<PAGE>
As filed with the Securities and Exchange Commission on October 31, 2000
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. 27 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
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Amendment No. 27 [ 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
AMY DOBERMAN, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019-6028
(Name and address of agent for service)
Copies to:
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)
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[ ] On pursuant to Rule 485(b)
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[ X ] 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)
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[ ] On pursuant to Rule 485(a)(2)
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Title of Securities Being Registered: Class A, B, C and Y Shares of Beneficial
Interest of PaineWebber Small Cap Fund.
<PAGE>
PaineWebber Small Cap Fund
---------------------------------
PROSPECTUS
DECEMBER 1, 2000
---------------------------------
This prospectus offers Class A, Class B, Class C and Class Y shares in one of
PaineWebber's stock funds. 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 the fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
On October 6, 2000, the board of trustees for PaineWebber Small Cap Fund
approved the submission to its shareholders of an Agreement and Plan of
Reorganization and Termination under which the fund would transfer substantially
all of its assets and liabilities to PACE Small/Medium Value Company Equity
Investments ('PACE fund'), a series of PaineWebber PACE Select Advisors Trust,
another open-end mutual fund. If the fund's shareholders approve its proposed
merger, you will receive shares of the PACE fund in exchange for your fund
shares and the fund will cease operations.
The same sub-advisers that now manage the fund's investments also manage the
PACE fund's investments. The merger is expected to be a tax-free organization,
which means that you will not realize any gain or loss on your receipt of PACE
fund shares in the merger and neither fund will realize any gain or loss. More
information about the proposed merger will be provided in proxy solicitation
materials that are expected to be mailed to fund shareholders in mid-December
2000.
You may continue to buy, sell and exchange your fund shares as described in this
prospectus prior to the shareholder meetings. When you sell or exchange your
fund shares, however, you generally will be subject to federal income tax on any
gain you realize. If a merger proposal is approved, the fund expects to close to
new purchases and exchange purchases approximately five business days prior to
the date on which the merger is to be effected.
<PAGE>
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PaineWebber Small Cap Fund
Contents
THE FUND
<TABLE>
<S> <C> <C>
----------------------------------------------------------------------------------------------------------------
What every investor 3 Investment Objective, Strategies and Risks
should know about 4 Performance
the fund 5 Expenses and Fee Tables
6 More About Risks and Investment Strategies
YOUR INVESTMENT
----------------------------------------------------------------------------------------------------------------
Information for 8 Managing Your Fund Account
managing your fund -- Flexible Pricing
account -- Buying Shares
-- Selling Shares
-- Exchanging Shares
-- Pricing and Valuation
ADDITIONAL INFORMATION
----------------------------------------------------------------------------------------------------------------
Additional important 13 Management
information about 14 Dividends and Taxes
the fund 15 Financial Highlights
----------------------------------------------------------------------------------------------------------------
Where to learn more Back Cover
about PaineWebber
mutual funds
</TABLE>
The fund is not a complete or
balanced investment program.
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Prospectus Page 2
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PaineWebber Small Cap Fund
PaineWebber Small Cap Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
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FUND OBJECTIVE
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests primarily in common stocks of small capitalization ('small
cap') companies that are believed to have substantial potential for capital
growth. The fund considers companies with market capitalization of up to $1.5
billion to be small cap.
The fund may invest, 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 is not
required to) use options, futures contracts and other derivatives as part of its
investment strategy or to help manage portfolio risks.
The fund's manager, Mitchell Hutchins Asset Management Inc., has appointed Ariel
Capital Management, Inc. ('Ariel') and ICM Asset Management, Inc. ('ICM') to
serve as sub-advisers for the fund's investments.
In managing its share of the fund's assets, Ariel invests in stocks of companies
that it believes are misunderstood or undervalued. It seeks to identify
companies in consistent industries with distinct market niches and excellent
management teams. It focuses on value stocks, which it defines as stocks that
have a low price/earnings ratio based on forward earnings and that trade at a
significant discount to the private market value that Ariel calculates for each
stock. Ariel generally sells stocks that cease to meet these criteria or that
are at risk for fundamental deterioration.
In managing its share of the fund's assets, ICM invests primarily in common
stocks of companies believed to offer good relative value that have either
fallen into disfavor among investors or are under-researched. In deciding which
stocks to buy or sell for the fund, ICM uses a top-down analysis to identify
broad sectors of the market believed to offer good relative value and then seeks
to identify individual companies within those sectors that meet ICM's investment
criteria. ICM also performs a bottom-up analysis to attempt to discover
inefficiently priced stocks in a broad range of sectors, including those not
identified in the top-down analysis. These two approaches are combined in
various proportions depending on market conditions. Regardless of which approach
is used to identify stock candidates, ICM then applies fundamental research
analysis.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:
Equity Risk -- stocks and other equity securities generally fluctuate in
value more than bonds. The fund could lose all of its investment in a
company's stock.
Limited Capitalization Risk -- Securities of mid and small capitalization
companies generally involve greater risk than securities of larger
capitalization companies because they may be more vulnerable to adverse
business or economic developments.
Foreign Investing Risk -- The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic developments
abroad. However, because the fund's foreign investments must be denominated in
U.S. dollars, it generally is not subject to the risk of changes in currency
valuations.
Derivatives Risk -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about risks of an investment in the fund is provided below in
'More About Risks and Investment Strategies.'
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Prospectus Page 3
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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)
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
------------- ------------
<S> <C>
1990
1991
1992
1993
1994 -1.20%
1995 16.81%
1996 17.45%
1997 27.38%
1998 -6.75%
1999
</TABLE>
Total return January 1, 2000 to September 30, 2000 -- %
Best quarter during years shown: quarter, -- %
Worst quarter during years shown: quarter, -- %
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
<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.......................... % % % % % %
Five Years........................ % % % % %
Life of Class..................... % % % % ** ***
</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 -- %; Class B -- %; Class C -- %; Class Y -- %.
*** Average annual total returns for the Russell 2000 [Small Cap] Index for the
life of each class were as follows:
Class A -- %; Class B -- %; Class C -- %; Class Y -- %.
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Prospectus Page 4
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PaineWebber Small Cap Fund
EXPENSES AND FEE TABLES
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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..............................................
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ % % % %
---- ---- ---- ----
---- ---- ---- ----
</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 sell 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................................................ $ $ $ $
Class B (assuming sale of all shares at end of
period)..............................................
Class B (assuming no sale of shares)...................
Class C (assuming sale of all shares at end of
period)..............................................
Class C (assuming no sale of shares)...................
Class Y................................................
</TABLE>
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Prospectus Page 5
<PAGE>
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PaineWebber Small Cap Fund
MORE ABOUT RISKS
AND INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
PRINCIPAL RISKS
The main risks of investing in the fund are described below. Other risks of
investing in the fund, along with further detail about some of the risks
described below, are discussed in the fund's Statement of Additional Information
('SAI'). Information on how you can obtain the SAI is on the back cover of this
prospectus.
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. The
fund may lose a substantial part, or even all, of its investment in a company's
stock.
Limited Capitalization Risk. Securities of mid and small cap companies generally
involve greater risk than securities of larger capitalization companies because
they may be more vulnerable to adverse business or economic developments. 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 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.
Foreign Securities Risk. Foreign investing involves risks relating to political,
social and economic developments abroad to a greater extent than investing in
the securities of U.S. issuers. In addition, there are differences between U.S.
and foreign regulatory requirements and market practices.
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 the fund to lose more than the amount it invested in the
derivative. Options and futures contracts are examples of derivatives. The
fund's use of derivatives may not succeed for various reasons, including
unexpected changes in the values of the derivatives or the assets underlying
them. Also, if the fund uses derivatives to adjust or 'hedge' the overall risk
of its portfolio, the hedge may not succeed if changes in the values of the
derivatives are not matched by opposite changes in the values of the assets
being hedged.
ADDITIONAL RISKS
Credit and Interest Rate Risks. The 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.
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.
ADDITIONAL INVESTMENT STRATEGIES
Defensive Positions; Cash Reserves. In order to protect itself from adverse
market conditions, the 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. In addition, if the fund's board appoints
a new sub-adviser to manage all or a portion of the fund's investments, the
fund may increase its cash reserves to facilitate the transition to the
investment style and strategies of the new sub-
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Prospectus Page 6
<PAGE>
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PaineWebber Small Cap Fund
adviser. Since these investments provide relatively low income, a defensive or
transition position may not be consistent with achieving the fund's investment
objective. The fund may invest up to 35% of its total assets in cash or money
market instruments as a cash reserve for liquidity or, as part of its ordinary
investment strategy.
Portfolio Turnover. The fund may engage in frequent trading to achieve its
investment objective. Frequent trading can result in portfolio turnover in
excess of 100% (high portfolio turnover).
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 the 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 fund does not restrict the frequency of trading in order to limit expenses
or the tax effect that the fund's dividends may have on shareholders.
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Prospectus Page 7
<PAGE>
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PaineWebber Small Cap Fund
MANAGING YOUR FUND ACCOUNT
--------------------------------------------------------------------------------
FLEXIBLE PRICING
The fund offers 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.
The 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 the 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 fund's 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 8
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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.
