<PAGE>
As filed with the Securities and Exchange Commission on November 24, 1999
1933 Act Registration No. 33-55374
1940 Act Registration No. 811-7374
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 25 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 25 [X]
(check appropriate box or boxes)
PAINEWEBBER SECURITIES TRUST
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ROBERT A. WITTIE, ESQ.
ELINOR W. GAMMON, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[X] On December 1, 1999 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] On pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Class A, B, C and Y Shares of Beneficial
Interest of PaineWebber Small Cap Fund.
<PAGE>
PaineWebber Growth Fund
PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund
PaineWebber Small Cap Fund
------------------------------------------
PROSPECTUS
DECEMBER 1, 1999
------------------------------------------
This prospectus offers shares in four of PaineWebber's stock funds. Each fund
offers four classes of shares, Classes A, B, C and Y. Each class has different
sales charges and ongoing expenses. You can choose the class that is best for
you based on how much you plan to invest and how long you plan to hold your fund
shares. Class Y shares are available only to certain types of investors.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
Contents
THE FUNDS
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
What every investor 3 PaineWebber Growth Fund
should know about 6 PaineWebber Growth and Income Fund
the funds 9 PaineWebber Mid Cap Fund
12 PaineWebber Small Cap Fund
15 More About Risks and Investment Strategies
YOUR INVESTMENT
- ----------------------------------------------------------------------------------------------------------------
Information for 17 Managing Your Fund Account
managing your fund -- Flexible Pricing
account -- Buying Shares
-- Selling Shares
-- Exchanging Shares
-- Pricing and Valuation
ADDITIONAL INFORMATION
- ----------------------------------------------------------------------------------------------------------------
Additional important 23 Management
information about 25 Dividends and Taxes
the funds 27 Financial Highlights
- ----------------------------------------------------------------------------------------------------------------
Where to learn more Back Cover
about PaineWebber
mutual funds
</TABLE>
The funds are not complete or
balanced investment programs.
---------------
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Prospectus Page 2
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund
PaineWebber Growth Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests primarily in common stocks that Mitchell Hutchins Asset
Management Inc., its investment adviser, believes have substantial potential for
capital growth.
The fund generally invests in larger capitalization companies but has the
flexibility to invest in companies having any market capitalization. Some of the
fund's investments may be in U.S. dollar denominated securities of foreign
issuers. The fund also may invest in bonds and, while it generally does not do
so, it may use options, futures contracts and other derivatives as part of its
investment strategy or to help manage portfolio risks.
In buying and selling stocks for the fund, Mitchell Hutchins uses its own
Multi-Factor Growth Model to identify companies that appear to have potential
for above-average growth in earnings, cash flow and/or book value. The model
ranks companies based on 'growth' factors such as earnings momentum, stock price
movement, economic sensitivity and industry performance forecasts. Mitchell
Hutchins then applies fundamental analysis to select specific stocks from among
those identified by the model. When investing in smaller companies, Mitchell
Hutchins also considers the trading volume of the company's stock.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
Common stocks, which are the fund's main type of investment, generally fluctuate
in value more than other investments. The fund could lose all of its investment
in a company's stock. The value of the fund's foreign investments may fall due
to adverse political, social and economic developments abroad.
More information about these and other risks of an investment in the fund is
provided below in 'More About Risks and Investment Strategies.' In particular,
see the following headings:
Equity Risk
Foreign Securities Risk
Derivatives Risk
Information on the fund's investment strategies and recent holdings can be found
in its current annual/semi-annual reports (see back cover for information on
ordering those reports).
---------------
- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund
PERFORMANCE
- --------------------------------------------------------------------------------
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class A shares because they have the longest performance history of
any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS A SHARES
<TABLE>
<CAPTION>
[GRAPH]
Calendar
Years Percentages
-------- -----------
<S> <C>
1989 34.27%
1990 -7.72%
1991 47.61%
1992 4.15%
1993 19.17%
1994 -10.90%
1995 33.02%
1996 14.11%
1997 17.01%
1998 31.95%
</TABLE>
Total return January 1 to September 30, 1999 -- 5.07%
Best quarter during years shown: 4th quarter, 1998 -- 29.99%
Worst quarter during years shown: 3rd quarter, 1990 -- (19.03)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B* CLASS C CLASS Y S&P 500
CLASS (3/18/85) (7/1/91) (7/2/92) (8/26/91) INDEX
(INCEPTION DATE) --------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
One Year.......................................... 26.01% 25.76% 29.84% 32.28% 28.60%
Five Years........................................ 14.80% 14.71% 14.95% 16.19% 24.05%
Ten Years......................................... 16.30% N/A N/A N/A 19.19%
Life of Class..................................... 15.44% 15.91% 16.33% 15.92% **
</TABLE>
- ------------
* Assumes conversion of Class B shares to Class A after six years.
** Average annual total returns for the S&P 500 Index for the life of each class
were as follows:
Class A 18.37%; Class B 20.19%; Class C 21.27%; Class Y 19.57%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a % of
offering price)........................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC) (as a
% of offering price)...................................... None 5% 1% None
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from
fund assets)
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees. 0.75% 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.16 0.21 0.19 0.11
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.16% 1.96% 1.94% 0.86%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A................................................. $563 $802 $1,060 $1,796
Class B (assuming sale of all shares at end of
period)............................................... 699 915 1,257 1,888
Class B (assuming no sale of shares).................... 199 615 1,057 1,888
Class C (assuming sale of all shares at end of
period)............................................... 297 609 1,047 2,264
Class C (assuming no sale of shares).................... 197 609 1,047 2,264
Class Y................................................. 88 274 477 1,061
</TABLE>
---------------
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Prospectus Page 5
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth and Income Fund
PaineWebber Growth and Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Current income and capital growth.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests in a combination of securities to obtain both growth and
income. To obtain growth, the fund invests in stocks that Mitchell Hutchins
Asset Management Inc., its investment adviser, believes have substantial
potential for capital growth. To obtain current income, the fund invests in
dividend paying stocks and, to a lesser extent, convertible bonds and money
market instruments.
The fund generally invests in large capitalization companies. Some of the fund's
investments may be in U.S. dollar denominated securities of foreign issuers. The
fund may, but generally does not, use options, futures contracts and other
derivatives as part of its investment strategy or to help manage portfolio
risks.
In buying and selling stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify stocks with growth potential that appear to be
undervalued. The model ranks companies based on 'value' factors such as
dividends, cash flows, earnings and book values, as well as on 'growth' factors,
such as earnings and price momentum and industry performance forecasts. Mitchell
Hutchins then applies fundamental analysis to select specific stocks from among
those identified by the model.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
Common stocks, which are the fund's main type of investment, generally fluctuate
in value more than other investments. The fund could lose all of its investment
in a company's stock. The value of the fund's foreign investments may fall due
to adverse political, social and economic developments abroad.
More information about these and other risks of an investment in the fund is
provided below in 'More About Risks and Investment Strategies.' In particular,
see the following headings:
Equity Risk
Foreign Securities Risk
Derivatives Risk
Information on the fund's investment strategies and recent holdings can be found
in its current annual/semi-annual reports (see back cover for information on
ordering those reports).
---------------
- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth and Income Fund
PERFORMANCE
- --------------------------------------------------------------------------------
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class A shares because they have the longest performance history of
any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS A SHARES
<TABLE>
<CAPTION>
[GRAPH]
Calendar
Years Percentages
-------- -----------
<S> <C>
1989 24.59%
1990 -1.01%
1991 35.34%
1992 3.90%
1993 -2.59%
1994 -5.87%
1995 33.21%
1996 23.46%
1997 31.86%
1998 17.97%
</TABLE>
Total return January 1 to September 30, 1999 -- (3.54)%
Best quarter during years shown: 4th quarter, 1998 -- 20.96%
Worst quarter during years shown: 3rd quarter, 1998 -- (13.95)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B* CLASS C CLASS Y S&P 500
CLASS (12/20/83) (7/1/91) (7/2/92) (2/12/92) INDEX
(INCEPTION DATE) ---------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
One Year.......................................... 12.67% 12.02% 16.06% 18.28% 28.60%
Five Years........................................ 18.13% 18.07% 18.29% 19.55% 24.05%
Ten Years......................................... 14.54% N/A N/A N/A 19.19%
Life of Class..................................... 13.75% 14.43% 14.80% 14.28% **
</TABLE>
- ------------
* Assumes conversion of Class B shares to Class A after six years.
** Average annual total returns for the S&P 500 Index for the life of each class
were as follows:
Class A -- 17.88%; Class B -- 20.19%; Class C -- 21.27%; Class Y -- 20.07%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 7
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth and Income Fund
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a % of
offering price)........................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC) (as a
% of offering price)...................................... None 5% 1% None
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from fund assets)
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees. 0.70% 0.70% 0.70% 0.70%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.13 0.16 0.15 0.09
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.08% 1.86% 1.85% 0.79%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A............................................... $ 555 $ 778 $1,019 $1,708
Class B (assuming sale of all shares at end of
period)............................................. 689 885 1,206 1,789
Class B (assuming no sale of shares).................. 189 585 1,006 1,789
Class C (assuming sale of all shares at end of
period)............................................. 288 582 1,001 2,169
Class C (assuming no sale of shares).................. 188 582 1,001 2,169
Class Y............................................... 81 252 439 978
</TABLE>
---------------
- --------------------------------------------------------------------------------
Prospectus Page 8
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Mid Cap Fund
PaineWebber Mid Cap Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests primarily in common stocks of medium capitalization ('mid cap')
companies that Mitchell Hutchins Asset Management Inc., its investment adviser,
believes have substantial potential for capital growth. The fund considers
companies with market capitalizations of between $750 million and $8 billion to
be mid cap.
The fund also invests, to a lesser extent, in stocks of larger and smaller
companies and in bonds and money market instruments. Some of the fund's
investments may be in U.S. dollar denominated securities of foreign issuers. The
fund may, but generally does not, use options, futures contracts and other
derivatives as part of its investment strategy or to help manage portfolio
risks.
In buying and selling stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify stocks with growth potential that appear to be
undervalued. The model ranks companies based on 'value' factors such as
dividends, cash flows, earnings and book values, as well as on 'growth' factors,
such as earnings and price momentum and industry performance forecasts. Mitchell
Hutchins then applies fundamental analysis to select specific stocks from among
those mid cap companies identified by the model.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
Common stocks, which are the fund's main type of investment, generally fluctuate
in value more than other investments. This risk is greater for the common stocks
of mid cap companies because they generally are more vulnerable than larger
companies to adverse business or economic developments, and they may have more
limited resources. The fund could lose all of its investment in a company's
stock. The value of the fund's foreign investments may fall due to adverse
political, social and economic developments abroad.
More information about these and other risks of an investment in the fund is
provided below in 'More About Risks and Investment Strategies.' In particular,
see the following headings:
Equity Risk
Limited Capitalization Risk
Foreign Securities Risk
Derivatives Risk
Information on the fund's investment strategies and recent holdings can be found
in its current annual/semi-annual reports (see back cover for information on
ordering those reports).
---------------
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Mid Cap Fund
PERFORMANCE
- --------------------------------------------------------------------------------
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class A shares because they have as long a performance history as
any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index of mid-cap companies that is unmanaged and that, therefore, does
not include any sales charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS A SHARES (1993 IS THE FUND'S FIRST FULL CALENDAR YEAR OF
OPERATIONS)
<TABLE>
<CAPTION>
[GRAPH]
Calendar
Years Percentages
-------- -----------
<S> <C>
1989 N/A
1990 N/A
1991 N/A
1992 N/A
1993 16.10%
1994 -1.36%
1995 28.79%
1996 17.87%
1997 15.14%
1998 11.81%
</TABLE>
Total return January 1 to September 30, 1999 -- 4.55%
Best quarter during years shown: 4th quarter, 1998 -- 27.43%
Worst quarter during years shown: 3rd quarter, 1998 -- (18.10)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B* CLASS C CLASS Y S&P 400 (MidCap)
CLASS (4/7/92) (4/7/92) (7/2/92) (3/17/98) INDEX
(INCEPTION DATE) -------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
One Year......................................... 6.76% 7.06% 10.13% N/A 18.30%
Five Years....................................... 12.99% 12.95% 13.16% N/A 18.70%
Life of Class.................................... 13.52% 13.44% 15.24% 1.77% **
</TABLE>
- ------------
* Assumes conversion of Class B shares to Class A after six years.
** Average annual total returns for the S&P MidCap 400 Index for the life of
each class were as follows: Class A -- 17.90%; Class B -- 17.90%;
Class C -- 19.23%; Class Y -- 7.30%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Mid Cap Fund
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a % of
offering price)........................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC) (as a
% of offering price)...................................... None 5% 1% None
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees. 1.00% 1.00% 1.00% 1.00%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.35 0.55 0.43 0.36
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.60% 2.55% 2.43% 1.36%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A................................................ $605 $ 932 $1,282 $2,265
Class B (assuming sale of all shares at end of
period).............................................. 758 1,094 1,555 2,439
Class B (assuming no sale of shares)................... 258 794 1,355 2,439
Class C (assuming sale of all shares at end of
period).............................................. 346 758 1,296 2,766
Class C (assuming no sale of shares)................... 246 758 1,296 2,766
Class Y................................................ 138 431 745 1,635
</TABLE>
---------------
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Small Cap Fund
PaineWebber Small Cap Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests primarily in common stocks of small capitalization ('small
cap') companies that Mitchell Hutchins Asset Management Inc., its investment
adviser, believes have substantial potential for capital growth. The fund
considers companies with market capitalizations of up to $1.5 billion to be
small cap.
