS--MAY 1, 1996
SMALL CAP FUND
PROSPECTUS--JULY , 1996
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS, NEW YORK, NY 10019
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PaineWebber Stock Funds are designed for investors generally seeking capital
appreciation by investing principally in equity securities. PaineWebber Growth
and Income Fund seeks to provide both capital growth and current income by
investing in dividend-paying equity securities believed to have potential for
rapid earnings growth. PaineWebber Growth Fund seeks long-term capital
appreciation by investing in equity securities of companies with substantial
potential for capital growth. PaineWebber Small Cap Fund seeks long-term capital
appreciation by investing primarily in equity securities of small capitalization
companies. Prior to July 1996, Small Cap Fund was known as "Small Cap Value
Fund."
This Prospectus dated May 1, 1996 (with respect to Growth and Income Fund and
Growth Fund), as revised July , 1996, and dated July , 1996 (with respect to
Small Cap Fund) concisely sets forth information that an investor should know
about the Funds before investing.
Please retain a copy of this Prospectus for future reference.
A Statement of Additional Information dated May 1, 1996 (with respect to Growth
and Income Fund and Growth Fund), as revised July , 1996, and dated July ,
1996 (with respect to Small Cap Fund) has been filed with the Securities and
Exchange Commission and is legally part of this Prospectus. The Statement of
Additional Information can be obtained without charge, and further inquiries can
be made, by contacting an individual Fund, your PaineWebber investment
executive, PaineWebber's correspondent firms or by calling toll-free
1-800-647-1568.
The Class Y shares described in this Prospectus are currently offered for sale
primarily to participants in the INSIGHT Investment Advisory Program
("INSIGHT"), when purchased through that program. The Class Y shares of Growth
and Income Fund and Growth Fund are also offered to the trustee of the
PaineWebber Savings Investment Plan ("PW SIP") on behalf of the PW SIP. See "How
to Buy Shares." Participants in the PW SIP may make further inquiries by
contacting the PaineWebber Incorporated Benefits Department, 10th Floor,
1000 Harbor Boulevard, Weehawken, New Jersey 07087 or by calling 1-201-902-4444.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR
THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
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TABLE OF CONTENTS
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PAGE
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The Funds at a Glance.................................................. 3
Expense Table.......................................................... 5
Financial Highlights................................................... 7
Investment Objective and Policies...................................... 8
Investment Philosophy & Process........................................ 8
Performance............................................................ 10
The Funds' Investments................................................. 12
How to Buy Shares...................................................... 14
How to Sell Shares..................................................... 15
Management............................................................. 15
Determining the Shares' Net Asset Value................................ 16
Dividends & Taxes...................................................... 17
General Information.................................................... 18
Prospectus Page 2
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
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THE FUNDS AT A GLANCE
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GROWTH AND INCOME FUND
GOAL: To increase the value of your investment by investing primarily in
dividend-paying equity securities with the potential for rapid earnings growth.
INVESTMENT OBJECTIVE: Current income and capital growth.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its price will rise and fall.
The Fund may invest in U.S. dollar-denominated securities of foreign companies,
which involves more risk than investing in the securities of U.S. companies. The
Fund may also invest up to 10% of its assets in high yield, high risk
convertible bonds, which are considered predominantly speculative and may
involve major risk exposure to adverse conditions. The Fund may use derivatives,
such as options and futures, in its hedging activities, which may involve
special risks. Investors may lose money by investing in the Fund; your
investment is not guaranteed.
SIZE: On February 29, 1996, the Fund had over $599 million in assets.
GROWTH FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of companies with substantial potential for capital growth.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its price will rise and fall.
The Fund may invest in U.S. dollar-denominated securities of foreign companies,
which involves more risk than investing in the securities of U.S. companies. The
Fund may also invest up to 35% of its net assets in high yield, high risk bonds
and convertible securities, which are considered predominantly speculative and
involve major risk exposure to adverse conditions. The Fund may use derivatives,
such as options and futures, in its hedging activities, which may involve
special risks. Investors may lose money by investing in the Fund; your
investment is not guaranteed.
SIZE: On February 29, 1996, the Fund had over $403 million in assets.
MANAGEMENT: Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of Growth and Income Fund and Growth Fund
(each a "Fund" and, collectively, the "Funds").
SMALL CAP FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of small capitalization ("small cap") companies.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its price will rise and fall.
The Fund may invest in U.S. dollar-
denominated securities of foreign companies, which involves more risk than
investing in the securities of U.S. companies. Small cap companies typically are
subject to a greater degree of change in earnings and business prospects than
are larger, more established companies. In addition, equity securities of small
cap companies may be less liquid and more volatile than those of larger
companies. The Fund may also invest up to 10% of its total assets in high yield,
high risk convertible bonds, which are predominantly speculative and may involve
major risk exposure to adverse conditions. The Fund may use derivatives, such as
options and future, in its hedging activities, which may involve special risks.
Investors may lose money by investing in the Fund; the investment is not
guaranteed.
SIZE: On February 29, 1996, the Fund had over $71 million in assets.
WHO SHOULD INVEST
GROWTH AND INCOME FUND is designed for investors seeking capital growth and
current income through investment in growth-oriented, dividend-paying equity
Prospectus Page 3
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
securities of U.S. companies and foreign companies that are traded in the United
States. Growth and Income Fund invests primarily in equity securities of larger
growth companies and smaller issuers with the potential for rapid earnings
growth that pay dividends. In addition, Growth and Income Fund can invest in
high yield, high risk convertible bonds. These investments offer the potential
for greater returns but also entail a substantial degree of volatility and risk.
Accordingly, Growth and Income Fund is designed for investors who are able to
bear the risks that come with investments in the stocks and bonds of such
companies.
GROWTH FUND is for investors who want long-term capital appreciation through
investment primarily in growth-oriented equity securities of U.S. companies and
foreign companies that are traded in the United States. Growth Fund invests in
equity securities of both larger growth companies and smaller issuers with
greater appreciation potential. In addition, Growth Fund can invest in high
yield, high risk bonds. These investments offer the potential for greater
returns but also entail a substantial degree of volatility and risk.
Accordingly, Growth Fund is designed for investors who are able to bear the
risks that come with investments in the stocks and bonds of such companies.
SMALL CAP FUND invests primarily in equity securities of small cap U.S.
companies and foreign companies that are traded in the U.S., and is designed for
investors who are seeking long-term capital appreciation. Several statistical
studies have been published indicating that the historical long-term returns of
small cap equity securities have been higher than those of large cap equity
securities. Equity securities of small cap companies generally exhibit greater
market volatility than is the case with equity securities of larger companies,
or equity securities in general. In addition, Small Cap Fund can invest in high
yield, high risk convertible bonds. These investments offer the potential for
greater returns, but also entail a substantial degree of volatility and risk.
Accordingly, Small Cap Fund is designed for investors who are able to bear the
risks and fluctuations associated with investment in smaller companies.
* * * *
The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or diversify
a portfolio. When selling shares, investors should be aware that they may get
more or less for their shares than they originally paid for them. As with any
mutual fund there is no assurance that the Funds will achieve their goals.
HOW TO PURCHASE CLASS Y SHARES
Eligible investors may purchase Class Y shares of the Funds as follows:
The price is the net asset value next calculated after PaineWebber's New York
City headquarters or the Fund's Transfer Agent ("Transfer Agent") receives the
purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares. 100%
of their purchase is immediately invested. Investors also do not pay a
redemption fee or contingent deferred sales charge when they sell Class Y
shares.
Prospectus Page 4
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
EXPENSE TABLE
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The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Funds. Expenses
shown below represent those incurred for the most recent fiscal year, except
that "Other Expenses" for Small Cap Fund are estimated based upon the expenses
incurred by that Fund's Class A shares for the twelve months ended January 31,
1996 (unaudited). The INSIGHT fee is not included.
SHAREHOLDER TRANSACTION EXPENSES CLASS Y
- --------------------------------------------------------------------- -------
Maximum Sales Charge on Purchases of Shares (as a % of offering
price)............................................................... None
Maximum annual investment advisory fee payable by shareholders
through INSIGHT (as a percentage of average daily net asset value of
shares held)......................................................... 1.50%
Sales Charge on Reinvested Dividends (as a % of offering price)...... None
Maximum Contingent Deferred Sales Charge (as a % of net asset value
at the time of purchase or sale, whichever is less)................. None
ANNUAL FUND OPERATING EXPENSES* (as a % of average net assets)
GROWTH AND INCOME FUND
Management Fees...................................................... 0.70%
12b-1 Fees........................................................... 0.00
Other Expenses....................................................... 0.19
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Total Operating Expenses............................................. 0.89%
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GROWTH FUND(A)
Management Fees...................................................... 0.75%
12b-1 Fees........................................................... 0.00
Other Expenses....................................................... 0.17
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Total Operating Expenses............................................. 0.92%
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SMALL CAP FUND
Management Fees...................................................... 1.00%
12b-1 Fees........................................................... 0.00
Other Expenses....................................................... 0.53
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Total Operating Expenses............................................. 1.53%
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-------
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<TABLE>
<C> <S>
* Participation in INSIGHT is subject to payment of an advisory fee at the maximum annual
rate of 1.50% of assets held through INSIGHT (generally charged quarterly in advance),
which may be charged to the INSIGHT participant's PaineWebber account.
(a) Does not include 0.05% in non-recurring reorganization expenses which were incurred
during the fiscal year ended August 31, 1995. If those expenses were included, "Other
expenses" for Class Y shares would be 0.22% and "Total operating expenses" would be
0.97%.
</TABLE>
EXAMPLE OF EFFECT OF FUND EXPENSES
The following example should assist investors in understanding various costs and
expenses incurred as shareholders of a Fund. The assumed 5% annual return shown
in the example is required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all mutual funds. THE EXAMPLE SHOULD NOT BE
CONSIDERED TO BE A
Prospectus Page 5
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES OF A FUND MAY BE MORE
OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in the Fund, assuming a 5% annual return.
GROWTH AND INCOME FUND
<TABLE><CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class Y..................................................... $ 9 $28 $49 $110
GROWTH FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------ ------- ------- --------
Class Y..................................................... $ 9 $29 $51 $113
SMALL CAP FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------ ------- ------- --------
Class Y..................................................... $ 16 $48 $83 $182
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
Reinvestment of all dividends and distributions; percentage amounts listed
under "Annual Fund Operating Expenses" remain the same for years shown.
Prospectus Page 6
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
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FINANCIAL HIGHLIGHTS
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The following table provides investors with data and ratios for one Class Y
share of Growth and Income Fund and Growth Fund for each of the periods shown.
This information is supplemented by the financial statements and accompanying
notes appearing in each Fund's Annual Report to Shareholders for the fiscal year
ended August 31, 1995 and the report of Ernst & Young LLP, independent auditors,
appearing in each Fund's Annual Report to Shareholders. Both are incorporated by
reference into the Statement of Additional Information. The financial statements
and notes, as well as the information in the table appearing below, have been
audited by Ernst & Young LLP. Further information about each Fund's performance
is also included in the Annual Report to Shareholders, which may be obtained
without charge. No information is presented for Class Y shares of Small Cap Fund
because no such shares were outstanding prior to July 1996.
<TABLE><CAPTION>
CLASS Y(2)
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GROWTH AND INCOME FUND GROWTH FUND
-------------------------------------------- ----------------------------------------
FOR THE
FOR THE PERIOD
YEARS ENDED FEBRUARY 12, FOR THE YEARS ENDED
AUGUST 31, 1992 TO AUGUST 31,
----------------------------- AUGUST 31, ----------------------------------------
1995 1994 1993 1992 1995 1994 1993 1992
-------- ------- ------- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 20.42 $ 20.86 $ 20.48 $ 20.95 $ 20.22 $ 20.71 $ 16.83 $ 17.50
-------- ------- ------- ------------ ------- ------- ------- -------
Net investment income.... 0.30 0.33 0.33 0.16 0.24 0.03 0.08 0.05
Net realized and
unrealized gains
(losses) from investment
transactions............. 3.18 (0.40) 0.37 (0.49) 2.10 0.55 4.42 (0.11)
-------- ------- ------- ------------ ------- ------- ------- -------
Total increase/decrease
from investment
operations............... 3.48 (0.07) 0.70 (0.33) 2.34 0.58 4.50 (0.06)
-------- ------- ------- ------------ ------- ------- ------- -------
Dividends from net
investment income....... (0.15) (0.34) (0.32) (0.14) -- -- -- (0.01)
Distributions from net
realized gains on
investment
transactions............. (1.21) (0.03) -- -- (0.03) (1.07) (0.62) (0.60)
-------- ------- ------- ------------ ------- ------- ------- -------
Total dividends and
distributions............ (1.36) (0.37) (0.32) (0.14) (0.03) (1.07) (0.62) (0.61)
-------- ------- ------- ------------ ------- ------- ------- -------
Net asset value, end of
period................... $ 22.54 $ 20.42 $ 20.86 $ 20.48 $ 22.53 $ 20.22 $ 20.71 $ 16.83
-------- ------- ------- ------------ ------- ------- ------- -------
-------- ------- ------- ------------ ------- ------- ------- -------
Total investment
return(1)................ 18.66% (0.31)% 3.44% (1.15)% 11.58% 2.67% 27.26% (0.52)%
-------- ------- ------- ------------ ------- ------- ------- -------
-------- ------- ------- ------------ ------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of period
(000's).................. $ 14,680 $14,690 $17,005 $ 10,560 $20,948 $30,521 $20,706 $11,581
Expenses to average net
assets................... 0.89% 0.90% 0.86% 0.93%* 0.97%(3) 0.94% 0.95% 1.12%
Net investment income to
average net assets....... 1.39% 1.60% 1.62% 1.56%* 0.53%(3) 0.40% 0.60% 0.38%
Portfolio turnover....... 111.27% 94.32% 36.52% 15.57% 36.10% 24.41% 35.81% 32.49%
</TABLE>
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<TABLE>
<C> <S>
* Annualized.
+ Commencement of offering of shares.
++ A per share breakdown for Class Y shares has been omitted for the period August 25, 1991
(commencement of offering of shares) to August 31, 1991 due to immaterial amounts.
(1) Total investment return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and capital gain distributions at
net asset value on the payable date, and a sale at net asset value on the last day of
each period reported. Total return information for periods less than one year are not
annualized.
(2) Formerly Class C shares.
(3) These ratios include non-recurring reorganization expenses of 0.05%.
</TABLE>
Prospectus Page 7
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE & POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards of trustees.