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;
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
The shares are held in trust and the death of the trustee requires liquidation
of the trust.
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Prospectus Page 9
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PaineWebber Small Cap Fund
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
less than 100 eligible employees or less than $1 million in assets.
NOTE ON SALES CHARGE WAIVERS FOR CLASS A, CLASS B AND CLASS C SHARES
If you think you qualify for any of the sales charge waivers described above,
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 fund's
Systematic Withdrawal Plan, see the SAI 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'sm' 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 a corporation, bank, trust company, insurance company, pension fund,
employee benefit plan, professional firm, trust, estate or educational,
religious or charitable organization with 5,000 or more employees or with over
$50 million in investable assets.
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 fund through the fund's transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must 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 fund 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>
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Prospectus Page 10
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PaineWebber Small Cap Fund
The 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 the 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 the 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. The 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 fund will not accept
signature guarantees that are not a part of these programs.
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 the fund money to maintain shareholder accounts. Therefore, the fund
reserves the right to repurchase all shares in any account that has a net asset
value of less than $500. If the 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. The 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 the 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. The 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.
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PaineWebber Small Cap 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 and Correspondent Firm Clients. If you bought your shares through
PaineWebber or a correspondent firm, you may exchange your shares by placing an
order with your Financial Advisor.
Other Investors. If you are not a PaineWebber or correspondent firm 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 'Selling 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. The fund calculates net asset value on days that the New
York Stock Exchange is open. The 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 fund does not
price its shares, on most 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.
The fund calculates its net asset value based on the current market value for
its portfolio securities. The fund normally obtains market values for its
securities from independent pricing services that use 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 fund normally uses 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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PaineWebber Small Cap Fund
MANAGEMENT
--------------------------------------------------------------------------------
MANAGER
Mitchell Hutchins Asset Management Inc. is the manager and administrator of the
fund. 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 a wholly owned indirect subsidiary of UBS AG, an
internationally diversified organization with headquarters in Switzerland and
operations in many areas of the financial services industry. On October 31,
2000, Mitchell Hutchins was adviser or sub-adviser of 31 investment companies
with 75 separate portfolios and aggregate assets of approximately $ billion.
Mitchell Hutchins, with the approval of the fund's board, has selected
investment sub-advisers for the fund and reviews the performance of those
sub-advisers.
SUB-ADVISERS AND PORTFOLIO MANAGERS
Ariel Capital Managment, Inc. ('Ariel') and ICM Asset Management, Inc. ('ICM')
serve as sub-advisers for this fund. Ariel is located at 307 North Michigan
Avenue, Suite 500, Chicago, Illinois 60601. Eric T. McKissack is primarily
responsible for the day-to-day management of the fund's assets allocated to
Ariel and has held his fund responsibilities since October 10, 2000. He has been
with Ariel since 1986 and is currently its vice chair and co-chief investment
officer.
ICM is located at 601 W. Main Avenue, Suite 600, Spokane, Washington 99201. As
of September 30, 2000, ICM had approximately $1.86 billion in assets under
management. ICM uses a team approach in the day-to-day management of its share
of the fund's assets and has held its fund responsibilities since October 10,
2000. ICM's team is led by Kevin A. Jones, CFA, and James M. Simmons, CFA. Five
experienced analysts round out the research team led by Messrs. Simmons and
Jones.
Mr. Simmons is the founder and chief investment officer of ICM. Mr. Jones is a
senior portfolio manager with ICM and has managed small- and mid-cap portfolios
since 1997. Prior to his appointment as senior portfolio manager in October
1998, Mr. Jones covered numerous industries as a research analyst. Before
joining ICM, Mr. Jones spent time as a portfolio analyst for another Northwest
investment adviser and as a financial consultant for two major brokerage firms.
He has over 12 years experience in the securities industry.
ADVISORY FEES
The fund paid fees to Mitchell Hutchins for advisory and administrative services
during the last fiscal year at the annual rate of 0.75% of its average daily net
assets.
OTHER INFORMATION
The fund has received an exemptive order from the SEC that permits its board to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval. The fund's shareholders must approve this policy
before its board may implement it. As of the date of this prospectus, the
shareholders of the fund have not been asked to do so.
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<PAGE>
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------------------------
PaineWebber Small Cap Fund
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS
The fund normally declares and pays dividends and distributes 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 the 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 the 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 the 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.
The fund expects that its dividends will be comprised primarily of capital gain
distributions. A 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. The fund will tell you annually how you should treat its
dividends for tax purposes.
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<PAGE>
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PaineWebber Small Cap Fund
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Prospectus Page 15
<PAGE>
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PaineWebber Small Cap Fund
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
fund's 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 the fund (assuming reinvestment of all dividends).
This information in the financial highlights has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports, along with
the funds' financial statements, are included in the fund's Annual Reports to
Shareholders. The Annual Report may be obtained without charge by calling
1-800-647-1568.
PAINEWEBBER SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------- -----------------------------------------------
FOR THE YEARS ENDED JULY 31, FOR THE YEARS ENDED JULY 31,
----------------------------------------------- -----------------------------------------------
2000 1999 1998 1997 1996# 2000 1999 1998 1997 1996#
---- ---- ---- ---- ----- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ $ 13.34 $ 13.42 $ 10.22 $ 11.30 $ $ 12.78 $ 13.00 $ 9.98 $ 11.15
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income
(loss)....................... (0.08) (0.13) (0.14) 0.00@ (0.29) (0.22) (0.23) (0.09)@
Net realized and unrealized
gains (losses) from
investments.................. (1.18) 1.22 3.75 0.50@ (1.02) 1.17 3.66 0.50@
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) from
investment operations........ (1.26) 1.09 3.61 0.50 (1.31) 0.95 3.43 0.41
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Distributions from net
realized gains from
investments.................. (1.11) (1.17) (0.41) (1.58) (1.11) (1.17) (0.41) (1.58)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period....................... $ $ 10.97 $ 13.34 $ 13.42 $ 10.22 $ $ 10.36 $ 12.78 $ 13.00 $ 9.98
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total investment return(1).... % (8.95)% 8.45% 36.11% 4.69% % (9.79)% 7.60% 35.16% 3.90%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Ratios/Supplemental Data:
Net assets, end of year
(000's)...................... $ $46,680 $47,589 $32,968 $30,675 $ $18,361 $54,639 $40,749 $36,612
Expenses to average net
assets, net of waivers from
adviser(2)................... % 1.59% 1.56% 2.00% 2.11% % 2.43% 2.33% 2.75% 2.90%
Net investment income (loss)
to average net assets, net of
waivers from adviser(2)...... % (0.77)% (0.99)% (1.16)% 0.02% % (1.62)% (1.75)% (1.91)% (0.78)%
Portfolio turnover rate....... % 61% 45% 54% 84% % 61% 45% 54% 84%
</TABLE>
---------
# Effective April 1, 1996, Mitchell Hutchins took over day-to-day management
of the Fund's assets.
'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 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 any applicable sales charges or program fees; results would be lower
if they were included.
(2) During the year ended July 31, 2000 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%.
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Prospectus Page 16
<PAGE>
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PAINEWEBBER SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS C CLASS Y
----------------------------------------------- ---------------------------------------------------------
FOR THE YEARS ENDED JULY 31, FOR THE YEARS ENDED JULY 31, FOR THE
----------------------------------------------- --------------------------------- PERIOD ENDED
2000 1999 1998 1997 1996# 2000 1999 1998 1997 JULY 31, 1996'D'
---- ---- ---- ---- ----- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ $ 12.76 $ 12.98 $ 9.97 $ 11.14 $ $13.42 $13.46 $10.21 $10.23
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
(0.20) (0.21) (0.24) (0.08)@ (0.07) (0.07) (0.11) 0.00@
(1.09) 1.16 3.66 0.49@ (1.17) 1.20 3.77 (0.02)@
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
(1.29) 0.95 3.42 0.41 (1.24) 1.13 3.66 (0.02)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
(1.11) (1.17) (0.41) (1.58) (1.11) (1.17) (0.41) --
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
$ $ 10.36 $ 12.76 $ 12.98 $ 9.97 $ $11.07 $13.42 $13.46 $10.21
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
% (9.63)% 7.61% 35.09% 3.90% % (8.73)% 8.74% 36.65% (0.20)%
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
$ $18,913 $32,174 $18,812 $18,606 $ $5,044 $7,169 $2,768 $2,801
% 2.39% 2.32% 2.77% 2.91% % 1.31% 1.39% 1.72% 1.72%*
% (1.59)% (1.75)% (1.93)% (0.77)% % (0.50)% (0.83)% (0.88)% 0.07%*
% 61% 45% 54% 84% % 61% 45% 54% 84%
</TABLE>
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<PAGE>
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PaineWebber Small Cap Fund
TICKER SYMBOL: Small Cap Fund Class: A: PSCAX
B: PSCBX
C: PSCDX
Y: None
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the fund's investments is available in the fund's
annual and semi-annual reports to shareholders. In the fund's annual reports,
you will find a discussion of the market conditions and investment strategies
that significantly affected the fund's performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the fund and is incorporated by
reference into this prospectus.