The fund also invests, to a lesser extent, in stocks of larger companies and in
bonds and money market instruments. Some of the fund's investments may be in
U.S. dollar denominated securities of foreign issuers. The fund may, but
generally does not, use options, futures contracts and other derivatives as part
of its investment strategy or to help manage portfolio risks, but generally does
not do so.
In buying and selling stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify stocks with growth potential that appear to be
undervalued. The model ranks companies based on 'value' factors such as
dividends, cash flows, earnings and book values, as well as on 'growth' factors,
such as earnings and price momentum and industry performance forecasts. Mitchell
Hutchins then applies fundamental analysis to select specific stocks from among
those small cap companies identified by the model.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
Common stocks, which are the fund's main type of investment, generally fluctuate
in value more than other investments. This risk is greater for the common stocks
of small cap companies because they generally are more vulnerable than large or
mid cap companies to adverse business or economic developments, and they may
have more limited resources. The fund could lose all of its investment in a
company's stock. The value of the fund's foreign investments may fall due to
adverse political, social and economic developments abroad.
More information about these and other risks of an investment in the fund is
provided below in 'More About Risks and Investment Strategies.' In particular,
see the following headings:
Equity Risk
Limited Capitalization Risk
Foreign Securities Risk
Derivatives Risk
Information on the fund's investment strategies and recent holdings can be found
in its current annual/semi-annual reports (see back cover for information on
ordering those reports).
---------------
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Small Cap Fund
PERFORMANCE
- --------------------------------------------------------------------------------
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class A shares because they have as long a performance history as
any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on two broad based
market indices of small cap companies that are unmanaged and, therefore, do not
include any sales charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS A SHARES (1994 IS THE FUND'S FIRST FULL CALENDAR YEAR OF
OPERATIONS)
<TABLE>
<CAPTION>
[GRAPH]
Calendar
Years Percentages
-------- -----------
<S> <C>
1989 N/A
1990 N/A
1991 N/A
1992 N/A
1993 N/A
1994 -1.20%
1995 16.81%
1996 17.45%
1997 27.38%
1998 -6.75%
</TABLE>
Total return January 1 to September 30, 1999 -- (11.69)%
Best quarter during years shown: 3rd quarter, 1997 -- 21.53%
Worst quarter during years shown: 3rd quarter, 1998 -- (26.69%)
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
RUSSELL 2000
CLASS A CLASS B* CLASS C CLASS Y S&P SmallCap 600 [SMALL CAP]
CLASS (2/1/93) (2/1/93) (2/1/93) (7/26/96) INDEX** INDEX***
(INCEPTION DATE) -------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
One Year........................... (10.96)% (11.65)% (8.32)% (6.49)% (1.30)% (2.60)%
Five Years......................... 8.99% 8.86% 9.14% N/A 13.20% 11.90%
Life of Class...................... 8.90% 8.79% 8.90% 14.16% ** ***
</TABLE>
- ------------
* Assumes conversion of Class B shares to Class A after six years.
** Average annual total returns for the S&P SmallCap 600 Index for the life
of each class were as follows: Class A -- 13.83%; Class B -- 13.83%; Class
C -- 13.83%; Class Y -- 0.71%.
*** Average annual total returns for the Russell 2000 [Small Cap] Index for the
life of each class were as follows: Class A -- 12.56%; Class B -- 12.56%;
Class C -- 12.56%; Class Y -- 1.06%.
---------------
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Prospectus Page 13
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
Painewebber Small Cap Fund
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a % of
offering price)........................................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC) (as a
% of offering price)...................................... None 5% 1% None
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from fund assets)
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees. 1.00% 1.00% 1.00% 1.00%
Distribution and/or Service (12b-1) Fees.................... 0.25 1.00 1.00 0.00
Other Expenses.............................................. 0.34 0.43 0.39 0.31
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.59% 2.43% 2.39% 1.31%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A................................................ $604 $ 929 $1,277 $2,254
Class B (assuming sale of all shares at end of
period).............................................. 746 1,058 1,496 2,368
Class B (assuming no sale of shares)................... 246 758 1,296 2,368
Class C (assuming sale of all shares at end of
period).............................................. 342 745 1,275 2,726
Class C (assuming no sale of shares)................... 242 745 1,275 2,726
Class Y................................................ 133 415 718 1,579
</TABLE>
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Prospectus Page 14
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
MORE ABOUT RISKS
AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
PRINCIPAL RISKS
The main risks of investing in one or more of the funds are described below. Not
all of these risks apply to each fund. You can find a list of the main risks
that apply to a particular fund by looking under the 'Investment Objective,
Strategies and Risks' heading for that fund.
Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ('SAI'). Information on how you can obtain the SAI is on the back
cover of this prospectus.
Derivatives Risk. The value of 'derivatives' -- so-called because their value
'derives' from the value of an underlying asset, reference rate or index -- may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options, futures contracts and forward currency contracts are examples of
derivatives. If a fund uses derivatives to adjust or 'hedge' the overall risk of
its portfolio, it is possible that the hedge will not succeed. This may happen
for various reasons, including unexpected changes in the value of the
derivatives that are not matched by opposite changes in the value of the rest of
the fund's portfolio.
Equity Risk. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial part, or even all, of its investment in a company's
stock.
Foreign Securities Risk. Foreign securities involve risks that normally are not
associated with securities of U.S. issuers. These include risks relating to
political, social and economic developments abroad and differences between U.S.
and foreign regulatory requirements and market practices.
Limited Capitalization Risk. Securities of mid and small cap companies generally
involve greater risk than securities of larger companies because they may be
more vulnerable to adverse business or economic developments. Mid and small cap
companies also may have limited product lines, markets or financial resources,
and they may be dependent on a relatively small management group. Securities of
mid and small cap companies may be less liquid and more volatile than securities
of larger companies or the market averages in general. In addition, small cap
companies may not be well-known to the investing public, may not have
institutional ownership and may have only cyclical, static or moderate growth
prospects. In general, all of these risks are greater for small cap companies
than for mid cap companies.
ADDITIONAL RISKS
Credit and Interest Rate Risks. Each fund is authorized to invest in bonds and
other income-producing securities. These securities are subject to credit risk
and interest rate risk.
Credit risk is the risk that the issuer of a bond will not make principal or
interest payments when they are due. Even if an issuer does not default on a
payment, a bond's value may decline if the market believes that the issuer has
become less able, or less willing, to make payments on time. Even high quality
bonds are subject to some credit risk. However, credit risk is higher for lower
quality bonds. Bonds that are not investment grade involve high credit risk and
are considered speculative. Lower quality bonds may fluctuate in value more than
higher quality bonds and, during periods of market volatility, may be more
difficult to sell at the time and price a fund desires.
The value of bonds can be expected to fall when interest rates rise and to rise
when interest rates fall. Interest rate risk is the risk that interest rates
will rise, so that the value of a fund's investments in bonds will fall. Because
interest rate risk is the primary risk presented by U.S. government and other
very high quality bonds, changes in interest rates may actually have a larger
effect on the value of those bonds than on lower quality bonds.
Year 2000 Risk. The funds could be adversely affected by problems relating to
the inability of
---------------
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Prospectus Page 15
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
computer systems used by Mitchell Hutchins and the funds' other service
providers to recognize the year 2000. While year 2000-related computer problems
could have a negative effect on the funds, Mitchell Hutchins is working to avoid
these problems with respect to its own computer systems and to obtain assurances
from service providers that they are taking similar steps.
Similarly, the companies in which the funds invest and trading systems used by
the funds could be adversely affected by this issue. The ability of a company or
trading system to respond successfully to the issue requires both technological
sophistication and diligence, and there can be no assurance that any steps taken
will be sufficient to avoid an adverse impact on the funds. This risk may be
greater with respect to trading systems in foreign countries.
ADDITIONAL INVESTMENT STRATEGIES
Defensive Positions; Cash Reserves. In order to protect itself from adverse
market conditions, a fund may take a temporary defensive position that is
different from its normal investment strategy. This means that the fund may
temporarily invest a larger-than-normal part, or even all, of its assets in cash
or money market instruments. Since these investments provide relatively low
income, a defensive position may not be consistent with achieving a fund's
investment objective. Each of the funds may invest up to 35% of its total assets
in cash or money market instruments as a cash reserve for liquidity or, except
in the case of Growth Fund, as part of its ordinary investment strategy.
Portfolio Turnover. Each fund may engage in frequent trading (high portfolio
turnover) in order to achieve its investment objective.
Frequent trading may increase the portion of a fund's capital gains that are
realized for tax purposes in any given year. This may increase the fund's
taxable dividends in that year. Frequent trading also may increase the portion
of a fund's realized capital gains that are considered 'short-term' for tax
purposes. Shareholders will pay higher taxes on dividends that represent
short-term gains than they would pay on dividends that represent long-term
gains. Frequent trading also may result in higher fund expenses due to
transaction costs.
The funds do not restrict the frequency of trading in order to limit expenses or
the tax effect that the fund's dividends may have on shareholders.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
MANAGING YOUR FUND ACCOUNT
- --------------------------------------------------------------------------------
FLEXIBLE PRICING
The funds offer four classes of shares -- Class A, Class B, Class C and
Class Y. Each class has different sales charges and ongoing expenses. You can
choose the class that is best for you, based on how much you plan to invest and
how long you plan to hold your fund investment. Class Y shares are only
available to certain types of investors.
Each fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service and (for Class B and Class C shares)
distribution fees for the sale of its shares and services provided to
shareholders. Because the 12b-1 distribution fees for Class B and Class C shares
are paid out of a fund's assets on an ongoing basis, over time they will
increase the cost of your investment and may cost you more than if you paid a
front-end sales charge.
CLASS A SHARES
Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.
The Class A sales charges for each fund are described in the following table.
CLASS A SALES CHARGES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF OFFERING PRICE
- -------------------- -------------- ------------------- -------------------------------
<S> <C> <C> <C>
Less than $50,000......................... 4.50% 4.71% 4.25%
$50,000 to $99,999........................ 4.00 4.17 3.75
$100,000 to $249,999...................... 3.50 3.63 3.25
$250,000 to $499,999...................... 2.50 2.56 2.25
$500,000 to $999,999...................... 1.75 1.78 1.50
$1,000,000 and over(1).................... None None 1.00(2)
</TABLE>
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of dividends are not subject
to this 1% charge. Withdrawals in the first year after purchase of up to 12%
of the value of the fund account under the funds' Systematic Withdrawal Plan
are not subject to this charge.
(2) Mitchell Hutchins pays 1% to PaineWebber.
Sales Charge Reductions and Waivers. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber mutual fund. You can combine the
value of Class A shares that you own in other PaineWebber funds and the purchase
amount of the Class A shares of the PaineWebber fund that you are buying.
You may also qualify for a lower sales charge if you combine your purchases with
those of:
your spouse, parents or children under age 21;
your Individual Retirement Accounts (IRAs);
certain employee benefit plans, including 401(k) plans;
a company that you control;
a trust that you created;
Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created by
you or by a group of investors for your children; or
accounts with the same adviser.
---------------
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Prospectus Page 17
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
You may qualify for a complete waiver of the sales charge if you:
Are an employee of PaineWebber or its affiliates or the spouse, parent or child
under age 21 of a PaineWebber employee;
Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that was
registered as a broker-dealer with the SEC; and
-- you were the Financial Advisor's client at the competing brokerage firm;
-- within 90 days of buying shares in a fund, you sell shares of one or more
mutual funds that were principally underwritten by the competing
brokerage firm or its affiliates, and you either paid a sales charge to
buy those shares, pay a contingent deferred sales charge when selling
them or held those shares until the contingent deferred sales charge was
waived; and
-- you purchase an amount that does not exceed the total amount of money you
received from the sale of the other mutual fund;
Acquire these shares through the reinvestment of dividends of a PaineWebber unit
investment trust;
Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more eligible
employees in the plan or at least $1 million in assets;
Are a participant in the PaineWebber Members Only'sm' Program. For investments
made pursuant to this waiver, Mitchell Hutchins may make payments out of its
own resources to PaineWebber and to participating membership organizations in
a total amount not to exceed 1% of the amount invested; or
Acquire these shares through a PaineWebber InsightOne'sm' Program brokerage
account.
Note: See the funds' Statement of Additional Information for some other sales
charge waivers. If you think you qualify for any sales charge reductions or
waivers, you will need to provide documentation to PaineWebber or the fund. For
more information, you should contact your PaineWebber Financial Advisor or
correspondent firm or call 1-800-647-1568. If you want information on the funds'
Systematic Withdrawal Plan, see the Statement of Additional Information or
contact your PaineWebber Financial Advisor or correspondent firm.
