PAINEWEBBER GROWTH FUND
PAINEWEBBER GROWTH AND INCOME FUND
PAINEWEBBER MID CAP FUND
PAINEWEBBER SMALL CAP FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above are diversified series of professionally
managed, open-end management investment companies organized as Massachusetts
business trusts (each a "Trust"). PaineWebber Growth Fund is a series of
PaineWebber Olympus Fund. PaineWebber Growth and Income Fund is a series of
PaineWebber America Fund. PaineWebber Mid Cap Fund is a series of PaineWebber
Managed Assets Trust. PaineWebber Small Cap Fund is a series of PaineWebber
Securities Trust.
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares.
Portions of each fund's Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information ("SAI"). The Annual
Reports accompany this SAI. You may obtain an additional copy of a fund's Annual
Report by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction with
the funds' current Prospectus, dated December 1, 1999. A copy of the Prospectus
may be obtained by calling any PaineWebber Financial Advisor or correspondent
firm or by calling toll-free 1-800-647-1568. This SAI is dated December 1, 1999.
TABLE OF CONTENTS
PAGE
The Funds and Their Investment............................................. 2
Policies...................................................................
The Funds' Investments, Related Risks and Limitations...................... 3
Strategies Using DerivativeInstruments..................................... 11
Organization of Trusts; Trustees and Officers and Principal
Holders of Securities..................................................... 18
Investment Advisory, Administration and Distribution Arrangements.......... 26
Portfolio Transactions..................................................... 33
Reduced Sales Charges, Additional Exchange and Redemption
Information and Other Services.......................................... 36
Conversion of Class B Shares............................................... 41
Valuation of Shares........................................................ 42
Performance Information.................................................... 42
Taxes...................................................................... 46
Other Information.......................................................... 49
Financial Statements....................................................... 51
Appendix................................................................... A-1
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THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
The investment objective of GROWTH FUND is long-term capital appreciation.
The fund invests primarily in equity securities of companies believed by
Mitchell Hutchins to have substantial potential for capital growth. Under normal
circumstances, the fund invests at least 65% of its total assets in equity
securities.
Growth Fund may invest up to 35% of its total assets in U.S. government
bonds and in corporate bonds, including up to 10% in bonds that are rated below
investment grade. These bonds may be convertible bonds and may be rated no lower
than B+ by Standard and Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), B-1 by Moody's Investors Service, Inc. ("Moody's) or comparably rated
by another rating agency or, if unrated, determined by Mitchell Hutchins to be
of comparable quality. The fund may invest up to 25% of its total assets 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 market.
Growth Fund may invest up to 10% of its net assets in illiquid securities.
The fund may purchase securities on a when-issued or delayed delivery basis. The
fund may lend its portfolio securities to qualified broker-dealers or
institutional investors in an amount up to 33 1/3% of its total assets. The fund
may borrow from banks or through reverse repurchase agreements for temporary or
emergency purposes, but not in excess of 10% of its total assets. The fund may
invest in the securities of other investment companies and may sell short
"against the box."
The investment objective of GROWTH AND INCOME FUND is current income and
capital growth. The fund seeks to achieve the capital growth portion of its
objective by investing, under normal circumstances, at least 65% of its total
assets in equity securities believed by Mitchell Hutchins to have the potential
for rapid earnings growth. The fund seeks to achieve the income portion of its
objective by investing, under normal circumstances, at least 65% of its total
assets in income-producing securities, which may include dividend-paying equity
securities, bonds and money market instruments. The fund may invest up to 10% of
its total assets in convertible securities rated below investment grade but no
lower than B by S&P or Moody's, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality. The fund
may also invest up to 25% of its total assets 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 market.
Growth and Income Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow from banks or through reverse repurchase
agreements for temporary or emergency purposes, but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
The investment objective of MID CAP FUND is long-term capital
appreciation. Under normal circumstances, the fund invests at least 65% of its
total assets in equity securities of medium capitalization ("mid cap")
companies, which the fund defines as companies having market capitalizations of
at least $750 million and no more than $8 billion at the time of purchase. The
fund may invest up to 35% of its total assets in equity securities of companies
that are larger or smaller than mid cap companies, as well as in bonds and money
market instruments. The fund may invest up to 35% of its total assets in U.S.
dollar-denominated equity securities of foreign issuers that are traded on
recognized U.S. exchanges or in the U.S. over-the-counter market.
Mid Cap Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
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total assets. The fund may borrow from banks or through reverse repurchase
agreements for temporary or emergency purposes, but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
The investment objective of SMALL CAP FUND is long-term capital
appreciation. Under normal circumstances, the fund invests at least 65% of its
total assets in equity securities of small capitalization ("small cap")
companies, which the fund defines as companies having market capitalizations of
up to $1.5 billion at the time of purchase. The 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 bonds and money market instruments. This includes up to
10% in convertible bonds that are rated below investment grade, but no lower
than B by S&P or Moody's, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality. The fund
may invest up to 25% of its total assets in U.S. dollar-denominated equity
securities of foreign issuers that are traded on recognized U.S. exchanges or in
the U.S. over-the-counter market.
Small Cap Fund may invest up to 15% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow from banks or through reverse repurchase
agreements for temporary or emergency purposes, but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the funds' investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or this SAI, the funds have established
no policy limitations on their ability to use the investments or techniques
discussed in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most preferred
stocks and securities that are convertible into them, including common stock
purchase warrants and rights, equity interests in trusts, partnerships, joint
ventures or similar enterprises and depositary receipts. Common stocks, the most
familiar type, represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
bonds may include debentures and notes that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. Preferred stock
also may be converted into or exchanged for common stock. Depositary receipts
typically are issued by banks or trust companies and evidence ownership of
underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that a fund may experience a substantial or
complete loss on an individual equity investment. While this is possible with
bonds, it is less likely.
BONDS. Bonds are fixed or variable rate debt obligations, including notes,
debentures, money market instruments and similar instruments and securities.
Mortgage- and asset-backed securities are types of bonds, and certain types of
income-producing, non-convertible preferred stocks may be treated as bonds for
investment purposes. Bonds generally are used by corporations and governments to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and normally must repay the amount borrowed on or before
maturity. Many preferred stocks and some bonds are "perpetual" in that they have
no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
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changes than are bonds with shorter durations. Duration is a measure of the
expected life of a bond on a present value basis. Credit risk is the risk that
an issuer may be unable or unwilling to pay interest and/or principal on the
bond. Credit risk can be affected by many factors, including adverse changes in
the issuer's own financial condition or in economic conditions.
CONVERTIBLE SECURITIES. A convertible security is a bond, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock because
they have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.
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.
WARRANTS. Warrants are securities permitting, but not obligating, holders
to subscribe for other securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other rating
agencies are private services that provide ratings of the credit quality of debt
obligations and certain other securities. A description of the ratings assigned
to corporate bonds by Moody's and S&P is included in the Appendix to this SAI.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a debt security's value or
its liquidity and do not guarantee the performance of the issuer. 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. There is a risk that rating agencies may
downgrade the rating of a bond. 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.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins will analyze interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds are dependent on a variety of factors, including
general money market conditions, general conditions in the bond market, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the payment
of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality. Moody's
considers bonds rated Baa (its lowest investment grade rating) to have
speculative characteristics. This means that changes in economic conditions or
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other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated bonds.
Non-investment grade bonds (commonly known as "junk bonds") are rated Ba
or lower by Moody's, BB or lower by S&P, comparably rated by another rating
agency or, if unrated, determined by Mitchell Hutchins to be of comparable
quality. A fund's investments in non-investment grade bonds entail greater risk
than its investments in higher rated bonds. Non-investment grade bonds, which
are sometimes referred to as "high yield" bonds, are considered predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal and may involve significant risk exposure to adverse conditions.
Non-investment grade bonds generally offer a higher current yield than that
available for investment grade issues; however, they involve greater risks, in
that they are especially sensitive 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 by collateral and will not receive payment until more senior claims
are paid in full.
The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds 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
restructurings or defaults. There can be no assurance that such declines will
not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's ability
to sell such securities at fair value in response to changes in the economy or
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade securities, especially in a thinly traded market.
U.S. GOVERNMENT SECURITIES. U.S. government securities include direct
obligations of the U.S. Treasury (such as Treasury bills, notes or bonds) and
obligations issued or guaranteed as to principal and interest (but not as to
market value) by the U.S. government, its agencies or its instrumentalities.
U.S. government securities include mortgage-backed securities issued or
guaranteed by government agencies or government-sponsored enterprises. Other
U.S. government securities may be backed by the full faith and credit of the
U.S. government or supported primarily or solely by the creditworthiness of
the government-related issuer or, in the case of mortgage-backed securities,
by pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the principal and interest components are individually numbered and
separately issued by the U.S. Treasury.
Treasury inflation-protected securities ("TIPS") are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semi-annually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds. Any increase in the value of TIPS is taxable in the year the increase
occurs, even though holders do not receive cash representing the increase at
that time.
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INVESTING IN FOREIGN SECURITIES. The funds may invest in U.S.
dollar-denominated equity securities of foreign issuers that are traded on
recognized U.S. exchanges or in the U.S. over-the-counter market. Securities of
foreign issuers may not be registered with the Securities and Exchange
Commission ("SEC"), and the issuers thereof may not be subject to its reporting
requirements. Accordingly, there may be less publicly available information
concerning foreign issuers of securities held by the 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.