You may discuss your questions about the fund by contacting your Financial
Advisor. You may obtain free copies of the fund's annual and semi-annual reports
and its SAI by contacting the fund directly at 1-800-647-1568.
You may review and copy information about the fund, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You may obtain information about the operations of the SEC's Public
Reference Room by calling the SEC at 1-202-942-8090. You may get copies of
reports and other information about the fund:
For a fee, by electronic request at [email protected] or by writing the SEC's
Public Reference Section,
Washington, D.C. 20549-0102; or
Telephone: 1-800-SEC-0330
Free, from the EDGAR Database on the SEC's Internet website at:
http://www.sec.gov
PaineWebber Securities Trust
-- PaineWebber Small Cap Fund
Investment Company Act File No. 811-7374
'c'2000 PaineWebber Incorporated. All rights reserved.
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<PAGE>
PAINEWEBBER SMALL CAP FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Small Cap Fund is a diversified series of PaineWebber Securities
Trust, a professionally managed, open-end management investment company
organized as a Massachusetts business trust ('Trust').
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly
owned asset management subsidiary of PaineWebber Incorporated ('PaineWebber')
serves as the manager and administrator for the fund. As distributor for the
fund, Mitchell Hutchins has appointed PaineWebber to serve as dealer for the
sale of fund shares. Mitchell Hutchins has appointed unaffiliated investment
advisers (each a 'sub-adviser') to serve as sub-advisers for the fund's
investment.
Portions of the 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 the Annual
Report without charge by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction with the
fund's current Prospectus, dated December 1, 2000. 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, 2000.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and Its Investment Policies........................ 2
The Fund's Investments, Related Risks and Limitations....... 2
Strategies Using Derivative Instruments..................... 10
Organization of the Trust; Trustees and Officers; Principal
Holders and Management Ownership of Securities............ 17
Investment Management, Administration and Distribution
Arrangements.............................................. 24
Portfolio Transactions...................................... 29
Reduced Sales Charges, Additional Exchange and Redemption
Information and Other Services............................ 31
Conversion of Class B Shares................................ 36
Valuation of Shares......................................... 37
Performance Information..................................... 37
Taxes....................................................... 40
Other Information........................................... 43
Financial Statements........................................ 44
Appendix.................................................... A-1
</TABLE>
<PAGE>
THE FUND AND ITS INVESTMENT POLICIES
The fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of the fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.
The investment objective of SMALL CAP FUND is long-term capital
appreciation. Ariel Capital Management, Inc. and ICM Asset Management, Inc.
serve as the fund's sub-advisers. 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
capitalization 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 a sub-adviser 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 FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the fund's investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or SAI, the fund has established no
policy limitations on its ability to use the investments or techniques discussed
in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most preferred
stocks and securities that are convertible into them, including common stock
purchase warrants and rights, equity interests in trusts, partnerships, joint
ventures or similar enterprises and depositary receipts. Common stocks, the most
familiar type, represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but actually
it is equity that is senior to a company's common stock. Convertible bonds may
include debentures and notes that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. Some preferred stock
also may be converted into or exchanged for common stock. Depositary receipts
typically are issued by banks or trust companies and evidence ownership of
underlying equity securities.
While past performance does not guarantee future results, equity securities
historically have provided the greatest long-term growth potential in a company.
However, their prices generally fluctuate more than other securities and reflect
changes in a company's financial condition and in overall market and economic
conditions. Common stocks generally represent the riskiest investment in a
company. It is possible that the fund may experience a substantial or complete
loss on an individual equity investment. While this is possible with bonds, it
is less likely.
BONDS. Bonds are fixed or variable rate debt obligations, including bills,
notes, debentures, money market instruments and similar instruments and
securities. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations and governments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and normally must repay the amount
borrowed on or before maturity. Many preferred stocks and some bonds are
'perpetual' in that they have no maturity date.
2
<PAGE>
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. Credit risk is the risk that an issuer may be
unable or unwilling to pay interest and/or principal on the bond. Credit risk
can be affected by many factors, including adverse changes in the issuer's own
financial condition or in economic conditions.
CONVERTIBLE SECURITIES. A convertible security is a bond, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest or dividends until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock because they have
fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a fund is called for redemption,
the fund will be required to permit the issuer to redeem the security, convert
it into underlying common stock or sell it to a third party.
WARRANTS. Warrants are securities permitting, but not obligating, holders to
subscribe for other securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other rating
agencies are private services that provide ratings of the credit quality of debt
obligations and certain other securities. A description of the ratings assigned
to corporate bonds by Moody's and S&P is included in the Appendix to this SAI.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a debt security's value or
its liquidity and do not guarantee the performance of the issuer. Rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies may
downgrade the rating of a bond. The fund 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, a sub-adviser
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 a sub-adviser 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
3
<PAGE>
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher rated bonds.
Non-investment grade bonds (commonly known as 'junk bonds') are rated Ba or
lower by Moody's, BB or lower by S&P, comparably rated by another rating agency
or, if unrated, determined by a sub-adviser to be of comparable quality. The
fund's investments in non-investment grade bonds entail greater risk than its
investments in higher rated bonds. Non-investment grade bonds, which are
sometimes referred to as 'high yield' bonds, are considered predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal and may involve significant risk exposure to adverse conditions.
Non-investment grade bonds generally offer a higher current yield than that
available for investment grade issues; however, they involve greater risks, in
that they are especially sensitive to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured by collateral and will not receive payment until more senior claims
are paid in full.
The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, such higher yields
did not reflect the value of the income stream that holders of such securities
expected, but rather the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuers' financial
restructurings or defaults. There can be no assurance that such declines will
not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit the fund's
ability to sell such securities at fair value in response to changes in the
economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of non-investment grade securities, especially in a thinly traded
market.
U.S. GOVERNMENT SECURITIES. U.S. government securities include direct
obligations of the U.S. Treasury (such as Treasury bills, notes or bonds) and
obligations issued or guaranteed as to principal and interest (but not as to
market value) by the U.S. government, its agencies or its instrumentalities.
U.S. government securities include mortgage-backed securities issued or
guaranteed by government agencies or government-sponsored enterprises. Other
U.S. government securities may be backed by the full faith and credit of the
U.S. government or supported primarily or solely by the creditworthiness of the
government-related issuer or, in the case of mortgage-backed securities, by
pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ('STRIPS') program. Under the STRIPS program, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
Treasury inflation-protected securities ('TIPS') (also known as
'inflation-indexed securities') 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 the fund holds TIPS, the fund
may earn less on the TIPS than it would on conventional Treasury bonds. Any
increase in the value of TIPS is taxable in the year the increase occurs, even
though holders do not receive cash representing the increase at that time. See
'Taxes -- Other Information,' below.
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INVESTING IN FOREIGN SECURITIES. The fund 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 fund 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 fund 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 the fund's investment policies, ADRs
generally are deemed to have the same classification as the underlying
securities they represent. Thus, an ADR representing ownership of common stock
will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through 'sponsored' or 'unsponsored' arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
Investment income on certain foreign securities in which the fund may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to which
the fund would be subject.
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 the 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 the applicable sub-adviser has determined are liquid pursuant to
guidelines established by the fund's board. The assets used as cover for
over-the-counter options written by the fund will be considered illiquid unless
the over-the-counter options are sold to qualified dealers who agree that the
fund may repurchase any over-the-counter options it writes 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. The fund may not be able readily to
liquidate its investments in illiquid securities and may have to sell other
investments if necessary to raise cash to meet its obligations. The lack of a
liquid secondary market for illiquid securities may make it more difficult for
the fund to assign a value to those securities for purposes of valuing its
portfolio and calculating its net asset value.
Restricted securities are not registered under the Securities Act of 1933,
as amended ('Securities Act'), and may be sold only in privately negotiated or
other exempted transactions or after a Securities Act registration statement has
become effective. Where registration is required the fund may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the fund might
obtain a less favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. A large institutional market has
developed for many U.S. and foreign securities that are not registered under the
Securities Act. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
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Institutional markets for restricted securities also have developed as a
result of Rule 144A under the Securities Act, which establishes a 'safe harbor'
from the registration requirements of the Securities 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 the fund, however, could affect adversely the
marketability of the securities, and the fund might be unable to dispose of them
promptly or at favorable prices.
The board has delegated the function of making day-to-day determinations of
liquidity to the sub-advisers pursuant to guidelines approved by the board. A
sub-adviser 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). A sub-adviser monitors the liquidity of restricted
securities in the fund's portfolio and reports periodically on such decisions to
the applicable board.
Each sub-adviser also monitors the holdings of illiquid securities in the
portion of fund's investments that it manages. If the fund's holdings of
illiquid securities exceeds its limitation on investments in illiquid securities
for any reason (such as a particular security becoming illiquid, changes in
the relative market values of liquid and illiquid portfolio securities or
shareholder redemptions), the applicable sub-adviser and Mitchell Hutchins will
consider what action would be in the best interests of the fund and its
shareholders. Such action may include engaging in an orderly disposition of
securities to reduce the fund's holdings of illiquid securities. However,
the fund is not required to dispose of illiquid securities under these
circumstances.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
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.
The fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
'tri-party' custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by the 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. The fund intends to
enter into repurchase agreements only in transactions with counterparties
believed by Mitchell Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by the fund subject to the fund's agreement to
repurchase the securities at an agreed-upon date or upon demand and at a price
reflecting a market rate of interest. Reverse repurchase agreements are subject
to the fund's limitation on borrowings and may be entered into only with banks
or securities dealers or their affiliates. While a reverse repurchase agreement
is outstanding, the fund will maintain, in a segregated account with its
custodian, cash or liquid securities, marked to market daily, in an
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amount at least equal to its obligations under the reverse repurchase agreement.
See 'The Fund's Investments, Related Risks and Limitations -- Segregated
Accounts.'
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the fund might be unable to deliver them when the fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may
receive an extension of time to determine whether to enforce the fund's
obligation to repurchase the securities, and the fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. The fund may
invest in money market investments for temporary or defensive purposes, to
reinvest cash collateral from its securities lending activities 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) securities of other investment companies that invest exclusively in money
market instruments and similar private investment vehicles.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The fund may invest in securities
of other investment companies, subject to limitations imposed by the Investment
Company Act of 1940, as amended ('Investment Company Act'). Among other things,
these limitations currently restrict the fund's aggregate investments in other
investment companies to no more than 10% of its total assets. The fund's
investment in certain private investment vehicles are not subject to this
restriction. The shares of other investment companies are subject to the
management fees and other expenses of those companies, and the purchase of
shares of some investment companies requires the payment of sales loads and (in
the case of closed-end investment companies) sometimes substantial premiums
above the value of such companies' portfolio securities. At the same time, the
fund would continue to pay its own management fees and expenses with respect to
all its investments, including shares of other investment companies. The fund
may invest in the shares of other investment companies when, in the judgment of
the applicable sub-adviser, the potential benefits of the investment outweigh
the payment of any management fees and expenses and, where applicable, premium
or sales load.
LENDING OF PORTFOLIO SECURITIES. The fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The fund may reinvest any cash collateral in money market
investments or other short-term liquid investments, including other investment
companies. The fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The fund will
retain authority to terminate any of its loans at any time. The 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. The fund will receive amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights, when regaining such rights is considered to be
in the fund's interest.
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Pursuant to procedures adopted by the boards governing the fund's securities
lending program, PaineWebber has been retained to serve as lending agent for the
fund. The board also has authorized the payment of fees (including fees
calculated as a percentage of invested cash collateral) to PaineWebber for these
services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber acted as lending agent. PaineWebber also has
been approved as a borrower under the fund's securities lending program.
SHORT SALES 'AGAINST THE BOX.' The fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales 'against the
box'). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of the fund, and the fund is
obligated to replace the securities borrowed at a date in the future. When the
fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. The fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box.
The fund might make a short sale 'against the box' to hedge against market
risks when a sub-adviser believes that the price of a security may decline,
thereby causing a decline in the value of a security owned by the fund or a
security convertible into or exchangeable for a security owned by the fund. 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 the fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment value or conversion premiums of such
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The 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 a
normal settlement date for such securities at a stated price and yield. The fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when the fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the fund on a when-issued or delayed delivery basis may
result in the fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, the fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which the
fund's total assets, including the value of when-issued and delayed delivery
securities held by the fund, 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
the fund's net asset value. When the 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 Fund's Investments, Related Risks and
Limitations -- Segregated Accounts.' The fund's when-issued and delayed delivery
purchase commitments could cause its net asset value per share to be more
volatile. The 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 fund may be exposed to the risk of financial failure or
insolvency of another party. To help lessen those risks, each sub-adviser,
subject to the supervision of the fund's board, monitors and evaluates the
creditworthiness of the parties with which the fund does business.
SEGREGATED ACCOUNTS. When the 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
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Derivative Instruments,' segregated accounts may also be required in connection
with certain transactions involving options, futures and swaps.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for the fund without the affirmative vote of the lesser of (a) more than
50% of its outstanding shares or (b) 67% or more of the shares present at a
shareholders' meeting if more than 50% of its outstanding shares are represented
at the meeting in person or by proxy. If a percentage restriction is adhered to
at the time of an investment or transaction, a later increase or decrease in
percentage resulting from changing values of portfolio securities or amount of
total assets will not be considered a violation of any of the following
limitations.
The 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, 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 board without shareholder
approval. If a percentage restriction is adhered to at the time of an investment
or transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
The fund will not:
(1) invest more than 15% of its net assets 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.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Each sub-adviser 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. The 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, the 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 fund are described
below.
The fund might not use any Derivative Instruments or derivative strategies,
and there can be no assurance that using any strategy will succeed. If a
sub-adviser is incorrect in its judgment on market values, interest rates or
other economic factors in using a Derivative Instrument or strategy, the fund
may have lower net income and a net loss on the investment.
Options on Equity and Debt Securities -- A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to buy the underlying security at the
exercise price.
Options on Securities Indices -- A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
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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. The fund may
use Derivative Instruments to attempt to hedge its portfolio and also to attempt
to enhance income or return or realize gains or to manage the duration of its
bond investments. For example, the fund may use Derivative Instruments to
stimulate full investment by the fund while retaining 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), to reduce
transaction costs and to facilitate trading.
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 the fund's portfolio. Thus, in a short hedge the 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, the
fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the fund intends to acquire. Thus, in a
long hedge, the fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
The fund may purchase and write (sell) 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. The fund
might enter into a long straddle when a sub-adviser 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. The fund might enter into a short straddle
when a sub-adviser believes
11
<PAGE>
it unlikely that the prices of the securities will be as volatile during the
term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the 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 the fund's
exposure to different asset classes without buying or selling the underlying
instruments. The 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, the 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, a sub-adviser 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. Each sub-adviser may use these
opportunities for the 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 fund's 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 a sub-adviser 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 each sub-adviser 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 the fund entered into a
short hedge because a sub-adviser 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, the fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments
12
<PAGE>
involving obligations to third parties (i.e., Derivative Instruments other than
purchased options). If the fund was unable to close out its positions in such
Derivative Instruments, it might be required to continue to maintain such assets
or accounts or make such payments until the positions expired or matured. These
requirements might impair the fund's ability to sell a portfolio security or
make an investment at a time when it would otherwise be favorable to do so, or
require that the fund sell a portfolio security at a disadvantageous time. The
fund's ability to 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 the fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the fund to an
obligation to another party. The fund will not enter into any such transactions
unless it owns either (1) an offsetting ('covered') position in securities 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. The 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 the
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 fund 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. The 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 the 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 the 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.
The fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
13
<PAGE>
The fund may purchase and write both exchange-traded and over-the-counter
options. Currently, many options on equity securities (stocks) are
exchange-traded. Exchange markets for options on bonds exist but are relatively
new, and these instruments are primarily traded on the over-the-counter market.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. In
contrast, over-the-counter options are contracts between the fund and its
counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the 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 fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The fund 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
fund will enter into over-the-counter options only with counterparties that are
expected to be capable of entering into closing transactions with the fund,
there is no assurance that the fund will in fact be able to close out an
over-the-counter option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the fund might be unable to close
out an over-the-counter option position at any time prior to its expiration.
If the fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered 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.
The 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. The fund's use of options is governed by
the following guidelines, which can be changed by its board without shareholder
vote:
(1) The 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
the 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 the fund that are held at any time will not exceed 20% of its
net assets.
FUTURES. The fund may purchase and sell securities index futures contracts
and interest rate future contracts. The fund 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, the fund may purchase or
sell futures contracts or purchase options thereon to increase or reduce its
exposure to an asset class without purchasing or selling the underlying
securities, either as a hedge or to enhance return or realize gains.
Futures strategies also can be used to manage the average duration of the
fund's bond portfolio. If a sub-adviser wishes to shorten the average duration
of the 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 a sub-
14
<PAGE>
adviser 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.
The 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. The fund will engage in this
strategy only when it is more advantageous to the fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, 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 the fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the fund may be required by an exchange to
increase the level of its initial margin payment, 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 the fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If the fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might
15
<PAGE>
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. The 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) The aggregate initial margin and premiums on futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), excluding the amount by which options are
'in-the-money,' may not exceed 5% of its net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by the 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 the fund will not exceed 5% of its total assets.
SWAP TRANSACTIONS. The 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.
The 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. The 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.
The 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, each sub-adviser 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.
The fund will enter into interest rate swap transactions only with banks and
recognized securities dealers or their respective affiliates believed by the
applicable sub-adviser to present minimal credit risk in accordance with
guidelines established by the fund's board. If there is a default by the other
party to such a transaction, the fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
16
<PAGE>
ORGANIZATION OF THE TRUST; TRUSTEES AND OFFICERS;
PRINCIPAL HOLDERS MANAGEMENT OWNERSHIP OF SECURITIES
The Trust was formed as a business trust under the laws of the Commonwealth
of Massachusetts on December 3, 1992. Securities Trust has two operating series.
The 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 the Trust oversees its operations.