CLASS B SHARES
Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH THE
IF YOU SELL SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
-------------- --------------------
<S> <C>
1st year since purchase... 5%
2nd year since purchase... 4
3rd year since purchase... 3
4th year since purchase... 2
5th year since purchase... 2
6th year since purchase... 1
7th year since purchase... None
</TABLE>
We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on withdrawals in any year of up to 12% of the
value of your Class B shares under the Systematic Withdrawal Plan.
To minimize your deferred sales charge, we will assume that you are selling:
First, Class B shares representing reinvested dividends, and
Second, Class B shares that you have owned the longest.
Sales Charge Waivers. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:
You participate in the Systematic Withdrawal Plan;
---------------
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Prospectus Page 18
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
You are older than 59 1/2 and are selling shares to take a distribution from
certain types of retirement plans;
You receive a tax-free return of an excess IRA contribution;
You receive a tax-qualified retirement plan distribution following retirement;
The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint tenant
with the right of survivorship; or
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 those pools.
Note: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber Financial Advisor or correspondent firm or
call 1-800-647-1568. If you want information on the Systematic Withdrawal Plan,
see the Statement of Additional Information or contact your PaineWebber
Financial Advisor or correspondent firm.
CLASS C SHARES
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 1.00% by the lesser of the net asset value of the Class C
shares at the time of purchase or the net asset value at the time of sale. We
will not impose the deferred sales charge on Class C shares representing
reinvestment of dividends or on withdrawals in the first year after purchase, of
up to 12% of the value of your Class C shares under the Systematic Withdrawal
Plan.
You may be eligible to sell your shares without paying a contingent deferred
sales charge if you:
Are a 401(k) or 403(b) qualified employee benefit plan with fewer than 100
employees or less than $1 million in assets; or
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 those pools.
Note: If you want information on the funds' Systematic Withdrawal Plan, see the
Statement of Additional Information or contact your PaineWebber Financial
Advisor or correspondent firm.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
Buy shares through PaineWebber's PACE Multi-Advisor Program;
Buy $10 million or more of PaineWebber fund shares at any one time;
Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or
Are an investment company advised by PaineWebber or an affiliate of PaineWebber.
The trustee of PaineWebber's 401(k) Plus Plan for its employees is also eligible
to purchase Class Y shares.
Class Y shares do not pay ongoing distribution or service fees or sales charges.
The ongoing expenses for Class Y shares are the lowest for all the classes.
BUYING SHARES
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the funds through the funds' transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must
---------------
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Prospectus Page 19
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
complete and sign the application and mail it, along with a check, to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you wish to invest in other PaineWebber Funds, you can do so by:
Contacting your Financial Advisor (if you have an account at PaineWebber or at a
PaineWebber correspondent firm);
Mailing an application with a check; or
Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional investments
in the same fund.
The funds and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account............... $1,000
To add to an account............. $ 100
</TABLE>
Each fund may waive or reduce these amounts for:
Employees of PaineWebber or its affiliates; or
Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.
Frequent Trading. The interests of a fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as 'market timing'. When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on a fund's ability to manage its
investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. A fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.
SELLING SHARES
You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent firm, you
can sell shares by contacting your Financial Advisor.
If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:
Your name and address;
The fund's name;
The fund account number;
The dollar amount or number of shares you want to sell; and
A guarantee of each registered owner's signature. A signature guarantee may be
obtained from a financial institution, broker, dealer or clearing agency that
is a participant in one of the medallion programs recognized by the Securities
Transfer Agents Association. These are: Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York
Stock Exchange Medallion Signature Program (MSP). The funds will not accept
signature guarantees that are not a part of these programs.
---------------
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Prospectus Page 20
<PAGE>
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------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
It costs each fund money to maintain shareholder accounts. Therefore, the funds
reserve the right to repurchase all shares in any account that has a net asset
value of less than $500. If a fund elects to do this with your account, it will
notify you that you can increase the amount invested to $500 or more within 60
days. A fund will not repurchase shares in accounts that fall below $500 solely
because of a decrease in the fund's net asset value.
EXCHANGING SHARES
You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.
You will not pay either a front-end sales charge or a deferred sales charge when
you exchange shares. However, you may have to pay a deferred sales charge if you
later sell the shares you acquired in the exchange. Each fund will use the date
that you purchased the shares in the first fund to determine whether you must
pay a deferred sales charge when you sell the shares in the acquired fund.
Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.
You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.
PaineWebber Clients. If you bought your shares through PaineWebber or a
correspondent firm, you may exchange your shares by placing an order with your
PaineWebber Financial Advisor.
Other Investors. If you are not a PaineWebber client, you may exchange your
shares by writing to the fund's transfer agent. You must include:
Your name and address;
The name of the fund whose shares you are selling and the name of the fund whose
shares you want to buy;
Your account number;
How much you are exchanging (by dollar amount or by number of shares to be
sold); and
A guarantee of your signature. (See 'Buying Shares' for information on obtaining
a signature guarantee.)
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
A fund may modify or terminate the exchange privilege at any time.
PRICING AND VALUATION
The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. Each fund calculates net asset value on days that the New
York Stock Exchange is open. Each fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the funds do not price their
shares, on national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the fund's net asset value
per share will be calculated as of the time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the fund.
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.
Each fund calculates its net asset value based on the current market value for
its portfolio securities. The funds normally obtain market values for their
securities from independent pricing services that use
---------------
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Prospectus Page 21
<PAGE>
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------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
reported last sales prices, current market quotations or valuations from
computerized 'matrix' systems that derive values based on comparable securities.
If a market value is not available from an independent pricing source for a
particular security, that security is valued at a fair value determined by or
under the direction of the fund's board. The funds normally use the amortized
cost method to value bonds that will mature in 60 days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.
---------------
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Prospectus Page 22
<PAGE>
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------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York, 10019-6114, and is a wholly owned asset management
subsidiary of PaineWebber Incorporated, which is wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. On October 31,
1999, Mitchell Hutchins was adviser or sub-adviser of 33 investment companies
with 76 separate portfolios and aggregate assets of approximately $48.9 billion.
PORTFOLIO MANAGERS
Growth Fund. Ellen R. Harris has been primarily responsible for the day-to-day
management of the fund's portfolio since its inception. Ms. Harris is a managing
director of Mitchell Hutchins and has been with Mitchell Hutchins since 1983.
Growth and Income Fund. Mark A. Tincher is primarily responsible for the
day-to-day management of the fund. Mr. Tincher has held his management
responsibilities for the fund since April 1995. Mr. Tincher is a managing
director and chief investment officer of equities of Mitchell Hutchins,
responsible for overseeing the management of equity investments. Prior to
joining Mitchell Hutchins in April, 1995, Mr. Tincher was a vice president at
Chase Manhattan Private Bank, where he directed the U.S. funds management and
equity research area and oversaw the management of all Chase U.S. equity funds.
Mr. Tincher was the sole portfolio manager of Vista Growth and Income Fund
('Vista Fund'), with full discretionary authority over the selection of
investments, from July, 1991 through March 16, 1995. Vista Fund's investment
objectives of long-term capital appreciation and dividend income were
substantially similar to Growth and Income Fund's investment objective of
current income and capital growth. Mr. Tincher used and relied upon the same
valuation model and analytical methods when managing the Vista Fund as he now
uses for Growth and Income Fund.
The cumulative total return for Vista Fund for the period it was managed by Mr.
Tincher was 46.18%; 39.24% after deducting that Fund's maximum sales charge of
4.75%. As of March 31, 1995, the Vista Fund had $1.6 billion in net assets. The
chart below shows calendar year total returns for Vista Fund; the 1991 return
represents the period from July 31, 1991, when Mr. Tincher took over day-to-day
management of the Vista Fund, through December 31, 1991. Sales charges have not
been deducted from total returns. Returns would be lower if sales charges were
deducted.
<TABLE>
<CAPTION>
[GRAPH]
Calendar
Date Percentages
-------- -----------
<S> <C>
7/31/91-12/31/91 9.69%
1992 15.11%
1993 12.99%
1994 -3.41%
</TABLE>
Average annual returns both before and after deducting the maximum sales charges
are shown in the table below. Average annual returns are for the one- and
three-year periods ended December 31, 1994 and the entire period during which
Mr. Tincher managed the Vista Fund (July 31, 1991 through March 16, 1995) and
are compared with the performance of the S&P 500 Index for each of those
periods.
---------------
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Prospectus Page 23
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
<TABLE>
<CAPTION>
VISTA S&P 500
FUND(1) INDEX(2)
------- --------
<S> <C> <C>
Mr. Tincher's Term as Manager
7/31/91 through 3/16/95
Before deducting
maximum sales charges.......... 11.04% 10.17%
After deducting
maximum sales charges.......... 9.56% 10.17%
Three Years Ended 12/31/94
Before deducting maximum
sales charges.................. 7.90% 6.26%
After deducting maximum
sales charges.................. 6.16% 6.26%
One Year Ended 12/31/94
Before deducting maximum
sales charges.................. (3.41)% 1.31%
After deducting maximum
sales charges.................. (8.00)% 1.31%
</TABLE>
- ------------
1. Average annual returns are for Class A shares and reflect, where applicable
the deduction of the maximum sales charge of 4.75%, changes in share prices,
reinvestment of dividends and are net of fund expenses. For the fiscal years
ended October 31, 1991 and October 31, 1992, expenses in the amount of 0.51%
and 0.03%, respectively, were waived or reimbursed.
2. The S&P 500 Index is an unmanaged index of common stocks that is considered
to be generally representative of the United States stock market. It is
adjusted to reflect reinvestment of dividends. No sales charges are
applicable.
- ------------
Historical performance is not indicative of future performance. Vista Fund is a
separate fund and its historical performance is not indicative of the past or
future performance of Growth and Income Fund. S&P 500 Index and Vista Fund
performance information calculated by Lipper Analytical Services Inc.; used with
permission.
Mid Cap Fund. Mark A. Tincher, Christopher G. Altschul and Antony J. Scott have
been primarily responsible for the day-to-day portfolio management of the Fund
since May 1, 1998. Information regarding Mr. Tincher's background may be found
under 'Growth and Income Fund.' Mr. Altschul is a first vice president of
Mitchell Hutchins and is responsible for its quantitative equity valuation
model. Prior to joining Mitchell Hutchins in April, 1995, Mr. Altschul was an
equity analyst at Chase Manhattan Bank. Mr. Scott is a first vice president of
Mitchell Hutchins and is an equity analyst responsible for the technology,
media, entertainment and medical products industries. Prior to joining Mitchell
Hutchins in May, 1996, Mr. Scott was a research analyst with Morgan Stanley &
Co.
Small Cap Fund. Donald R. Jones has been primarily responsible for the
day-to-day management of the fund since April, 1996. Mr. Jones is a senior vice
president of Mitchell Hutchins. Prior to joining Mitchell Hutchins in February
1996, he was a vice president in the Asset Management Group of First Fidelity
Bancorporation.
ADVISORY FEES
The funds paid advisory fees to Mitchell Hutchins for the most recent fiscal
year at the following rate of average daily net assets:
<TABLE>
<S> <C>
Growth Fund.................... 0.75%(1)
Growth and Income Fund......... 0.70%
Mid Cap Fund................... 1.00%(1)
Small Cap Fund................. 1.00%(2)
</TABLE>
- ------------
(1) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The percentages exluding the waiver
are the same since the fee waiver represents less than 0.005%.
(2) During the year ended July 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The percentages excluding the waiver
would be the same since the fee waived represents less than 0.005%.
OTHER INFORMATION
The funds have received an exemptive order from the SEC that permits their
boards to appoint and replace sub-advisers and to amend sub-advisory contracts
without obtaining shareholder approval. A fund's shareholders must approve this
policy before its board may implement it. As of the date of this prospectus, the
funds have not asked their shareholders to do so.
---------------
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Prospectus Page 24
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Growth and Income Fund normally pays semi-annual dividends and distributes any
gains annually. The other funds normally declare and pay dividends and
distribute any gains annually.
Classes with higher expenses are expected to have lower dividends. For example,
Class B shares and Class C are expected to have the lowest dividends of any
class of a fund's shares, while Class Y shares are expected to have the highest.
You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its correspondent firms if you prefer to receive dividends in cash.
TAXES
The dividends that you receive from a fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) plan, dividends on your shares generally will not be subject to
tax.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange any fund's shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the first
fund's shares, and any gain will be subject to federal income tax.
Growth and Income Fund expects that its dividends will primarily be taxed as
ordinary income. The other funds expect that their dividends will be comprised
primarily of capital gain distributions. The distribution of capital gains will
be taxed at a lower rate than ordinary income if the fund held the assets that
generated the gains for more than 12 months. Your fund will tell you how you
should treat its dividends for tax purposes.
---------------
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Prospectus Page 25
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
---------------
- --------------------------------------------------------------------------------
Prospectus Page 26
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for classes of fund shares that have existed for less than 5 years. Certain
information reflects financial results for a single fund share. In the tables,
'total investment return' represents the rate that an investor would have earned
(or lost) on an investment in a fund (assuming reinvestment of all dividends).