The funds may invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank
or trust company evidencing ownership of the underlying securities. They
generally are in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. For purposes of each fund's
investment policies, ADRs generally are deemed to have the same classification
as the underlying securities they represent. Thus, an ADR representing ownership
of common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
Investment income 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. The term "illiquid securities" means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which a fund has valued the securities and includes,
among other things, purchased over-the-counter options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins has determined are liquid pursuant to guidelines established
by each fund's board. The assets used as cover for over-the-counter options
written by the funds will be considered illiquid unless the over-the-counter
options are sold to qualified dealers who agree that the funds may repurchase
any over-the-counter options they write at a maximum price to be calculated by a
formula set forth in the option agreements. The cover for an over-the-counter
option written subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. A fund may not be able readily to liquidate its
investments in illiquid securities and may have to sell other investments if
necessary to raise cash to meet its obligations. The lack of a liquid secondary
market for illiquid securities may make it more difficult for a fund to assign a
value to those securities for purposes of valuing its portfolio and calculating
its net asset value.
Restricted securities are not registered under the Securities Act of 1933,
as amended ("Securities Act"), and may be sold only in privately negotiated or
other exempted transactions or after a Securities Act registration statement has
become effective. Where registration is required, 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 a 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.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the Securities Act. Institutional investors generally will not
seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
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Institutional markets for restricted securities also have developed as a
result of Rule 144A under the Securities Act, which establishes a "safe harbor"
from the registration requirements of that Act for resales of certain securities
to qualified institutional buyers. Such markets include automated systems for
the trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a fund, however, could affect adversely the marketability of the securities, and
the fund might be unable to dispose of them promptly or at favorable prices.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (E.G., the time needed to sell the security, how bids are solicited and
the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities in each fund's portfolio and reports periodically on such
decisions to the applicable board.
Mitchell Hutchins also monitors each fund's overall holdings of illiquid
securities. If a fund's holdings of illiquid securities comes to exceed its
limitation on investments in illiquid securities for any reason, such as a
security ceasing to qualify as liquid, changes in relative market values of
portfolio securities or shareholder redemptions, Mitchell Hutchins will consider
what action would be in the best interests of the fund and its shareholders.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
A fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by a fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. Each fund intends to
enter into repurchase agreements only with counterparties in transactions
believed by Mitchell Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by a fund subject to the fund's agreement to repurchase
the securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to each
fund's limitation on borrowings and may be entered into only with banks and
securities dealers or their affiliates. While a reverse repurchase agreement is
outstanding, a fund will maintain, in a segregated account with its custodian,
cash or liquid securities, marked to market daily, in an amount at least equal
to its obligations under the reverse repurchase agreement. See "The Funds'
Investments, Related Risks and Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
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files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may
receive an extension of time to determine whether to enforce the fund's
obligation to repurchase the securities, and the fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each fund
may invest in money market investments for temporary or defensive purposes or as
part of its normal investment program. Such investments include, among other
things, (1) securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, (2) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers, (3) commercial paper and
notes, including those with variable and floating rates of interest, (4) debt
obligations of foreign branches of U.S. banks, U.S. branches of foreign banks
and foreign branches of foreign banks, (5) debt obligations issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities, including obligations of supranational entities,
(6) bonds issued by foreign issuers, (7) repurchase agreements and (8) other
investment companies that invest exclusively in money market instruments.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The funds may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act of 1940, as amended ("1940 Act"), that at present
restrict investments in registered investment companies to no more than 10% of a
fund's total assets. The shares of other investment companies are subject to the
management fees and other expenses of those funds. At the same time, a fund
would continue to pay its own management fees and expenses with respect to all
its investments, including the securities of other investment companies.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. Each fund will retain authority to terminate any of its loans at any
time. Each fund may pay reasonable fees in connection with a loan and may pay
the borrower or placing broker a negotiated portion of the interest earned on
the reinvestment of cash held as collateral. A fund will receive 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, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the boards governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
SHORT SALES "AGAINST THE BOX." Each fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a fund, and that fund is
obligated to replace the securities borrowed at a date in the future. When a
fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, that fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. Each fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box.
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A fund might make a short sale "against the box" to hedge against market
risks when Mitchell Hutchins believes that the price of a security may decline,
thereby causing a decline in the value of a security owned by a fund or a
security convertible into or exchangeable for a security owned by a fund. 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 securities a fund owns,
either directly or indirectly, and in the case where a fund owns convertible
securities, changes in the investment value 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, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. A
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when a fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a fund on a when-issued or delayed delivery basis may
result in the fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, 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 that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a fund's net asset value. When a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "The Funds' Investments, Related Risks
and Limitations -- Segregated Accounts." A fund may sell the right to acquire
the security prior to delivery if Mitchell Hutchins deems it advantageous to do
so, which may result in a gain or loss to the fund.
COUNTERPARTIES. The funds may be exposed to the risk of financial failure
or insolvency of another party. To help lessen those risks, Mitchell Hutchins,
subject to the supervision of each fund's board, monitors and evaluates the
creditworthiness of the parties with which each fund does business.
SEGREGATED ACCOUNTS. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis and reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures and swaps.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
Each fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of
the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
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apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
(2) purchase any security if, as a result of that purchase, 25% or more of
the fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or to municipal securities.
(3) issue senior securities or borrow money, except as permitted under the
Investment Company Act, and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval. If a percentage restriction is adhered to at the time of
an investment or transaction, later changes in percentage resulting from a
change in values of portfolio securities or amount of total assets will not be
considered a violation of any of the following limitations.
Each fund will not:
(1) invest more than 10% of its net assets (15% of net assets for Small
Cap Fund) in illiquid securities.
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(3) 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
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and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) 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.
(5) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger (and
except that a fund will not purchase securities of registered open-end
investment companies or registered unit investment trusts in reliance on
Sections 12(d)(1)(F) or 12(d)(1)(G) of the Investment Company Act).
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may use a
variety of financial instruments ("Derivative Instruments"), including certain
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts and swap transactions. A fund may enter into transactions
involving one or more types of Derivative Instruments under which the full value
of its portfolio is at risk. Under normal circumstances, however, each fund's
use of these instruments will place at risk a much smaller portion of its
assets. The particular Derivative Instruments that may be used by the funds are
described below.
A fund might not use any Derivative Instruments or derivative strategies,
and there can be no assurance that using any strategy will succeed. If Mitchell
Hutchins is incorrect in its judgment on market values, interest rates or other
economic factors in using a Derivative Instrument or strategy, a fund may have
lower net income and a net loss on the investment.
OPTIONS ON EQUITY AND DEBT SECURITIES. A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to buy the underlying security at the
exercise price.
OPTIONS ON SECURITIES INDICES. A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS. A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
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most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. A fund may
use Derivative Instruments to attempt to hedge its portfolio and also to attempt
to enhance income or return or realize gains or to manage the duration of its
bond portfolio.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Derivative Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a fund's portfolio. Thus, in a short hedge a fund takes a
position in a Derivative Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, a
fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, a fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, 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 Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a fund intends to acquire. Thus, in a long
hedge, a fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, a fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transaction costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or indices of
securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. A fund might enter into a short straddle when
Mitchell Hutchins believes it unlikely that the prices of the securities will be
as volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad stock market
sectors in which a fund has invested or expects to invest. Derivative
Instruments on bonds may be used to hedge either individual securities or broad
fixed income market sectors.
Income strategies using Derivative Instruments may include the writing of
covered options to obtain the related option premiums. Return or gain strategies
may include using Derivative Instruments to increase or decrease a fund's
exposure to different asset classes without buying or selling the underlying
instruments. A fund also may use derivatives to simulate full investment by the
fund while maintaining a cash balance for fund management purposes (such as to
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provide liquidity to meet anticipated shareholder sales of fund shares and for
fund operating expenses).
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins may discover additional opportunities in
connection with Derivative Instruments and with hedging, income, return and gain
strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may use these
opportunities for a fund to the extent that they are consistent with the fund's
investment objective and permitted by its investment limitations and applicable
regulatory authorities. The funds' Prospectus or this SAI will be supplemented
to the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of Mitchell Hutchins to predict movements of the overall securities or interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Derivative Instruments, there can be no assurance that any particular
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if 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 increase might be wholly or partially offset by a decline in the
price of the Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, the
fund could suffer a loss. In either such case, the fund would have been in a
better position had it not hedged at all.
(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(I.E., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the fund sell a portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
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COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities or
other options or futures contracts or (2) cash or liquid securities with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each fund will comply with SEC guidelines
regarding cover for such transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. A fund may also use options
to attempt to enhance return or realize gains by increasing or reducing its
exposure to an asset class without purchasing or selling the underlying
securities. Writing covered put or call options can enable a fund to enhance
income by reason of the premiums paid by the purchasers of such options. Writing
covered call options serves as a limited short hedge, because declines in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the 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 over-the-counter options
written by a fund would be considered illiquid to the extent described under
"The Funds' Investments, Related Risks and Limitations--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contract to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. Options that
expire unexercised have no value.
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
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 over-the-counter
options. Currently, many options on equity securities (stocks) are
exchange-traded. Exchange markets for options on bonds exist but are relatively
new, and these instruments are primarily traded on the over-the-counter market.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. In
contrast, over-the-counter options are contracts between a fund and its
counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the fund
as well as the loss of any expected benefit of the transaction.
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The funds' ability to establish and close out positions in exchange-listed
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
over-the-counter options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. Although the
funds will enter into over-the-counter options only with counterparties that are
expected to be capable of entering into closing transactions with the funds,
there is no assurance that a fund will in fact be able to close out an
over-the-counter option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a fund might be unable to close out
an over-the-counter 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 a fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund may purchase and write put and call options on indices in much the
same manner as the more traditional options discussed above, except the index
options may serve as a hedge against overall fluctuations in a securities market
(or market sector) rather than anticipated increases or decreases in the value
of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. Each fund's use of options is governed
by the following guidelines, which can be changed by its board without
shareholder vote:
(1) A fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums on
all other options held by the fund, does not exceed 5% of its total assets.