GROWTH AND INCOME FUND
The investment objective of Growth and Income Fund is current income and capital
growth. The Fund seeks to achieve this objective by investing primarily in
dividend-paying equity securities believed by Mitchell Hutchins to have the
potential for rapid earnings growth. Normally, Growth and Income Fund invests at
least 65% of its total assets in such equity securities. The Fund may invest up
to 35% of its total assets in equity securities not meeting these selection
criteria, as well as in U.S. government bonds, corporate bonds and money market
instruments, including up to 10% in convertible bonds rated below investment
grade. Up to 25% of the Fund's total assets may be invested in U.S.
dollar-denominated equity securities and bonds of foreign issuers that are
traded on recognized U.S. exchanges or in the U.S. over-the-counter ("OTC")
market.
GROWTH FUND
The investment objective of Growth Fund is long-term capital appreciation.
Growth Fund seeks to achieve this objective by investing primarily in equity
securities issued by companies that, in the judgment of Mitchell Hutchins, have
substantial potential for capital growth. Under normal circumstances, at least
65% of the Fund's total assets are invested in equity securities. The Fund may
invest up to 35% of its total assets in U.S. government bonds and in corporate
bonds (including up to 10% in corporate bonds rated below investment grade). Up
to 25% of the Fund's total assets may be invested in U.S. dollar-denominated
equity securities and bonds of foreign issuers that are traded on recognized
U.S. exchanges or in the U.S. OTC market.
SMALL CAP FUND
The investment objective of Small Cap Fund is long-term capital appreciation.
Under normal circumstances, at least 65% of the Fund's total assets are invested
in equity securities of small cap companies, which are defined as companies
having market capitalizations of up to $1 billion. Small Cap Fund may invest up
to 35% of its total assets in equity securities of companies that are larger
than small cap companies, as well as in U.S. government bonds, corporate bonds
and money market instruments, including up to 10% of total assets in convertible
bonds rated below investment grade. Up to 25% of the Fund's total assets may be
invested in U.S. dollar-denominated equity securities of foreign issuers traded
on recognized U.S. exchanges or in the U.S. OTC market.
As with any mutual fund, there can be no assurance that any of these Funds will
achieve its investment objective. Each Fund's net asset value fluctuates based
upon changes in the value of its portfolio securities.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
In seeking to balance capital growth with current income, Mitchell Hutchins
follows a disciplined investment process that relies on the Mitchell Hutchins
Equity Research Team and the Mitchell Hutchins Factor Valuation Model. In order
to fulfill the income component, the Fund invests at least 65% of its assets in
dividend-paying stocks.
The Model screens a universe of small-to large-capitalization companies from ten
different business sectors to identify undervalued companies with strong
earnings momentum, that rank well in three measures:
. VALUE: projected dividends, cash flow, earnings and book value;
. MOMENTUM: earnings and price to identify companies that could surprise on the
upside; and
. ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.
Prospectus Page 8
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
The equity securities ranking in the top 20% of the Model's universe are
screened twice a month. Then the Team takes a closer look at those equity
securities that rank higher based on value and momentum. The Equity Research
Team applies traditional analysis and speaks to the management of these
companies, as well as those of their competitors. Based on the Team's findings
in the context of Mitchell Hutchins' economic forecast, the Fund decides whether
to purchase or sell equity securities. In seeking capital appreciation, the Fund
would also invest in bonds when, for instance, Mitchell Hutchins anticipates
that market interest rates may decline or credit factors or ratings affecting
particular issuers may improve.
GROWTH FUND
In selecting equity securities with the potential for above-average growth in
earnings, cash flow and/or book value that are selling at a reasonable value
relative to that growth, Mitchell Hutchins follows a disciplined investment
process that relies on the Mitchell Hutchins Equity Research Team and combines a
"bottom-up," stock-by-stock approach with the Mitchell Hutchins Factor Valuation
Model. The Fund can invest in companies of large market capitalizations,
medium-sized companies and smaller companies that are aggressively expanding
their businesses. This flexibility allows the Fund to invest more of its assets
in companies that have greater earnings growth potential regardless of their
market capitalizations. When investing in small-cap companies the Team places
more emphasis on the trading volume of the company's stock.
The Model screens a universe of small to large capitalization companies from ten
different business sectors to identify undervalued companies with strong
earnings momentum, that rank well in three measures.
. VALUE: projected dividends, cash flow, earnings and book value;
. MOMENTUM: earnings and price to identify companies that could surprise on the
upside; and
. ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.
The equity securities ranking in the top 20% of the Model's universe are
screened on a monthly basis. Then the Team takes a closer look at those equity
securities that rank higher based on earnings growth and applies traditional
analysis. The Team may speak to the management of these companies, as well as
those of their competitors. Based on the Team's findings in the context of
Mitchell Hutchins' economic forecast, the Fund decides whether to purchase or
sell equity securities. In seeking capital appreciation, the Fund would also
invest in bonds when, for instance, Mitchell Hutchins anticipates that market
interest rates may decline or credit factors or ratings affecting particular
issuers may improve.
SMALL CAP FUND
In selecting small cap equity securities with the potential for capital
appreiciation, Mitchell Hutchins follows a disciplined investment process that
relies on the Mitchell Hutchins Factor Valuation Model and the Mitchell Hutchins
Equity Research Team. The Model screens a universe of companies from ten
different business sectors to identify undervalued companies with strong
earnings momentum, that ranked well in three measures:
. VALUE: projected dividends, cash flow, earnings and book value;
. MOMENTUM: earnings and price to identify companies that could surprise on the
upside; and
. ECONOMIC SENSITIVITY: to forecast how different equity securities and
industries may perform under various economic scenarios.
Through this screening process, the Model identifies the equity securities of
small cap companies ranking in the top 20% of the universe. Then the Mitchell
Hutchins Equity Research Team applies traditional analysis to the equity
securities of these small cap companies. The Team may speak to the management of
these companies, as well as to those of their competitors. Based on the Team's
findings in the context of Mitchell Hutchins' economic forecast, the Fund
decides whether to purchase or sell equity securities. In seeking capital
appreciation, the Fund would also invest in bonds when, for instance, Mitchell
Hutchins anticipates that market interest rates may decline or credit factors or
ratings affecting particular issuers may improve.
Prospectus Page 9
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------
Here are the total returns for Growth and Income Fund and Growth Fund. No
information is presented for Class Y shares of Small Cap Fund because no such
shares were outstanding during the periods shown. Past results are not a
guarantee of future results.
GROWTH AND INCOME FUND
45%
35%
33.63%
25%
15%
5% 5.17%
-2.31%
-5%
-5.57%
-15%
2/12/92-12/31/92 1993 1994 1995
As Class Y shares commenced operations on February 12, 1992, the 1992 return
represents the period from February 12, 1992 through December 31, 1992.
GROWTH FUND
45%
35%
33.40%
25%
19.47%
15%
12.21%
5%
4.42%
-5%
-10.64%
-15%
-25%
8/25/91-12/31/91 1992 1993 1994 1995
As Class Y shares commenced operations on August 25, 1991, the 1991 return
represents the period from August 25, 1991 through December 31, 1991.
Prospectus Page 10
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
GROWTH AND INCOME FUND
AVERAGE ANNUAL RETURNS
AS OF AUGUST 31, 1995
CLASS Y SHARES
--------------
Inception Date............................................. 2/12/92
One Year................................................... 18.66%
Life....................................................... 5.37%
GROWTH FUND
AVERAGE ANNUAL RETURNS
AS OF AUGUST 31, 1995
CLASS Y SHARES
--------------
Inception Date............................................. 8/26/91
One Year................................................... 11.58%
Life....................................................... 10.33%
PERFORMANCE INFORMATION
The Funds perform 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 Funds as a steady compound
annual rate of return. Actual year-by-year returns fluctuate and may be higher
or lower than standardized return. One-, five- and ten-year periods will be
shown, unless the Fund or Class has been in existence for a shorter period.
Total return calculations assume reinvestment of dividends and other
distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.
Total return information reflects past performance and does not necessarily
indicate future results. The investment return and principal value of shares of
the Funds will fluctuate. The amount investors receive when selling shares may
be more or less than what they paid. Further information about the Funds'
performance is contained in the Funds' Annual Reports, which may be obtained
without charge by contacting each Fund, your PaineWebber investment executive or
PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568.
Prospectus Page 11
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and common
stock purchase warrants and rights. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. While past
performance does not guarantee future results, common stocks historically have
provided the greatest long-term growth potential in a company. However, their
prices generally fluctuate more than other securities, and reflect changes in a
company's financial condition and in overall market and economic conditions.
Preferred stock has certain fixed-income features, like a bond, but is actually
equity in a company, like common stock. Convertible securities may include
debentures, notes and preferred equity securities, which are convertible into
common stock.
BONDS (including notes and debentures) are used by corporations and governments
to borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Bonds have
varying degrees of investment risk and varying levels of sensitivity to changes
in interest rates.
RISKS
Each Fund predominantly invests its assets in equity securities. Following is a
discussion of these risks and other risks that are common to each Fund:
EQUITY SECURITIES. Equity securities historically have shown greater growth
potential than other types of securities. Common stocks generally represent the
riskiest investment in a company. It is possible that investors may lose their
entire investment.
FOREIGN SECURITIES. Each Fund may invest a portion of its assets in U.S.
dollar-denominated securities of foreign companies that are traded on recognized
U.S. exchanges or in the U.S. OTC market. Investing in the securities of foreign
companies involves more risks than investing in securities of U.S. companies.
Their value is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values. Values
may also be affected by foreign tax laws, changes in foreign economic or
monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
BOND RATINGS. Investment grade bonds are those rated within the four highest
categories by Standard & Poor's, a division of The McGraw Hill Companies
("S&P"), or Moody's Investors Service, Inc. ("Moody's"). Moody's fourth highest
category (Baa) includes securities which, in its opinion, have speculative
features. For example, changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher-rated debt instruments. The Funds may also
invest in securities that are comparably rated by another ratings agency and in
unrated securities if they are deemed to be of comparable quality. Credit
ratings attempt to evaluate the safety of principal and interest payments and do
not evaluate the volatility of the bond's value or its liquidity. There is a
risk that bonds will be downgraded by rating agencies. The rating agencies may
fail to make timely changes in credit ratings in response to subsequent events,
so that an issuer's current financial condition may be better or worse than the
rating indicates.
INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and bond prices will fall, lowering the value of a Fund's bond
investments. Long-term bonds are generally more sensitive to interest rate
changes than short-term bonds. Adverse changes in economic conditions can affect
an issuer's ability to pay principal and interest.
NON-INVESTMENT GRADE (LOWER-RATED) BOND RATINGS. Lower-rated bonds are deemed by
the ratings agencies to be predominantly speculative regarding the issuer's
ability to pay principal and interest and may involve major risk exposure during
adverse economic conditions. They are also known as "junk bonds." During an
economic downturn or period of rising interest rates, issuers of those
securities may experience financial stress that adversely affects their ability
to pay interest and principal and may increase the possibility of default.
Lower-rated bonds are frequently unsecured by collateral and will not receive
payment until more senior claims are paid in full. The market for lower-rated
bonds is thinner and less active, which may limit the Funds' ability to
Prospectus Page 12
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
sell such bonds at a fair value in response to changes in the economy or
financial markets.
Growth and Income Fund can invest up to 10% of total assets in convertible
securities rated as low as B by S&P or Moody's or comparably rated by another
ratings agency.
Growth Fund can invest up to 10% of total assets in bonds and convertible
securities rated as low as B+ by S&P, B1 by Moody's or comparably rated by
another ratings agency.
Small Cap Fund can invest up to 10% of total assets in convertible securities
rated as low as B by S&P or Moody's or comparably rated by another ratings
agency.
In addition to these general risks, Small Cap Fund is also subject to the
following risk consideration:
SMALL CAP COMPANIES. 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, markets or financial resources, and may be
dependent on a relatively small management 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 addition, 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.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING STRATEGIES. Each Fund may use certain strategies designed to adjust the
overall risk of its portfolio of investments. These "hedging" strategies involve
derivative contracts, including options (on securities, futures and stock
indexes) and futures contracts (on stock indexes and interest rates). In
addition, new financial products and risk management techniques continue to be
developed and may be used if consistent with the Funds' investment objectives
and policies. The Statement of Additional Information for the Funds contains
further information on these strategies.
The Funds might not use any hedging strategies, and there can be no assurance
that any strategy used will succeed. If Mitchell Hutchins is incorrect in its
judgment on market values, interest rates or other economic factors in using a
hedging strategy, the Fund may have lower net income and a net loss on the
investment. Each of these strategies involves certain risks, which include:
. the fact that the skills needed to use hedging instruments are different from
those needed to select securities for the Funds,
. the possibility of imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the securities
being hedged,
. possible constraints placed on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
"cover" or to segregate securities, and
. the possibility that the Fund is unable to close out or liquidate its hedged
position.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of that
Fund's total assets. Lending securities enables a Fund to earn additional
income, but could result in a loss or delay in recovering these securities.
DEFENSIVE POSITIONS. When Mitchell Hutchins believes that unusual circumstances
warrant a defensive posture, each Fund may temporarily commit all or any portion
of its assets to cash or money market instruments, including repurchase
agreements. In a typical repurchase agreement, the Fund buys a security and
simultaneously agrees to sell it back at an agreed-upon price and time, usually
no more than seven days after purchase.
OTHER INFORMATION. Growth and Income Fund and Growth Fund each may invest up to
10% of its net assets, and Small Cap Fund up to 15% of its net assets, in
illiquid securities. These include certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws. The Funds do
not consider securities that are eligible for resale pursuant to SEC Rule 144A
to be illiquid securities if Mitchell Hutchins has determined such securities to
be liquid, based upon the trading markets for the securities under procedures
approved by the board of trustees.
Each Fund may also purchase bonds on a when-issued basis or may purchase or sell
securities for delayed delivery. A Fund generally would not pay for such
securities or start earning interest on them until they are delivered, but it
would immediately assume the risks of ownership, including the risk of price
fluctuation. Each Fund may invest up to 35% of its total assets in money market
instruments and/or cash for liquidity purposes or pending investment in other
securities.
Each Fund may borrow up to 10% of its total assets for temporary or emergency
purposes. Each Fund may sell securities short "against the box" to defer
realization of gains or losses for tax or other purposes. When a security is
sold against the box, the seller owns the security. Each Fund may enter into
reverse repurchase agreements up to an aggregate value of 5% (10% for Small Cap
Fund) of its total assets.