This information in the financial highlights has been audited by Ernst & Young
LLP, independent auditors (or for Small Cap Fund, PricewaterhouseCoopers LLP,
independent accountants), whose reports, along with the funds' financial
statements, are included in the funds' Annual Reports to Shareholders. Annual
Reports may be obtained without charge by calling 1-800-647-1568.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 27
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 20.08 $ 25.94 $ 24.37 $ 22.27 $ 20.04
-------- -------- -------- -------- --------
Net investment income (loss)................................ (0.10) (0.09) (0.08)'D' (0.12) 0.01
Net realized and unrealized gains from investments.......... 8.88 1.01 3.76'D' 4.06 2.25
-------- -------- -------- -------- --------
Total increase from investment operations................... 8.78 0.92 3.68 3.94 2.26
-------- -------- -------- -------- --------
Distributions from net realized gains from investment
transactions.............................................. (2.01) (6.78) (2.11) (1.84) (0.03)
-------- -------- -------- -------- --------
Net asset value, end of year................................ $ 26.85 $ 20.08 $ 25.94 $ 24.37 $ 22.27
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return (1)................................. 44.97% 3.37% 15.85% 18.43% 11.28%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of year (000's)............................. $295,906 $202,253 $201,725 $203,882 $183,958
Expenses to average net assets, net of waivers from
adviser (3)............................................... 1.15% 1.19% 1.27% 1.28% 1.28%(2)
Net investment income (loss) to average net assets, net of
waivers from adviser (3).................................. (0.41)% (0.39)% (0.32)% (0.49)% 0.19%(2)
Portfolio turnover.......................................... 38% 52% 86% 60% 36%
</TABLE>
- ------------
'D' Calculated using the average shares outstanding for the year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each year reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included.
(2) These ratios include non-recurring acquisition expenses of 0.06%.
(3) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver are
the same since the fee waiver represents less than 0.005%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 28
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------------------------------- -------------------------------------------------------
FOR THE YEARS ENDED AUGUST 31, FOR THE YEARS ENDED AUGUST 31,
---------------------------------------------------------- -------------------------------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18.44 $ 24.51 $ 23.30 $ 21.53 $ 19.53 $ 18.65 $ 24.71 $ 23.48 $ 21.68 $ 19.67
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
(0.30) (0.30) (0.26)'D' (0.39) (0.02) (0.26) (0.27) (0.27)'D' (0.34) (0.10)
8.13 1.01 3.58 'D' 4.00 2.05 8.18 0.99 3.61 'D' 3.98 2.14
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
7.83 0.71 3.32 3.61 2.03 7.92 0.72 3.34 3.64 2.04
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
(2.01) (6.78) (2.11) (1.84) (0.03) (2.01) (6.78) (2.11) (1.84) (0.03)
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
$ 24.26 $ 18.44 $ 24.51 $ 23.30 $ 21.53 $ 24.56 $ 18.65 $ 24.71 $ 23.48 $ 21.68
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
43.75% 2.55% 14.98% 17.48% 10.40% 43.74% 2.59% 14.95% 17.50% 10.37%
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
------- ------- -------- -------- -------- ------- ------- ------- ------- -------
$85,576 $74,094 $115,529 $140,551 $152,357 $35,793 $21,714 $24,760 $29,923 $30,608
1.96% 1.99% 2.06% 2.06% 2.06%(2) 1.94% 1.99% 2.07% 2.07% 2.05%(2)
(1.22)% (1.18)% (1.12)% (1.27)% (0.60)%(2) (1.20)% (1.19)% (1.13)% (1.28)% (0.57)%(2)
38% 52% 86% 60% 36% 38% 52% 86% 60% 36%
</TABLE>
---------------
- --------------------------------------------------------------------------------
Prospectus Page 29
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Y
-----------------------------------------------
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 20.67 $ 26.46 $ 24.74 $ 22.53 $ 20.22
------- ------- ------- ------- -------
Net investment income (loss)................................ (0.03) (0.03) (0.01)'D' (0.02) 0.24
Net realized and unrealized gains from investments.......... 9.16 1.02 3.84'D' 4.07 2.10
------- ------- ------- ------- -------
Total increase from investment operations................... 9.13 0.99 3.83 4.05 2.34
------- ------- ------- ------- -------
Distributions from net realized gain from investment
transactions.............................................. (2.01) (6.78) (2.11) (1.84) (0.03)
------- ------- ------- ------- -------
Net asset value, end of year................................ $ 27.79 $ 20.67 $ 26.46 $ 24.74 $ 22.53
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment return(1).................................. 45.40% 3.61% 16.24% 18.72% 11.58%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of year (000's)............................. $33,383 $21,440 $20,281 $21,409 $20,948
Expenses to average net assets, net of waivers from adviser
(3)....................................................... 0.86% 0.91% 1.00% 1.02% 0.97%(2)
Net investment income (loss) to average net assets, net of
waivers from adviser (3).................................. (0.12)% (0.12)% (0.05)% (0.23)% 0.53%(2)
Portfolio turnover.......................................... 38% 52% 86% 60% 36%
</TABLE>
- ------------
'D' Calculated using the average shares outstanding for the year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each year reported. The figures do not
include program fees; results would be lower if program fees were included.
(2) These ratios include non-recurring acquisition expenses of 0.05%.
(3) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver are
the same since the fee waiver represents less than 0.005%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 30
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
---------------
- --------------------------------------------------------------------------------
Prospectus Page 31
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
Painewebber Growth and Income Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
FOR THE YEAR ENDED AUGUST 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 26.92 $ 30.60 $ 24.35 $ 22.52 $ 20.43
-------- -------- -------- -------- -------
Net investment income....................................... 0.13 0.19 0.23 0.22 0.24
Net realized and unrealized gains (losses) from investments
and options............................................... 6.88 (0.99) 9.29 3.46 3.18
-------- -------- -------- -------- -------
Total increase (decrease) from investment operations........ 7.01 (0.80) 9.52 3.68 3.42
-------- -------- -------- -------- -------
Dividends from net investment income........................ (0.08) (0.21) (0.25) (0.34) (0.12)
Distributions from net realized gains from investment
transactions.............................................. (1.78) (2.67) (3.02) (1.51) (1.21)
-------- -------- -------- -------- -------
Total dividends and distributions to shareholders........... (1.86) (2.88) (3.27) (1.85) (1.33)
-------- -------- -------- -------- -------
Net asset value, end of year................................ $ 32.07 $ 26.92 $ 30.60 $ 24.35 $ 22.52
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Total investment return (1)................................. 26.48% (3.51)% 42.42% 17.40% 18.30%
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Ratios/Supplemental data:
Net assets, end of year (000's)............................. $844,415 $670,606 $441,699 $276,016 $187,057
Expenses to average net assets.............................. 1.08% 1.07% 1.15% 1.20%(2) 1.19%
Net investment income (loss) to average net assets.......... 0.41% 0.71% 0.88% 0.98%(2) 1.07%
Portfolio turnover.......................................... 57% 62% 70% 112% 111%
</TABLE>
- ------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each year reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included.
(2) These ratios include non-recurring acquisition expenses of 0.04%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 32
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------------------------- ----------------------------------------------------
FOR THE YEARS ENDED AUGUST 31, FOR THE YEARS ENDED AUGUST 31,
---------------------------------------------------- ----------------------------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996# 1995
---- ---- ---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 26.77 $ 30.46 $ 24.26 $ 22.37 $ 20.37 $ 26.82 $ 30.53 $ 24.33 $ 22.43 $ 20.42
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(0.15) (0.02) 0.04 0.04 0.06 (0.12) 0.01 0.05 0.05 0.06
6.88 (1.02) 9.23 3.45 3.18 6.86 (1.03) 9.24 3.46 3.19
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
6.73 (1.04) 9.27 3.49 3.24 6.74 (1.02) 9.29 3.51 3.25
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-- -- (0.05) (0.09) (0.03) -- (0.02) (0.07) (0.10) (0.03)
(1.78) (2.65) (3.02) (1.51) (1.21) (1.78) (2.67) (3.02) (1.51) (1.21)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(1.78) (2.65) (3.07) (1.60) (1.24) (1.78) (2.69) (3.09) (1.61) (1.24)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$ 31.72 $ 26.77 $ 30.46 $ 24.26 $ 22.37 $ 31.78 $ 26.82 $ 30.53 $ 24.33 $ 22.43
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
25.51% (4.28)% 41.33% 16.49% 17.38% 25.49% (4.23)% 41.30% 16.52% 17.37%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$306,557 $353,150 $376,840 $277,753 $247,543 $165,948 $149,458 $ 84,922 $ 43,148 $ 30,468
1.86% 1.87% 1.93% 1.99%(2) 1.97% 1.85% 1.85% 1.92% 1.99%(2) 1.98%
(0.37)% (0.08)% 0.11% 0.17%(2) 0.29% (0.36)% (0.07)% 0.10% 0.18%(2) 0.28%
57% 62% 70% 112% 111% 57% 62% 70% 112% 111%
</TABLE>
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Prospectus Page 33
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth and Income Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Y
-----------------------------------------------
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 26.92 $ 30.59 $ 24.35 $ 22.54 $ 20.42
------- ------- ------- ------- -------
Net investment income....................................... 0.24 0.30 0.32 0.30 0.30
Net realized and unrealized gains (losses) from investments
and options............................................... 6.86 (1.02) 9.26 3.45 3.18
------- ------- ------- ------- -------
Total increase (decrease) from investment operations........ 7.10 (0.72) 9.58 3.75 3.48
------- ------- ------- ------- -------
Dividends from net investment income........................ (0.12) (0.28) (0.32) (0.43) (0.15)
Distributions from net realized gains from investment
transactions.............................................. (1.78) (2.67) (3.02) (1.51) (1.21)
------- ------- ------- ------- -------
Total dividends and distributions to shareholders........... (1.90) (2.95) (3.34) (1.94) (1.36)
------- ------- ------- ------- -------
Net asset value, end of year................................ $ 32.12 $ 26.92 $ 30.59 $ 24.35 $ 22.54
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment return(1).................................. 26.82% (3.24)% 42.74% 17.77% 18.66%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of year (000's)............................. $65,104 $65,518 $46,745 $22,942 $14,680
Expenses to average net assets.............................. 0.79% 0.80% 0.88% 0.92%(2) 0.89%
Net investment income to average net assets................. 0.70% 0.99% 1.14% 1.26%(2) 1.39%
Portfolio turnover.......................................... 57% 62% 70% 112% 111%
</TABLE>
- ------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each year reported. The figures do not
include program fees; results would be lower if program fees were included.
(2) These ratios include non-recurring acquisition expenses of 0.04%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 34
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Mid Cap Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
FOR THE
FOR THE FIVE
YEAR MONTHS
ENDED ENDED FOR THE YEARS ENDED MARCH 31,
AUGUST 31, AUGUST 31, ---------------------------------------------
1999 1998# 1998 1997 1996 1995
---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................... $ 7.97 $ 15.00 $ 13.44 $ 15.61 $ 12.81 $ 11.65
-------- -------- ---------- ---------- -------- --------
Net investment loss..................................... (0.07) (0.03) (0.13) (0.17) (0.16) (0.09)
Net realized unrealized gains (losses) from
investments........................................... 3.43 (3.15) 5.15 0.32 3.71 1.29
-------- -------- ---------- ---------- -------- --------
Net increase (decrease) from investment operations...... 3.36 (3.18) 5.02 0.15 3.55 1.20
-------- -------- ---------- ---------- -------- --------
Distributions from net realized gains from
investments........................................... (0.66) (3.85) (3.46) (2.32) (0.75) (0.04)
-------- -------- ---------- ---------- -------- --------
Net asset value, end of period.......................... $ 10.67 $ 7.97 $ 15.00 $ 13.44 $ 15.61 $ 12.81
-------- -------- ---------- ---------- -------- --------
-------- -------- ---------- ---------- -------- --------
Total investment return(1).............................. 43.38% (27.31)% 41.50% (0.21)% 28.16% 10.36%
-------- -------- ---------- ---------- -------- --------
-------- -------- ---------- ---------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's)....................... $113,126 $ 90,650 $ 101,698 $ 76,909 76,558 $ 62,673
Expenses to average net assets, net of waivers from
adviser(2)............................................ 1.60% 1.48%* 1.51% 1.60% 1.58% 1.58%
Net investment loss to average net assets, net of
waivers from adviser(2)............................... (0.64)% (0.61)%* (1.16)% (1.20)% (1.11)% (0.79)%
Portfolio turnover...................................... 79% 80% 64% 56% 57% 42%
</TABLE>
- ------------
* Annualized.
# Effective May 1, 1998, Mitchell Hutchins took over day-to-day management of
the Fund's assets.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include sales charges; results would be lower if sales charges were
included. Total investment return for period of less than one year has not
been annualized.