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander*'D'; 53 Trustee and President Mrs. Alexander is Chairman (since March
1999) and a director of Mitchell
Hutchins (since January 1995), and an
executive vice president and a director
of PaineWebber (since March 1984). She
was chief executive officer of Mitchell
Hutchins from January 1995 to October
2000. Mrs. Alexander is president and a
director or trustee of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Richard Q. Armstrong; 65 Trustee Mr. Armstrong is chairman and principal
One Old Church Road of R.Q.A. Enterprises (management
Unit #6 consulting firm) (since April 1991 and
Greenwich, CT 06830 principal occupation since March 1995).
Mr. Armstrong was chairman of the board,
chief executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a partner of
The New England Consulting Group
(management consulting firm) (December
1992-September 1993). He was managing
director of LVMH U.S. Corporation (U.S.
subsidiary of the French luxury goods
conglomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is a
director or trustee of 29 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ----------------------- ----------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**'D'; Trustee and Chairman of Mr. Bewkes is a director of Paine Webber
74 the Board of Trustees Group Inc. ('PW Group') (holding company
of PaineWebber and Mitchell Hutchins).
Prior to 1996, he was a consultant to PW
Group. He serves as a consultant to
PaineWebber (since May 1999). 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 40 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP Advisors,
1275 Pennsylvania Ave, N.W. LLP (international investments and
Washington, DC 20004 consulting firm) (since March 1994) and
a partner of McKinsey & Company
(management consulting firm) (since
1991). He is also a director of Archer-
Daniels-Midland Co. (agricultural
commodities), Hollinger International
Co. (publishing), Homestake Mining Corp.
(gold mining), six investment companies
in the Deutsche Bank family of funds,
nine investment companies in the Flag
Investors family of funds, The Central
European Fund, Inc. and The Germany
Fund, Inc., vice chairman of Anchor
Gaming (provides technology to gaming
and wagering industry) (since July 1999)
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 29 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, NY 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg
is also a director of Primedia, Inc.
(publishing), Federated Department
Stores, Inc. (operator of department
stores) and Revlon, Inc. (cosmetics).
Dean Feldberg is a director or trustee
of 37 investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
George W. Gowen; 71 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller. Prior
New York, NY 10017 to May 1994, he was a partner in the law
firm of Fryer, Ross & Gowen. Mr. Gowen
is a director or trustee of 37
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank) and chairman of
Suite 350 of Thayer Hotel Investors II and Lodging
Washington, DC 20004 Opportunities Fund (hotel investment
partnerships). From January 1992 to
November 1992, he was campaign manager
of Bush-Quayle '92. From 1990 to 1992,
he was vice chairman and, from 1989 to
1990, he was president of Northwest
Airlines Inc. and NWA Inc. (holding
company of Northwest Airlines Inc.).
Prior to 1989, he was employed by the
Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice president
and president of Marriott Hotels and
Resorts. Mr. Malek is also a director
of Aegis Communications, Inc.
(tele-services), American Management
Systems, Inc. (management consulting and
computer related services), Automatic
Data Processing, Inc. (computing
services), CB Richard Ellis, Inc. (real
estate services), FPL Group, Inc.
(electric services), Global Vacation
Group (packaged vacations), HCR/Manor
Care, Inc. (health care), SAGA Systems,
Inc. (software company) and Northwest
Airlines Inc. Mr. Malek is a director or
trustee of 29 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Carl W. Schafer; 64 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation
Princeton, NJ 08542 supporting mainly 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,
E.I.I. Realty Trust (investment
company), Evans Systems, Inc. (motor
fuels, convenience store and diversified
company), Electronic Clearing House,
Inc., (financial transactions
processing), Frontier Oil Corporation
and Nutraceutix, Inc. (biotechnology
company). Prior to January 1993, he was
chairman of the Investment Advisory
Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or
trustee of 29 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Brian M. Storms*'D'; 46 Trustee Mr. Storms is chief executive officer
(since October 2000), 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 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Amy Doberman**; 38 Vice President Ms. Doberman is a senior vice president
and general counsel of Mitchell
Hutchins. From December 1996 through
July 2000, she was general counsel of
Aeltus Investment Management, Inc. Prior
to working at Aeltus, Ms. Doberman was a
Division of Investment Management
Assistant Chief Counsel at the SEC.
Ms. Doberman is a vice president of 29
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.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ----------------------- ----------------------------------------
<S> <C> <C>
John J. Lee***; 32 Vice President and Mr. Lee is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Prior
to September 1997, he was an audit
manager in the financial services
practice of Ernst & Young LLP. Mr. Lee
is a vice president and assistant
treasurer of 30 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Kevin J. Mahoney***; 35 Vice President and Mr. Mahoney is a first vice president
Assistant Treasurer and a senior manager of the mutual fund
finance department of Mitchell Hutchins.
From August 1996 through March 1999, he
was the manager of the mutual fund
internal control group of Salomon Smith
Barney. Prior to August 1996, he was an
associate and assistant treasurer for
BlackRock Financial Management L.P. Mr.
Mahoney is a vice president and
assistant treasurer of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Ann E. Moran***; 43 Vice President and Ms. Moran is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Ms.
Moran is a vice president and assistant
treasurer of 30 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Dianne E. O'Donnell**; 48 Vice President and Ms. O'Donnell is a senior vice president
Secretary and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice
president and secretary of 29 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.
Paul H. Schubert***; 37 Vice President and Mr. Schubert is a senior vice president
Treasurer and director of the mutual fund finance
department of Mitchell Hutchins. Mr.
Schubert is a vice president and
treasurer of 30 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 THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Barney A. Taglialatela***; 39 Vice President and Mr. Taglialatela is a vice president and
Assistant Treasurer a manager of the mutual fund finance
department of Mitchell Hutchins.
Mr. Taglialatela is a vice president and
assistant treasurer of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Keith A. Weller**; 39 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Mr. Weller is a vice president
and assistant secretary of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>
---------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York, New
York 10019-6028.
***This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
'D'Mrs. Alexander, Mr. Bewkes and Mr. Storms are 'interested persons' of the
fund as defined in the Investment Company Act by virtue of their positions
with Mitchell Hutchins, PaineWebber, and/or PW Group.
The Trust pays each board member who is not an 'interested person' of the
Trust $1,500 annually for Small Cap Fund and $1,000 annually for its second
series. The Trust also pays each such board member $150 for attending each board
meeting and each separate meeting of a board committee. The Trust thus pays each
such board member $2,500 annually, plus any additional amounts due for board or
committee meetings.
The Trust pays up to $150 per series for attending 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. Because PaineWebber and Mitchell Hutchins perform
substantially all the services necessary for the operation of the Trust and the
fund, the Trust requires no employees. No officer, director or employee of
Mitchell Hutchins or PaineWebber presently receives any compensation from the
Trust for acting as a board member or officer.
The table below includes certain information relating to the compensation by
the Trust of its current trustees and the compensation of those trustees from
all PaineWebber funds during the periods indicated.
22
<PAGE>
COMPENSATION TABLE'D'
<TABLE>
<CAPTION>
AGGREGATE TOTAL
COMPENSATION COMPENSATION
FROM SECURITIES FROM THE FUND
NAME OF PERSON, POSITION TRUST* COMPLEX**
------------------------ ------ ---------
<S> <C> <C>
Richard Q. Armstrong, Trustee............................... $ $
Richard R. Burt, Trustee.................................... $ $
Meyer Feldberg, Trustee..................................... $ $
George W. Gowen, Trustee.................................... $ $
Frederic V. Malek, Trustee.................................. $ $
Carl W. Schafer, 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 from the
PaineWebber funds.
* Represents fees paid to each trustee from the Trust indicated for the fiscal
year ended July 31, 2000.
** Represents total compensation paid during the calendar year ended
December 31, 1999, to each board member by 31 investment companies (34 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.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of October 31, 2000, trustees and officers owned in the aggregate less
than 1% of the outstanding shares of any class of the fund.
As of October 31, 2000, the following shareholders are shown in the fund's
records as owning 5% or more of any class of the fund's shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE OF SHARES
NAME AND ADDRESS* BENEFICIALLY OWNED AS OF OCTOBER 31, 2000
----------------- -----------------------------------------
<S> <C>
</TABLE>
---------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
23
<PAGE>
INVESTMENT MANAGEMENT, ADMINISTRATION AND
DISTRIBUTION ARRANGEMENTS
INVESTMENT MANAGEMENT, AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment manager and administrator for the fund pursuant to a
separate interim investment management and administration contract dated October
10, 2000 ('Management Contract') with the Trust. Under the Management Contract,
the fund pays fees to Mitchell Hutchins for its services at the annual contract
rate of 1.00% of the fund's average daily net assets. All fees paid under the
Management Contract are computed daily and paid monthly.