(2) The aggregate value of securities underlying put options written by a
fund, determined as of the date the put options are written, will not exceed 50%
of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities and stock or bond indices and options on futures contracts) purchased
by a fund that are held at any time will not exceed 20% of its net assets.
FUTURES. The funds may purchase and sell securities index futures
contracts and interest rate future contracts. The funds may purchase put and
call options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices. In addition, a fund
may purchase or sell futures contracts or purchase options thereon to increase
or reduce its exposure to an asset class without purchasing or selling the
underlying securities, either as a hedge or to enhance return or realize gains.
Futures strategies also can be used to manage the average duration of a
fund's bond portfolio. If Mitchell Hutchins wishes to shorten the average
duration of a fund's bond portfolio, the fund may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the fund's bond
portfolio, the fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
A fund may also write put options on futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.
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No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a fund may be required by an exchange to increase
the level of its initial margin payment, and initial margin requirements might
be increased generally in the future by regulatory action.
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 unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. Each fund's use of
futures and related options is governed by the following guidelines, which can
be changed by its board without shareholder vote:
16
<PAGE>
(1) The aggregate initial margin and premiums on futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), excluding the amount by which options are "in-the-money,"
may not exceed 5% of its net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by each fund that are held at any time will not exceed 20%
of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each fund will not exceed 5% of its total assets.
SWAP TRANSACTIONS. Each fund may enter into swap transactions, which
include swaps, caps, floors and collars relating to interest rates, securities
or other instruments. Interest rate swaps involve an agreement between two
parties to exchange payments that are based, for example, on variable and fixed
rates of interest and that are calculated on the basis of a specified amount of
principal (the "notional principal amount") for a specified period of time.
Interest rate cap and floor transactions involve an agreement between two
parties in which the first party agrees to make payments to the counterparty
when a designated market interest rate goes above (in the case of a cap) or
below (in the case of a floor) a designated level on predetermined dates or
during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated ceiling level or goes below
a designated floor level on predetermined dates or during a specified time
period. Equity swaps or other swaps relating to securities or other instruments
are also similar, but they are based on changes in the value of the underlying
securities or instruments. For example, an equity swap might involve an exchange
of the value of a particular security or securities index in a certain notional
amount for the value of another security or index or for the value of interest
on that notional amount at a specified fixed or variable rate.
Each fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its bond portfolio or
to protect against any increase in the price of securities it anticipates
purchasing at a later date. A fund may use interest rate swaps, caps, floors and
collars as a hedge on either an asset-based or liability-based basis, depending
on whether it is hedging its assets or its liabilities. Interest rate swap
transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.
A fund will usually enter into swaps on a net basis, I.E., the two payment
streams are netted out, with the fund receiving or paying, as the case may be,
only the net amount of the two payments. Since segregated accounts will be
established with respect to such transactions, Mitchell Hutchins believes such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to the fund's borrowing restrictions. The net amount of
the excess, if any, of the fund's obligations over its entitlements with respect
to each swap will be accrued on a daily basis, and appropriate fund assets
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account as described above in "Investment Policies
and Restrictions -- Segregated Accounts." The fund also will establish and
maintain such segregated accounts with respect to its total obligations under
any swaps that are not entered into on a net basis.
A fund will enter into interest rate swap transactions only with banks and
recognized securities dealers or their respective affiliates believed by
Mitchell Hutchins to present minimal credit risk in accordance with guidelines
established by the fund's board. If there is a default by the other party to
such a transaction, the fund will have to rely on its contractual remedies
(which may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
17
<PAGE>
ORGANIZATION OF TRUSTS; TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
Each Trust was formed as a business trust under the laws of the
Commonwealth of Massachusetts. America Fund and Olympus Fund were formed on
October 31, 1986. Managed Assets Trust was formed on August 9, 1991. Securities
Trust was formed on December 3, 1992. Securities Trust has two operating series;
eachother Trust has one series. Each Trust is governed by a board of trustees,
which is authorized to establish additional series and to issue an unlimited
number of shares of beneficial interest of each existing or future series, par
value $0.001 per share. The board of each Trust oversees its operations.
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE EACH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------- -------------------
<S> <C> <C>
Margo N. Alexander*+; Trustee and President Mrs. Alexander is Chairman (since March
52 1999), chief executive officer and a
director of Mitchell Hutchins (since January
1995), and an executive vice president and a
director of PaineWebber (since March 1984).
Mrs. Alexander is president and a director or
trustee of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal of
One Old Church Road R.Q.A. Enterprises (management consulting
Unit #6 firm) (since April 1991 and principal
Greenwich, CT 06830 occupation since March 1995). Mr.
Armstrong was chairman of the board, chief
executive officer and co-owner of Adirondack
Beverages (producer and distributor of soft
drinks and sparkling/still waters) (October
1993-March 1995). He was a partner of The New
England Consulting Group (management
consulting firm) (December 1992-September
1993). He was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the French
luxury goods conglomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits subsidiary,
Schieffelin & Somerset Company (1987-1991).
Mr. Armstrong is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
18
<PAGE>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE EACH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------- -------------------
<S> <C> <C>
E. Garrett Bewkes, Trustee and Mr. Bewkes is a director of Paine Webber
Jr.**+; 73 Chairman of the Group Inc. ("PW Group") (holding company of
Board of Trustees PaineWebber and Mitchell Hutchins). Prior
to December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of the
board, president and chief executive officer
of American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation.
Mr. Bewkes is a director or trustee of 35
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave, N.W. (international investments and consulting
Washington, DC 20004 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp. (gold
mining), vice chairman (since July 1999) of
Anchor Gaming (provides technology to gaming
and wagering industry) and chairman (since
April 1996) of Weirton Steel Corp. (makes and
finishes steel products) since April 1996. He
was the chief negotiator in the Strategic Arms
Reduction Talks with the former Soviet Union
(1989-1991) and the U.S. Ambassador to the
Federal Republic of Germany (1985-1989). Mr.
Burt is a director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
Mary C. Farrell**+; 50 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 the Financial Women's Association
and Women's Economic Roundtable and appears as
a regular panelist on Wall $treet Week with
Louis Rukeyser. She also serves on the Board
of Overseers of New York University's Stern
School of Business. Ms. Farrell is a director
or trustee of 30 investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
19
<PAGE>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE EACH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------- -------------------
<S> <C> <C>
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, NY 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is also
a director of Primedia, Inc. (publishing),
Federated Department Stores, Inc. (operator of
department stores) and Revlon, Inc.
(cosmetics). Dean Feldberg is a director or
trustee of 34 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to
New York, NY 10017 May 1994, he was a partner in the law firm
of Fryer, Ross & Gowen. Mr. Gowen is a
director or trustee of 34 investment companies
for which Mitchell Hutchins, Paine Webber or
one of their affiliates serves as investment
adviser.
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank) and chairman of
Suite 350 of Thayer Hotel Investors II and Lodging
Washington, DC 20004 Opportunities Fund (hotel investment
partnerships). From January 1992 to November
1992, he was campaign manager of Bush-Quayle
`92. From 1990 to 1992, he was vice chairman
and, from 1989 to 1990, he was president of
Northwest Airlines Inc. and NWA Inc. (holding
company of Northwest Airlines Inc.). Prior to
1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline
catering and contract feeding), where he most
recently was an executive vice president and
president of Marriott Hotels and Resorts. Mr.
Malek is also a director of Aegis
Communications, Inc. (tele-services), American
Management Systems, Inc. (management
consulting and computer related services),
Automatic Data Processing, Inc. (computing
services), CB Richard Ellis, Inc. (real estate
services), FPL Group, Inc. (electric
services), Global Vacation Group (packaged
vacations), HCR/Manor Care, Inc. (health care)
and Northwest Airlines Inc. Mr. Malek is a
director or trustee of 31 investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
20
<PAGE>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE EACH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------- -------------------
<S> <C> <C>
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, Foundation (charitable foundation supporting
#1100 mainly oceanographic exploration and
Princeton, NJ 08542 research). He is a director of Labor
Ready, Inc. (temporary employment), Roadway
Express, Inc. (trucking), The Guardian Group
of Mutual Funds, the Harding, Loevner Funds,
E.I.I. Realty Trust (investment company),
Evans Systems, Inc. (motor fuels, convenience
store and diversified company), Electronic
Clearing House, Inc., (financial transactions
processing), Frontier Oil Corporation and
Nutraceutix, Inc. (biotechnology company).
Prior to January 1993, he was chairman of the
Investment Advisory Committee of the Howard
Hughes Medical Institute. Mr. Schafer is a
director or trustee of 31 investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
Brian M. Storms*+; 45 Trustee Mr. Storms is president and chief operating
officer of Mitchell Hutchins (since March
1999). Prior to joining Mitchell Hutchins, Mr.
Storms was president of Prudential Investments
(1996-1999). Prior to joining Prudential, he
was a managing director at Fidelity
Investments. Mr. Storms is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Christopher G. Altschul*; Vice President Mr. Altschul is a first vice president and
32 (Managed Assets portfolio manager of Mitchell Hutchins.
Trust only) Prior to April 1995, he was an equity
analyst at Chase Manhattan Bank. Mr. Altschul
is a vice president of one investment company
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
Ellen R. Harris*; 53 Vice President Ms. Harris is a managing director and a
(Olympus Fund only) portfolio manager of Mitchell Hutchins.
Ms. Harris is a vice president of two
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Donald R. Jones*; 39 Vice President Mr. Jones is a senior vice president and
(Securities Trust a portfolio manager of Mitchell Hutchins.
only) 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, PaineWebber or one of
their affiliates serves as investment adviser.