(2) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver are
the same since the fee waiver represents less than 0.005%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 35
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Mid Cap Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------
FOR THE
FOR THE FIVE
YEAR MONTHS
ENDED ENDED FOR THE YEARS ENDED MARCH 31,
AUGUST 31, AUGUST 31, -----------------------------------------
1999 1998# 1998 1997 1996 1995
---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................... $ 7.99 $ 15.07 $ 13.59 $ 15.88 $ 13.11 $ 12.02
------- ------- -------- -------- -------- --------
Net investment loss..................................... (0.27) (0.07) (0.31) (0.31) (0.29) (0.20)
Net realized and unrealized gains (losses) from
investments........................................... 3.53 (3.16) 5.25 0.34 3.81 1.33
------- ------- -------- -------- -------- --------
Net increase (decrease) from investment operations...... 3.26 (3.23) 4.94 0.03 3.52 1.13
------- ------- -------- -------- -------- --------
Distributions from net realized gains from
investments........................................... (0.66) (3.85) (3.46) (2.32) (0.75) (0.04)
------- ------- -------- -------- -------- --------
Net asset value, end of period.......................... $ 10.59 $ 7.99 $ 15.07 $ 13.59 $ 15.88 $ 13.11
------- ------- -------- -------- -------- --------
------- ------- -------- -------- -------- --------
Total investment return(1).............................. 41.95% (27.54)% 40.39% (0.99)% 27.28% 9.46%
------- ------- -------- -------- -------- --------
------- ------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's)....................... $28,077 $54,978 $143,058 $134,495 $157,021 $139,302
Expenses to average net assets, net of waivers from
adviser(2)............................................ 2.55% 2.32%* 2.28% 2.36% 2.34% 2.34%
Net investment income (loss) to average net assets,
net of waivers from adviser(2)........................ (1.61)% (1.48)%* (1.92)% (1.95)% (1.87)% (1.56)%
Portfolio turnover...................................... 79% 80% 64% 56% 57% 42%
</TABLE>
- ------------
* Annualized.
# Effective May 1, 1998, Mitchell Hutchins took over day-to-day management of
the Fund's assets.
'D' Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include sales charges or program fees; results would be lower if sales
charges or program fees were included. Total investment return for period of
less than one year has not been annualized.
(2) During the year ended August 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver are
the same since the fee waiver represents less than 0.005%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 36
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS Y
--------------------------------------------------------------- ------------------------------------
FOR THE FOR THE FOR THE
FOR THE FIVE FOR THE FIVE PERIOD
YEAR MONTHS YEAR MONTHS MARCH 17,
ENDED ENDED FOR THE YEARS ENDED MARCH 31, ENDED ENDED 1998'D' TO
AUGUST 31, AUGUST 31, ------------------------------------- AUGUST 31, AUGUST 31, MARCH 31,
1999 1998# 1998 1997 1996 1995 1999 1998# 1998
---- ----- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 7.26 $ 14.07 $ 12.87 $ 15.14 $ 12.54 $ 11.50 $ 7.97 $15.00 $14.90
------- ------- ------- ------- ------- ------- ------ ------ ------
(0.15) (0.06) (0.26) (0.29) (0.27) (0.19) (0.02) (0.01) 0.00
3.12 (2.90) 4.92 0.34 3.62 1.27 3.41 (3.17) 0.10
------- ------- ------- ------- ------- ------- ------ ------ ------
2.97 (2.96) 4.66 0.05 3.35 1.08 3.39 (3.18) 0.10
------- ------- ------- ------- ------- ------- ------ ------ ------
(0.66) (3.85) (3.46) (2.32) (0.75) (0.04) (0.66) (3.85) --
------- ------- ------- ------- ------- ------- ------ ------ ------
$ 9.57 $ 7.26 $ 14.07 $ 12.87 $ 15.14 $ 12.54 $10.70 $ 7.97 $15.00
------- ------- ------- ------- ------- ------- ------ ------ ------
------- ------- ------- ------- ------- ------- ------ ------ ------
42.17% (27.58)% 40.46% (0.91)% 27.16% 9.45% 43.77% (27.31)% 0.67%
------- ------- ------- ------- ------- ------- ------ ------ ------
------- ------- ------- ------- ------- ------- ------ ------ ------
$16,594 $16,875 $27,814 $24,810 $27,601 $24,993 $ 290 $ 65 $ 35
2.43% 2.28%* 2.29% 2.37% 2.36% 2.35% 1.36% 1.23%* 1.22%*
(1.47)% (1.42)%* (1.94)% (1.97)% (1.89)% (1.57)% (0.36)% (0.29)%* 0.00%*
79% 80% 64% 56% 57% 42% 79% 80% 64%
</TABLE>
---------------
- --------------------------------------------------------------------------------
Prospectus Page 37
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Small Cap Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
FOR THE YEARS ENDED JULY 31,
-----------------------------------------------
1999 1998 1997 1996# 1995
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 13.34 $ 13.42 $ 10.22 $ 11.30 $ 10.27
------- ------- ------- ------- -------
Net investment income (loss)................................ (0.08) (0.13) (0.14) 0.00@ 0.05
Net realized and unrealized gains (losses) from
investments............................................... (1.18) 1.22 3.75 0.50@ 1.50
------- ------- ------- ------- -------
Net increase (decrease) from investment operations.......... (1.26) 1.09 3.61 0.50 1.55
------- ------- ------- ------- -------
Distributions from net realized gains from investments...... (1.11) (1.17) (0.41) (1.58) (0.52)
------- ------- ------- ------- -------
Net asset value, end of year................................ $ 10.97 $ 13.34 $ 13.42 $ 10.22 $ 11.30
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment return(1).................................. (8.95)% 8.45% 36.11% 4.69% 15.80%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratios/Supplemental Data:
Net assets, end of year (000's)............................. $46,680 $47,589 $32,968 $30,675 $20,494
Expenses to average net assets, net of waivers from
adviser(2)................................................ 1.59% 1.56% 2.00% 2.11% 1.98%
Net investment income (loss) to average net assets, net of
waivers from adviser(2)................................... (0.77)% (0.99)% (1.16)% 0.02% 0.41%
Portfolio turnover rate..................................... 61% 45% 54% 84% 19%
</TABLE>
- ------------
# Effective April 1, 1996, Mitchell Hutchins took over day-to-day management of
the Fund's assets.
@ Calculated using the average monthly shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of each year reported. The figures do not
include sales charges; results would be lower if sales charges were
included.
(2) During the year ended July 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 38
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------------------- -----------------------------------------------
FOR THE YEARS ENDED JULY 31, FOR THE YEARS ENDED JULY 31,
----------------------------------------------- -----------------------------------------------
1999 1998 1997 1996# 1995 1999 1998 1997 1996# 1995
---- ---- ---- ----- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.78 $ 13.00 $ 9.98 $ 11.15 $ 10.22 $ 12.76 $ 12.98 $ 9.97 $ 11.14 $ 10.22
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.29) (0.22) (0.23) (0.09)@ (0.04) (0.20) (0.21) (0.24) (0.08)@ (0.05)
(1.02) 1.17 3.66 0.50@ 1.49 (1.09) 1.16 3.66 0.49@ 1.49
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(1.31) 0.95 3.43 0.41 1.45 (1.29) 0.95 3.42 0.41 1.44
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(1.11) (1.17) (0.41) (1.58) (0.52) (1.11) (1.17) (0.41) (1.58) (0.52)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 10.36 $ 12.78 $ 13.00 $ 9.98 $ 11.15 $ 10.36 $ 12.76 $ 12.98 $ 9.97 $ 11.14
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(9.79)% 7.60% 35.16% 3.90% 14.86% (9.63)% 7.61% 35.09% 3.90% 14.76%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$18,361 $54,639 $40,749 $36,612 $46,142 $18,913 $32,174 $18,812 $18,606 $13,263
2.43% 2.33% 2.75% 2.90% 2.74% 2.39% 2.32% 2.77% 2.91% 2.73%
(1.62)% (1.75)% (1.91)% (0.78)% (0.35)% (1.59)% (1.75)% (1.93)% (0.77)% (0.34)%
61% 45% 54% 84% 19% 61% 45% 54% 84% 19%
</TABLE>
---------------
- --------------------------------------------------------------------------------
Prospectus Page 39
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Small Cap Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Y
----------------------------------------------------
FOR THE YEARS ENDED JULY 31, FOR THE
---------------------------- PERIOD ENDED
1999 1998 1997 JULY 31, 1996'D'
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........................ $13.42 $13.46 $10.21 $10.23
------ ------ ------ ------
Net investment income (loss)................................ (0.07) (0.07) (0.11) 0.00@
Net realized and unrealized gains (losses) from
investments............................................... (1.17) 1.20 3.77 (0.02)@
------ ------ ------ ------
Net increase (decrease) from investment operations.......... (1.24) 1.13 3.66 (0.02)
------ ------ ------ ------
Distributions from net realized gains from investments...... (1.11) (1.17) (0.41) --
------ ------ ------ ------
Net asset value, end of period.............................. $11.07 $13.42 $13.46 $10.21
------ ------ ------ ------
------ ------ ------ ------
Total investment return(1).................................. (8.73)% 8.74% 36.65% (0.20)%
------ ------ ------ ------
------ ------ ------ ------
Ratios/Supplemental Data:
Net assets, end of period (000's)........................... $5,044 $7,169 $2,768 $2,801
Expenses to average net assets, net of waivers from
adviser(2)................................................ 1.31% 1.39% 1.72% 1.72%*
Net investment income (loss) to average net assets, net of
waivers from adviser(2)................................... (0.50)% (0.83)% (0.88)% 0.07%*
Portfolio turnover rate..................................... 61% 45% 54% 84%
</TABLE>
- ------------
* Annualized.
'D' For the period July 26, 1996 (commencement of offering shares) to July 31,
1996.
@ Calculated using the average monthly shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of each period reported. The figures do not
include sales charges or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year has not been annualized
(2) During the year ended July 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.
---------------
- --------------------------------------------------------------------------------
Prospectus Page 40
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber Growth Fund PaineWebber Growth and Income Fund
PaineWebber Mid Cap Fund PaineWebber Small Cap Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TICKER SYMBOL: Growth Fund Class: A: PGRAX Growth and Income Fund Class: A: PDGAX
B: PGRBX B: PDGBX
C: PGRDX C: PWDDX
Y: PGRYZ Y: PWGYX
Mid Cap Fund Class: A: PWCAX Small Cap Fund Class: A: PSCAX
B: PWCBX B: PSCBX
C: PWCDX C: PSCDX
Y: None Y: None
</TABLE>
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual reports,
you will find a discussion of the market conditions and investment strategies
that significantly affected the funds' performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the funds and is incorporated
by reference into this prospectus.
You may discuss your questions about the funds by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual reports
and the SAI by contacting the funds directly at 1-800-647-1568.
You may review and copy information about the funds, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies of reports and other information about
the funds and about the operations of the SEC's Public Reference Room:
For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009
Telephone: 1-800-SEC-0330
Free, from the SEC's Internet website at: http://www.sec.gov
PaineWebber Olympus Fund
-- PaineWebber Growth Fund
Investment Company Act File No. 811-4180
PaineWebber America Fund
-- PaineWebber Growth and Income Fund
Investment Company Act File No. 811-3502
PaineWebber Managed Assets Trust
-- PaineWebber Mid Cap Fund
Investment Company Act File No. 811-6376
PaineWebber Securities Trust
-- PaineWebber Small Cap Fund
Investment Company Act File No. 811-7374
'c'1999 PaineWebber Incorporated. All rights reserved. Member SIPC.
---------------
- --------------------------------------------------------------------------------
<PAGE>
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
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds and Their Investment Policies.............................................................. 2
The Funds' Investments, Related Risks and Limitations................................................ 3
Strategies Using Derivative Instruments.............................................................. 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......................................................................... 42
Valuation of Shares.................................................................................. 42
Performance Information.............................................................................. 43
Taxes................................................................................................ 47
Other Information.................................................................................... 50
Financial Statements................................................................................. 51
Appendix............................................................................................. A-1
</TABLE>
<PAGE>
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, at least 65% of the fund's total assets is invested
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 ("S&P"), B-1 by Moody's Investors Service
("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
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
total assets. The fund may borrow from banks or
2
<PAGE>
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 (referred to as "stocks" in the
Prospectus) 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 depository 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
securities may include debentures, notes and preferred equity securities, 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. Depository 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.
BONDS. Bonds are fixed or variable rate debt obligations, including
notes, debentures, and similar instruments and securities and money market
instruments. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations and governments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and normally must repay the amount
borrowed on or before maturity. Many preferred stocks and some bonds are
"perpetual" in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. 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
3
<PAGE>
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 BONDS. Convertible 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. Some convertible securities are "perpetual" in that they
have no maturity date.
Convertible 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 the fund's investments in
bonds. In general, convertible bonds having longer durations are more sensitive
to interest rate changes than are convertible securities with shorter durations.
Credit risk is the risk that an issuer may be unable or unwilling to pay
interest and/or principal on the bond. Credit risk can be affected by many
factors, including adverse changes in the issuer's own financial condition or in
economic conditions.
A convertible bond entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to non-convertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible bonds rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable non-convertible
securities.