Prospectus Page 13
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Class Y shares are sold to eligible investors at the net asset value next
determined after the purchase order is received at PaineWebber's New York City
headquarters or, with respect to Growth and Income Fund and Growth Fund, for
purchases by the trustee of the PW SIP, by the Transfer Agent. No initial or
contingent deferred sales charge is imposed, nor are Class Y shares subject to
rule 12b-1 distribution or service fees. The Funds and Mitchell Hutchins reserve
the right to reject any purchase order and to suspend the offering of the Class
Y shares for a period of time. Mitchell Hutchins, the distributor for each
Fund's Class Y shares, has appointed PaineWebber to serve as the exclusive
dealer for each Fund's Class Y shares.
PURCHASES BY INSIGHT PARTICIPANTS
An investor who purchases $50,000 or more of shares of the mutual funds that are
available to INSIGHT participants (which include the PaineWebber mutual funds in
the Flexible Pricing SystemSM and certain other specified mutual funds) may take
part in INSIGHT, a total portfolio asset allocation program sponsored by
PaineWebber, and thus become eligible to purchase Class Y shares. INSIGHT offers
comprehensive investment services, including a personalized asset allocation
investment strategy using an appropriate combination of funds, monitoring of
investment performance and comprehensive quarterly reports that cover market
trends, portfolio summaries and personalized account information.
Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.50% of assets held through the program
(generally charged quarterly in advance), which covers all INSIGHT investment
advisory services and program administration fees. Employees of PaineWebber and
its affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.
Please contact your PaineWebber investment executive or PaineWebber
correspondent firm or call 1-800-697-1568 for more information concerning mutual
funds that are available to INSIGHT participants or for other INSIGHT program
information.
PURCHASES BY THE TRUSTEE OF THE PW SIP
The Class Y shares of Growth and Income Fund and Growth Fund also are offered
for sale to the trustee of the PW SIP, a defined contribution plan sponsored by
Paine Webber Group Inc. ("PW Group"). The trustee of the PW SIP purchases and
redeems these Class Y shares to implement the investment choices of individual
plan participants with respect to their PW SIP contributions. Individual plan
participants should consult the Plan Information Statement and Summary Plan
Description of the PW SIP (collectively the "Plan Documents") for a description
of the procedures and limitations applicable to making and changing investment
choices.
Copies of the Plan Documents are available from the PaineWebber Incorporated
Benefits Department, 1000 Harbor Boulevard, 10th Floor, Weehawken, NJ 07087
(telephone 1-201-902-4444).
As described in the Plan Documents, the average net asset value per share at
which Class Y shares of Growth and Income Fund and Growth Fund are purchased or
redeemed by the trustee of the PW SIP for the accounts of individual
participants might be more or less than the net asset value per share prevailing
at the time that such participants made their investment choices or made their
contributions to the PW SIP.
ACQUISITION OF CLASS Y SHARES BY
OTHERS
Present holders of Class Y shares of a former Mitchell Hutchins/Kidder, Peabody
("MH/KP") mutual fund who are not current INSIGHT participants may acquire Class
Y shares of a Fund only when those shares are issued in connection with the
reorganization of the MH/KP mutual fund into that Fund. This category includes
former employees of Kidder, Peabody & Co., Incorporated ("Kidder, Peabody"),
their associated accounts, and present and former directors and trustees of the
MH/KP mutual funds.
Dividends and other distributions on Class Y shares of a Fund issued in
connection with a reorganization will be paid in additional Class Y shares at
net asset value, unless the shareholder has requested cash payments. These
holders may not otherwise purchase additional Class Y shares.
Prospectus Page 14
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
Each Fund is authorized to offer Class Y shares to other employee benefit and
retirement plans of PW Group and its affiliates and certain other investment
programs that are sponsored by PaineWebber and that may invest in PaineWebber
mutual funds. At present, however, INSIGHT participants and the PW SIP are the
only purchasers in these two categories.
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price as next calculated after the order is received and accepted. Share prices
are normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).
Because the Funds incur fixed costs in maintaining shareholder accounts, each
Fund reserves the right to purchase back all Fund shares in any shareholder
account having a net asset value of less than $500. If the Fund elects to do so,
it will notify the shareholder of the opportunity to increase the amount
invested to $500 or more within 60 days of the notice. The Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.
SALES BY PARTICIPANTS IN PW SIP
The trustee of the PW SIP sells Class Y shares of Growth and Income Fund and
Growth Fund to implement the investment choices of individual plan participants
with respect to their PW SIP contributions, as described in the Plan Documents
referenced under "How to Buy Shares" above. The price at which Class Y shares
are sold by the trustee of the PW SIP might be more or less than the price per
share at the time the participants made their investment choices.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
Each Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board of trustees).
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber, which is wholly owned
by Paine Webber Group Inc., a publicly owned financial services holding company.
At , 1996, Mitchell Hutchins was adviser or sub-adviser of investment
companies with separate portfolios and aggregate assets of approximately $
billion.
The boards of trustees have determined that brokerage transactions for the Funds
may be conducted through PaineWebber or its affiliates in accordance with
procedures adopted by each Fund's board of trustees.
ABOUT THE INVESTMENT ADVISER
As investment adviser for Growth and Income Fund, Growth Fund and Small Cap
Fund, Mitchell Hutchins makes and implements all investment decisions and
supervises all aspects of each Fund's operations.
Mark A. Tincher has been responsible for the day-to-day management of Growth and
Income Fund since April 1995. Mr. Tincher, a vice president of the Fund, is a
managing director and chief investment officer of equities of Mitchell Hutchins,
responsible for overseeing the management of equity investments. Upon his
arrival at Mitchell Hutchins, Mr. Tincher formed the Mitchell Hutchins Equity
Research Team. Each analyst specializes in different industries, providing
PaineWebber Stock Funds with more leverage. The Equity Research Team is also
assisted by members of Mitchell Hutchins' fixed income groups, which provide
input on market outlook, interest rate forecasts and other considerations
pertaining to domestic equity and fixed income investments.
From March 1988 to March 1995, Mr. Tincher worked for Chase Manhattan Private
Bank where he was vice president. Before joining Mitchell Hutchins, Mr. Tincher
directed the U.S. funds management and equity research area at Chase and oversaw
the management of all Chase U.S. equity funds (the Vista Funds and Trust
Investment Funds).
Ellen R. Harris has been primarily responsible for the day-to-day portfolio
management of Growth Fund since its inception. Ms. Harris, a vice president of
the Fund, is
Prospectus Page 15
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
a managing director of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
1983 as a portfolio manager, Ms. Harris served as a vice president and portfolio
manager at American General Capital Management (now American Capital
Management).
Donald R. Jones has been primarily responsible for
day-to-day portfolio management of Small Cap Fund
since April 1996. Mr. Jones has been a first vice president of Mitchell Hutchins
since February 1996. Prior to joining Mitchell Hutchins, Mr. Jones was a vice
president in the Asset Management Group of First Fidelity Bancorporation, which
he joined in 1983.
Mitchell Hutchins personnel may engage in securities transactions for their own
accounts pursuant to a code of ethics that establishes procedures for persons
investing and restricts certain transactions.
MANAGEMENT FEES & OTHER EXPENSES
The Funds pay Mitchell Hutchins a monthly fee for its services. For the most
recently ended fiscal year, the Funds paid advisory fees at the annual rate (as
a percentage of average daily net assets) of 0.70% for Growth and Income Fund,
0.75% for Growth Fund and 1.00% for Small Cap Fund. The management fees paid by
Growth Fund and Small Cap Fund are higher than those paid by most other mutual
funds. However, Mitchell Hutchins believes that these fees are comparable to the
management fees paid by other funds with similar investment objectives and
policies.
Each 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.
- --------------------------------------------------------------------------------
DETERMINING THE SHARES' NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. A
"Business Day" is any day, Monday through Friday, on which the New York Stock
Exchange is open for business. Each Fund's net asset value per share is
determined by dividing the value of the securities held by the Fund, plus any
cash or other assets, minus all liabilities, by the total number of Fund shares
outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available, assets
are valued at fair value as determined in good faith by or under the direction
of its 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 a Fund's board of trustees determines that this does not represent fair
value. It should be recognized that judgment plays a greater role in valuing
lower rated corporate bonds because there is less reliable, objective data
available.
Prospectus Page 16
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
DIVIDENDS & TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Growth Fund and Small Cap Fund each pay an annual dividend and Growth and Income
Fund pays a semi-annual dividend from net investment income and net short-term
capital gain, if any. Each Fund also distributes annually substantially all of
its net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any. Each Fund may make additional distributions,
if necessary, to avoid a 4% excise tax on certain undistributed income and
capital gain.
Dividends and other distributions paid on Class Y shares of the Funds are
calculated at the same time and in the same manner as dividends and
distributions of other classes of shares.
Each Fund's dividends and capital gain distributions are paid in additional Fund
shares of the same class at net asset value, unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and other
distributions in cash, either mailed to the shareholder by check or credited to
the shareholder's PaineWebber account, should contact their investment
executives at PaineWebber or one of its correspondent firms. For PW SIP
participants, Growth and Income
Fund and Growth Fund's Class Y dividends and distributions are paid in
additional Class Y shares at net asset value unless the transfer agent is
instructed otherwise.
TAXES
Each of the Funds intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will not have to
pay Federal income tax on that part of its investment company taxable income
(generally consisting of net investment income and net short-term capital gain)
and net capital gain that it distributes to its shareholders.
Dividends from each Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to shareholders as ordinary
income. Distributions of each Fund's net capital gain (whether paid in cash or
additional shares) are taxable to shareholders as a long-term capital gain,
regardless of how long they have held their Fund shares. Shareholders who are
not subject to tax on their income generally will not be required to pay tax on
distributions.
Qualified profit-sharing plans such as the PW SIP generally pay no Federal
income tax. Individual participants in the PW SIP should consult the plan
documents and their own tax advisers for information on the tax consequences of
participating in the PW SIP.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the dividends and capital gain distributions paid (or deemed paid) by the Fund
that year and any portion of those dividends that qualify for special tax
treatment.
WITHHOLDING REQUIREMENTS
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Funds with a correct taxpayer
identification number. Withholding from dividends and capital gain distributions
at that rate is also required for shareholders who otherwise are subject to
backup withholding.
TAXES ON THE SALE OF FUND SHARES
When shareholders sell (redeem) shares, it may result in a taxable gain or loss.
This depends upon whether the shareholders receive more or less than their
adjusted basis for the shares. In addition, if a Fund's shares are bought within
30 days before or after selling other shares of the Fund (regardless of class)
at a loss, all or a portion of that loss will not be deductible and will
increase the basis of the newly purchased shares.
* * * *
Because the foregoing only summarizes some of the important tax considerations
affecting the Funds and their shareholders, a further discussion is contained in
the Statement of Additional Information. Prospective shareholders are urged to
consult their tax advisers.
Prospectus Page 17
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND GROWTH FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION
GROWTH AND INCOME FUND
Growth and Income Fund is a diversified series of PaineWebber America Fund, an
open-end management investment company which was formed on October 31, 1986 as a
business trust under the laws of the Commonwealth of Massachusetts. The trustees
have authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share.
GROWTH FUND
Growth Fund is a diversified series of PaineWebber Olympus Fund, an open-end
management investment company which was formed on October 31, 1986 as a business
trust under the laws of the Commonwealth of Massachusetts. The trustees have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share.
SMALL CAP FUND
Small Cap Fund is a diversified series of PaineWebber
Securities Trust, an open-end management investment
company which was formed on December 3, 1992 as a
business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an
unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. In addition
to Small Cap Fund, shares of one other series have
been authorized.
SHARES
The shares of each Fund are divided into four classes, designated Class A
shares, Class B shares, Class C shares and Class Y shares. Each Class represents
an interest in the respective Fund's investment portfolio and has similar
rights, privileges and preferences. However, each class may differ with respect
to sales charges, if any, distribution and/or service fees, if any, other
expenses allocable exclusively to each class, voting rights on matters
exclusively affecting that class, and its exchange privilege, if any. The
different sales charges and other expenses applicable to the different classes
of shares of the Funds will affect the performance of those classes.
Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due to
the differing expenses of the classes, dividends on the other classes are likely
to be lower than for the Class Y shares.
More information concerning Class A, Class B and Class C shares of the Funds may
be obtained from a PaineWebber investment executive or correspondent firm or by
calling 1-800-647-1568.
Although each Fund is offering only its own shares, it is possible that a Fund
might become liable for a misstatement in the Prospectus about one of the other
Funds.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, as a result, the holders of more than 50% of all the shares of any Trust
may elect all of the trustees of that Trust. The shares of the different Classes
of a Fund will be voted together, except that only the shareholders of a
particular Class of a Fund are required to vote on matters affecting only that
Class, such as the terms of a distribution plan as it relates to the Class.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of a
Trust may remove a trustee through a declaration in writing or by vote cast in
person or by proxy at a meeting called for that purpose. A meeting will be
called to vote on the removal of a trustee at the written request of holders of
10% of a Trust's outstanding shares.
REPORTS TO SHAREHOLDERS
Each Fund sends Fund shareholders audited annual and unaudited semi-annual
reports, each of which includes a list of the investment securities held by that
Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated herein by reference, is available
to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT;
TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as each Fund's custodian and recordkeeping
agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds' transfer
and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
Prospectus Page 18
<PAGE>
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PAINEWEBBER GROWTH AND INCOME FUND
PAINEWEBBER GROWTH FUND
PROSPECTUS--MAY 1, 1996
PAINEWEBBER SMALL CAP FUND
PROSPECTUS--JULY , 1996
CLASS Y SHARES
- --------------------------------------------------------------------------------
/X/ PAINEWEBBER BOND FUNDS
/X/ PAINEWEBBER GROWTH FUNDS
High Income Fund
Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund
/X/ PAINEWEBBER TAX-FREE BOND FUNDS /X/ PAINEWEBBER GLOBAL FUNDS
Global Equity Fund
California Tax-Free Income Fund Global Income Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund New York Tax-Free Income Fund
/X/ PAINEWEBBER ASSET ALLOCATION /X/ PAINEWEBBER MONEY MARKET
FUNDS FUNDS
Balanced Fund
Tactical Allocation Fund
A prospectus containing more complete information for any of these
funds, including charges and expenses, can be obtained from a
PaineWebber investment executive or correspondent firm. Please
read it carefully before investing. It is important you have all
the information you need to make a sound investment decision.