During the periods indicated, Mitchell Hutchins earned (or accrued) fees
under a prior investment advisory and administration contract in the amounts set
forth below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Small Cap Fund................................... $ $1,035,125 $1,340,576
</TABLE>
Under the terms of the Management Contract, the 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 the 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 the applicable Trust
or Mitchell Hutchins; (6) all expenses incurred in connection with the board
members' services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the fund for violation of any law; (10) legal,
accounting and auditing expenses, including legal fees of special counsel for
the independent board members; (11) charges of custodians, transfer agents and
other agents; (12) costs of preparing share certificates; (13) expenses of
setting in type and printing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy materials for
existing shareholders and costs of mailing such materials to existing
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the fund; (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under the Management 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 Management Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Management Contract is an interim
contract that may be terminated without penalty on 10 days' written notice to
Mitchell Hutchins by the board or by vote of a majority of the outstanding
voting securities of the fund and will terminate 150 days after October 10, 2000
(on March 9, 2000) unless it has by then been approved by a majority of the
outstanding voting securities of the fund.
The Management Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers for the management of the fund's investment portfolio and, as
described below, Mitchell Hutchins has entered into one or more interim
sub-advisory contracts (each a 'Sub-Advisory Contract') for the fund. Mitchell
Hutchins is responsible for monitoring the services furnished pursuant to the
Sub-Advisory
24
<PAGE>
Contracts and making recommendations to the board with respect to the retention
or replacement of sub-advisers and renewal of Sub-Advisory Contracts.
Mitchell Hutchins has entered into separate Sub-Advisory Contracts with
Ariel Capital Management, Inc. ('Ariel') and ICM Asset Management, Inc. ('ICM').
Mitchell Hutchins (not the fund) pays each of these sub-advisers a fee at the
annual rate of 0.30% of the fund's average daily net assets that it manages.
Prior to October 10, 2000, Mitchell Hutchins managed the fund's assets. Ariel is
an independent subchapter S corporation with a majority of ownership held by its
employees. ICM also is an independent subchapter S corporation with a majority
of ownerhsip held by its employees. James M. Simmons, founder and chief
investment officer of ICM, owns more than 25% of ICM's voting stock.
Under each Sub-Advisory Contract, the sub-adviser will not be liable for any
error or judgment or mistake of law or for any loss suffered by the fund, its
shareholders or Mitchell Hutchins in connection with the performance of the
contract, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the sub-adviser in the performance of its duties or
from reckless disregard of its duties and obligations thereunder.
The Sub-Advisory Contract terminates automatically 150 days after
October 10, 2000 (on March 9, 2000) and is terminable at any time without
penalty on 10 days' written notice to Mitchell Hutchins by the board of the fund
or by vote of a majority of the fund's outstanding voting securities and may be
terminated by the sub-adviser upon not more than 60 days' written notice to
Mitchell Hutchins. A Sub-Advisory Contract may be terminated by Mitchell
Hutchins (1) upon material breach by the sub-adviser of its representations and
warranties, which breach shall not be cured within a 20 day period after notice
of such breach; or (2) if the sub-adviser becomes unable to discharge its duties
and obligations under the Sub-Advisory Contract.
SECURITIES LENDING. During the periods indicated, the fund paid (or accrued)
the following fees to PaineWebber for its services as securities lending agent:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
FUND 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Small Cap Fund................................... $ $23,627 $25,267
</TABLE>
NET ASSETS. The following table shows the approximate net assets as of
October 31, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
<S> <C>
Domestic (excluding Money Market)........................... $
Global......................................................
Equity/Balanced.............................................
Fixed Income (excluding Money Market).......................
Taxable Fixed Income....................................
Tax-Free Fixed Income...................................
Money Market Funds..........................................
</TABLE>
PERSONAL TRADING POLICIES. The fund and Mitchell Hutchins each have adopted
a code of ethics under rule 17j-1 of the Investment Company Act, which permits
personnel covered by the rule to invest in securities that may be purchased or
held by a fund but prohibits fraudulent, deceptive or manipulative conduct in
connection with that personal investing. Each sub-adviser also has adopted a
code of ethics under rule 17j-1.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of each
class of shares of the Fund under a distribution contract with the Trust
('Distribution Contract') that requires Mitchell Hutchins to use its best
efforts, consistent with its other businesses, to sell shares of the Fund.
Shares of the fund are offered continuously. Under a dealer agreement between
Mitchell Hutchins and PaineWebber relating to each class of shares of the fund
('PW Dealer Agreement') PaineWebber and its correspondent firms sell the fund's
shares. Mitchell Hutchins is located at 51 West 52nd Street, New
25
<PAGE>
York, New York 10019-6114 and PaineWebber is located at 1285 Avenue of the
Americas, New York, New York 10019-6028.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by the Trust in the manner prescribed under Rule 12b-1
under the Investment Company Act (each, respectively, a 'Class A Plan,' 'Class B
Plan' and 'Class C Plan,' and, collectively, 'Plans'), the fund pays Mitchell
Hutchins a service fee, accrued daily and payable monthly, at the annual rate of
0.25% of the average daily net assets for each class. Under the Class B Plan and
the Class C Plan, the fund also pays Mitchell Hutchins a distribution fee,
accrued daily and payable monthly, at the annual rate of 0.75% of the average
daily net assets of the Class B shares and Class C shares, respectively. There
is no distribution plan with respect to the fund's Class Y shares and the fund
pays no service or distribution fees with respect to its 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 the 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:
Offset the commissions it pays to PaineWebber for selling the fund's Class
B and Class C shares, respectively.
Offset the 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 fund 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 the fund must pay service and distribution fees to
Mitchell Hutchins for its service- and distribution-related activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the fund
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 fund. Annually, the board of
the 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 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 board, including those trustees who are not 'interested persons' of the
Trust and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by the fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the relevant class of the fund, and (4) while the
Plan remains in effect, the selection and nomination of trustees who are not
'interested persons' of the Trust shall be committed to the discretion of the
trustees who are not 'interested persons' of the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each class of the fund's
shares to such class based on the ratio of
26
<PAGE>
sales of shares of such class to the sales of all three classes of shares. The
fees paid by one class of the fund's shares will not be used to subsidize the
sale of any other class of fund shares.
For the fund's fiscal year ended July 31, 2000, the fund paid (or accrued)
the following fees to Mitchell Hutchins under the Plans:
<TABLE>
<CAPTION>
SMALL CAP
FUND
----
<S> <C>
Class A................................................... $
Class B................................................... $
Class C................................................... $
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the fund during the fund's July 31, 2000 fiscal year,
as shown below:
CLASS A
<TABLE>
<CAPTION>
SMALL CAP
FUND
----
<S> <C>
Marketing and advertising................................. $
Amortization of commissions...............................
Printing of prospectuses and statements of additional
information to other than current shareholders..........
Branch network costs allocated and interest expense.......
Service fees paid to PaineWebber financial advisors.......
</TABLE>
CLASS B
<TABLE>
<CAPTION>
SMALL CAP
FUND
----
<S> <C>
Marketing and advertising................................. $
Amortization of commissions...............................
Printing of prospectuses and statements of additional
information to other than current shareholders..........
Branch network costs allocated and interest expense.......
Service fees paid to PaineWebber financial advisors.......
</TABLE>
CLASS C
<TABLE>
<CAPTION>
SMALL CAP
FUND
----
<S> <C>
Marketing and advertising................................. $
Amortization of commissions...............................
Printing of prospectuses and statements of additional
information to other than current shareholders..........
Branch network costs allocated and interest expense.......
Service fees paid to PaineWebber financial advisors.......
</TABLE>
'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 the fund's overall Flexible Pricing'sm' system of distribution,
the 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
27
<PAGE>
to make additional investments in the fund and attracting new investors and
assets to the fund to the benefit of the fund and its shareholders, (2)
facilitate distribution of the fund's shares and (3) maintain the competitive
position of the fund in relation to other funds that have implemented or are
seeking to implement similar distribution arrangements.
In approving the Class A Plan, the board considered all the features of the
distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the fund than might otherwise be the case, (3)
the advantages to the shareholders of economics of scale resulting from growth
in the fund's assets and potential continued growth, (4) the services provided
to the fund and its shareholders by Mitchell Hutchins, (5) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, the board considered all the features of the
distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales commissions when Class B shares are sold and continuing service
fees thereafter while their customers invest their entire purchase payments
immediately to Class B shares would prove attractive to the investment
executives and correspondent firms, resulting in greater growth of the fund than
might otherwise be the case, (4) the advantages to the shareholders of economics
of scale resulting from growth in the fund's assets and potential continued
growth, (5) the services provided to the fund and its shareholders by Mitchell
Hutchins and (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service- and distribution-related expenses and costs. The trustees also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives, without the concomitant receipt by Mitchell Hutchins of
initial sales charges, was conditioned upon its expectation of being compensated
under the Class B Plan.
In approving the Class C Plan, the board considered all the features of the
distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from fund purchase payments and instead having
the entire amount of an investor's purchase payments immediately invested in
fund shares, (2) the advantage to investors in being free from contingent
deferred sales charges upon redemption for shares held more than one year and
paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales compensation for their sales of Class C shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class C shares and generally do not face
contingent deferred sales charges, would prove attractive to the investment
executives and correspondent firms, resulting in greater growth to the fund than
might otherwise be the case, (4) the advantages to the shareholders of economies
of scale resulting from growth in the fund's assets and potential continued
growth, (5) the services provided to the fund and its shareholders by Mitchell
Hutchins, (6) the services provided by PaineWebber pursuant to its Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption, was conditioned
upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the board considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The board 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
28
<PAGE>
average net assets of the fund, which fees would increase if the Plan were
successful and the fund attained and maintained significant asset levels.