Convertible bonds have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics and
(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases. The value of a convertible bond is a function
of its "investment value" (determined by its yield comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the bond's worth, at market
value, if converted into the underlying common stock). The investment value of a
convertible bond is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible bond's investment value. The conversion value of a
convertible bond is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible bond is governed principally by its investment value,
and generally the conversion value decreases as the convertible bond approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible bond
will be increasingly influenced by its conversion value. In addition, a
convertible bond generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible bond 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 bond held by the fund is called for redemption, the
fund will be required to permit the issuer to redeem the security, convert it
into underlying common stock or sell it to a third party.
WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
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
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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
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 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 higher 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. This has been reflected in recent
volatility in emerging market securities. 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
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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
(collectively, "U.S. government securities"). 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.
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.
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, ADR's 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 depository's
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligations and the depository'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. To the extent a fund invests in
illiquid securities, it may not be able to readily liquidate such investments
and may have to sell other investments if necessary to raise cash to meet its
obligations. The lack of a
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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 ("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. To the extent that
foreign securities are freely tradable in the country in which they are
principally traded, they generally are not considered illiquid, even if they are
restricted in the United States. A large institutional market has developed for
many U.S. and foreign securities that are not registered under the Securities
Act. Institutional investors generally will not seek to sell these instruments
to the general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as
a result of Rule 144A under the Securities Act, which establishes a "safe
harbor" from the registration requirements of 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 such portfolio securities, and the fund might be unable to
dispose of such securities 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.
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.
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
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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 that 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. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce that 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.
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 that 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
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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.
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.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The funds may invest in
securities of other investment companies, subject to Investment Company Act
limitations which 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, and the purchase of shares of some investment companies requires
the payment of sales loads and sometimes substantial premiums above the value of
such companies' portfolio securities. 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.
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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
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 of 1940, as amended ("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.
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NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval.
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 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 to attempt to hedge each fund's
portfolio and also to attempt to enhance income or return or realize gains and
to manage the duration of its bond portfolio. 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.
The funds 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 or currency 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 or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right to
sell the underlying security or currency at a specified price during the option
term or 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 or currency 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
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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
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. 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.
12
<PAGE>
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 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 utilize 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
13
<PAGE>
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.
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,
currencies 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.
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<PAGE>
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 which, 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.
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 the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
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.
15
<PAGE>
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.
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
16
<PAGE>
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:
(1) To the extent a fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on those positions (excluding
the amount by which options are "in-the-money") may not exceed 5% of 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
17
<PAGE>
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.
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;
the other Trusts each have 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>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Margo N. Alexander*'D'; 52 Trustee and President Mrs. Alexander is Chairman (since March 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 R.Q.A.
One Old Church Road Enterprises (management consulting firm) (since
Unit #6 April 1991 and principal occupation since March
Greenwich, CT 06830 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**'D'; 73 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber Group Inc.
Board of Trustees ("PW Group") (holding company of PaineWebber and
Mitchell Hutchins). Prior to December 1995, he was
a consultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief
executive officer of American Bakeries Company. Mr.
Bewkes is a director of Interstate Bakeries
Corporation. 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 firm)
Washington, DC 20004 (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), Powerhouse Technologies Inc. (provides
technology to gaming and wagering industry) and
Chairman of Weirton Steel Corp. (makes and finishes
steel products) since April 1996. He was the chief
negotiator in the Strategic Arms Reduction Talks
with the former Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal Republic of Germany
(1985-1989). Mr. Burt is a director or trustee of
31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Mary C. Farrell**'D'; 49 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of the
New York, NY 10027 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 May 1994,
New York, NY 10017 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 Partners
1455 Pennsylvania Ave, N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle `92.
Washington, DC 20004 From 1990 to 1992, he was vice chairman and, from
1989 to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.). Prior to 1989, he
was employed by the Marriott Corporation (hotels,
restaurants, airline catering and contract
feeding), where he most recently was an executive
vice president and president of Marriott Hotels and
Resorts. Mr. Malek is also a director of Aegis
Communications, Inc. (tele-services), American
Management Systems, Inc. (management consulting and
computer related services), Automatic Data
Processing, Inc. (computing), CB Richard Ellis,
Inc. (real estate services), FPL Group, Inc.
(electric services), Global Vacation Group
(packaged vacations), HCR/Manor Care, Inc. (health
care) 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.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic Foundation
66 Witherspoon Street, #1100 (charitable foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and research). He is a
director of Labor Ready, Inc. (temporary
employment), Roadway Express, Inc. (trucking), The
Guardian Group of Mutual Funds, the Harding,
Loevner Funds, 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*'D'; 45 Trustee Mr. Storms is president and chief operating officer
of Mitchell Hutchins (since March 1999). Mr. Storms
was president of Prudential Investments
(1996-1999). Prior to joining Prudential, he was a
managing director at Fidelity Investments. Mr.
Storms is 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*; 32 Vice President Mr. Altschul is a first vice president and
(Managed Assets Trust only) portfolio manager of Mitchell Hutchins. 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 their affiliates serves as
investment adviser.
Ellen R. Harris*; 53 Vice President Ms. Harris is a managing director and a portfolio
(Olympus Fund only) 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 a
(Securities Trust only) portfolio manager of Mitchell Hutchins. Prior to
February 1996, he was a vice president in the asset
management group of First Fidelity Bancorporation.
Mr. Jones is a vice president of two investment
companies for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment
adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
James F. Keegan*; 39 Vice President Mr. Keegan is a senior vice president and a
(Securities Trust only) portfolio manager of Mitchell Hutchins. 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 of the
Assistant Treasurer 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 an investment adviser.
Thomas J. Libassi*; 40 Vice President Mr. Libassi is a senior vice president and a
(Securities Trust only) portfolio manager of Mitchell Hutchins. Prior to
May 1994, he was a vice president of Keystone
Custodian Funds Inc. with portfolio management
responsibility. Mr. Libassi is a vice president of
six investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Kevin J. Mahoney**; 34 Vice President and Assistant Mr. Mahoney is a first vice president and a senior
Treasurer 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 only) investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was director
of fixed income investments of IBM Corporation. Mr.
McCauley is a vice president of 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 of the
Assistant Treasurer 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.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Dianne E. O'Donnell**; 47 Vice President and Secretary Ms. O'Donnell is a senior vice president 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*; 40 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. Schonfeld**; 48 Vice President Ms. Schonfeld is a managing director and 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**; 36 Vice President and Treasurer Mr. Schubert is a senior vice president and
director of the mutual fund finance department of
Mitchell Hutchins. From August 1992 to August 1994,
he was a vice president at BlackRock Financial
Management L.P. 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 portfolio
(Managed Assets Trust only) manager of Mitchell Hutchins. 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 a
(Securities Trust only) portfolio manager of Mitchell Hutchins. 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. Taglialatela**; 38 Vice President and Mr. Taglialatela is a vice president and a manager
Assistant Treasurer 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.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; 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 a portfolio
(Securities Trust only) manager of Mitchell Hutchins responsible for global
fixed income investments and currency trading. Mr.
Waugh is a vice president of five investment
companies for which Mitchell Hutchins, 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 associate
Assistant Secretary 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 each listed person is 51 West 52nd Street, New
York, New York 10019-6114.
** The business address of each listed person is 1285 Avenue of the Americas,
New York, New York 10019.
'D' 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:
OLYMPUS FUND AND AMERICA FUND pays each trustee who is not an
"interested person" of the Trust $1,500 annually for each
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.
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.
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,
Mitchell
24
<PAGE>
Hutchins and, as applicable, a sub-adviser perform substantially all the
services necessary for the 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'D'
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE AGGREGATE AGGREGATE TOTAL
COMPENSATION COMPENSATION FROM COMPENSATION COMPENSATION COMPENSATION FROM
NAME OF PERSON, FROM AMERICA MANAGED ASSETS FROM SECURITIES FROM OLYMPUS THE FUND
POSITION FUND(1) 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
</TABLE>
- --------------------
'D' 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.
(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.
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:
<TABLE>
<CAPTION>
NAME AND ADDRESS* NUMBER AND PERCENTAGE OF SHARES
----------------- BENEFICIALLY OWNED AS OF OCTOBER 31, 1999
-----------------------------------------
<S> <C>
Northern Trust Company as Trustee for the 1,114,350.516
benefit of PaineWebber 401(k) Plan 6.55%
</TABLE>
- ---------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
INVESTMENT ADVISORY, ADMINISTRATION 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 fund. Under the
Advisory Contracts, each fund pays Mitchell Hutchins a fee at the annual rate
specified below. The Advisory Contract for the Growth Fund is dated March 1,
1989. Growth Fund pays Mitchell Hutchins a fee at the annual rate of 0.75% of
the Fund's average daily net assets, computed daily and paid monthly. The
Advisory Contract for Growth and Income Fund is dated March 1, 1989. Growth and
Income Fund pays Mitchell Hutchins a fee at the annual rate of 0.70% of the
Fund's average daily net assets, computed daily and paid monthly. The Advisory
Contract for the Mid Cap Fund is dated March 20, 1992. Mid Cap Fund pays
Mitchell Hutchins a fee at the annual rate of 1.00% of the Fund's average daily
net assets, computed daily and paid monthly. The Advisory Contract for Small Cap
Fund is dated January 28, 1993. Small Cap Fund pays Mitchell Hutchins a fee at
the annual rate of 1.00% of the Fund's average daily net assets, computed daily
and paid monthly.
During each of the periods indicated, Mitchell Hutchins earned (or
accrued) advisory and administration fees in the amounts set forth below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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>
<TABLE>
<CAPTION>
FISCAL YEAR FIVE MONTH PERIOD FISCAL YEAR FISCAL YEAR
ENDED AUGUST ENDED AUGUST ENDED MARCH ENDED MARCH
31, 1999 31, 1998 31, 1998 31, 1997
------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C>
Mid Cap Fund..................... $1,733,828 $964,741 $2,680,122 $2,684,390
</TABLE>
26
<PAGE>
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 the 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
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 each 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.
27
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED 1997
--------------
<S> <C>
Growth Fund (8/31)........................................ $110,890
Growth and Income Fund (8/31)............................. 191,744
Small Cap Fund (7/31)..................................... 35,040
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------- -----------------
<S> <C> <C>
Mid Cap Fund................................. $28,077 $89,240
</TABLE>
Subsequent to July 31, 1997, PFPC (not the funds) pays PaineWebber for
certain transfer agency-related services that PFPC has delegated to PaineWebber.
SECURITIES LENDING. During the periods indicated, each fund paid (or
accrued) the following fees to PaineWebber for its services as securities
lending agent:
<TABLE>
<CAPTION>
FUND FISCAL YEAR ENDED
- ---- -----------------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR FIVE MONTH FISCAL YEAR
ENDED AUGUST PERIOD ENDED ENDED MARCH
31, 1999 AUGUST 31, 1998 31, 1998
------------ --------------- -----------
<S> <C> <C> <C>
Mid Cap Fund..................... $31,282 $ 8,609 $ 2,859
</TABLE>
28
<PAGE>
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.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ----------
<S> <C>
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
</TABLE>
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 mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber Funds and other Mitchell Hutchins advisory clients. Personnel of
each sub-adviser may also invest in securities for their own accounts pursuant
to comparable codes of ethics.
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.
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 1940 Act ("Class A Plan," "Class B Plan" and "Class C Plan," "
collectively, "Plans"), each Funds pay Mitchell Hutchins a service fee, accrued
daily and payable monthly, at the 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, those Funds also pay 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.
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:
29
<PAGE>
Offset the commissions it pays to PaineWebber for selling each
fund's Class B and Class C shares, respectively.
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 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.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each class of each
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 respective fiscal year ended in 1999, the fund paid (or
accrued) the following fees to Mitchell Hutchins under the Plans:
<TABLE>
<CAPTION>
GROWTH AND SMALL
GROWTH FUND INCOME FUND MID CAP FUND CAP FUND
(8/31) (8/31) (8/31) (7/31)
----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
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
</TABLE>
30
<PAGE>
Mitchell Hutchins estimates that 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
<TABLE>
<CAPTION>
GROWTH GROWTH AND
FUND INCOME FUND MID CAP FUND SMALL CAP FUND
(8/31) (8/31) (8/31) (7/31)
-------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Marketing and advertising.......... $189,778 $1,828,674 $159,551 $173,684
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
</TABLE>
CLASS B
<TABLE>
<CAPTION>
GROWTH GROWTH AND
FUND INCOME FUND MID CAP FUND SMALL CAP FUND
(8/31) (8/31) (8/31) (7/31)
-------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
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
</TABLE>
CLASS C
<TABLE>
<CAPTION>
GROWTH GROWTH AND
FUND INCOME FUND MID CAP FUND SMALL CAP FUND
(8/31) (8/31) (8/31) (8/31)
-------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
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
</TABLE>
31
<PAGE>
"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 Pricing'sm' 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 Funds and attracting
new investors and assets to the Funds to the benefit of each Fund and its
shareholders, (2) facilitate distribution of the Fund's shares and (3) maintain
the competitive position of a 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 Funds than might otherwise be the
case, (3) the advantages to the shareholders of economics of scale resulting
from growth in each Fund's assets and potential continued growth, (4) the
services provided to each 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
each Fund than might otherwise be the case, (4) the advantages to the
shareholders of economics of scale resulting from growth in each Fund's assets
and potential continued growth, (5) the services provided to a 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 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 d 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 each Fund
than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in each Fund's assets and potential
continued growth, (5) the services provided to each 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
32
<PAGE>
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 received 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.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FIVE MONTH PERIOD FISCAL YEAR FISCAL YEAR
AUGUST 31, 1999 ENDED AUGUST 31, ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
MID CAP FUND
Earned.....................................$26,484 $42,878 $ 79,840 $ 124,319
Retained................................... 2,128 3,039 4,826 7,597
</TABLE>
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:
<TABLE>
<CAPTION>
GROWTH GROWTH AND MID CAP SMALL CAP
FUND INCOME FUND FUND FUND
(8/31) (8/31) (8/31) (7/31)
------ ----------- ------- ---------
<S> <C> <C> <C> <C>
Class A $0 N/A $0 $0
Class B $87,416 $1,199,541 $102,439 $113,689
Class C $ 5,924 $ 75,074 $ 1,978 $ 11,385
</TABLE>
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
33
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FIVE MONTH PERIOD FISCAL YEAR FISCAL YEAR
AUGUST 31, ENDED AUGUST 31, ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Fund......................... $411,285 $673,061 $388,468 $330,810
</TABLE>
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 their last three
respective fiscal years, the funds paid to PaineWebber the brokerage commissions
set forth below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FIVE MONTH PERIOD FISCAL YEAR FISCAL YEAR
AUGUST 31, ENDED AUGUST 31, ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Fund........................ $22,902 $0 $0 $0
</TABLE>
34
<PAGE>
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.