(R) 1996 PAINEWEBBER INCORPORATED
<PAGE>
PAINEWEBBER GROWTH AND INCOME FUND
PAINEWEBBER GROWTH FUND
PAINEWEBBER SMALL CAP FUND
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The three funds named above (each a "Fund" and, collectively, "Funds") are
diversified series of professionally managed, open-end investment companies
organized as Massachusetts business trusts (each a "Trust" and, collectively,
"Trusts"). PaineWebber Growth and Income Fund ("Growth and Income Fund"), a
series of PaineWebber America Fund ("America Fund"), seeks to provide current
income and capital growth; it invests primarily in dividend-paying equity
securities believed by its investment adviser to have the potential for rapid
earnings growth. PaineWebber Growth Fund ("Growth Fund"), a series of
PaineWebber Olympus Fund ("Olympus Fund"), seeks long-term capital appreciation;
it invests primarily in equity securities issued by companies deemed by its
investment adviser to have substantial potential for capital growth. PaineWebber
Small Cap Fund ("Small Cap Fund"), a series of PaineWebber Securities Trust
("Securities Trust"), also seeks long-term capital appreciation; it invests
primarily in equity securities of small cap companies.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"). As distributor for the
Funds, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive
dealer for the sale of Fund shares. The Class Y shares described in this
Statement of Additional Information are currently offered for sale primarily to
participants in the INSIGHT Investment Advisory Program ("INSIGHT"), when
purchased through that program. The Class Y shares of Growth and Income Fund and
Growth Fund also are offered for sale to the trustee of the PaineWebber Savings
Investment Plan acting on behalf of that Plan.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated May 1, 1996
(with respect to Growth and Income Fund and Growth Fund), as revised July ,
1996, and July , 1996 (with respect to Small Cap Fund). This Statement of
Additional Information is dated May 1, 1996 (with respect to Growth and Income
Fund and Growth Fund), as revised July , 1996, and July , 1996 (with respect
to Small Cap Fund). 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. Participants in the PaineWebber Savings Investment Plan may
obtain a copy of the Prospectus by contacting the PaineWebber Incorporated
Benefits Department, 1000 Harbor Boulevard, 10th Floor, Weehawken, New Jersey
07087 or by calling 1-201-902-4444.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P") and
other nationally recognized statistical rating organizations
<PAGE>
("NRSROs") are private services that provide ratings of the credit quality of
debt obligations. A description of the ratings assigned to corporate debt
obligations by Moody's and S&P is included in the Appendix to this Statement of
Additional Information. The Funds may use these ratings in determining whether
to purchase, sell or hold a security. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
securities with the same maturity, interest rate and rating may have different
market prices.
Ratings of debt securities represent the NRSROs' opinions regarding their
quality, are not a guarantee of quality, and may be reduced after a Fund has
acquired the security. Mitchell Hutchins will consider such an event in
determining whether a Fund should continue to hold the security but is not
required to dispose of it. In the event that, due to a downgrade of one or more
debt securities, an amount in excess of the permitted percentage of a Fund's net
assets is held in securities rated below investment grade and comparable unrated
securities, the Fund will engage in an orderly disposition of such securities to
the extent necessary to ensure that its holdings of such securities does not
exceed that percentage.
Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins to be of comparable
quality 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 exposure to adverse conditions.
Lower rated debt securities generally offer a higher current yield than that
available for investment grade issues, but they involve higher risks, in that
they are especially subject to adverse changes in general economic conditions
and in the industries in which the issuers are engaged, to changes in the
financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for lower rated debt securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or default. There can be no
assurance that such declines will not recur. The market for lower-rated debt
issues generally is thinner and less active than that for higher quality
securities, which may limit a Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Securities of foreign
issuers may not be registered with the Securities and Exchange Commission
("SEC"), nor may the issuers thereof be subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by the Funds than is available concerning U.S.
companies. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies.
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<PAGE>
The Funds 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 each 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. ADRs are publicly traded on exchanges or
over-the-counter in the United States and are issued through "sponsored" or
"unsponsored" arrangements. In a sponsored ADR arrangement, the foreign issuer
assumes the obligation to pay some or all of the depositary's transaction fees,
whereas under an unsponsored arrangement, the foreign issuer assumes no
obligations and the depositary's transaction fees are paid directly by the ADR
holders. In addition, less information is available in the United States about
an unsponsored ADR than about a sponsored ADR.
Investment income on certain foreign securities in which the Funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Funds would be subject.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets (15%
for Small Cap Fund) in illiquid securities. The term "illiquid securities" for
this purpose means securities that cannot be disposed of within seven days in
the ordinary course of business at approximately the amount at which a Fund has
valued the securities and includes, among other things, purchased
over-the-counter ("OTC") options, repurchase agreements maturing in more than
seven days and restricted securities other than those Mitchell Hutchins has
determined are liquid pursuant to guidelines established by each Trust's board
of trustees. The assets used as cover for OTC options written by each Fund will
be considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act"). Where
registration is required, a Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the
3
<PAGE>
ability to liquidate an investment to satisfy share redemption orders. Such
markets include automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified institutional buyers interested in purchasing
Rule 144A-eligible restricted securities held by the Funds, however, could
affect adversely the marketability of such portfolio securities and the Funds
might be unable to dispose of such securities promptly or at favorable prices.
Each Trust's board of trustees has delegated the function of making
day-to-day determinations of liquidity to Mitchell Hutchins, pursuant to
guidelines approved by the board. Mitchell Hutchins takes into account a number
of factors in reaching liquidity decisions, including (1) the frequency of
trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of restricted securities in each Fund's
portfolio and reports periodically on such decisions to the boards.
CONVERTIBLE SECURITIES. A convertible security entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities have characteristics similar to
nonconvertible debt securities in that they ordinarily provide a stable stream
of income with generally higher yields than those of common stocks of the same
or similar issuers. Convertible securities rank senior to common stock in a
corporations' capital structure but are usually subordinated to comparable
non-convertible securities.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics and
(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases. The value of a convertible security is a
function of its "investment value" (determined by its yield comparison with the
yields of other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as interest
rates decline. The credit standing of the issuer and other factors also may have
an effect on the convertible security's investment value. The conversion value
of a convertible security is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible security is governed principally by its investment
value, and generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into underlying common stock or sell it to a third party.
4
<PAGE>
Lower rated convertible securities generally offer a higher current yield
than that available from higher grade issues, but they involve higher risks, in
that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuation in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress, which
could adversely affect their ability to make payments of principal and interest
(or, in the case of convertible preferred stock, dividends) and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them, and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
GOVERNMENT SECURITIES. Government securities in which the Funds may invest
include direct obligations of the United States Treasury and obligations issued
or guaranteed by the United States government or one of its agencies or
instrumentalities ("Government Securities"). Direct obligations of the United
States Treasury include a variety of securities that differ in their interest
rates, maturities and dates of issuance. Among the Government Securities that
may be held by the Funds are instruments that are supported by the full faith
and credit of the United States; instruments that are supported by the right of
the issuer to borrow from the United States Treasury; and instruments that are
supported solely by the credit of the instrumentality.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
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 a Fund upon
acquisition is accrued as interest and included in its 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 Funds if the other party to a repurchase
agreement becomes insolvent.
The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins to present minimal credit
risks in accordance with guidelines established by each Trust's board of
trustees. Mitchell Hutchins reviews and monitors the creditworthiness of those
institutions under each board's general supervision.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of the Fund's net assets (10% of total assets for Small Cap Fund).
Such agreements involve the sale of securities held by a Fund subject to that
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, a Fund's custodian segregates assets to
cover the Fund's obligations under the reverse repurchase agreement. See
"Investment Policies and Restrictions--Segregated Accounts."
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 33
1/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only
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<PAGE>
when the borrower maintains acceptable collateral with that Fund's custodian
bank, marked to market daily, in an amount at least equal to the market value of
the securities loaned, plus accrued interest and dividends. Acceptable
collateral is limited to cash, U.S. government securities and irrevocable
letters of credit that meet certain guidelines established by Mitchell Hutchins.
In determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each Fund will retain authority to terminate
any loans at any time. Each 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. Each 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. Each Fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the Fund's
interest.
SHORT SALES "AGAINST THE BOX". Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes. To make
delivery to the purchaser in a short sale, the executing broker borrows the
securities being sold short on behalf of a Fund, and that Fund is obligated to
replace the securities borrowed at a date in the future. When a Fund sells
short, it will establish a margin account with the broker effecting the short
sale, and will deposit collateral with the broker. In addition, that Fund will
maintain with its custodian, in a segregated account, the securities that could
be used to cover the short sale. Each Fund will incur transaction costs,
including interest expense, in connection with opening, maintaining and closing
short sales against the box. The Funds currently do not intend to have
obligations under short sales that at any time during the coming year exceed 5%
of a Fund's net assets.
The Funds might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by a Fund or a security convertible into or exchangeable for a security owned by
a Fund, or when Mitchell Hutchins wants to sell a security that a Fund owns at a
current price, but also wishes to defer recognition of gain or loss for federal
income tax purposes. In such case, any loss in a Fund's long position after the
short sale should be reduced by a gain in the short position. Conversely, any
gain in the long position should be reduced by a loss in the short position. The
extent to which gains or losses in the long position are reduced will depend
upon the amount of the securities sold short relative to the amount of the
securities a Fund owns, either directly or indirectly, and in the case where a
Fund owns convertible securities, changes in the investment values or conversion
premiums of such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
"delayed delivery." In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but a Fund generally
would not pay for such securities or start earning interest or dividends on them
until they are delivered. However, when a Fund purchases securities on a
when-issued or delayed delivery basis, it immediately assumes the risks of
ownership, including the risk of price fluctuation. Failure by a counterparty to
deliver a security purchased on a when-issued or delayed delivery basis may
result in a loss or missed opportunity to make an alternative investment.
Depending on market conditions, a Fund's when-issued and delayed delivery
purchase commitments could cause its net asset value per share to be more
volatile, because such securities may increase the amount by which the Fund's
total assets, including the value of when-issued and delayed delivery securities
held by the Fund, exceeds its net assets.
6
<PAGE>
A security purchased on a when-issued or delayed delivery basis is recorded
as an asset on the commitment date and is subject to changes in market value.
Thus, fluctuation in the value of the security from the time of the commitment
date will affect a Fund's net asset value. When a Fund agrees to purchase
securities on a when-issued basis, its custodian segregates assets to cover the
amount of the commitment. See "Investment Policies and Restrictions--Segregated
Accounts." The Funds purchase when-issued securities only with the intention of
taking delivery, but may sell the right to acquire the security prior to
delivery if Mitchell Hutchins deems it advantageous to do so, which may result
in capital gain or loss to a Fund.
SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, such as reverse
repurchase agreements or the purchase of securities on a when-issued or delayed
delivery basis, it will maintain with an approved custodian in a segregated
account cash, Government Securities or other liquid high-grade debt securities,
marked to market daily, in an amount at least equal to the Fund's obligation or
commitment under such transactions. As described below under "Hedging
Strategies," segregated accounts may also be required in connection with certain
transactions involving options and futures contracts.
INVESTMENT LIMITATIONS OF THE FUNDS
Each Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this fundamental
limitation: Mortgage- and asset-backed securities will not be considered to have
been issued by the same issuer by reason of the securities having the same
sponsor, and mortgage- and asset-backed securities issued by a finance or other
special purpose subsidiary that are not guaranteed by the parent company will be
considered to be issued by a separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or to municipal securities.
(3) issue senior securities or borrow money, except as permitted under the
1940 Act and then not in excess of 33 1/3% of the Fund's total assets (including
the amount of the senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of the issuance or borrowing, except
that the Fund may borrow up to an additional 5% of its total assets (not
including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
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<PAGE>
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
The foregoing fundamental investment limitations for each Fund cannot be
changed without the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of that 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 restrictions are not fundamental and may be changed
by each Trust's board of trustees without shareholder approval.
Each Fund will not:
(1) purchase or retain the securities of any issuer if the officers and
trustees of its Trust and the officers and directors of Mitchell Hutchins (each
owning beneficially more than 0.5% of the outstanding securities of an issuer)
own in the aggregate more than 5% of the securities of the issuer.
(2) purchase any security if as a result more than 5% of its total assets
would be invested in securities of companies that together with any predecessors
have been in continuous operation for less than three years.
(3) invest more than 10% of its net assets (15% of net assets for Small Cap
Fund) in illiquid securities, a term which means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which it has valued the securities and includes,
among other things, repurchase agreements maturing in more than seven days.
(4) make investments in warrants if such investments, valued at the lower of
cost or market, exceed 5% of the value of its net assets, which amount may
include warrants that are not listed on the New York Stock Exchange, Inc
("NYSE") or the American Stock Exchange, Inc., provided that such unlisted
warrants, valued at the lower of cost or market, do not exceed 2% of its net
assets, and further provided that this restriction does not apply to warrants
attached to, or sold as a unit with, other securities. For purposes of this
restriction, the term "warrants" does not include options on securities, stock
or bond indices or futures contracts.
(5) change its investment policies to permit the Fund to invest more than
35% of its total assets in debt securities rated Ba or lower by Moody's or BB or
lower by S&P, comparably rated by another NRSRO or
8
<PAGE>
determined by Mitchell Hutchins to be of comparable quality without giving at
least 30 days' advance notice to shareholders.
(6) invest in real estate limited partnerships.
(7) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(8) engage in short sales of securities or maintain a short position, except
that the Fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(9) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in such
programs or leases and investments in asset-backed securities supported by
receivables generated from such programs or leases are not subject to this
prohibition.
(10) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or as
a result of reorganization, consolidation, or merger.
HEDGING STRATEGIES
HEDGING INSTRUMENTS. Mitchell Hutchins may use a variety of financial
instruments ("Hedging Instruments"), including certain options, futures
contracts (sometimes referred to as "futures") and options on futures contracts,
to attempt to hedge each Fund's portfolio. In particular, each Fund may use the
hedging instruments described below:
OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option during the
option term, to deliver the underlying security against payment of the exercise
price. A put option is a similar contract that gives its purchaser, in return
for a premium, the right to sell the underlying security at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security at the exercise price.
OPTIONS ON STOCK INDEXES--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values of
those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.
STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar amount
times the difference between the stock index value at the close of trading of
the contract and the price
9
<PAGE>
at which the futures contract is originally struck. No physical delivery of the
stocks comprising the index is made. Generally, contracts are closed out prior
to the expiration date of the contract.
INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be broadly
categorized as "short hedges" and "long hedges." A short hedge is a purchase or
sale of a Hedging Instrument intended to partially or fully offset potential
declines in the value of one or more investments held in a Fund's portfolio.