Under the Distribution Contract for the Class A shares, for the fiscal years
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
----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
SMALL CAP FUND
Earned.......................................... $ $41,538 $299,265
Retained........................................ 2,502 17,983
</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 the fund's July 31, 2000 fiscal year:
<TABLE>
<CAPTION>
SMALL CAP FUND
--------------
<S> <C>
Class A...................................... $
Class B...................................... $
Class C...................................... $
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, each sub-adviser is
responsible for the execution of the fund's portfolio transactions and the
allocation of brokerage transactions with respect to the fund assets that it
manages. In executing portfolio transactions, each sub-adviser seeks to obtain
the best net results for the fund, taking into account such factors as the price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved. While
each sub-adviser 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 fund
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 fund paid the brokerage commissions
set forth below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Small Cap Fund................................ $ $223,906 $163,052
</TABLE>
The fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted through PaineWebber or its affiliates or through brokerage affiliates
of a sub-adviser. The board has adopted procedures in conformity with Rule 17e-1
under the Investment Company Act to ensure that all brokerage commissions paid
to PaineWebber or brokerage affiliates of a sub-adviser are reasonable and fair.
Specific provisions in the Management Contract and each Sub-Advisor's Contract
authorize Mitchell Hutchins and the sub-advisers and any of its affiliates that
is a member of a national securities exchange to effect portfolio transactions
for the fund on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations. During the periods
indicated, the fund paid to PaineWebber the brokerage commissions set forth
below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Small Cap Fund....................................... $ $600 $0
</TABLE>
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<PAGE>
The amounts paid by the fund to PaineWebber in brokerage commissions for its
most recent fiscal year represents % of the total brokerage commission paid
and % 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
fund's procedures in selecting FCMs to execute its 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, each sub-adviser 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 board a sub-adviser may cause the fund to purchase and
sell portfolio securities through brokers who provide a sub-adviser with
brokerage or research services. The fund may pay those brokers a higher
commission than may be charged by other brokers, provided that the sub-adviser
determines in good faith that the commission is reasonable in terms either of
that particular transaction or of the overall responsibility of a sub-adviser 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 the fund's July 31, 2000 fiscal year, Mitchell Hutchins directed the
portfolio transactions indicated below to brokers chosen because they provide
research and analysis, for which the fund paid the brokerage commissions
indicated below:
<TABLE>
<CAPTION>
BROKERAGE
AMOUNT OF PORTFOLIO COMMISSIONS
TRANSACTIONS PAID
------------ ----
<S> <C> <C>
Small Cap Fund......................................... $ $
</TABLE>
For purchases or sales with broker-dealer firms which act as principal, each
sub-adviser seeks best execution. Although a sub-adviser may receive certain
research or execution services in connection with these transactions, it 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. Each sub-adviser 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 a sub-adviser's own research efforts and, when utilized, are
subject to internal analysis before being incorporated into their investment
processes. Information and research services furnished by brokers or dealers
through which or with which the fund effect securities transactions may be used
by the applicable sub-adviser in advising other funds or accounts and,
conversely, research services furnished to a sub-adviser by brokers or dealers
in connection with other funds or accounts that either of them advises may be
used in advising the fund.
Investment decisions for the fund and for other investment accounts managed
by each sub-adviser are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the fund and such other account(s) as
to amount in a manner deemed equitable to the fund and such account(s). While in
some cases this practice could have a detrimental effect upon the price or value
of the security as far as the fund is concerned, or upon its ability to complete
its entire order, in other cases it is believed that coordination and the
ability to participate in volume transactions will be beneficial to the fund.
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<PAGE>
The fund 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 the board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the fund.
PORTFOLIO TURNOVER. The fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of the fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
securities in the portfolio during the year.
For the periods shown, the fund's portfolio turnover rates were:
<TABLE>
<CAPTION>
PORTFOLIO
TURNOVER RATE
-------------
<S> <C>
SMALL CAP FUND
Fiscal Year Ended July 31, 2000........................ %
Fiscal Year Ended July 31, 1999........................ 61%
</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;
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 the
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 fund
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges indicated in the table of
sales charges for Class A shares in the Prospectus. The sales charge payable on
31
<PAGE>
the purchase of Class A shares of the fund and Class A shares of such other
funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An 'eligible group of related fund investors' can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled
by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The registered
investment adviser must communicate at least quarterly through a newsletter
or investment update establishing a relationship with all of the accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the fund among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have redeemed
Class A shares of the 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.
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<PAGE>
PURCHASES AND SALES OF CLASS Y SHARES THROUGH THE PACE'sm' MULTI ADVISOR
PROGRAM. An investor who participates in the PACE'sm' Multi Advisor Program is
eligible to purchase Class Y shares. The PACE'sm' 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'sm' 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'sm' Multi Advisor Program.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONE'sm' PROGRAM.
Investors who purchase shares through the PaineWebber InsightOne'sm' Program are
eligible to purchase Class A shares without a sales load. The PaineWebber
InsightOne'sm' Program offers a nondiscretionary brokerage account to investors
for an asset-based fee at an annual rate of up to 1.50% of the assets in the
account. Account holders may purchase or sell certain investment products
without paying commissions or other markups/markdowns.
PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(K) PLUS
PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds that are
included as investment options under the Plan to implement the investment
choices of individual participants with respect to their Plan contributions.
Individual Plan participants should consult the Summary Plan Description and
other plan material of the PW 401(k) Plus Plan (collectively, 'Plan Documents')
for a description of the procedures and limitations applicable to making and
changing investment choices. Copies of the Plan Documents are available from the
Benefits Connection, 100 Halfday Road, Lincolnshire, IL 60069 or by calling
1-888-Pwebber (1-888-793-2237). As described in the Plan Documents, the price at
which Class Y shares are bought and sold by the trustee of PW 401(k) Plus Plan
might be more or less than the price per share at the time the participants made
their investment choices.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the fund 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 the fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the fund's investment objective, policies and
restrictions.
If conditions exist that make cash payments undesirable, the fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the fund and valued in the same way as they would
be valued for purposes of computing the fund's net asset value. 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. The fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The fund may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange is closed or trading on
the New York Stock Exchange is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the fund's portfolio at the time.
SERVICE ORGANIZATIONS. The 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. The
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
33
<PAGE>
be priced based on the fund's net asset value next computed after receipt of the
order by the service organizations or their agents. Service organizations may
include retirement plan service providers who aggregate purchase and redemption
instructions received from numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an Automatic Investment Plan
with a minimum initial investment of $1,000 through which a fund will deduct $50
or more on a monthly, quarterly, semi-annual or annual basis from the investor's
bank account to invest directly in the fund. Participation in the Automatic
Investment Plan enables an investor to use the technique of 'dollar cost
averaging.' When an investor invests the same dollar amount each month under the
Plan, the investor will purchase more shares when the fund's net asset value per
share is low and fewer shares when the net asset value per share is high. Using
this technique, an investor's average purchase price per share over any given
period will be lower than if the investor purchased a fixed number of shares on
a monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.
SYSTEMATIC WITHDRAWAL PLAN. The Systematic Withdrawal Plan allows investors
to set up monthly, quarterly (March, June, September and December), semi-annual
(June and December) or annual (December) withdrawals from their PaineWebber
Mutual Fund accounts. Minimum balances and withdrawals vary according to the
class of shares:
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 semi-annual and annual withdrawals of $100, $200, $300 and
$400, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may withdraw no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this Plan.
An investor's participation in the systematic withdrawal plan will terminate
automatically if the 'Initial Account Balance' (a term that means the value of
the fund account at the time the investor elects to participate in the
systematic withdrawal plan) less aggregate redemptions made other than pursuant
to the systematic withdrawal plan is less than the minimum values specified
above. Purchases of additional shares of the fund concurrent with withdrawals
are ordinarily disadvantageous to shareholders because of tax liabilities and,
for Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
'Valuation of Shares') after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. ('Transfer Agent').
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber Financial Advisors, correspondent firms
or the Transfer Agent at 1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available through
PaineWebber in which purchases of PaineWebber mutual funds and other investments
may be made. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.
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<PAGE>
TRANSFER OF ACCOUNTS. If investors holding shares of the 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 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 in connection with 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. In deciding whether to use
dollar cost averaging, an investor should also consider whether a large single
investment would qualify for sales load reductions.
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 Platinum
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;
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<PAGE>
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;
Platinum MasterCard'r', 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 Platinum
MasterCard'r' 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
Platinum MasterCard'r', with an additional fee of $40 if the investor selects an
optional line of credit with the Platinum MasterCard'r'.