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:
<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO BROKERAGE COMMISSIONS
TRANSACTIONS PAID
-------------------- ---------------------
<S> <C> <C>
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
</TABLE>
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
35
<PAGE>
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 make for a fund and one or more of such accounts.
In such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between that fund and such other
account(s) as to amount according to a formula deemed equitable to the fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the funds are
concerned, or upon their ability to complete their entire order, in other cases
it is believed that coordination and the ability to participate in volume
transactions will be beneficial to the funds.
The funds will not purchase securities that are offered in
underwritings in which PaineWebber is a member of the underwriting or selling
group, except pursuant to procedures adopted by each board pursuant to Rule
10f-3 under the 1940 Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the Funds.
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
<TABLE>
<CAPTION>
PORTFOLIO
TURNOVER RATE
-------------
<S> <C>
GROWTH 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%
</TABLE>
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:
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;
36
<PAGE>
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;
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
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.
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 tables 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.
37
<PAGE>
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.
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 ALIENS WAIVER OF CONTINGENT DEFERRED SALES CHARGE. 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 the 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 PACE MULTI ADVISOR
PROGRAM. An investor who participates in the PACE Multi Advisor Program is
eligible to purchase Class Y shares. The PACE Multi Advisor Program is an
advisory program sponsored by PaineWebber that provides comprehensive investment
services, including investor profiling, a personalized asset allocation strategy
using an appropriate combination of funds, and a quarterly investment
performance review. Participation in the PACE Multi Advisor Program is subject
to payment of an advisory fee at the effective maximum annual rate of 1.5% of
assets. Employees of PaineWebber and its affiliates are entitled to a waiver of
this fee. Please contact your PaineWebber Financial Advisor or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACE Multi Advisor Program.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONE'sm'
PROGRAM. An investor who participates in the PaineWebber InsightOne'sm' Program
is eligible to purchase Class A shares without a sales load through that
Program. The PaineWebber InsightOne'sm' Program offers a nondiscretionary
brokerage account to
38
<PAGE>
investors for an asset-based fee. Account holders may purchase or sell certain
investment products without paying commissions or other markups/markdowns (other
than the asset-based Program fee). For more information, investors should
contact their PaineWebber Financial Advisors.
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.
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
of 1940, 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 ("NYSE") is
closed or trading on the NYSE is restricted as determined by the SEC, (2) when
an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for 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, semiannual 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
39
<PAGE>
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),
semiannual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
Class A and Class C shares. Minimum value of fund shares in $5,000;
minimum withdrawals of $100.
Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semiannual 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
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, semiannual 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'sm';
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT'r' (RMA)'r'
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for
40
<PAGE>
shares purchased automatically deducted from the client's RMA account. The
client may elect to invest at monthly or quarterly intervals and may elect
either to invest a fixed dollar amount (minimum $100 per period) or to purchase
a fixed number of shares. A client can elect to have Plan purchases executed on
the first or fifteenth day of the month. Settlement occurs three Business Days
(defined under "Valuation of Shares") after the trade date, and the purchase
price of the shares is withdrawn from the investor's RMA account on the
settlement date from the following sources and in the following order:
uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder,
must have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the
PW Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the
Plan, an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity
and Gold MasterCard'r' transactions during the period, and
provide unrealized and realized gain and loss estimates for
most securities held in the account;
comprehensive year-end summary statements that provide
information on account activity for use in tax planning and
tax return preparation;
automatic "sweep" of uninvested cash into the RMA
accountholder's choice of one of the 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.
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;
41
<PAGE>
Gold MasterCard, with or without a line of credit, which
provides RMA accountholders with direct access to their
accounts and can be used with automatic teller machines
worldwide. Purchases on the Gold MasterCard are debited to the
RMA account once monthly, permitting accountholders to remain
invested for a longer period of time;
24-hour access to account information through toll-free
numbers, and more detailed personal assistance during business
hours from the RMA Service Center;
unlimited electronic funds transfers and bill payment services
for an additional fee;
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
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
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued, or (ii) 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 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 NYSE on each Business Day, which is defined as each Monday
through Friday when the NYSE is open. Prices will be calculated earlier when the
NYSE closes early because trading has been halted for the day. Currently the
NYSE 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. and foreign 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 or the sub-adviser as the
primary market. Securities traded in the over-the-counter market and listed on
the
42
<PAGE>
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:
<TABLE>
<S> <C>
P(1+T)'pp'n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of
a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
</TABLE>
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.
43
<PAGE>
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
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
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%
</TABLE>
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
MID CAP FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
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% 13.66% N/A
Non-Standardized ............................................. 14.58% 13.64% 13.66% N/A
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%
</TABLE>
44
<PAGE>
SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
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%
</TABLE>
- -------------------
* 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.
** The inception date for each class of shares is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
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 Dow
Jones Industrial Average, the International Finance Corporation Global Total
Return Index, the Nasdaq Composite Index, the Russell 2000 Index, the Wilshire
5000 Index, the Lehman Bond Index, the 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 Perspective Indices, the Morgan Stanley
Capital International Energy Sources Index, the Standard & Poor's Oil Composite
Index, the Morgan Stanley Capital International World Index (including Asia
Pacific regional indices), the Salomon Brothers Non-U.S. Dollar Index, the
Salomon Brothers Non-U.S. World Government Bond Index, the Salomon Brothers
World Government Index, other similar Salomon Brothers indices or components
thereof and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The funds also may refer in such materials to mutual
fund performance rankings and other data, such as comparative asset, expense and
fee levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar.
Performance Advertisements also may refer to discussions of the funds and
comparative mutual fund data and ratings reported in independent periodicals,
including (but not limited to) THE WALL STREET JOURNAL, MONEY MAGAZINE, FORBES,
BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE
CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in
Performance Advertisements may be in graphic form.
45
<PAGE>
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(Registered) 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.
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>
YEAR Common Stocks Long-Term Gov't Bonds Inflation/CPI Treasury Bills
<S> <C> <C> <C> <C>
1928 $22,039 $11,751 $9,553 $11,028
1929 $20,184 $12,153 $9,572 $11,552
1930 $15,158 $12,719 $8,994 $11,831
1931 $8,588 $12,044 $8,138 $11,957
1932 $7,885 $14,072 $7,300 $12,072
1933 $12,142 $14,062 $7,337 $12,108
1934 $11,967 $15,473 $7,486 $12,128
1935 $17,672 $16,243 $7,710 $12,148
1936 $23,667 $17,465 $7,803 $12,170
1937 $15,376 $17,505 $8,045 $12,208
1938 $20,161 $18,473 $7,822 $12,205
1939 $20,079 $19,570 $7,784 $12,208
1940 $18,115 $20,762 $7,859 $12,208
1941 $16,015 $20,955 $8,623 $12,215
1942 $19,273 $21,630 $9,424 $12,248
1943 $24,265 $22,080 $9,721 $12,291
1944 $29,057 $22,700 $9,926 $12,331
1945 $39,645 $25,136 $10,150 $12,372
1946 $36,446 $25,111 $11,993 $12,415
1947 $38,527 $24,453 $13,074 $12,478
1948 $40,646 $25,284 $13,428 $12,579
1949 $48,283 $26,915 $13,186 $12,717
1950 $63,594 $26,931 $13,950 $12,870
1951 $78,869 $25,873 $14,769 $13,061
1952 $93,357 $26,173 $14,899 $13,278
1953 $92,433 $27,126 $14,991 $13,520
1954 $141,071 $29,076 $14,916 $13,636
1955 $185,594 $28,701 $14,971 $13,850
1956 $197,768 $27,097 $15,399 $14,191
1957 $176,449 $29,118 $15,864 $14,636
1958 $252,957 $27,345 $16,144 $14,862
1959 $283,211 $26,727 $16,386 $15,300
1960 $284,542 $30,410 $16,628 $15,707
1961 $361,055 $30,705 $16,740 $16,042
1962 $329,535 $32,820 $16,944 $16,480
1963 $404,669 $33,217 $17,223 $16,994
1964 $471,359 $34,383 $17,428 $17,596
1965 $530,043 $34,627 $17,763 $18,287
1966 $476,721 $35,891 $18,358 $19,158
1967 $591,038 $32,597 $18,916 $19,964
1968 $656,407 $32,512 $19,809 $21,004
1969 $600,613 $30,863 $21,019 $22,386
1970 $624,697 $34,601 $22,173 $23,846
1971 $714,091 $39,179 $22,918 $24,893
1972 $849,626 $41,408 $23,700 $25,849
1973 $725,071 $40,948 $25,785 $27,640
1974 $533,144 $42,730 $28,931 $29,851
1975 $731,474 $46,661 $30,956 $31,582
1976 $905,565 $54,500 $32,442 $33,193
1977 $840,364 $54,118 $34,648 $34,886
1978 $895,828 $53,469 $37,767 $37,398
1979 $1,060,661 $52,827 $42,790 $41,287
1980 $1,404,315 $50,767 $48,096 $45,911
1981 $1,335,504 $51,732 $52,376 $52,660
1982 $1,621,301 $72,631 $54,419 $58,190
1983 $1,986,094 $73,139 $56,487 $63,310
1984 $2,111,218 $84,476 $58,746 $69,515
1985 $2,791,030 $110,664 $60,979 $74,867
1986 $3,307,371 $137,776 $61,649 $79,509
1987 $3,479,354 $134,056 $64,362 $83,882
1988 $4,063,885 $147,060 $67,194 $89,167
1989 $5,344,009 $173,678 $70,285 $96,657
1990 $5,173,001 $184,446 $74,572 $104,196
1991 $6,750,766 $220,044 $76,884 $110,031
1992 $7,270,575 $237,867 $79,114 $113,882
1993 $7,996,906 $281,159 $81,250 $117,185
1994 $8,101,665 $259,229 $83,443 $121,755
1995 $10,507,050 $313,511 $85,404 $126,856
1996 $13,710,736 $337,286 $88,451 $135,380
1997 $18,274,382 $363,828 $90,067 $142,494
1998 $23,495,420 $441,777 $91,513 $149,416
</TABLE>
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook'TM', Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not
represent any fund's performance. These returns consist of income and capital
appreciation (or depreciation) and should not be considered an indication or
guarantee of future investment results. Year-to-year fluctuations in certain
markets have been significant and negative returns have been experienced in
certain markets from time to time. Stocks are measured by the S&P 500, an
unmanaged weighted index comprising 500 widely held common stocks and varying in
composition. Unlike
46
<PAGE>
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 1925 to 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.
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.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale
(redemption) of shares may result in a taxable gain or loss. This depends upon
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. Special tax rules apply when a
shareholder sells or exchanges Class A shares within 90 days of purchase and
subsequently acquires Class A shares of a 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 gains or loss will be recognized by a
shareholder as a result of a conversion from Class B shares into 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, net short-term capital gain and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These additional 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 foreign
currencies, or other income (including gains from options, futures or foreign
currency contracts) derived with respect to its business of investing in
securities or those currencies ("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
47
<PAGE>
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 from each fund's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
federal alternative minimum tax.
If 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 a
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 such stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in 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,
48
<PAGE>
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 qualify as permissible
income under the Income Requirement.
Offsetting positions in any actively traded security, option, futures
or forward 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 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" (i.e., a straddle of which at least one, but not all, positions are
section 1256 contracts).
When a covered call option written (sold) by a fund expires, it
realizes 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 realizes 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 is 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, futures or forward currency
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 or forward
currency 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.
49
<PAGE>
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
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
50
<PAGE>
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.
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.
51
<PAGE>
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
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial
A-1
<PAGE>
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.
A-2
<PAGE>
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUNDS AND THEIR
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH INFORMATION
THAT IS DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION
ARE NOT AN OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS
OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
------------
'c'1999 PaineWebber Incorporated. All rights reserved.