21
<PAGE>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE EACH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------- -------------------
<S> <C> <C>
James F. Keegan*; 39 Vice President Mr. Keegan is a senior vice president and
(Securities Trust a portfolio manager of Mitchell Hutchins.
only) Prior to March 1996, he was director of
fixed income strategy and research of Merrion
Group, L.P. From 1987 to 1994, he was a vice
president of global investment management of
Bankers Trust. Mr. Keegan is a vice president
of four investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of
Mitchell Hutchins. Prior to September 1997, he
was an audit manager in the financial services
practice of Ernst & Young LLP. Mr. Lee is a
vice president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Thomas J. Libassi*; 40 Vice President Mr. Libassi is a senior vice president and
(Securities Trust a portfolio manager of Mitchell
only) Hutchins. Mr. Libassi is a vice president
of six investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice president and
Assistant Treasurer a senior manager of the mutual fund finance
department of Mitchell Hutchins. From August
1996 through March 1999, he was the manager of
the mutual fund internal control group of
Salomon Smith Barney. Prior to August 1996, he
was an associate and assistant treasurer for
BlackRock Financial Management L.P. Mr.
Mahoney is a vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Dennis McCauley*; 53 Vice President Mr. McCauley is a managing director and chief
(Securities Trust investment officer--fixed income of
only) Mitchell Hutchins. Prior to December 1994,
he was director of fixed income investments of
IBM Corporation. Mr. McCauley is a vice
president of 22 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of
Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
22
<PAGE>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE EACH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------- -------------------
<S> <C> <C>
Dianne E. O'Donnell Vice President and Ms. O'Donnell is a senior vice president
**; 47 Secretary and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice president
and secretary of 31 investment companies and a
vice president and assistant secretary of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Emil Polito*; 39 Vice President Mr. Polito is a senior vice president and
director of operations and control for
Mitchell Hutchins. Mr. Polito is a vice
president of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Victoria E. Vice President Ms. Schonfeld is a managing director and
Schonfeld**; 48 general counsel of Mitchell Hutchins (since
May 1994) and a senior vice president of
PaineWebber (since July 1995). Ms. Schonfeld
is a vice president of 31 investment companies
and a vice president and secretary of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Paul H. Schubert Vice President and Mr. Schubert is a senior vice president and
**; 36 Treasurer director of the mutual fund finance
department of Mitchell Hutchins. Mr. Schubert
is a vice president and treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Antony J. Scott*; 36 Vice President Mr. Scott is a first vice president and
(Managed Assets portfolio manager of Mitchell Hutchins.
Trust only) Prior to May 1996, he was a research
analyst at Morgan Stanley. Mr. Scott is a vice
president of one investment company for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Nirmal Singh*; 43 Vice President Mr. Singh is a senior vice president and
(Securities Trust a portfolio manager of Mitchell Hutchins.
only) Mr. Singh is a vice president of four
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Barney A. Vice President and Mr. Taglialatela is a vice president and
Taglialatela**; 38 Assistant Treasurer a manager of the mutual fund finance
department of Mitchell Hutchins. Prior to
February 1995, he was a manager of the mutual
fund finance division of Kidder Peabody Asset
Management, Inc. Mr. Taglialatela is a vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
23
<PAGE>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE EACH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------- -------------------
<S> <C> <C>
Mark A. Tincher*; 44 Vice President Mr. Tincher is a managing director and
chief investment officer--equities of Mitchell
Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas of Chase
Manhattan Private Bank. Mr. Tincher is a vice
president of 13 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Stuart Waugh*; 44 Vice President Mr. Waugh is a managing director and
(Securities Trust a portfolio manager of Mitchell Hutchins
only) responsible for global fixed income
investments and currency trading. Mr. Waugh is
a vice president of five investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice president and
Assistant Secretary 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 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
</TABLE>
- -------------
* The business address of this person is 51 West 52nd Street, New York, New
York 10019-6114.
** The business address of this person is 1285 Avenue of the Americas, New York,
New York 10019.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of each fund as defined in the Investment Company Act by virtue of
their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
Board members are compensated as follows:
o OLYMPUS FUND AND AMERICA FUND pay each trustee who is not an
"interested person" of the Trust $1,500 annually per series. Each
Trust presently has one series and thus pays each such trustee $1,500
annually, plus any additional amounts due for board or committee
meetings.
o MANAGED ASSETS TRUST pays each board members who are not "interested
persons" of the Trust $1,000 annually for its sole series, plus any
additional amounts due for board or committee meetings.
o SECURITIES TRUST has two series and pays each board member who is not
an "interested person" of the Trust $1,500 annually for Small Cap
Fund and an additional $1,000 annually for its second series.
Therefore, Securities Trust pays each such board member $2,500
annually, plus any additional amounts due for board or committee
meetings.
Each Trust pays up to $150 per series for each board meeting and each
separate meeting of a board committee. Each chairman of the audit and contract
review committees of individual funds within the PaineWebber fund complex
receives additional compensation, aggregating $15,000 annually, from the
relevant funds. All board members are reimbursed for any expenses incurred in
attending meetings. Board members and officers own in the aggregate less than 1%
of the outstanding shares of any class of each fund. Because PaineWebber and
Mitchell Hutchins perform substantially all the services necessary for the
24
<PAGE>
operation of the Trusts and each fund, the Trusts require no employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trust for acting as a board member or
officer.
The table below includes certain information relating to the compensation
of each Trust's current trustees from the Trust and the compensation of those
trustees from all PaineWebber funds during the periods indicated.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE AGGREGATE AGGREGATE TOTAL
COMPENSATION COMPENSATION COMPENSATION COMPENSATION COMPENSATION
NAME OF PERSON, FROM AMERICA FROM MANAGED FROM SECURITIES FROM OLYMPUS FROM THE FUND
POSITION FUND (1) ASSETS TRUST(1) TRUST(2) FUND(1) COMPLEX(3)
- --------------- ------------ --------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Richard Q. Armstrong, $2,310 $1,810 $4,090 $2,310 $101,372
Trustee
Richard R. Burt, $2,280 $1,780 $4,030 $2,280 $101,372
Trustee
Meyer Feldberg, $2,962 $2,462 $5,394 $2,962 $116,222
Trustee
George W. Gowen, $2,310 $1,810 $4,090 $2,310 $108,272
Trustee
Frederic V. Malek, $2,310 $1,810 $4,090 $2,310 $101,372
Trustee
Carl W. Schafer, $2,310 $1,810 $4,090 $2,310 $101,372
Trustee
- --------------------
+ Only independent board members are compensated by the PaineWebber funds and identified above;
board members who are "interested persons," as defined by the Investment Company Act, do not
receive compensation from the funds.
(1) Represents fees paid to each trustee from the Trust indicated for the fiscal year ended
August 31, 1999.
(2) Represents fees paid to each trustee from the Trust indicated for the fiscal year ended July
31, 1999.
(3) Represents total compensation paid during the calendar year ended December 31, 1998, to each
board member by 31 investment companies (33 in the case of Messrs. Feldberg and Gowen) for which
Mitchell Hutchins, PaineWebber or one of their affiliates served as investment adviser. No fund
within the PaineWebber fund complex has a bonus, pension, profit sharing or retirement plan.
</TABLE>
25
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of October 31, 1999, the following shareholder is shown in Olympus
Fund's records as owning 5% or more of Growth Fund's shares:
Name and Address* Number and Percentage of Shares
----------------- Beneficially Owned as of
October 31, 1999
-------------------------------
Northern Trust Company as Trustee for 1,114,350.516 Class Y shares
the benefit of PaineWebber 401(k) Plan 6.55%
---------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
INVESTMENT ADVISORY, AMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator of each fund pursuant to a
separate contract (each an "Advisory Contract") with each Trust. Under the
Advisory Contracts, the funds pay fees (expressed as a percentage of the fund's
average daily net assets) to Mitchell Hutchins for these services at the annual
contract rates of 0.70% for Growth Fund, 0.75% for Growth and Income Fund and
1.00% for Mid Cap Fund and Small Cap Fund.
During the periods indicated, Mitchell Hutchins earned (or accrued)
advisory and administration fees in the amounts set forth below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
<S> <C> <C> <C> <C>
1999 1998 1997
---- ---- ----
Growth Fund (8/31)............... $3,177,112 $2,858,153 $2,934,644
Growth and Income Fund (8/31)..... $10,130,336 $8,823,952 $5,312,189
Small Cap Fund (7/31)............. $1,035,125 $1,340,576 $ 873,636
</TABLE>
FISCAL FIVE MONTH FISCAL YEAR FISCAL
YEAR ENDED PERIOD ENDED ENDED MARCH YEAR ENDED
AUGUST 31, AUGUST 31, MARCH 31, MARCH 31,
1999 1998 1998 1997
---- ---- ---- ----
Mid Cap Fund........ $1,733,828 $964,741 $2,680,122 $2,684,390
Prior to May 1, 1998, Denver Investment Advisors, LLC served as investment
sub-adviser for Mid Cap Fund pursuant to a separate contract with Mitchell
Hutchins dated March 21, 1995. Under that contract and a substantially identical
prior contract, for the one month ended May 1, 1998 and the fiscal years ended
March 31, 1998 and March 31, 1997, Mitchell Hutchins (not the fund) paid Denver
Investment Advisors LLC sub-advisory fees in the amount of $110,392, $1,340,049
and $1,342,195, respectively.