Thus, in a short hedge, a Fund takes a position in a Hedging Instrument whose
price is expected to move in the opposite direction of the price of the
investment being hedged. For example, a Fund might purchase a put option on a
security to hedge against a potential decline in the value of that security. If
the price of the security declined below the exercise price of the put, a Fund
could exercise the put and thus limit its loss below the exercise price to the
premium paid plus transactions costs. In the alternative, because the value of
the put option can be expected to increase as the value of the underlying
security declines, a Fund might be able to close out the put option and realize
a gain to offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge, a Fund takes a position in a Hedging Instrument whose price is expected
to move in the same direction as the price of the prospective investment being
hedged. For example, a Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, a Fund could exercise the call and thus limit its acquisition cost to the
exercise price plus the premium paid and transactions costs. Alternatively, a
Fund might be able to offset the price increase by closing out an appreciated
call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Fund owns or
intends to acquire. Hedging Instruments on stock indices, in contrast, generally
are used to hedge against price movements in broad equity market sectors in
which a Fund has invested or expects to invest. Hedging Instruments on debt
securities may be used to hedge either individual securities or broad fixed
income market sectors.
Because the Funds intend to use options and futures for hedging purposes,
each Fund may enter into any futures contracts or options on futures contracts
as long as the aggregate of the market value of the Fund's outstanding futures
contracts and market value of the futures contracts subject to outstanding
options written by
10
<PAGE>
that Fund does not exceed 50% of the market value of the total assets of that
Fund. Under normal circumstances, however, the value of a Fund's portfolio
assets so hedged generally will be a much smaller amount.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, foreign currency contracts
or other techniques are developed. Mitchell Hutchins may utilize these
opportunities to the extent that they are consistent with each Fund's investment
objective and permitted by each Fund's investment limitations and applicable
regulatory authorities. The Funds' Prospectus or Statement of Additional
Information will be supplemented to the extent that new products or techniques
involve materially different risks than those described below or in the
Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the ability of
Mitchell Hutchins to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded.
The effectiveness of hedges using Hedging Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged. Because the Funds invest primarily in
common stocks of issuers meeting the specific criteria described in the
Prospectus, there might be a significant lack of correlation between the
portfolio and the stock indices underlying any such Hedging Instruments used by
a Fund.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because Mitchell Hutchins projected a decline in the price of a security
in that Fund's portfolio, and the price of that security increased instead, the
gain from that might be wholly or partially offset by a decline in the price of
the Hedging Instrument. Moreover, if the price of the Hedging Instrument
declined by more than the increase in the price of the security, that Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not hedged at all.
11
<PAGE>
(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund was unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
positions expired or matured. These requirements might impair a Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Hedging Instrument prior to expiration or maturity depends on the existence of
a liquid secondary market or, in the absence of such a market, the ability and
willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a Fund.
COVER FOR HEDGING STRATEGIES. The Funds will not use Hedging Instruments for
speculative purposes or for purposes of leverage. Transactions using Hedging
Instruments, other than purchased options, expose the Funds to an obligation to
another party. The Funds will not enter into any such transactions unless it
owns either (1) an offsetting ("covered") position in securities, other options
or futures contracts or (2) cash and short-term liquid debt securities, with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. The Funds will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so require,
set aside cash, U.S. government securities or other liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put or call options, on equity and debt securities and stock indices and
foreign currencies. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing covered call options
serves as a limited short hedge, because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security appreciates to a price higher than the exercise
price of the call option, it can be expected that the option will be exercised
and the affected Fund will be obligated to sell the security at less than its
market value. Writing covered put options serves as a limited long hedge because
increases in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security at more than its market value. The securities or other
assets used as cover for OTC options written by a Fund would be considered
illiquid to the extent described under "Investment Policies and
Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
12
<PAGE>
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between a Fund and its contra party (usually
a securities dealer or a bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the contra party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the contra party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Funds will enter into OTC option transactions only with contra parties that
have a net worth of at least $20 million.
Generally, the OTC debt options or foreign currency options used by the
Funds are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Funds' ability to establish and close out positions in exchange-traded
options depends on the existence of a liquid market. The Funds intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Funds, there is no
assurance that the Funds will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency of
the contra party, the Funds might be unable to close out an OTC option position
at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
LIMITATIONS ON THE USE OF OPTIONS. The Funds' use of options is governed by
the following guidelines, which can be changed by each Trust's board of trustees
without shareholder vote:
(1) Each Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums on
all other options held by that Fund, does not exceed 5% of its total assets.
(2) The aggregate value of underlying securities on which covered calls are
written will not exceed 50% of each Fund's total assets.
(3) To the extent cash or cash equivalents, including Government Securities,
are maintained in a segregated account to collateralize options written on
currencies, securities or stock indexes, each Fund will limit collateralization
to 20% of its net assets.
FUTURES. The Funds may purchase and sell stock index futures contracts,
interest rate futures contracts and foreign currency futures contracts. The
Funds may also purchase put and call options, and write covered put and call
13
<PAGE>
options, on futures in which it is allowed to invest. The purchase of futures or
call options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, and writing
covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options on securities
or indices.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities, government securities or other liquid, high-grade debt securities,
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a Fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, the Funds may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position due
to the absence of a liquid secondary market or the imposition of price limits,
it could incur substantial losses. A Fund would continue to be subject to market
risk with respect to the position. In addition, except in the case of purchased
options, a Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving
14
<PAGE>
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are less
onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES. The Funds' use of futures and related
options is governed by the following guidelines, which can be changed by each
Trust's board of trustees without shareholder vote:
(1) To the extent a Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on those positions (excluding
the amount by which options are "in-the-money") may not exceed 5% of that Fund's
net assets.
(2) The aggregate premiums paid on all options (including options on
securities and stock or bond indices and options on futures contracts) purchased
by a Fund that are held at any time will not exceed 20% of that Fund's net
assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each Fund will not exceed 5% of its total assets.
15
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of each Trust (positions are held for
both Trusts, except as indicated), their ages, business addresses and principal
occupations during the past five years are:
<TABLE><CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ --------------------------------------
<S> <C> <C>
Margo N. Alexander**; 49 Trustee and President Mrs. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins (since January
1995) and also an executive vice
president and a director of
PaineWebber Incorporated
("PaineWebber"). Mrs. Alexander is
president and a director or trustee
of 30 investment companies for which
Mitchell Hutchins or PaineWebber
serves an investment adviser.
Richard Q. Armstrong; Trustee Mr. Armstrong is chairman and
60 78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm) (since
April 1991 and principal occupation
since March 1995). Mr. Armstrong is
also a director 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 waters) (October
1993-March 1995). He was a partner
of the New England Consulting Group
(management consulting firm)
(December 1992-September 1993). He
was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the
French luxury goods conglomerate,
Luis Vuitton Moet Hennessey
Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong
is a director or trustee of 29
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
E. Garrett Bewkes, Jr.**; 69 Trustee and Mr. Bewkes is a director of Paine
Chairman of the Webber Group Inc. ("PW Group")
Board of Trustees (holding company of PaineWebber and
Mitchell Hutchins). Prior to
December 1995, he was a consultant
to PW Group. Prior to 1988, he was
chairman of the board, president and
chief executive officer of American
Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries
Corporation and NaPro
Bio-Therapeutics, Inc. and is a
director or trustee of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
16
<PAGE>
<TABLE><CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ --------------------------------------
<S> <C> <C>
Richard Burt; 49 Trustee Mr. Burt is chairman of International
1101 Connecticut Avenue, N.W. Equity Partners (international
Washington, D.C. 20036 investments and consulting firm)
(since March 1994) and a partner of
McKinsey & Company (management
consulting firm) (since 1991). He is
also a director of American
Publishing Company. He was the chief
negotiator in the Strategic Arms
Reduction Talks with the former
Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal
Republic of Germany (1985-1989). Mr.
Burt is a director or trustee of 29
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mary C. Farrell**; 46 Trustee Ms. Farrell is a managing director,
senior investment strategist, and
member of the Investment Policy
Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982.
She is a member of Financial Women's
Association and Women's Economic
Roundtable and is employed as a
regular panelist on Wall $treet Week
with Louis Rukeyser. She also serves
on the Board of Overseers of New
York University's Stern School of
Business Ms. Farrell is also a
director or trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Mr. Feldberg is Dean and Professor of
Management of the Graduate School of
Business, Columbia University. Prior
to 1989, he was president of the
Illinois Institute of Technology.
Dean Feldberg is also a director of
AMSCO International Inc., Federated
Department Stores, Inc., and New
World Communications Group
Incorporated and is a Meyer
Feldberg; 54 Columbia University 101
Uris Hall New York, New York 10027 \
Trustee \ director or trustee of 29
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
17
<PAGE>
<TABLE><CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ --------------------------------------
<S> <C> <C>
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, New York 10017 Prior to May 1994, he was a partner
in the law firm of Fryer, Ross &
Gowen. Mr. Gowen is also a director
of Columbia Real Estate Investments,
Inc. and is a director or trustee of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 59 Trustee Mr. Malek is chairman of Thayer
901 15th Street, N.W. Capital Partners (investment bank)
Suite 300 and a co- chairman and director of
Washington, D.C. 20005 CB Commercial Group Inc. (real
estate). From January 1992 to
November 1992, he was campaign
manager of Bush-Quayle '92. From
1990 to 1992, he was vice chairman,
and from 1989 to 1990, he was
president of Northwest Airlines
Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of
NWA Inc.) Prior to 1989, he was
employed by the Marriott Corporation
(hotels, restaurants, airline
catering and contract feeding),
where he most recently was an
executive vice president and
president of Marriott Hotels and
Resorts. Mr. Malek is also a
director of American Management
Systems, Inc. (management consulting
and computer-related services),
Automatic Data Processing, Inc.,
Avis, Inc. (passenger car rental),
FPL Group, Inc. (electric service
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ --------------------------------------
<S> <C> <C>
Carl W. Schafer; 60 Trustee Mr. Schafer is president of the
P.O. Box 1164 Atlantic Foundation (charitable
Princeton, N.J. 08542 foundation supporting mainly
oceanographic exploration and
research). He also is a director of
Roadway Express, Inc. (trucking),
The Guardian Group of Mutual Funds,
Evans Systems, Inc. (a motor fuels,
convenience store and diversified
company), Hidden Lake Gold Mines
Ltd. (gold mining), Electronic
Clearing House, Inc. (financial
transactions processing), Wainoco
Oil Corporation and Nutraceutix Inc.
(bio-technology). Prior to January
1993, Mr. Schafer was chairman of
the Investment Advisory Committee of
the Howard Hughes Medical Institute.
Mr Schafer is a director or trustee
of 29 other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
John R. Torell III; 56 Trustee Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial advisory
Suite 4605 firm) (since 1989), chairman of
New York, New York 10153 Telesphere Corporation (electronic
provider of financial information)
and a partner of Zilkha & Company
(merchant banking and private
investment company). He is the
former chairman and chief executive
officer of Fortune Bancorp
(1990-1991 and 1990-1994,
respectively), the former chairman,
president and chief executive
officer of CalFed, Inc. (savings
association) (1988 to 1989) and
former president of Manufacturers
Hanover Corp. (bank) (prior to
1988). Mr. Torell is also a director
of American Home Products Corp., New
Colt Inc. (armament manufacturer)
and Volt Information Sciences Inc.
Mr. Torell is a director or trustee
of 29 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 of advisory
administration of Mitchell Hutchins.
Prior to November 1993, she was
compliance manager of Hyperion
Capital Management, Inc., an
investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice
president and manager-legal
administration of Mitchell Hutchins.
Ms. Boyle is a vice president of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
19
<PAGE>
<TABLE><CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ --------------------------------------
<S> <C> <C>
Ellen R. Harris; 49 Vice President (Olympus Ms. Harris is a managing director and
Fund only) a portfolio manager of Mitchell
Hutchins. Ms. Harris is also a vice
president of three investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Donald R. Jones; 35 Vice President Mr. Jones is a first vice president
(Securities Trust only) and a portfolio manager of Mitchell
Hutchins. Prior to February 1996, he
was a vice president in the asset
management group of First Fidelity
Bancorporation. Mr. Jones is a vice
president of two investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Thomas J. Libassi; 37 Vice President Mr. Libassi is a senior vice president
(Securities Trust only) and portfolio manager of Mitchell
Hutchins. Prior to May 1994, he was
a vice president of Keystone
Custodian Funds Inc. with portfolio
management responsibility. Mr.
Libassi is a vice president of four
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. Mr. Maher is a vice
president and assistant treasurer of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director
(Securities Trust only) and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was director of
fixed income investments of IBM
Corporation. Mr. McCauley is a vice
president of 19 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is a
vice president and assistant
treasurer of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general counsel
of Mitchell Hutchins. Ms. O'Donnell
is a vice president and secretary of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
20
<PAGE>
<TABLE><CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ --------------------------------------
<S> <C> <C>
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. Prior to May 1994, she was
a partner in the law firm of Arnold
& Porter. Ms. Schonfeld is a vice
president of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. From August 1992 to August
1994, he was a vice president at
BlackRock Financial Management, Inc.
Prior to August 1992, he was an
audit manager with Ernst & Young
LLP. Mr. Schubert is a vice
president and assistant treasurer of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president
(Securities Trust only) and a portfolio manger of Mitchell
Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice
Treasurer president and the director of the
mutual fund finance division of
Mitchell Hutchins. Prior to 1991, he
was an audit senior manager with
Ernst & Young LLP. Mr. Sluyters is a
vice president and treasurer of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
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 a vice
president of 14 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice
(Securities Trust only) president and a portfolio manager of
Mitchell Hutchins. Mr. Varrelman is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
21
<PAGE>
<TABLE><CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ------------------------------ ------------------------ --------------------------------------
<S> <C> <C>
Stuart Waugh; 40 Vice President Mr. Waugh is a managing director and a
(Securities Trust only) portfolio manager of Mitchell
Hutchins responsible for global
fixed income investments and
currency trading. Mr.. Waugh is a
vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to May
1995, he was an attorney in private
practice. Mr. Weller is a vice
president and assistant secretary of
29 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.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of each
Trust as defined in the Investment Company Act of 1940 ("1940 Act") by virtue
of their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
Each Trust pays trustees who are not "interested persons" of the Trust
$1,000 annually for each series and $150 for each board meeting and separate
meeting of a board committee. Each Trust presently has one series and thus pays
each such trustee $1,000 annually, plus any additional amounts due for board or
committee meetings. Certain committee chairs receive additional compensation
aggregating $15,000 annually from all the funds within the PaineWebber fund
complex. All trustees are reimbursed for any expenses incurred in attending
meetings. Trustees own in the aggregate less than 1% of the outstanding shares
of each Fund. Because Mitchell Hutchins and PaineWebber perform substantially
all of the services necessary for the operation of the Trusts, the Trusts
require no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from any Trust for acting as a
trustee or officer.