Member SIPC.
PaineWebber
Growth Fund
PaineWebber
Growth and Income Fund
PaineWebber
Mid Cap Fund
PaineWebber
Small Cap Fund
--------------------------------------
Statement of Additional Information
December 1, 1999
--------------------------------------
<PAGE>
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
<S> <C>
(1) Amended and Restated Declaration of Trust(1)
(2) Restated By-Laws(1)
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest(2)
(4) (a) Investment Advisory and Administration Contract(3)
(b) Investment Advisory and Administration Fee Agreement with
respect to PaineWebber Strategic Income Fund(3)
(5) (a) Distribution Contract with respect to Class A Shares(3)
(b) Distribution Contract with respect to Class B Shares(3)
(c) Distribution Contract with respect to Class C Shares(4)
(d) Distribution Contract with respect to Class Y Shares(5)
(e) Exclusive Dealer Agreement with respect to Class A Shares(3)
(f) Exclusive Dealer Agreement with respect to Class B Shares(3)
(g) Exclusive Dealer Agreement with respect to Class C Shares(4)
(h) Exclusive Dealer Agreement with respect to Class Y Shares(5)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement(3)
(8) Transfer Agency Agreement(3)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Accountants' consent
(filed herewith)
(11) Financial Statements omitted from Part B - none
(12) Letter of investment intent(3)
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
Shares(7)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares(7)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares(7)
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan Pursuant to Rule 18f-3(6)
</TABLE>
- ----------
(1) Incorporated by reference from Post-Effective Amendment No. 19 to the
registration statement, SEC File No. 33-55374, filed November 25, 1997.
(2) Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's amended and restated Declaration of Trust and from Articles
II, VII and X of Registrant's restated By-Laws.
C-1
<PAGE>
(3) Incorporated by reference from Post-Effective Amendment No. 20 to the
registration statement, SEC File No. 33-55374, filed March 31, 1998.
(4) Incorporated by reference from Post-Effective Amendment No. 8 to the
registration statement, SEC File No. 33-55374, filed November 14, 1995.
(5) Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement, SEC File No. 33-55374, filed May 31, 1996.
(6) Incorporated by reference from Post-Effective Amendment No. 15 to the
registration statement, SEC file No. 33-55374, filed September 27, 1996.
(7) Incorporated by reference from Post-Effective Amendment No. 21 to the
registration statement, SEC File No. 33-55374, filed November 20, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant
None
Item 25. Indemnification
Section 3 of Article X of the Declaration of Trust, "Indemnification,"
provides that the appropriate series of the Registrant will indemnify the
trustees and officers of the Registrant to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue of
being or having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article X, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
did not act in good faith in the reasonable belief that his action was in the
best interest of the Registrant. Section 3 of Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Registrant or a particular series; and that, provided they
have exercised reasonable care and have acted under the reasonable belief that
their actions are in the best interest of the Registrant, the trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgment or mistakes of fact or law,
for any act or omission in accordance with advice of counsel or other experts,
or for failing to follow such advice, with respect to the meaning and operation
of the Declaration of Trust.
Article IX of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Registrant, or is or was serving at the request of the
Registrant as a trustee, officer or employee of a corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the Registrant would have the power to indemnify him
against such liability to the Registrant or its shareholders, provided that the
Registrant may not purchase or maintain insurance that protects any such person
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Section 9 of the Investment Advisory and Administration Contract with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") provides that
Mitchell Hutchins shall not be liable for any error of
C-2
<PAGE>
judgment or mistake of law or for any loss suffered by any series of the
Registrant in connection with the matters to which the Contract relates, except
for a loss resulting from the willful misfeasance, bad faith, or gross
negligence of Mitchell Hutchins in the performance of its duties or from its
reckless disregard of its obligations and duties under the Contract. Section 10
of the Contract provides that the Trustees shall not be liable for any
obligations of the Trust or any series under the Contract and that Mitchell
Hutchins shall look only to the assets and property of the Registrant in
settlement of such right or claim and not to the assets and property of the
Trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and Trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with the Contract. Section 10 of each Distribution
Contract contains provisions similar to Section 10 of the Investment Advisory
and Administration Contract, with respect to Mitchell Hutchins and PaineWebber,
as appropriate.
Section 9 of each Exclusive Dealer Agreement contains provisions similar
to Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number
801-13219), and is incorporated herein by reference.
C-3
<PAGE>
Item 27. Principal Underwriters
a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
MITCHELL HUTCHINGS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. The directors
and officers of Mitchell Hutchins, their principal business addresses, and their
positions and offices with Mitchell Hutchins are identified in its Form ADV, as
filed with the Securities and Exchange Commission (registration number
801-13219). The directors and officers of PaineWebber, their principal business
addresses, and their positions and offices with PaineWebber are identified in
its Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-7163). The foregoing information is hereby incorporated herein by
reference. The information set forth below is furnished for those directors and
officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant.
Positions and Offices Positions and Offices With
Name With Registrant Underwriter or Exclusive Dealer
- ---- --------------- -------------------------------
Margo N. Alexander* Trustee and President Chairman, Chief Executive Officer
and a Director of Mitchell
Hutchins and an Executive Vice
President and a Director of
PaineWebber
Mary C. Farrell** Trustee Managing Director, Senior
Investment Strategist and member
of the Investment Policy Committee
of PaineWebber
Brian M. Storms* Trustee President and Chief Operating
Officer of Mitchell Hutchins
C-4
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices With
Name With Registrant Underwriter or Exclusive Dealer
- ---- --------------- -------------------------------
<S> <C> <C>
Donald R. Jones* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
James F. Keegan* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
John J. Lee** Vice President and Vice President and a Manager of
Assistant Treasurer the Mutual Fund Finance Department
of Mitchell Hutchins
Thomas J. Libassi* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
Kevin J. Mahoney** Vice President and First Vice President and a Senior
Assistant Treasurer Manager of the Mutual Fund Finance
Department of Mitchell Hutchins
Dennis McCauley* Vice President Managing Director and Chief
Investment Officer - Fixed Income
of Mitchell Hutchins
Ann E. Moran** Vice President and Vice President and a Manager of
Assistant Treasurer the Mutual Fund Finance Department
of Mitchell Hutchins
Dianne E. O'Donnell** Vice President and Senior Vice President and Deputy
Secretary General Counsel of Mitchell
Hutchins
Emil Polito* Vice President Senior Vice President and Director
of Operations and Control for
Mitchell Hutchins
Victoria E. Vice President Managing Director and General
Schonfeld** Counsel of Mitchell Hutchins and a
Senior Vice President of
PaineWebber
Paul H. Schubert** Vice President and Senior Vice President and Director
Treasurer of the Mutual Fund Finance
Department of Mitchell Hutchins
Nirmal Singh* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
Barney A. Vice President and Vice President and a Manager of
Taglialatela** Assistant Treasurer the Mutual Fund Finance Department
of Mitchell Hutchins
Mark A. Tincher* Vice President Managing Director and Chief
Investment Officer - Equities of
Mitchell Hutchins
Stuart Waugh* Vice President Managing Director and a Portfolio
Manager of Mitchell Hutchins
Keith A. Weller** Vice President and First Vice President and Associate
Assistant Secretary General Counsel of Mitchell
Hutchins
</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.
c) None
C-5
<PAGE>
Item 28. Location of Accounts and Records
The books and other documents required by paragraphs (b)(4), (c) and (d)
of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's investment adviser, Mitchell Hutchins, 1285
Avenue of the Americas, New York, New York 10019. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession of
Registrant's transfer agent and custodian.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
None.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 22nd day of November, 1999.
PAINEWEBBER SECURITIES TRUST
By: /s/ Dianne E. O'Donnell
------------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee November 22, 1999
- -------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman November 22, 1999
- -------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee November 22, 1999
- --------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee November 22, 1999
- --------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee November 22, 1999
- --------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee November 22, 1999
- --------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee November 22, 1999
- --------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee November 22, 1999
- --------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee November 22, 1999
- --------------------------
Carl W. Schafer *
/s/ Brian M. Storms Trustee November 22, 1999
- --------------------------
Brian M. Storms **
/s/ Paul H. Schubert Vice President and November 22, 1999
- -------------------------- Treasurer (Chief Financial
Paul H. Schubert and Accounting Officer)
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File 2-89016, filed June 27, 1996.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 14, 1999 and incorporated by reference from Post-Effective Amendment
No. 61 to the registration statement of PaineWebber Managed Investments
Trust, SEC File 2-91362, filed June 1, 1999.
<PAGE>
PAINEWEBBER SECURITIES TRUST
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
(1) Amended and Restated Declaration of Trust(1)
(2) Restated By-Laws(1)
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest(2)
(4) (a) Investment Advisory and Administration Contract(3)
(b) Investment Advisory and Administration Fee Agreement with
respect to PaineWebber Strategic Income Fund(3)
(5) (a) Distribution Contract with respect to Class A Shares(3)
(b) Distribution Contract with respect to Class B Shares(3)
(c) Distribution Contract with respect to Class C Shares(4)
(d) Distribution Contract with respect to Class Y Shares(5)
(e) Exclusive Dealer Agreement with respect to Class A Shares(3)
(f) Exclusive Dealer Agreement with respect to Class B Shares(3)
(g) Exclusive Dealer Agreement with respect to Class C Shares(4)
(h) Exclusive Dealer Agreement with respect to Class Y Shares(5)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement(3)
(8) Transfer Agency Agreement(3)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Accountants' consent
(filed herewith)
(11) Financial Statements omitted from Part B - none
(12) Letter of investment intent(3)
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
Shares(7)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares(7)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares(7)
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan Pursuant to Rule 18f-3(6)
</TABLE>
- ----------
(1) Incorporated by reference from Post-Effective Amendment No. 19 to the
registration statement, SEC File No. 33-55374, filed November 25, 1997.
<PAGE>
(2) Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's amended and restated Declaration of Trust and from Articles
II, VII and X of Registrant's restated By-Laws.
(3) Incorporated by reference from Post-Effective Amendment No. 20 to the
registration statement, SEC File No. 33-55374, filed March 31, 1998.
(4) Incorporated by reference from Post-Effective Amendment No. 8 to the
registration statement, SEC File No. 33-55374, filed November 14, 1995.
(5) Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement, SEC File No. 33-55374, filed May 31, 1996.
(6) Incorporated by reference from Post-Effective Amendment No. 15 to the
registration statement, SEC file No. 33-55374, filed September 27, 1996.
(7) Incorporated by reference from Post-Effective Amendment No. 21 to the
registration statement, SEC File No. 33-55374, filed November 20, 1998.
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................ 'TM'
The registered trademark symbol shall be expressed as................. 'r'
The service mark symbol shall be expressed as......................... 'sm'
The dagger symbol shall be expressed as............................... 'D'
Characters normally expressed as superscript shall be preceded by..... 'pp'
The copyright symbol shall be expressed as............................ 'c'
<PAGE>
Exhibit No. 9
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone 202-778-9000
www.kl.com
November 24, 1999
PaineWebber Securities Trust
51 West 52nd Street
New York, New York 10019-6114
Ladies and Gentlemen:
You have requested our opinion, as counsel to PaineWebber Securities Trust
("Trust"), as to certain matters regarding the issuance of certain Shares of the
Trust. As used in this letter, the term "Shares" means the Class A, Class B,
Class C and Class Y shares of beneficial interest of the series of the Trust
listed below that may be issued during the time that Post-Effective Amendment
No. 25 to the Trust's Registration Statement on Form N-1A ("PEA") is effective
and has not been superseded by another post-effective amendment. The series of
the Trust is PaineWebber Small Cap Fund.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) of the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by investment companies organized as business trusts in that State and to
the Securities Act of 1933 ("1933 Act"), the Investment Company Act of 1940
("1940 Act") and the regulations of the Securities and Exchange Commission
("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in accordance
with the terms contemplated by the PEA, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, the
Shares will have been validly issued, fully paid and non-assessable.
We note, however, that the Trust is an entity of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that creditors of,
contractors with and claimants against the Trust or any series shall look only
to the assets of the Trust for the appropriate series for payment. It also
requires that notice of such disclaimer be given in each note, bond, contract,
certificate, undertaking or instrument made
<PAGE>
PaineWebber Securities Trust
November 24, 1999
Page 2
or issued by the officers or the trustees of the Trust on behalf of the Trust.
The Declaration of Trust further provides: (1) for indemnification from the
assets of the Trust or the appropriate series for all loss and expense of any
shareholder held personally liable for the obligations of the Trust or any
series by virtue of ownership of shares of the Trust or such series; and (2) for
the Trust or appropriate series to assume the defense of any claim against the
shareholder for any act or obligation of the Trust or series. Thus, the risk of
a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust or series would be unable to meet
its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 25 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated September 13, 1999, relating to the financial
statements and financial highlights appearing in the July 31, 1999 Annual Report
to Shareholders of PaineWebber Small Cap Fund, which are also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the headings "Financial Highlights" in the Prospectus and "Auditors" in
the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
November 22, 1999