Under the terms of the applicable Advisory Contract, each fund bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of a Trust not readily identifiable as belonging to a
specific series of the Trust are allocated among series by or under the
direction of the Trust's board in such manner as the board deems fair and
equitable. Expenses borne by each fund include the following: (1) the cost
(including brokerage commissions, if any) of securities purchased or sold by the
fund and any losses incurred in connection therewith; (2) fees payable to and
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<PAGE>
expenses incurred on behalf of the fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members who are not interested persons of the applicable Trust
or Mitchell Hutchins; (6) all expenses incurred in connection with the board
members' services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the fund for violation of any law; (10) legal,
accounting and auditing expenses, including legal fees of special counsel for
the independent board members; (11) charges of custodians, transfer agents and
other agents; (12) costs of preparing share certificates; (13) expenses of
setting in type and printing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy materials for
existing shareholders and costs of mailing such materials to existing
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the fund; (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under 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 Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of 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.
Prior to August 1, 1997, PaineWebber provided certain services to each
fund not otherwise provided by its transfer agent. Pursuant to an agreement
between PaineWebber and each fund relating to those services, PaineWebber earned
(or accrued) the amounts set forth below during the periods indicated:
FISCAL YEAR
ENDED 1997
-----------
Growth Fund (8/31).................. $110,890
Growth and Income Fund (8/31)....... 191,744
Small Cap Fund (7/31)............... 35,040
FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------- -----------------
Mid Cap Fund................ $28,077 $89,240
Subsequent to July 31, 1997, PFPC (not the funds) pays PaineWebber for
certain transfer agency-related services that PFPC has delegated to PaineWebber.
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SECURITIES LENDING. During the periods indicated, each fund paid (or
accrued) the following fees to PaineWebber for its services as securities
lending agent:
Fund Fiscal Year Ended
---- -----------------
1999 1998
---- ----
Growth Fund (8/31)................ $48,764 $82,147
Growth and Income Fund (8/31)..... 13,888 57,530
Small Cap Fund (7/31)............. 23,627 25,267
FISCAL YEAR FIVE MONTH FISCAL YEAR
ENDED AUGUST PERIOD ENDED ENDED MARCH
31, 1999 AUGUST 31, 1998 31, 1998
------------ --------------- -----------
Mid Cap Fund........... $31,282 $ 8,609 $ 2,859
NET ASSETS. The following table shows the approximate net assets as of
October 31, 1999, 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)................. $7,873.9
Global............................................ 4,651.4
Equity/Balanced................................... 7,822.0
Fixed Income (excluding Money Market)............. 4,703.3
Taxable Fixed Income........................ 3,233.7
Tax-Free Fixed Income....................... 1,469.6
Money Market Funds................................ 36,069.2
PERSONAL 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 funds and other Mitchell
Hutchins advisory accounts by all Mitchell Hutchins' directors, officers and
employees, establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber Funds and other Mitchell
Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each Fund under separate distribution contracts with
each Trust (collectively, "Distribution Contracts") that require Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
shares of each Fund. Shares of each of the Funds are offered continuously. Under
separate exclusive dealer agreements between Mitchell Hutchins and PaineWebber
relating to each class of shares (collectively, "Exclusive Dealer Agreements")
PaineWebber and its correspondent firms sell the Funds' shares. Mitchell
Hutchins is located at 51 West 52nd Street, New York, New York 10019-6114 and
PaineWebber is located at 1285 Avenue of the Americas, New York, New York 10019.
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares adopted by each Trust in the manner prescribed under Rule
12b-1 under the Investment Company Act (each, respectively, a "Class A Plan,"
"Class B Plan" and "Class C Plan," and, collectively, "Plans"), each fund pays
Mitchell Hutchins a service fee, accrued daily and payable monthly, at the
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<PAGE>
annual rate of 0.25% of the average daily net assets for each class, except that
the Class A Plans for Growth Fund and Growth and Income Fund provide that the
service fee paid with respect to shares sold prior to December 2, 1988 ("Old
Shares") is paid at the annual rate of 0.15% of the fund's net assets
represented by such Old Shares. Shares acquired through new purchases,
reinvestment of dividends and other distributions and exchanges on/or after
December 2, 1988 are not considered "Old Shares" for this purpose. Under the
Class B Plan and the Class C Plan, each funds also pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.75%
of the average daily net assets of the Class B shares and Class C shares,
respectively. There is no distribution plan with respect to the funds' Class Y
shares and the funds pay no service or distribution fees with respect to their
Class Y shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B
and C shares primarily to pay PaineWebber for shareholder servicing, currently
at the annual rate of 0.25% of the aggregate investment amounts maintained in
each fund by PaineWebber clients. PaineWebber then compensates its Financial
Advisors for shareholder servicing that they perform and offsets its own
expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:
o Offset the commissions it pays to PaineWebber for selling each fund's
Class B and Class C shares, respectively.
o Offset each fund's marketing costs attributable to such classes, such
as preparation, printing and distribution of sales literature,
advertising and prospectuses to prospective investors and related
overhead expenses, such as employee salaries and bonuses.
PaineWebber compensates Financial Advisors when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors at
the time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge paid
when Class A shares are bought and of the contingent deferred sales charge paid
upon sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related Distribution Contracts for Class A, Class B and
Class C shares specify that each fund must pay service and distribution fees to
Mitchell Hutchins for its service- and distribution-related activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
funds will not be obligated to pay more than those fees. On the other hand, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. Expenses in excess of service and distribution fees
received or accrued through the termination date of any Plan will be Mitchell
Hutchins' sole responsibility and not that of the funds. Annually, the board of
each fund reviews the Plans and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the trustees will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendment thereto is
approved, by the applicable board, including those trustees who are not
"interested persons" of the relevant Trust and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan, acting in person at a meeting called for that purpose, (3) payments by a
fund under the Plan shall not be materially increased without the affirmative
vote of the holders of a majority of the outstanding shares of the relevant
class of the fund, and (4) while the Plan remains in effect, the selection and
nomination of trustees who are not "interested persons" of a Trust shall be
committed to the discretion of the trustees who are not "interested persons" of
the respective Trust.
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<PAGE>
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each class of a fund's
shares to such class based on the ratio of sales of shares of such class to the
sales of all three classes of shares. The fees paid by one class of a fund's
shares will not be used to subsidize the sale of any other class of fund shares.
For each fund's fiscal year ended July 31 or August 31, 1999, the fund
paid (or accrued) the following fees to Mitchell Hutchins under the Plans:
GROWTH AND
GROWTH INCOME MID CAP SMALL
FUND FUND FUND CAP FUND
(8/31) (8/31) (8/31) (7/31)
------ ------ ------ ------
Class A $630,894 $2,101,282 $274,562 $106,092
Class B $874,272 $3,597,748 $452,325 $319,616
Class C $315,698 $1,758,886 $181,436 $230,517
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each fund during the fund's 1999
fiscal year, as shown below:
CLASS A
GROWTH GROWTH AND MID CAP SMALL CAP
FUND INCOME FUND FUND FUND
(8/31) (8/31) (8/31) (7/31)
------ ------ ------ ------
Marketing and advertising....... $189,778 $1,828,674 $159,551 $173,684
Amortization of commissions..... 0 0 0 0
Printing of prospectuses and
statements of additional
information to other than
current shareholders.......... 5,845 17,489 4,046 1,860
Branch network costs allocated
and interest expense.......... 847,690 2,168,414 503,159 166,081
Service fees paid to
PaineWebber financial advisors 246,049 809,586 107,079 40,874
CLASS B
GROWTH GROWTH AND MID CAP SMALL CAP
FUND INCOME FUND FUND FUND
(8/31) (8/31) (8/31) (7/31)
------ ------ ------ ------
Marketing and advertising........ $60,663 $779,133 $66,360 $125,616
Amortization of commissions...... 316,013 1,278,989 159,517 110,636
Printing of prospectuses and
statements of additional
information to other than
current shareholders........... 1,691 7,459 1,004 1,352
Branch network costs allocated
and interest expense........... 284,130 1,085,441 217,630 130,388
Service fees paid to
PaineWebber financial advisors. 85,242 346,093 44,102 30,627
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<PAGE>
CLASS C
GROWTH GROWTH AND MID CAP SMALL CAP
FUND INCOME FUND FUND FUND
(8/31) (8/31) (8/31) (7/31)
------ ------ ------ ------
Marketing and advertising........ $21,816 $380,116 $26,446 $93,972
Amortization of commissions...... 91,326 404,010 53,070 66,443
Printing of prospectuses and
statements of additional
information to other than
current shareholders........... 707 3,629 593 1,014
Branch network costs allocated and
interest expense............... 98,680 455,975 83,677 87,965
Service fees paid to PaineWebber
financial advisors............. 30,780 169,336 17,690 22,149
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the funds' shares, including the PaineWebber retail branch system.
In approving each fund's overall Flexible PricingSM system of
distribution, each board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, each board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the fund than might otherwise be the case, (3)
the advantages to the shareholders of economics of scale resulting from growth
in the fund's assets and potential continued growth, (4) the services provided
to the fund and its shareholders by Mitchell Hutchins, (5) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, each board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales commissions when Class B shares are sold and continuing service
fees thereafter while their customers invest their entire purchase payments
immediately to Class B shares would prove attractive to the investment
executives and correspondent firms, resulting in greater growth of the fund than
might otherwise be the case, (4) the advantages to the shareholders of economics
of scale resulting from growth in the fund's assets and potential continued
growth, (5) the services provided to the fund and its shareholders by Mitchell
Hutchins and (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service- and distribution-related expenses and costs. The trustees also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives, without the concomitant receipt by Mitchell Hutchins of
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<PAGE>
initial sales charges, was conditioned upon its expectation of being compensated
under the Class B Plan.