22
<PAGE>
The table below includes certain information relating to the compensation of
each Trust's current trustees who held office during the last fiscal year and by
all investment companies in the same complex during the calendar year ended
December 31, 1995.
COMPENSATION TABLE
<TABLE><CAPTION>
AGGREGATE TOTAL
COMPENSATION AGGREGATE AGGREGATE COMPENSATION
FROM PW COMPENSATION COMPENSATION FROM THE
AMERICA FUND FROM PW FROM PW TRUST AND
(GROWTH AND OLYMPUS FUND SECURITIES THE FUND
INCOME (GROWTH TRUST (SMALL COMPLEX PAID
NAME OF PERSON, POSITION FUND)(1) FUND)(1) CAP FUND)(2) TO TRUSTEES(3)
- ----------------------------------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Richard Q. Armstrong, Trustee............ -- -- $ 563 $ 9,000
Richard R. Burt, Trustee................. -- -- 750 7,750
Meyer Feldberg, Trustee.................. $3,750 $2,125 -- 106,375
George W. Gowen, Trustee................. 3,750 2,125 -- 99,750
Frederic V. Malek, Trustee............... 3,750 2,125 -- 99,750
Carl W. Schafer, Trustee................. -- -- -- 118,175
John R. Torell, III, Trustee............. -- -- 2,563 28,125
</TABLE>
- ------------
Only independent members of the board are compensated by the Trusts and
identified above; trustees who are "interested persons," as defined by the 1940
Act, do not receive compensation.
(1) Represents fees paid to each trustee during the fiscal year ended August 31,
1995; the Trusts do not have pension or retirement plans.
(2) Represents fees paid to each trustee during the fiscal year ended July 31,
1995.
(3) Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995.
23
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to advisory contracts (each an
"Advisory Contract") with each Trust. Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate specified below. Furthermore, under a service agreement with each Trust
that is reviewed by each Trust's board of trustees annually, PaineWebber
provides certain services to the Funds not otherwise provided by the Funds'
transfer agent.
Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each 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 Fund or Mitchell Hutchins; (6) all expenses incurred in
connection with the trustees' services, including travel expenses; (7) taxes
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectible items of deposit and other insurance or fidelity
bonds; (9) any costs, expenses or losses arising out of a liability of or claim
for damages or other relief asserted against the 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 boards and any committees thereof; (17) the cost of investment company
literature and other publications provided to trustees and officers; and (18)
costs of mailing, stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse a 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 Funds is 2.5% of the first $30 million of a 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 last three
fiscal years, no reimbursements were required pursuant to such limitation for
either Fund.
Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the contracts, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. Each Advisory Contract terminates
automatically 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 a Fund's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins,
or by Mitchell Hutchins on 60 days' written notice to a Fund.
GROWTH AND INCOME FUND. Pursuant to the Advisory Contract dated March 1,
1989 between America Fund and Mitchell Hutchins, Growth and Income Fund pays
Mitchell Hutchins a fee at the annual rate of 0.70%
24
<PAGE>
of the Fund's average daily net assets, computed daily and paid monthly. For the
fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993, Growth
and Income Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $3,378,079, $4,892,163 and $6,413,944, respectively.
Pursuant to the applicable service agreement, during the fiscal years ended
August 31, 1995, August 31, 1994 and August 31, 1993, Growth and Income Fund
paid (or accrued) to PaineWebber service fees of $219,613, $303,496 and
$355,724, respectively.
Mitchell Hutchins Institutional Investors Inc. ("MHII"), a wholly owned
subsidiary of Mitchell Hutchins, served as sub-adviser to Growth and Income Fund
from May 19, 1994 to April 25, 1995 pursuant to a sub-advisory contract between
MHII and Mitchell Hutchins under which Mitchell Hutchins (not the Fund) paid
MHII a fee in the annual amount of 0.25% of the Fund's average daily net assets.
During the periods from September 1, 1994 to April 25, 1995 and May 19, 1994 to
August 31, 1994, Mitchell Hutchins paid or accrued to MHII sub-advisory fees of
$998,353 and $405,821, respectively.
GROWTH FUND. Pursuant to the Advisory Contract dated March 1, 1989, between
Olympus Fund and Mitchell Hutchins, Growth Fund pays Mitchell Hutchins a fee at
the annual rate of 0.75% of the Fund's average daily net assets, computed daily
and paid monthly. For the fiscal years ended August 31, 1995, August 31, 1994
and August 31, 1993, the Growth Fund paid (or accrued) to Mitchell Hutchins
investment advisory and administration fees of $1,993,930, $2,069,033 and
$1,402,141, respectively. Pursuant to the applicable service agreement, during
the fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993,
Growth Fund paid (or accrued) to PaineWebber service fees of $114,163, $103,435
and $75,713, respectively.
SMALL CAP FUND. Pursuant to the Advisory Contract dated January 28, 1993,
between Securities Trust and Mitchell Hutchins, Small Cap Fund pays Mitchell
Hutchins a fee at the annual rate of 1.00% of the Fund's average daily 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, Small Cap Fund paid (or accrued) to Mitchell Hutchins investment advisory
and administrative fees of $829,906, $491,757 and $939,774, respectively.
Pursuant to the applicable service agreement during the fiscal year ended July
31, 1995, the six months ended July 31, 1994 and the fiscal year ended January
31, 1993, Small Cap Fund paid (or accrued) to PaineWebber service fees of
$72,929, $26,353 and $47,661, respectively.
Quest Advisory Corp. ("Quest") served as a sub-adviser to Small Cap Fund
from February 1, 1993 through March 31, 1996, pursuant to a sub-advisory
contract between Quest and Mitchell Hutchins dated January 28, 1993, under which
Mitchell Hutchins (not the Fund) paid or accrued to Quest during the fiscal year
ended July 31, 1995, the six months ended July 31, 1994 and the fiscal year
ended January 31, 1994, $414,953, $245,878 and $469,887, respectively, in
sub-advisory fees.
25
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
February 29, 1996, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- ----------------------------------------------------------------- ----------
Domestic (excluding Money Market)................................ $5,653.6
Global........................................................... 2,836.8
Equity/Balanced.................................................. 2,922.3
Fixed Income (excluding Money Market)............................ 5,568.1
Taxable Fixed Income......................................... 3,854.2
Tax-Free Fixed Income........................................ 1,713.9
Money Market Funds............................................... 22,732.0
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber funds and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class Y shares of each Fund under separate distribution contracts with each
Trust dated June 3, 1996 that require Mitchell Hutchins to use its best
efforts, consistent with its other businesses, to sell shares of the Funds.
Class Y shares of the Funds are offered continuously. Under exclusive dealer
agreements between Mitchell Hutchins and PaineWebber dated dated June 3, 1996
PaineWebber and its correspondent firms sell each Fund's Class Y shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by each Trust's board of trustees, Mitchell
Hutchins is responsible for the execution of each Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for the
Funds, taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. While Mitchell Hutchins
generally seeks reasonably competitive commission rates, payment of the lowest
commission is not necessarily consistent with obtaining the best net results.
Prices paid to dealers in principal transactions, 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 Funds may invest in
securities traded in the 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. For the fiscal years
ended August 31, 1995, August 31, 1994 and August 31, 1993, Growth and Income
Fund paid $1,241,906, $1,901,499 and $1,131,909, respectively, in brokerage
commissions. For the fiscal years ended August 31, 1995, August 31, 1994 and
August 31, 1993, Growth Fund paid $273,991, $222,490 and $150,432, respectively,
in brokerage commissions.
26
<PAGE>
For the fiscal year ended July 31, 1995, the six months ended July 31, 1994, and
the fiscal year ended January 31, 1994, Small Cap Fund paid $120,717, $113,315
and $349,051, respectively, in brokerage commissions.
The Funds have no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Funds contemplate that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted through PaineWebber. The Trusts' boards of trustees have adopted
procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all
brokerage commissions paid to PaineWebber are reasonable and fair. Specific
provisions in the Advisory Contracts authorize PaineWebber to effect portfolio
transactions for the Funds on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.
For the fiscal year ended August 31, 1995, Growth and Income Fund paid $65,991
in brokerage commissions to PaineWebber, which represented 5.31% of the total
brokerage commissions paid by the Fund and 5.20% of the total dollar amount of
transactions involving payment of commissions. For the fiscal years ended August
31, 1994 and August 31, 1993, Growth and Income Fund paid $47,142 and $108,080,
respectively, in brokerage commissions to PaineWebber. For the fiscal year ended
August 31, 1995, Growth Fund paid $4,200 in brokerage commissions to
PaineWebber, which represented 1.53% of the total brokerage commissions paid by
the Fund and 2.13% of the total dollar amount of transactions involving payment
of commissions. For the fiscal years ended August 31, 1994 and August 31, 1993,
Growth Fund paid $9,326 and $3,500, respectively, in brokerage commissions to
PaineWebber. For the fiscal year ended July 31, 1995, Small Cap Fund paid $665
in commissions to PaineWebber, which represented 0.6% of the total brokerage
commissions paid by the Fund and 0.4% of the total dollar amount of transactions
involving the 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.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Funds' procedures in selecting FCMs to execute their transactions in futures
contracts, including procedures permitting the use of PaineWebber are similar to
those in effect with respect to brokerage transactions in securities.
Consistent with the interests of each Fund and subject to the review of each
Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase and
sell portfolio securities from and to dealers or through brokers who provide the
Fund with research, analysis, advice and similar services. In return for such
services, the Fund may pay to those brokers a higher commission than may be
charged by other brokers, provided that Mitchell Hutchins determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins to the
particular 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 Growth and Income Fund and Growth Fund, for the fiscal year ended
August 31, 1995, Mitchell Hutchins (or, for Growth and Income Fund, MHII)
directed $125,000,872 and $6,914,330, respectively, in portfolio transactions to
brokers chosen because they provided research services, for which the Funds paid
$168,587 and $9,720, respectively, in commissions.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins
27
<PAGE>
may engage in agency transactions in OTC equity and debt securities in return
for research and execution services. These transactions are entered into only in
compliance with procedures ensuring that the transaction (including commissions)
is at least as favorable as it would have been if effected directly with a
market-maker that did not provide research or execution services. These
procedures include Mitchell Hutchins receiving multiple quotes from dealers
before executing the transactions on an agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Funds effect securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts and, conversely,
information and research services furnished to Mitchell Hutchins by brokers or
dealers in connection with other funds or accounts that either of them advises
may be used in advising the Funds. 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 Mitchell Hutchins under the Advisory Contract.
Investment decisions for the Funds and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for a Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between that Fund and such other account(s)
as to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Funds are concerned, or
upon their ability to complete their entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Funds.
The Funds will not purchase securities that are offered in underwritings in
which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by each 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
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the Funds.
PORTFOLIO TURNOVER. The Funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
<TABLE><CAPTION>
PORTFOLIO
TURNOVER RATE
-------------
<S> <C>
GROWTH AND INCOME FUND
Fiscal Year Ended August 31, 1995............................................. 111%
Fiscal Year Ended August 31, 1994............................................. 94%
GROWTH FUND
Fiscal Year Ended August 31, 1995............................................. 36%
Fiscal Year Ended August 31, 1994............................................. 24%
SMALL CAP FUND
Fiscal Year Ended July 31, 1995............................................... 19%
Six Months Ended July 31, 1994................................................ 20%
Fiscal Year Ended January 31, 1994............................................ 98%
</TABLE>
28
<PAGE>
VALUATION OF SHARES
The Funds determine their net asset values 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. stock exchanges are valued at the last
sale price on the day the securities are valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
OTC market and listed on Nasdaq are valued at the last trade price on Nasdaq at
4:00 p.m., Eastern time; other OTC securities are valued at the last bid price
available prior to valuation. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of each Trust's board of trustees. In valuing lower
rated corporate debt securities it should be recognized that judgment often
plays a greater role than is the case with respect to securities for which a
broader range of dealer quotations and last-sale information is available.
PERFORMANCE INFORMATION
Each Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in each Fund's Performance Advertisements are calculated according
to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. Each Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). A 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.
29
<PAGE>
The following table shows performance information for the Class Y (formerly
Class C) shares of Growth and Income Fund and Growth Fund for the periods
indicated. Small Cap Fund had no Class Y shares outstanding during these
periods. All returns for periods of more than one year are expressed as an
average return.
<TABLE><CAPTION>
GROWTH AND
INCOME FUND GROWTH FUND
----------- -----------
CLASS Y CLASS Y
----------- -----------
<S> <C> <C>
Fiscal year ended August 31, 1995
Standardized Return*............................................. 18.66% 11.58%
Non-Standardized Return.......................................... 18.66% 11.58%
Five years ended August 31, 1995:
Standardized Return*............................................. NA NA
Non-Standardized Return.......................................... NA NA
Inception** to August 31, 1995:
Standardized Return*............................................. 5.37% 10.33%
Non-Standardized Return.......................................... 5.37% 10.33%
</TABLE>
- ------------
NOTE:
* Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.
** The inception dates for the Class Y shares of the Funds are as follows:
Growth and Income Fund-February 12, 1992; Growth Fund-August 26, 1991.
OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual
Funds ("Morningstar"), with the performance of recognized stock and other
indices, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, the Nasdaq
Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman
Bond Index, 30-year and 10-year U.S. Treasury bonds, the Morgan Stanley Capital
International World Index and changes in the Consumer Price Index as published
by the U.S. Department of Commerce. The Funds also may refer in such materials
to mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of the
Funds and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.
The Funds 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 in
additional Fund shares, any future income or capital appreciation of a 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 a Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
30
<PAGE>
The Funds may also compare their 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 Funds'
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 Funds are not insured or guaranteed by the U.S.
government and returns and net asset value will fluctuate. The debt securities
held by the Funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term securities. An investment in any of
the Funds involves greater risks than an investment in either a money market
fund or a CD.
The Funds may also compare their performance to general trends in the stock
and bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1926 to 1993, stocks beat all
other traditional asset classes. A $10 investment in the S&P 500 grew to $8,001,
significantly more than any other investment.