In approving the Class C Plan, each board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from fund purchase payments and instead having
the entire amount of an investor's purchase payments immediately invested in
fund shares, (2) the advantage to investors in being free from contingent
deferred sales charges upon redemption for shares held more than one year and
paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales compensation for their sales of Class C shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class C shares and generally do not face
contingent deferred sales charges, would prove attractive to the investment
executives and correspondent firms, resulting in greater growth to the fund than
might otherwise be the case, (4) the advantages to the shareholders of economies
of scale resulting from growth in the fund's assets and potential continued
growth, (5) the services provided to the fund and its shareholders by Mitchell
Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service- and distribution-related expenses and costs. The trustees also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives without the concomitant receipt by Mitchell Hutchins of
initial sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the boards considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees which are
calculated based upon a percentage of the average net assets of each fund, which
fees would increase if the Plan were successful and the funds attained and
maintained significant asset levels.
Under the Distribution Contracts for the Class A shares, for the fiscal
years (or periods) set forth below, Mitchell Hutchins earned the following
approximate amounts of sales charges and retained the following approximate
amounts, net of concessions to PaineWebber as exclusive dealer.
FISCAL YEARS ENDED
--------------------------------------------------
1999 1998 1997
GROWTH FUND (8/31) --------------- ---------------- -----------------
Earned.................. $222,025 $ 77,935 $ 113,033
Retained................ 15,108 5,776 6,886
GROWTH AND INCOME FUND (8/31)
Earned.................. 554,856 3,377,803 1,057,894
Retained................ 26,318 200,804 28,748
SMALL CAP FUND (7/31)
Earned.................. 41,538 299,265 39,599
Retained................ 2,502 17,983 2,303
FISCAL YEAR FIVE MONTH FISCAL YEAR FISCAL YEAR
ENDED AUGUST PERIOD ENDED ENDED MARCH ENDED MARCH
31, 1999 AUGUST 31, 1998 31, 1998 31, 1997
-------- --------------- -------- --------
MID CAP FUND
Earned.................. $26,484 $42,878 $ 79,840 $ 124,319
Retained................ 2,128 3,039 4,826 7,597
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<PAGE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of Class A, Class B and Class C
shares for each fund's 1999 fiscal year:
GROWTH GROWTH AND
FUND INCOME FUND MID CAPFUND SMALL CAP FUND
(8/31) (8/31) (8/31) (7/31)
------ ------ ----- ------
Class A $0 $0 $0 $0
Class B $87,416 $1,199,541 $102,439 $113,689
Class C $5,924 $ 75,074 $ 1,978 $11,385
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of the funds' portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for a fund, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While Mitchell Hutchins generally seeks
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The funds may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker. During the periods
indicated, the funds paid the brokerage commissions set forth below:
FISCAL YEARS ENDED
---------------------------------------
1999 1998 1997
---- ---- ----
Growth Fund (8/31).................... $306,183 $455,002 $665,156
Growth and Income Fund (8/31)......... $1,833,422 $1,782,530 $1,139,813
Small Cap Fund.(7/31)................. $223,906 $163,052 $147,913
FISCAL FIVE MONTH FISCAL YEAR FISCAL YEAR
YEAR ENDED PERIOD ENDED ENDED ENDED
AUGUST 31, AUGUST 31, MARCH 31, MARCH 31,
1999 1998 1998 1997
---- ---- ---- ----
Mid Cap Fund.............. $411,285 $673,061 $388,468 $330,810
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 Mitchell Hutchins or its affiliates,
including PaineWebber. Each board has adopted procedures in conformity with Rule
17e-1 under the Investment Company Act to ensure that all brokerage commissions
paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the 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. During the periods
indicated, the funds paid to PaineWebber the brokerage commissions set forth
below:
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<PAGE>
FISCAL YEARS ENDED
---------------------------------------------
1999 1998 1997
---- ---- ----
Growth Fund (8/31) $34,416 $43,380 $32,130
Growth and Income Fund (8/31) $124,174 $51,462 $43,440
Small Cap Fund (7/31) $600 $0 $3,900
FISCAL FIVE MONTH FISCAL FISCAL
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31, MARCH 31, MARCH 31,
1999 1998 1998 1997
---- ---- ---- ----
Mid Cap Fund................... $22,902 $0 $0 $0
The amounts paid by the funds to PaineWebber in brokerage commissions for
their most recent fiscal year represent (1) for Growth Fund, 11.24% of the total
brokerage commission paid and 12.74% of the total dollar amount of transactions
involving the payment of brokerage commissions; (2) for Growth and Income Fund,
6.8% of the total brokerage commission paid and 5.8% of the total dollar amount
of transactions involving the payment of brokerage commissions; (3) for Mid Cap
Fund, 5.57% of the total brokerage commission paid and 5.01% of the total dollar
amount of transactions involving the payment of brokerage commissions; and (4)
for Small Cap Fund, 0.27% of the total brokerage commission paid and 0.04% of
the total dollar amount of transactions involving the payment of brokerage
commissions.
Transaction 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.
In selecting brokers, Mitchell Hutchins will consider the full range and
quality of a broker's services. Consistent with the interests of the funds and
subject to the review of each board, Mitchell Hutchins may cause a fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins with brokerage or research services. The funds may pay those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that the commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to that fund and its other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
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<PAGE>
During each fund's 1999 fiscal year, Mitchell Hutchins directed the
portfolio transactions indicated below to brokers chosen because they provide
research and analysis, for which the funds paid the brokerage commissions
indicated below:
AMOUNT OF PORTFOLIO BROKERAGE
TRANSACTIONS COMMISSIONS PAID
------------------- ----------------
Growth Fund (8/31) $22,826,179 $24,266
Growth and Income Fund (8/31) $90,132,305 $135,376
Mid Cap Fund (8/31) $27,402,461 $35,509
Small Cap Fund (7/31) $2,986,688 $6,078
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 were
attributed to the services provided by the executing dealer. Mitchell Hutchins
may engage in agency transactions in over-the-counter equity and debt securities
in return for research and execution services. These transactions are entered
into only 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.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into their investment
processes. 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,
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.
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 a fund is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the fund.
The funds will not purchase securities that are offered in underwritings
in which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by each board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the funds.
PORTFOLIO TURNOVER. The 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.
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<PAGE>
For the periods shown, the funds' portfolio turnover rates were:
PORTFOLIO
TURNOVER RATE
GROWTH FUND -------------
Fiscal Year Ended August 31, 1999.............. 38%
Fiscal Year Ended August 31, 1998.............. 52%
GROWTH AND INCOME FUND
Fiscal Year Ended August 31, 1999.............. 57%
Fiscal Year Ended August 31, 1998.............. 62%
MID CAP FUND
Fiscal Year Ended August 31, 1999.............. 79%
Five month period ended August 31, 1998........ 80%
Fiscal Year Ended March 31, 1998............... 64%
SMALL CAP FUND
Fiscal Year Ended July 31, 1999................ 61%
Fiscal Year Ended July 31, 1998................ 45%
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell Hutchins
may make payments out of its own resources to PaineWebber and to the
variable annuity's sponsor, adviser or distributor in a total amount not
to exceed l% of the amount invested;
o Acquire shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of shares at net
asset value to that program. For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its
own resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to implement a rebalancing
feature of such an investment program, the minimum subsequent investment
requirement is also waived;
o Acquire shares in connection with a reorganization pursuant to which a
fund acquires substantially all of the assets and liabilities of another
fund in exchange solely for shares of the acquiring fund; or
o Acquire shares in connection with the disposition of proceeds from the
sale of shares of Managed High Yield Plus Fund Inc. that were acquired
during that fund's initial public offering of shares and that meet
certain other conditions described in its prospectus.
In addition, reduced sales charges on Class A shares are available through
the combined purchase plan or through rights of accumulation described below.
Class A shares purchases of $1 million or more are not subject to an initial
sales charge; however, if a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, is imposed. This contingent deferred sales charge is waived if you are
eligible to invest in certain offshore investment pools offered by PaineWebber,
your shares are sold before March 31, 2000 and the proceeds are used to purchase
interests in one or more of these pools (see below).
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COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related fund investors may combine purchases of Class A shares of the funds
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges indicated in the table of
sales charges for Class A shares in the Prospectus. The sales charge payable on
the purchase of Class A shares of the funds and Class A shares of such other
funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or the
individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The registered
investment adviser must communicate at least quarterly through a newsletter or
investment update establishing a relationship with all of the accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have redeemed
Class A shares of a fund may reinstate their account without a sales charge by
notifying the Transfer Agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to the
shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal income
tax purposes by the amount of any sales charge paid on Class A shares, under the
circumstances and to the extent described in "Taxes" in the SAI.
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WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.
NON-RESIDENT ALIEN WAIVER OF CONTINGENT DEFERRED SALES CHARGE FOR CLASS A,
B AND C SHARES. Until March 31, 2000, investors who are non-resident aliens will
be able to sell their fund shares without incurring a contingent deferred sales
charge, if they use the sales proceeds to immediately purchase shares of certain
offshore investment pools available through PaineWebber. The fund will waive the
contingent deferred sales charge that would otherwise apply to a sale of Class
A, Class B or Class C shares of a fund. Fund shareholders who want to take
advantage of this waiver should review the offering documents of the offshore
investment pools for further information, including investment minimums, and
fees and expenses. Shares of the offshore investment pools are available only in
those jurisdictions where the sale is authorized and are not available to any
U.S. person, including, but not limited to, any citizen or resident of the
United States, and U.S. partnership or U.S. trust, and are not available to
residents of certain other countries. For more information on how to take
advantage of the deferred sales charge waiver, investors should contact their
PaineWebber Financial Advisors.
PURCHASES AND SALES OF CLASS Y SHARES THROUGH THE PACESM MULTI ADVISOR
PROGRAM. An investor who participates in the PACESM Multi Advisor Program is
eligible to purchase Class Y shares. The PACESM Multi Advisor Program is an
advisory program sponsored by PaineWebber that provides comprehensive investment
services, including investor profiling, a personalized asset allocation strategy
using an appropriate combination of funds, and a quarterly investment
performance review. Participation in the PACESM Multi Advisor Program is subject
to payment of an advisory fee at the effective maximum annual rate of 1.5% of
assets. Employees of PaineWebber and its affiliates are entitled to a waiver of
this fee. Please contact your PaineWebber Financial Advisor or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACESM Multi Advisor Program.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONESM Program.
Investors who purchase shares through the PaineWebber InsightOneSM Program are
eligible to purchase Class A shares without a sales load. The PaineWebber
InsightOneSM Program offers a nondiscretionary brokerage account to investors
for an asset-based fee at an annual rate of up to 1.50% of the assets in the
account. Account holders may purchase or sell certain investment products
without paying commissions or other markups/markdowns.
PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(K) PLUS
PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds that are
included as investment options under the Plan to implement the investment
choices of individual participants with respect to their Plan contributions.
Individual Plan participants should consult the Summary Plan Description and
other plan material of the PW 401(k) Plus Plan (collectively, "Plan Documents")
for a description of the procedures and limitations applicable to making and
changing investment choices. Copies of the Plan Documents are available from the
Benefits Connection, 100 Halfday Road, Lincolnshire, IL 60069 or by calling
1-888-Pwebber (1-888-793-2237). As described in the Plan Documents, the price at
which Class Y shares are bought and sold by the trustee of PW 401(k) Plus Plan
might be more or less than the price per share at the time the participants made
their investment choices.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or a fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the fund's investment objective, policies and
restrictions.
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If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time.
SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form" in accordance with the policies of the service organizations. A fund
will be deemed to have received these purchase and redemption orders when a
service organization or its agent accepts them. Like all customer orders, these
orders will be priced based on the fund's net asset value next computed after
receipt of the order by the service organizations or their agents. Service
organizations may include retirement plan service providers who aggregate
purchase and redemption instructions received from numerous retirement plans or
plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an Automatic Investment Plan
with a minimum initial investment of $1,000 through which a fund will deduct $50
or more on a monthly, quarterly, semi-annual or annual basis from the investor's
bank account to invest directly in the fund. Participation in the Automatic
Investment Plan enables an investor to use the technique of "dollar cost
averaging." When an investor invests the same dollar amount each month under the
Plan, the investor will purchase more shares when a fund's net asset value per
share is low and fewer shares when the net asset value per share is high. Using
this technique, an investor's average purchase price per share over any given
period will be lower than if the investor purchased a fixed number of shares on
a monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.
SYSTEMATIC WITHDRAWAL PLAN. The Systematic Withdrawal Plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares in $5,000;
minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $10,000; minimum monthly,
quarterly, and semi-annual and annual withdrawals of $100, $200, $300 and
$400, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may withdraw no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this Plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan) less aggregate redemptions made other than pursuant
to the systematic withdrawal plan is less than the minimum values specified
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above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. ("Transfer Agent").
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber Financial Advisors, correspondent firms
or the Transfer Agent at 1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available through
PaineWebber in which purchases of PaineWebber mutual funds and other investments
may be made. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.
TRANSFER OF ACCOUNTS. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with the Transfer Agent. However, if
the other firm has entered into a selected dealer agreement with Mitchell
Hutchins relating to the fund, the shareholder may be able to hold fund shares
in an account with the other firm.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICEMARK)
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
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averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account
activity, including investment transactions, checking
activity and Gold MasterCard(R) transactions during the
period, and provide unrealized and realized gain and loss
estimates for most securities held in the account;
o comprehensive year-end summary statements that provide
information on account activity for use in tax planning and
tax return preparation;
o automatic "sweep" of uninvested cash into the RMA
accountholder's choice of one of the six RMA money market
funds-RMA Money Market Portfolio, RMA U.S. Government
Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA New Jersey Municipal Money Fund and RMA New
York Municipal Money Fund. AN INVESTMENT IN A MONEY MARKET
FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH A MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF
YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A MONEY MARKET FUND.
o check writing, with no per-check usage charge, no minimum
amount on checks and no maximum number of checks that can
be written. RMA accountholders can code their checks to
classify expenditures. All canceled checks are returned
each month;
o Gold MasterCard, with or without a line of credit, which
provides RMA accountholders with direct access to their
accounts and can be used with automatic teller machines
worldwide. Purchases on the Gold MasterCard are debited to
the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
o 24-hour access to account information through toll-free
numbers, and more detailed personal assistance during
business hours from the RMA Service Center;
o unlimited electronic funds transfers and bill payment
services for an additional fee;
o expanded account protection for the net equity securities
balance in the event of the liquidation of PaineWebber.
This protection does not apply to shares of funds that are
held at PFPC and not through PaineWebber; and
o automatic direct deposit of checks into your RMA account
and automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a fund will automatically convert to Class A shares of
that fund, based on the relative net asset values per share of the two classes,
as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
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the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (1) the date on which such Class B shares were
issued, or (2) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and that the conversion
of shares does not constitute a taxable event. If the conversion feature ceased
to be available, the Class B shares would not be converted and would continue to
be subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not continue to be
met.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities 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
over-the-counter market and listed on the Nasdaq Stock Market ("Nasdaq") are
valued at the last trade price on Nasdaq prior to valuation; other
over-the-counter securities are valued at the last bid price available prior to
valuation (other than short-term investments that mature in 60 days or less
which are valued as described further below). Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the applicable board. It
should be recognized that judgment often plays a greater role in valuing thinly
traded securities and lower rated bonds than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining until maturity,
unless the applicable board determines that this does not represent fair value.
PERFORMANCE INFORMATION
The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:
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n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of
a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the
beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge is deducted from the initial $1,000 payment and, for
Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
The funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following tables show performance information for each class of the
funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average return.
GROWTH FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Year ended August 31, 1999:
Standardized Return*................. 38.42% 38.75% 42.74% 45.40%
Non-Standardized .................... 44.97% 43.75% 43.74% 45.40%
Five Years ended August 31, 1999:
Standardized Return*................. 16.93% 16.85% 17.06% 18.33%
Non-Standardized .................... 18.00% 17.06% 17.06% 18.33%
Ten years ended August 31, 1999:
Standardized Return*................. 13.62% N/A N/A N/A
Non-Standardized .................... 14.14% N/A N/A N/A
Inception** to August 31, 1999:
Standardized Return*................. 14.98% 15.05% 15.23% 15.08%
Non-Standardized .................... 15.35% 15.05% 15.23% 15.08%
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GROWTH AND INCOME FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Year ended August 31, 1999:
Standardized Return*................. 20.78% 20.51% 24.49% 26.82%
Non-Standardized .................... 26.48% 25.51% 25.49% 26.82%
Five Years ended August 31, 1999:
Standardized Return*................. 18.18% 18.14% 18.36% 19.61%
Non-Standardized .................... 19.27% 18.35% 18.36% 19.61%
Ten years ended August 31, 1999
Standardized Return*................. 12.08% N/A N/A N/A
Non-Standardized .................... 12.60% N/A N/A N/A
Inception** to August 31, 1999:
Standardized Return*................. 13.05% 12.78% 13.08% 12.80%
Non-Standardized .................... 13.38% 12.78% 13.08% 12.80%
MID CAP FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Year ended August 31, 1999:
Standardized Return*................. 36.85% 36.95% 41.17% 43.77%
Non-Standardized .................... 43.38% 41.95% 42.17% 43.77%
Five Years ended August 31, 1999:
Standardized Return*................. 13.52% 13.44% 13.65% 18.33%
Non-Standardized .................... 14.55% 17.06% 17.06% 18.33%
Inception** to August 31, 1999:
Standardized Return*................. 12.71% 12.64% 14.13% 3.54%
Non-Standardized .................... 13.41% 12.64% 14.13% 3.54%
SMALL CAP FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Year ended July 31, 1999:
Standardized Return*................. (13.05)% (13.84)% (10.44)% (8.73)%
Non-Standardized .................... (8.95)% (9.79)% (9.63)% (8.73)%
Five Years ended July 31, 1999:
Standardized Return*................. 9.25% 9.18% 9.39% N/A
Non-Standardized .................... 10.26% 9.46% 9.39% N/A
Inception** to July 31, 1999:
Standardized Return*................. 7.71% 7.69% 7.65% 10.56%
Non-Standardized .................... 8.47% 7.69% 7.65% 10.56%
- ---------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.
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** The inception date for each class of shares is as follows:
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Growth Fund......................... 03/18/85 07/01/91 07/02/92 08/26/91
Growth and Income Fund.............. 12/20/83 07/01/91 07/02/92 02/12/92
Mid Cap Fund........................ 04/07/92 04/07/92 07/02/92 03/17/98
Small Cap Fund...................... 02/01/93 02/01/93 02/01/93 07/26/96
OTHER INFORMATION. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), with the
performance of recognized stock and other indices, including (but not limited
to) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), the
Standard & Poor's 600 Small-Cap Index, the Standard & Poor's 400 Mid-Cap Index,
the Dow Jones Industrial Average, the International Finance Corporation Global
Total Return Index, the Nasdaq Composite Index, the Russell 2000 Index, the
Russell 1000 Index (including Value and Growth Sub-indexes), the Wilshire 5000
Index, Standard & Poor's Mid Cap Financials Index, Standard & Poor's Super
Composite Financials Index, Standard & Poor's Financial Index, the Lehman Bond
Index, the Lehman Brothers 20+ Year Treasury Bond Index, the Lehman Brothers
Government/Corporate Bond Index, other similar Lehman Brothers indices or
components thereof, 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 THE WALL STREET JOURNAL, MONEY MAGAZINE,
SMART MONEY, MUTUAL FUNDS, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE
KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic
form.