The chart shown is for illustrative purposes only and does not represent the
Funds' performance and should not be considered an indication or guarantee of
future results. Year-to-year fluctuations of the S&P 500 have been significant,
and total return for some periods has been negative. The S&P 500 includes
companies with larger market capitalizations than those in which the Funds
invest. Unlike investors in bonds and Treasury bills, common stock investors do
not receive fixed income payments and are not entitled to repayment of
principal. These differences contribute to investment risk. Returns shown for
long-term government bonds are based on Treasury bonds with 20-year maturities.
31
<PAGE>
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are the following: (1) each Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"); (2) each Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months-options, futures or forward contracts (other than those
on foreign currencies), or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) ("Short-Short Limitation"); (3) at the close of each quarter of each
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 that
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 each
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. government securities or the securities
of other RICs) of any one issuer.
Dividends and other distributions declared by the Funds in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Funds and received by
the shareholders on December 31 of that year if the distributions are paid by
the Funds during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by each 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 any 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.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
Each Fund may invest in the stock of "passive foreign investment companies"
("PFICs") if such stock is a permissible investment. 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
32
<PAGE>
production of, passive income. Under certain circumstances, each Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain from disposition of such stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in each 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 a Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital gain
over net short-term capital loss)-which would have to be distributed to satisfy
the Distribution Requirement and avoid imposition of the Excise Tax-even if
those earnings and gain are not distributed to 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 Funds, would be
entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the owner's adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
The use of hedging strategies, such as writing ("selling") and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the character, timing and amount of recognition of the gains
and losses the Fund realizes in connection therewith. Income from foreign
currencies (except certain gains therefrom that may be excluded by futures
regulations), and income from transactions in options, futures and forward
currency contracts derived by each Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures contracts (other than those on foreign currencies) will be
subject to the Short-Short Limitation if they are held for less than three
months. Income from the disposition of foreign currencies, and options, futures
and forward contracts on foreign currencies, that are not directly related to
the Fund's principal business of investing in securities (or options and futures
with respect to securities) also will be subject to the Short-Short Limitation
if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
OTHER INFORMATION
Effective July 1, 1991, the name of Growth Fund was changed from
"PaineWebber Classic Growth Fund" to its current name. Growth and Income Fund's
name was changed from "PaineWebber Classic Growth and Income Fund" to
"PaineWebber Dividend Growth Fund" effective May 17, 1991 and to its current
name effective April 3, 1995. Effective on May 17, 1991, Growth and Income Fund
was combined in a tax-free reorganization with PaineWebber Classic Dividend
Growth Fund, which was at that time another series of PaineWebber America Fund.
As a result of the reorganization, each shareholder of PaineWebber Classic
Dividend Growth Fund became a shareholder of Growth and Income Fund. Effective
July , 1996, the name of Small Cap Fund was changed from
33
<PAGE>
"Small Cap Value Fund" to its current name [and Small Cap Fund was combined in a
tax-free reorganization with Small Cap Growth Fund, a series of PaineWebber
Investment Trust III. As a result of the reorganization, each shareholder of
PaineWebber Small Cap Growth Fund became a shareholder of Small Cap Fund.] Prior
to November 10, 1995, the Class Y shares of Growth and Income Fund and Growth
Fund were known as "Class C" shares.
PaineWebber America Fund, PaineWebber Olympus Fund and PaineWebber
Securities Trust are entities of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of the Funds could, under
certain circumstances, be held personally liable for the obligations of the
Trusts or Funds. However, each Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trusts or the Funds 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 any Trust or Fund, the trustees or any of them in
connection with a Trust. Each Declaration of Trust provides for indemnification
from a Fund's property for all losses and expenses of any shareholder held
personally liable for the obligations of that Fund. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which a 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 that
Fund. The trustees intend to conduct the operations of each Fund in such a way
as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Funds.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Funds, has passed upon
the legality of the shares offered by the Funds' Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to PaineWebber and Mitchell Hutchins in
connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for Growth Fund and Growth and Income Fund. Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036, serves as
independent accountants for Small Cap Fund.
FINANCIAL STATEMENTS
Each Fund's Annual Report to Shareholders for its last fiscal year is a
separate document supplied with this Statement of Additional Information and the
financial statements, accompanying notes and report of independent auditors
appearing therein are incorporated herein by this reference. The Semi-Annual
Report to Shareholders for Small Cap Fund is a separate document supplied with
this Statement of Additional Information and the financial statements and
accompanying notes appearing therein are incorporated herein by reference.
34
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC. ("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 a
"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; CA. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings; C. Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's 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 STANDARD & POOR'S ("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 higher
rated issues only in small degree; A. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories; BB,
B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the
35
<PAGE>
highest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions; C1. The rating C1 is reserved for income
bonds on which no interest is being paid; D. Debt rated D is in default, and
payment of interest and/or repayment of principal is in arrears.
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.
36
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE
PROSPECTUS OR IN THIS STATEMENT OF PAINEWEBBER
ADDITIONAL INFORMATION IN CONNECTION
WITH THE OFFERING MADE BY THE
PROSPECTUS AND, IF GIVEN OR MADE, GROWTH AND INCOME FUND
SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUNDS OR THEIR PAINEWEBBER
DISTRIBUTOR. THE PROSPECTUS AND THIS
STATEMENT OF ADDITIONAL INFORMATION
DO NOT CONSTITUTE AN OFFERING BY ANY GROWTH FUND
FUND OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
------------------- STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
MAY 1, 1996
PAGE
---- PAINEWEBBER
Investment Policies and Restrictions 1
Investment Limitations of the Funds. 7 SMALL CAP FUND
Hedging Strategies.................. 9
Trustees and Officers............... 16
Investment Advisory and Distribution STATEMENT OF ADDITIONAL INFORMATION
Arrangements........................ 24
Portfolio Transactions.............. 26 JULY , 1996
Valuation of Shares................. 29
Performance Information............. 29
Taxes............................... 32
Other Information................... 33
Financial Statements................ 34 CLASS Y SHARES
Appendix............................ 35
(C)1996 PaineWebber Incorporated
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements: (filed herewith)
PaineWebber Small Cap Value Fund
--------------------------------
Included in Part A of this Registration Statement:
Not applicable
Included in Part B of this Registration Statement through incorporation by
reference from the Semi-Annual Report to Shareholders, as filed with the
SEC through EDGAR on April 2, 1996, Accession No. 0000950130-96-001115:
Portfolio of Investments at January 31, 1996 (unaudited)
Statement of Assets and Liabilities at January 31, 1996 (unaudited)
Statement of Changes in Net Assets for the six months ended January
31, 1996 (unaudited)
Statement of Operations for the six months ended January 31, 1996
(unaudited)
Notes to Financial Statements (unaudited)
Financial Highlights for one Class A, Class B and Class C share of the
Fund for the six months ended January 31, 1996 (unaudited)
Included in Part B of this Registration Statement through incorporation by
reference from the Annual Report to Shareholders previously filed with the
Securities and Exchange Commission through EDGAR on October 5, 1995
(Accession No. 0000950130-95-001994):
Portfolio of Investments at July 31, 1995.
Statement of Assets and Liabilities at July 31, 1995.
Statement of Operations for the fiscal year ended July 31, 1995.
Statement of Changes in Net Assets for the fiscal year ended July 31,
1995 and the period February 1, 1994 to July 31, 1994.
Notes to Financial Statements.
Financial Highlights for one Class A, Class B and Class C share of the
Fund for the fiscal year ended July 31, 1995, the period February 1,
1994 to July 31, 1994 and the year ended January 31, 1994.
Report of Price Waterhouse LLP, Independent Accountants, dated
September 20, 1995.
C-1
<PAGE>
(b) Exhibits:
(1) (a) Declaration of Trust 1/
-
(b) Amendment effective December 10, 1992 to Declaration of Trust 2/
-
(c) Amendment effective November 29, 1993 to Declaration of Trust 6/
-
(d) Amendment effective July 20, 1995 to Declaration of Trust 12/
--
(e) Amendment effective November 10, 1995 to Declaration of Trust 12/
--
(2) (a) By-Laws 1/
-
(b) Amendment dated September 28, 1994 to By-Laws 8/
-
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 9/
-
(5) (a) Investment Advisory and Administration Contract 4/
-
(b) Fee Agreement with respect to PaineWebber Strategic Income Fund
6/
-
(6) (a) Distribution Contract with respect to Class A Shares 5/
-
(b) Distribution Contract with respect to Class B Shares 5/
-
(c) Distribution Contract with respect to Class C Shares 10/
--
(d) Distribution Contract with respect to Class Y Shares 12/
--
(e) Exclusive Dealer Agreement with respect to Class A Shares 5/
-
(f) Exclusive Dealer Agreement with respect to Class B Shares 5/
-
(g) Exclusive Dealer Agreement with respect to Class C Shares 10/
--
(h) Exclusive Dealer Agreement with respect to Class Y Shares 12/
--
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 5/
-
(9) Form of Transfer Agency Agreement 7/
-
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A, B and C shares of
PaineWebber Small Cap Value Fund 3/
-
(b) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A, B and C shares of
PaineWebber Strategic Income Fund 5/
-
(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y shares of PaineWebber
Strategic Income Fund 12/
--
(d) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y shares of PaineWebber Small
Cap Value Fund (filed herewith)
(11) Other opinions, appraisals, rulings and consents:
Accountants' consent with respect to PaineWebber Small Cap Value
Fund (filed herewith)
(12) Financial Statements omitted from Part B - none
(13) Letter of investment intent 3/
-
(14) Prototype Retirement Plan - none
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares 4/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares 4/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
C Shares 4/
-
(d) Addendum to Plan of Distribution pursuant to Rule 12b-1 with
respect to Class C Shares of PaineWebber Strategic Income Fund 6/
-
(16) (a) Schedule for Computation of Performance Quotations for
PaineWebber Small Cap Value Fund 6/
-
(b) Schedule of Computation of Performance Quotations for PaineWebber
Strategic Income Fund 8/
-
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan Pursuant to Rule 18f-3 13/
--
C-2
<PAGE>
_____________
1/ Incorporated by reference from Registrant's initial Registration Statement,
- -
SEC File No. 33-55374, filed December 3, 1992.
2/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
- -
Registration Statement, SEC File No. 33-55374, filed January 7, 1993.
3/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
- -
Registration Statement, SEC File No. 33-55374, filed January 28, 1993.
4/ Incorporated by reference from Post-Effective Amendment No. 1 to the
- -
Registration Statement, SEC File No. 33-55374, filed August 13, 1993.
5/ Incorporated by reference from Post-Effective Amendment No. 2 to the
- -
Registration Statement, SEC File No. 33-55374, filed November 29, 1993.
6/ Incorporated by reference from Post-Effective Amendment No. 3 to the
- -
Registration Statement, SEC File No. 33-55374, filed June 1, 1994.
7/ Incorporated by reference from Post-Effective Amendment No. 6 to the
- -
Registration Statement, SEC File No. 33-55374, filed December 1, 1994.
8/ Incorporated by reference from Post-Effective Amendment No. 7 to the
- -
Registration Statement, SEC File No. 33-55374, filed June 1, 1995.
9/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- -
Registrant's Declaration of Trust, as amended effective December 10, 1992,
November 29, 1993, July 20, 1995 and November 10, 1995, and from Articles
II, VII and X of Registrant's By-Laws, as amended September 28, 1994.
10/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- --
Registration Statement, SEC File No. 33-55374, filed November 14, 1995.
11/ Incorporated by reference from Post-Effective Amendment No. 9 to the
- --
Registration STatement, SEC File No. 33-55474, filed April 4, 1996.
12/ Incorporated by reference from Post-Effective Amendment No. 13 to the
- --
Registration STatement, SEC File No. 33-55474, filed May 31, 1996.
13/ Incorporated by reference from Post-Effective Amendment No. 10 to the
- --
Registration STatement, SEC File No. 33-55474, filed April 26, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
None
Item 26. Number of Holders of Securities
-------------------------------
C-3
<PAGE>
Title of Class Number of Record Holders as
--------------
of May 17, 1996
------------
Shares of beneficial interest,
par value $0.001 per share, in
PaineWebber Small Cap Value Fund
Class A Shares 2,024
Class B Shares 5,032
Class C Shares 1,469
Class Y Shares 0
PaineWebber Strategic Income Fund
Class A Shares 757
Class B Shares 2,572
Class C Shares 1,066
Class Y Shares 0
Item 27. Indemnification
---------------
Section 3 of Article X of the Declaration of Trust, "Indemnification,"
provides that the appropriate series of the Registrant will indemnify the
trustees and officers of the Registrant to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue of
being or having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article X, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
did not act in good faith in the reasonable belief that his action was in the
best interest of the Registrant. Section 3 of Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Registrant or a particular series; and that, provided they
have exercised reasonable care and have acted under the reasonable belief that
their actions are in the best interest of the Registrant, the trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgement or mistakes of fact or law,
for any act or omission in accordance with advice of counsel or other experts,
or for failing to follow such advice, with respect to the meaning and operation
of the Declaration of Trust.
Article IX of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Registrant, or is or was serving at the request of the
Registrant as a trustee, officer or employee of a corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the Registrant would have the power to indemnify him
against such liability to the Registrant or its shareholders, provided that the
Registrant may not purchase or maintain insurance that protects any such person
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
C-4
<PAGE>
Section 9 of the Investment Advisory and Administration Contract with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") provides that
Mitchell Hutchins shall not be liable for any error of judgment or mistake of
law or for any loss suffered by any series of the Registrant in connection with
the matters to which the Contract relates, except for a loss resulting from the
willful misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the
performance of its duties or from its reckless disregard of its obligations and
duties under the Contract. Section 10 of the Contract provides that the
Trustees shall not be liable for any obligations of the Trust or any series
under the Contract and that Mitchell Hutchins shall look only to the assets and
property of the Registrant in settlement of such right or claim and not to the
assets and property of the Trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and Trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with the Contract. Section 10 of each Distribution
Contract contains provisions similar to Section 10 of the Investment Advisory
and Administration Contract, with respect to Mitchell Hutchins and PaineWebber,
as appropriate.
Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number 801-
13219), and is incorporated herein by reference.