The 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.
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 values will fluctuate. The bonds held by
the funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term bonds. An investment in any fund
involves greater risks than an investment in either a money market fund or a CD.
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<PAGE>
Each fund may also compare its performance to general trends in the stock
and bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
<TABLE>
<CAPTION>
IBBOTSON CHART PLOT POINTS
Chart showing performance of S&P 500, long-term U.S. government bonds,
Treasury Bills and inflation from 1925 through 1998
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
46
<PAGE>
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
<S> <C> <C> <C> <C>
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
</TABLE>
Source: STOCKS, BONDS, BILLS AND INFLATION 1998 YEARBOOKTM, Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not represent
any fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. Year-to-year fluctuations in certain markets have
been significant and negative returns have been experienced in certain markets
from time to time. Stocks are measured by the S&P 500, an unmanaged weighted
index comprising 500 widely held common stocks and varying in composition.
Unlike investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
Over time, stocks have outperformed all other investments by a wide
margin, offering a solid hedge against inflation. From January 1, 1926 to
December 31, 1998, stocks beat all other traditional asset classes. A $10,000
investment in the S&P 500 grew to $23,495,420, significantly more than any other
investment.
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TAXES
BACKUP WITHHOLDING. Each fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of fund
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of any fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
SPECIAL RULE FOR CLASS A SHAREHOLDERS. A Special tax rule applies when a
shareholder sells or exchanges Class A shares of a fund within 90 days of
purchase and subsequently acquires Class A shares of the same or another
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
CONVERSION OF CLASS B SHARES. No gain or loss will be recognized by a
shareholder as a result of a conversion of Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To continue to qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code, each fund must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income (consisting generally
of net investment income and net short-term capital gain) ("Distribution
Requirement") and must meet several additional requirements. For each fund,
these requirements include the following: (1) the fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities, or other income (including gains from options or futures) derived
with respect to its business of investing in securities ("Income Requirement");
(2) at the close of each quarter of the fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities that are
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer. If a fund failed to qualify for
treatment as a RIC for any taxable year, (a) it would be taxed as an ordinary
corporation on its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (b) the shareholders would treat
all those distributions, including distributions of net capital gain (the excess
of net long-term capital gain over net short-term capital loss), as dividends
(that is, ordinary income) to the extent of the fund's earnings and profits. In
addition, the fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
OTHER INFORMATION. Dividends and other distributions declared by a fund in
October, November or December of any year and payable to shareholders of record
on a date in any of those months will be deemed to have been paid by the fund
and received by the shareholders on December 31 of that year if the
distributions are paid by the fund during the following January. Accordingly,
those distributions will be taxed to shareholders for the year in which that
December 31 falls.
A portion of the dividends (whether paid in cash or additional shares)
from each fund's investment company taxable income may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion for a
fund may not exceed the aggregate dividends received by the fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax.
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If shares of a 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 that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a 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 that stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.
If a fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain (which it
may have to distribute to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax) even if the QEF does not distribute those earnings
and gain to the fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain of its requirements.
Each fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years under the election (and under regulations proposed in 1992
that provided a similar election with respect to the stock of certain PFICs). A
fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.
The use of hedging strategies involving Derivative Instruments, such as
writing (selling) and purchasing options and futures contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses a fund realizes in connection
therewith. Gains from options and futures derived by a fund with respect to its
business of investing in securities will be treated as qualifying income under
the Income Requirement.
Certain futures contracts in which a fund may invest may be subject to
section 1256 of the Internal Revenue Code ("section 1256 contracts"). Any
section 1256 contracts a fund holds at the end of each taxable year generally
must be "marked-to-market" (that is, treated as having been sold at that time
for their fair market value) for federal income tax purposes, which the result
that unrealized gains or losses will be treated as though they were realized.
Sixty percent of any net gain or loss recognized on these deemed sales, and 60%
of any net realized gain or loss from any actual sales of section 1256
contracts, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that a fund must distribute to satisfy the Distribution
Requirement (I.E., with respect to the portion treated as short-term capital
gain), which will be taxable to its shareholders as ordinary income, and to
increase the net capital gain a fund recognizes, without in either case
increasing the cash available to the fund. A fund may elect not to have the
foregoing rules apply to any "mixed straddle" (that is, a straddle, clearly
identified by the fund in accordance with the regulations, at least one (but not
all) the positions of which are section 1256 contracts), although doing so may
have the effect of increasing the relative proportion of net short-term capital
gain (taxable as ordinary income) and thus increasing the amount of dividends
that must be distributed.
Offsetting positions in any actively traded security, option or futures
contract entered into or held by a fund may constitute a "straddle" for federal
income tax purposes. Straddles are subject to certain rules that may affect the
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<PAGE>
amount, character and timing of a fund's gains and losses with respect to
positions of the straddle by requiring, among other things, that (1) loss
realized on disposition of one position of a straddle be deferred to the extent
of any unrealized gain in an offsetting position until the latter position is
disposed of, (2) the fund's holding period in certain straddle positions not
begin until the straddle is terminated (possibly resulting in gain being treated
as short-term rather than long-term capital gain) and (3) losses recognized with
respect to certain straddle positions, that otherwise would constitute
short-term capital losses, be treated as long-term capital losses. Applicable
regulations also provide certain "wash sale" rules, which apply to transactions
where a position is sold at a loss and a new offsetting position is acquired
within a prescribed period, and "short sale" rules applicable to straddles.
Different elections are available to the funds, which may mitigate the effects
of the straddle rules, particularly with respect to mixed straddles.
When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by a fund is exercised, the fund will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.
If a fund has an "appreciated financial position"-- generally, an interest
(including an interest through an option or futures contract or short sale) with
respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted
basis--and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or a futures contract entered into by
a fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially identical
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
The foregoing is only a general summary of some of the important federal
tax considerations generally affecting the funds and their shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the funds' activities, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes applicable to the funds and to
dividends and other distributions therefrom.
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUSTS. Each Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of a fund could, under certain circumstances, be held personally
liable for the obligations of the fund or its Trust. However, each Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust or the fund and requires that notice of such disclaimer be given in
each note, bond, contract, instrument, certificate or undertaking made or issued
by the board members or by any officers or officer by or on behalf of the Trust
or the fund, the board members or any of them in connection with the Trust. Each
Declaration of Trust provides for indemnification from the relevant fund's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the fund itself would be unable to meet its obligations, a possibility
that Mitchell Hutchins believes is remote and not material. Upon payment of any
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liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the relevant fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.
CLASSES OF SHARES. A share of each class of a fund represents an identical
interest in that fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege, if any. The different sales charges and other
expenses applicable to the different classes of shares of the funds will affect
the performance of those classes. Each share of a fund is entitled to
participate equally in dividends, other distributions and the proceeds of any
liquidation of that fund. However, due to the differing expenses of the classes,
dividends and liquidation proceeds on Class A, B, C and Y shares will differ.
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 fund (or Securities Trust, which has more than one series) may
elect all of the board members of that fund or Securities Trust. The shares of a
fund will be voted together, except that only the shareholders of a particular
class of a fund may vote on matters affecting only that class, such as the terms
of a Plan as it relates to the class. The shares of each series of Securities
Trust will be voted separately, except when an aggregate vote of all the series
is required by law.
The funds do not hold annual meetings. Shareholders of record of no less
than two-thirds of the outstanding shares of a fund or Securities Trust may
remove a board member through a declaration in writing or by vote cast in person
or by proxy at a meeting called for that purpose. A meeting will be called to
vote on the removal of a board member at the written request of holders of 10%
of the outstanding shares of a fund or Securities Trust.
CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the Transfer Agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
PRIOR NAMES. Prior to April 3, 1995, Growth and Income Fund was known as
"PaineWebber Dividend Growth Fund." Prior to May 1, 1998, Mid Cap Fund was known
as "PaineWebber Capital Appreciation Fund." Prior to July 26, 1996, Small Cap
Fund was known as "PaineWebber Small Cap Value Fund." On July 26, 1996, Small
Cap Fund was combined in a tax-free reorganization with PaineWebber 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, each fund's Class C
shares were known as "Class D" shares. Prior to November 10, 1995, the Class Y
shares of Growth and Income Fund and Growth Fund were known as Class C shares.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND 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 each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
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COMBINED PROSPECTUS. 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 another fund. The board of each fund has considered this factor
in approving the use of a single, combined Prospectus.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
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, Growth and Income Fund and Mid
Cap Fund. PricewaterhouseCoopers 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 SAI, and the financial statements,
accompanying notes and report of independent auditors or independent accountants
appearing therein are incorporated herein by this reference.
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APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risk appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future; Baa. Bonds which are rated Baa are considered
as medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment 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 applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
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obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
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.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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INVESTORS SHOULD RELY ONLY ON THE
INFORMATION CONTAINED OR REFERRED TO IN
THE PROSPECTUS AND THIS STATEMENT OF PaineWebber
ADDITIONAL INFORMATION. THE FUNDS AND Growth Fund
THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE INVESTORS WITH PaineWebber
INFORMATION THAT IS DIFFERENT. THE Growth and Income Fund
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION ARE NOT AN OFFER PaineWebber
TO SELL SHARES OF THE FUNDS IN ANY Mid Cap Fund
JURISDICTION WHERE THE FUNDS OR THEIR
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE PaineWebber
SHARES. Small Cap Fund
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Statement of Additional Information
December 1, 1999
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(COPYRIGHT) 1999 PaineWebber Incorporated. All rights reserved. Member SIPC.