C-5
<PAGE>
Item 29. Principal Underwriters
----------------------
a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER INVESTMENT TRUST III
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. The directors
and officers of Mitchell Hutchins, their principal business addresses, and their
positions and offices with Mitchell Hutchins are identified in its Form ADV, as
filed with the Securities and Exchange Commission (registration number 801-
13219). The directors and officers of PaineWebber, their principal business
addresses, and their positions and offices with PaineWebber are identified in
its Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-7163). The foregoing information is hereby incorporated herein by
reference. The information set forth below is furnished for those directors and
officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant:
C-6
<PAGE>
Name and Principal Positions and Offices Positions and Offices With
Business Address With Registrant Underwriter or Exclusive Dealer
---------------- --------------- -------------------------------
Margo N. Alexander Trustee and President President, Chief Executive
1285 Avenue of the (Chief Executive Officer and a director of
Americas Officer) Mitchell Hutchins; Executive
New York, NY 10019 Vice President and a director
of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior
1285 Avenue of the Investment Strategist and
Americas Member of the Investment
New York, NY 10019 Policy Committee of
PaineWebber
Teresa M. Boyle Vice President First Vice President and
1285 Avenue of the Manager - Advisory
Americas Administration of Mitchell
New York, NY 10019 Hutchins
Donald R. Jones Vice President First Vice President and a
1285 Avenue of the Portfolio Manager of Mitchell
Americas Hutchins
New York, NY 10019
Thomas J. Libassi Vice President Senior Vice President and a
1285 Avenue of the Portfolio Manager of Mitchell
Americas Hutchins
New York, NY 10019
C. William Maher Vice President and First Vice President and a
1285 Avenue of the Assistant Treasurer Senior Manager of the Mutual
Americas Fund Finance Division of
New York, NY 10019 Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief
1285 Avenue of the Investment Officer - Fixed
Americas Income of Mitchell Hutchins
New York, NY 10019
Ann E. Moran Vice President and Vice President of Mitchell
1285 Avenue of the Assistant Treasurer Hutchins
Americas
New York, NY 10019
Dianne E. O'Donnell Vice President and Senior Vice President and
1285 Avenue of the Secretary Deputy General Counsel of
Americas Mitchell Hutchins
New York, NY 10019
Victoria E. Schonfeld Vice President Managing Director and General
1285 Avenue of the Counsel of Mitchell Hutchins
Americas
New York, NY 10019
Paul H. Schubert Vice President and First Vice President and a
1285 Avenue of the Assistant Treasurer Senior Manager of the Mutual
Americas Fund Finance Division of
New York, NY 10019 Mitchell Hutchins
Nirmal Singh 1285 Vice President First Vice President and a
Avenue of the Americas Portfolio Manager of Mitchell
New York, NY 10019 Hutchins
C-7
<PAGE>
Name and Principal Positions and Offices Positions and Offices With
Business Address With Registrant Underwriter or Exclusive Dealer
---------------- --------------- -------------------------------
Julian F. Sluyters Vice President and Senior Vice President and
1285 Avenue of the Treasurer Director of the Mutual Fund
Americas Finance Division of Mitchell
New York, NY 10019 Hutchins
Mark A. Tincher Vice President Managing Director and Chief
1285 Avenue of the Investment Officer - U.S.
Americas Equity Investments of Mitchell
New York, NY 10019 Hutchins
Craig Varrelman Vice President First Vice President and a
1285 Avenue of the Portfolio Manager of Mitchell
Americas Hutchins
New York, NY 10019
Stuart Waugh Vice President Managing Director and a
1285 Avenue of the Portfolio Manager of Mitchell
Americas Hutchins
New York, NY 10019
Keith A. Weller Vice President and First Vice President and
1285 Avenue of the Assistant Secretary Associate General Counsel of
Americas Mitchell Hutchins
New York, NY 10019
c) None
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and (d) of
Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's Investment Adviser, Mitchell Hutchins, 1285
Avenue of the Americas, New York, New York 10019. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession of
Registrant's transfer agent and custodian.
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 28th day of June, 1996.
PAINEWEBBER SECURITIES TRUST
By: /s/ Dianne E. O'Donnell
----------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Margo N. Alexander President and Trustee June 28, 1996
---------------------------- (Chief Executive Officer)
Margo N. Alexander *, **
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman June 28, 1996
---------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. ***
/s/ Richard Q. Armstrong Trustee June 28, 1996
----------------------------
Richard Q. Armstrong **
/s/ Richard Burt Trustee June 28, 1996
----------------------------
Richard Burt **
/s/ Mary C. Farrell Trustee June 28, 1996
----------------------------
Mary C. Farrell **
/s/ Meyer Feldberg Trustee June 28, 1996
----------------------------
Meyer Feldberg **
/s/ George W. Gowen Trustee June 28, 1996
----------------------------
George W. Gowen ***
/s/ Frederick V. Malek Trustee June 28, 1996
----------------------------
Frederic V. Malek **
/s/ Carl W. Schafer Trustee June 28, 1996
----------------------------
Carl W. Schafer **
/s/ John R. Torell III Trustee June 28, 1996
----------------------------
John R. Torell III **
/s/ Julian F. Sluyters Vice President and Treasurer (Chief June 28, 1996
---------------------------- Financial and Accounting Officer)
Julian F. Sluyters
C-9
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 8, 1995 and incorporated by reference from Post-Effective Amendment
No. 34 to the registration statement of PaineWebber America Fund, SEC File
No. 2-78626, filed May 10, 1995.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
April 18, 1996 and incorporated by reference from Post-Effective Amendment
No. 17 to the registration statement of PaineWebber Municipal Series, SEC
File No. 33-11611, filed April 25, 1996.
*** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
April 18, 1996 and incorporated by reference from Post-Effective Amendment
No. 14 to the registration statement of PaineWebber Investment Trust, SEC
File No. 33-39659, filed May 2, 1996.
C-10
<PAGE>
PAINEWEBBER SECURITIES TRUST
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
(1) (a) Declaration of Trust 1/
-
(b) Amendment effective December 10, 1992 to Declaration of Trust 2/
-
(c) Amendment effective November 29, 1993 to Declaration of Trust 6/
-
(d) Amendment effective July 20, 1995 to Declaration of Trust 13/
--
(e) Amendment effective November 10, 1995 to Declaration of Trust 13/
--
(2) (a) By-Laws 1/
-
(b) Amendment dated September 28, 1994 to By-Laws 8/
-
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 9/
-
(5) (a) Investment Advisory and Administration Contract 4/
-
(b) Fee Agreement with respect to PaineWebber Strategic Income Fund
6/
-
(6) (a) Distribution Contract with respect to Class A Shares 5/
-
(b) Distribution Contract with respect to Class B Shares 5/
-
(c) Distribution Contract with respect to Class C Shares 10/
--
(d) Distribution Contract with respect to Class Y Shares 13/
--
(e) Exclusive Dealer Agreement with respect to Class A Shares 5/
-
(f) Exclusive Dealer Agreement with respect to Class B Shares 5/
-
(g) Exclusive Dealer Agreement with respect to Class C Shares 10/
--
(h) Exclusive Dealer Agreement with respect to Class Y Shares 13/
--
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 5/
-
(9) Form of Transfer Agency Agreement 7/
-
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A, B and C shares of
PaineWebber Small Cap Value Fund 3/
-
(b) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A, B and C shares of
PaineWebber Strategic Income Fund 5/
-
(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y shares of PaineWebber
Strategic Income Fund 13/
--
(d) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y shares of PaineWebber Small
Cap Value Fund (filed herewith)
(11) Other opinions, appraisals, rulings and consents:
Accountants' consent with respect to PaineWebber Small Cap Value
Fund (filed herewith)
(12) Financial Statements omitted from Part B - none
(13) Letter of investment intent 3/
-
(14) Prototype Retirement Plan - none
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares 4/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares 4/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
C Shares 4/
-
(d) Addendum to Plan of Distribution pursuant to Rule 12b-1 with
respect to Class C Shares of PaineWebber Strategic Income Fund 6/
-
(16) (a) Schedule for Computation of Performance Quotations for
PaineWebber Small Cap Value Fund 6/
-
(b) Schedule of Computation of Performance Quotations for PaineWebber
Strategic Income Fund 8/
-
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan Pursuant to Rule 18f-3 12/
--
<PAGE>
_____________
1/ Incorporated by reference from Registrant's initial Registration Statement,
- -
SEC File No. 33-55374, filed December 3, 1992.
2/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
- -
Registration Statement, SEC File No. 33-55374, filed January 7, 1993.
3/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
- -
Registration Statement, SEC File No. 33-55374, filed January 28, 1993.
4/ Incorporated by reference from Post-Effective Amendment No. 1 to the
- -
Registration Statement, SEC File No. 33-55374, filed August 13, 1993.
5/ Incorporated by reference from Post-Effective Amendment No. 2 to the
- -
Registration Statement, SEC File No. 33-55374, filed November 29, 1993.
6/ Incorporated by reference from Post-Effective Amendment No. 3 to the
- -
Registration Statement, SEC File No. 33-55374, filed June 1, 1994.
7/ Incorporated by reference from Post-Effective Amendment No. 6 to the
- -
Registration Statement, SEC File No. 33-55374, filed December 1, 1994.
8/ Incorporated by reference from Post-Effective Amendment No. 7 to the
- -
Registration Statement, SEC File No. 33-55374, filed June 1, 1995.
9/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- -
Registrant's Declaration of Trust, as amended effective December 10, 1992,
November 29, 1993, July 20, 1995 and November 10, 1995, and from Articles
II, VII and X of Registrant's By-Laws, as amended September 28, 1994.
10/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- --
Registration Statement, SEC File No. 33-55374, filed November 14, 1995.
11/ Incorporated by reference from Post-Effective Amendment No. 9 to the
- --
Registration Statement, SEC File No. 33-55474, filed April 4, 1996.
12/ Incorporated by reference from Post-Effective Amendment No. 10 to the
- --
Registration Statement, SEC File No. 33-55474, filed April 26, 1996.
13/ Incorporated by reference from Post-Effective Amendment No. 13 to the
- --
Registration Statement, SEC File No. 33-55474, filed May 31, 1996.
EXHIBIT 10(d)
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036-1800
June 28, 1996
PaineWebber Securities Trust
1285 Avenue of the Americas
New York, New York 10019
Dear Sir/Madam:
PaineWebber Securities Trust ("Trust") is an unincorporated voluntary
association organized under the laws of the Commonwealth of Massachusetts on
December 3, 1992. You have requested our opinion regarding certain matters in
connection with the issuance by the Trust of an indefinite number of Class Y
shares of beneficial interest ("Class Y Shares") of PaineWebber Small Cap Value
Fund, one of the two series of the Trust.
We have, as counsel, participated in various business and other matters
related to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of the Declaration of Trust and By-Laws of the Trust, the
minutes of the meetings of the trustees and other documents relating to the
organization and operation of the Trust, and we generally are familiar with its
business affairs. Based on the foregoing, it is our opinion that the unlimited
number of unissued Class Y Shares of PaineWebber Small Cap Fund, which are
currently being registered under the Securities Act of 1933, as amended ("1933
Act"), may be legally and validly issued from time to time in accordance with
the Trust's Declaration of Trust and By-Laws and, subject to compliance with the
1933 Act, the Investment Company Act of 1940, as amended, and various state laws
regulating the offer and sale of securities; and when so issued, the Class Y
Shares of PaineWebber Small Cap Value Fund will be legally issued, fully paid
and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the trust. The
<PAGE>
PaineWebber Securities Trust
June 28, 1996
Page 2
Declaration of Trust states that creditors of, contractors with and claimants
against the Trust or any series thereof shall look only to the assets of the
Trust or the appropriate series for payment. It also requires that notice of
such disclaimer be given in each note, bond, contact, certificate, undertaking
or instrument made or issued by the officers or trustees of the Trust on behalf
of the Trust. The Declaration of Trust further provides (i) for indemnification
from the assets of the appropriate series for all loss and expense of any
shareholder held personally liable for the obligations of the Trust or any
series by virtue of ownership of shares of such series and (ii) for the
appropriate series to assume the defense of any claim against the shareholder
for any act or obligation of the series. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust or series would be unable to meet its
obligations.
We hereby consent to the filing of this opinion in connection with Post-
Effective Amendment No. 14 to the Trust's Registration Statement on Form N-1A
(SEC File Nos. 33-55374 and 811-7374) to be filed with the Securities and
Exchange Commission. We also consent to the reference to our firm under the
caption "Counsel" in the Statement of Additional Information filed as part of
the Registration Statement.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By:/s/ Susan M. Casey
------------------------
Susan M. Casey
Exhibit 11
Price Waterhouse LLP
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 14 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated September 20, 1995, relating to the financial
statements and financial highlights appearing in the July 31, 1995 Annual
Report to Shareholders of PaineWebber Small Cap Value Fund, which are also
incorporated by reference into the Registration Statement. We also consent
to the reference to us under the heading "Other Information - Auditors" in
the Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 27, 1996
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<NAME> PAINEWEBBER SECURITIES TRUST
<SERIES>
<NUMBER> 1
<NAME> PAINEWEBBER SMALL CAP VALUE FUND-CLASS A
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<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
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<INVESTMENTS-AT-VALUE> 19,752
<RECEIVABLES> 18
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<OTHER-ITEMS-ASSETS> 39
<TOTAL-ASSETS> 19,809
<PAYABLE-FOR-SECURITIES> 0
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<DIVIDEND-INCOME> 198
<INTEREST-INCOME> 52
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<EXPENSES-NET> 200
<NET-INVESTMENT-INCOME> 49
<REALIZED-GAINS-CURRENT> 762
<APPREC-INCREASE-CURRENT> (351)
<NET-CHANGE-FROM-OPS> 460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1,468
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 158
<NUMBER-OF-SHARES-REDEEMED> (271)
<SHARES-REINVESTED> 130
<NET-CHANGE-IN-ASSETS> (838)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 942
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 104
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 200
<AVERAGE-NET-ASSETS> 20,556
<PER-SHARE-NAV-BEGIN> 11.30
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.23
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 2
<NAME> PAINEWEBBER SMALL CAP VALUE FUND-CLASS B
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 38,812
<INVESTMENTS-AT-VALUE> 41,108
<RECEIVABLES> 36
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 83
<TOTAL-ASSETS> 41,228
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 352
<TOTAL-LIABILITIES> 352
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,989
<SHARES-COMMON-STOCK> 3,882
<SHARES-COMMON-PRIOR> 4,139
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (17)
<ACCUMULATED-NET-GAINS> 608
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,296
<NET-ASSETS> 40,876
<DIVIDEND-INCOME> 412
<INTEREST-INCOME> 107
<OTHER-INCOME> 0
<EXPENSES-NET> 581
<NET-INVESTMENT-INCOME> (62)
<REALIZED-GAINS-CURRENT> 1,586
<APPREC-INCREASE-CURRENT> (731)
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