CONVERSION OF CLASS B SHARES
Class B shares of the fund will automatically convert to Class A shares,
based on the relative net asset values per share of the two classes, as of the
close of business on the first Business Day (as defined under 'Valuation of
Shares') of the month in which the sixth anniversary of the initial issuance of
such Class B shares occurs. For the purpose of calculating the holding period
required for conversion of Class B shares, the date of initial issuance shall
mean (1) the date on which such Class B shares were issued, or (2) for Class B
shares obtained through an exchange, or a series of exchanges, the date on which
the original Class B shares were issued. For purposes of conversion to Class A
shares, Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A shares, a pro rata
portion of the Class B shares in the sub-account will also convert to Class A
shares. The portion will be determined by the ratio that the shareholder's Class
B shares converting to Class A shares bears to the shareholder's total Class B
shares not acquired through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
'preferential dividends' under the Internal Revenue Code and that the conversion
of shares does not constitute a taxable event. If the conversion feature ceased
to be available, the Class B shares would not be converted and would continue to
be subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not continue to be
met.
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<PAGE>
VALUATION OF SHARES
The fund determines its net asset value per share separately for each class
of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. stock exchanges are valued at the last
sale price on the day the securities are valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
over-the-counter market and listed on the Nasdaq Stock Market ('Nasdaq') are
valued at the last trade price on Nasdaq prior to valuation; other
over-the-counter securities are valued at the last bid price available prior to
valuation (other than short-term investments that mature in 60 days or less
which are valued as described further below). Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the applicable board. It
should be recognized that judgment often plays a greater role in valuing thinly
traded securities and lower rated bonds than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining until maturity,
unless the applicable board determines that this does not represent fair value.
PERFORMANCE INFORMATION
The fund's performance data quoted in advertising and other promotional
materials ('Performance Advertisements') represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ('Standardized
Return') used in the fund's Performance Advertisements are calculated according
to the following formula:
P(1 + T)'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.
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 fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). The fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
37
<PAGE>
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following tables show performance information for each class of the
fund's shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average return.
SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended July 31, 2000:
Standardized Return*.......................... % % % %
Non-Standardized.............................. % % % %
Five Years ended July 31, 2000:
Standardized Return*.......................... % % % N/A
Non-Standardized.............................. % % % N/A
Inception** to July 31, 2000:
Standardized Return*.......................... % % % %
Non-Standardized.............................. % % % %
</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 the class of shares is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Small Cap Fund........................................ 02/01/93 02/01/93 02/01/93 07/26/96
</TABLE>
OTHER INFORMATION. In Performance Advertisements, the fund may compare its
Standardized Return and/or their Non-Standardized Return with data published by
Lipper Inc. ('Lipper'), CDA Investment Technologies, Inc. ('CDA'), Wiesenberger
Investment Companies Service ('Wiesenberger'), Investment Company Data, Inc.
('ICD') or Morningstar Mutual Funds ('Morningstar'), with the performance of
recognized stock and other indices, including (but not limited to) the Standard
& Poor's 500 Composite Stock Price Index ('S&P 500'), the Standard & Poor's 600
Small-Cap Index, the Standard & Poor's 400 Mid-Cap Index, the Dow Jones
Industrial Average, the International Finance Corporation Global Total Return
Index, the Nasdaq Composite Index, the Russell 2000 Index, the Russell 1000
Index (including Value and Growth Sub-indexes), the Wilshire 5000 Index,
Standard & Poor's Mid Cap Financials Index, Standard & Poor's Super Composite
Financials Index, Standard & Poor's Financial Index, the Lehman Bond Index, the
Lehman Brothers 20+ Year Treasury Bond Index, the Lehman Brothers
Government/Corporate Bond Index, other similar Lehman Brothers indices or
components thereof, 30-year and 10-year U.S. Treasury bonds, the Morgan Stanley
Capital International World Index, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. The fund also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the fund and comparative mutual fund data and ratings reported in
independent periodicals, including THE WALL STREET JOURNAL, MONEY MAGAZINE,
SMART MONEY, MUTUAL FUNDS, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE
KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic
form.
The fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on a fund investment are reinvested in
additional fund shares, any future income or capital appreciation of a fund
38
<PAGE>
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 fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote'r' Money Markets. In comparing the 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 fund are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The bonds held by
the fund 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.
The 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.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
LONG-
TERM
COMMON GOV'T TREASURY
YEAR STOCKS BONDS INFLATION/CPI BILLS
---- ------ ----- ------------- --------
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
</TABLE>
Source: Stocks, Bonds, Bills and Inflation 1999 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
investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From January 1, 1926 to December 31,
1999, stocks beat all other traditional asset
39
<PAGE>
classes. A $10,000 investment in the S&P 500 grew to $28,456,281, significantly
more than any other investment.
TAXES
BACKUP WITHHOLDING. The fund is required to withhold 31% of all dividends,
capital gain distributions and redemption proceeds payable to individuals and
certain other non-corporate shareholders who do not provide the fund or
PaineWebber with a correct taxpayer identification number. Withholding at that
rate also is required from dividends and capital gain distributions payable to
those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of fund
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of any fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if the fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
SPECIAL RULE FOR CLASS A SHAREHOLDERS. A Special tax rule applies when a
shareholder sells or exchanges Class A shares of the fund within 90 days of
purchase and subsequently acquires Class A shares of the same or another
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
CONVERSION OF CLASS B SHARES. No gain or loss will be recognized by a
shareholder as a result of a conversion of Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. The fund intends to
continue to qualify for treatment as a regulated investment company ('RIC')
under the Internal Revenue Code. To so qualify, the fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain) ('Distribution Requirement') and must meet several additional
requirements. For the fund, these requirements include the following: (1) the
fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities, or other income (including gains
from options or futures) derived with respect to its business of investing in
securities ('Income Requirement'); (2) at the close of each quarter of the
fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If the fund failed to qualify for treatment as a RIC for any taxable
year, (1) 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 (2) the shareholders would treat all those distributions,
including distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), as dividends (that is, ordinary income)
to the extent of the fund's earnings and profits. In addition, the fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for RIC treatment.
OTHER INFORMATION. Dividends and other distributions the fund declares in
October, November or December of any year that are 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 fund
pays the distributions during the following January.
40
<PAGE>
A portion of the dividends (whether paid in cash or additional shares) from
the fund's investment company taxable income may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion for
the fund may not exceed the aggregate dividends received by the fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax.
If shares of the fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
The fund will be subject to a nondeductible 4% excise tax ('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.
The fund may invest in the stock of 'passive foreign investment companies'
('PFICs') if that stock is a permissible investment. A PFIC is any foreign
corporation (with certain exceptions) that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the fund will be subject to
federal income tax on a portion of any 'excess distribution' received on the
stock of a PFIC or of any gain from disposition of that stock (collectively
'PFIC income'), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.
If the 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.
The 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
the 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).
The fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.
The use of hedging strategies involving Derivative Instruments, such as
writing (selling) and purchasing options and futures contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses the fund realizes in connection
therewith. Gains from options and futures derived by a fund with respect to its
business of investing in securities will be treated as qualifying income under
the Income Requirement.
Certain futures contracts in which the fund may invest may be subject to
section 1256 of the Internal Revenue Code ('section 1256 contracts'). Any
section 1256 contracts the fund holds at the end of each taxable year generally
must be 'marked-to-market' (that is, treated as having been sold at that time
for their fair market value) for federal income tax purposes, which the result
that unrealized gains or losses will be treated as though they were realized.
Sixty percent of any net gain or loss recognized on these deemed sales, and 60%
of any net realized gain or loss from any actual sales of section 1256
contracts, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term
41
<PAGE>
capital gain or loss. These rules may operate to increase the amount that the
fund must distribute to satisfy the Distribution Requirement (i.e., with respect
to the portion treated as short-term capital gain), which will be taxable to its
shareholders as ordinary income, and to increase the net capital gain the fund
recognizes, without in either case increasing the cash available to the fund.
The fund may elect not to have the foregoing rules apply to any 'mixed straddle'
(that is, a straddle, clearly identified by the fund in accordance with the
regulations, at least one (but not all) the positions of which are section 1256
contracts), although doing so may have the effect of increasing the relative
proportion of net short-term capital gain (taxable as ordinary income) and thus
increasing the amount of dividends that must be distributed.
Offsetting positions in any actively traded security, option or futures
contract entered into or held by the 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 the fund's gains and losses with
respect to positions of the straddle by requiring, among other things, that
(1) loss realized on disposition of one position of a straddle be deferred to
the extent of any unrealized gain in an offsetting position until the latter
position is disposed of, (2) the fund's holding period in certain straddle
positions not begin until the straddle is terminated (possibly resulting in gain
being treated as short-term rather than long-term capital gain) and (3) losses
recognized with respect to certain straddle positions, that otherwise would
constitute short-term capital losses, be treated as long-term capital losses.
Applicable regulations also provide certain 'wash sale' rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and 'short sale' rules applicable to
straddles. Different elections are available to the funds, which may mitigate
the effects of the straddle rules, particularly with respect to mixed straddles.
When a covered call option written (sold) by the fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by the fund is exercised, the fund will be treated
as having sold the underlying security, producing long-term or short-term
capital gain or loss, depending on the holding period of the underlying security
and whether the sum of the option price received on the exercise plus the
premium received when it wrote the option is more or less than the basis of the
underlying security.
If the fund has an 'appreciated financial position' -- generally, an
interest (including an interest through an option or futures contract or short
sale) with respect to any stock, debt instrument (other than 'straight debt') or
partnership interest the fair market value of which exceeds its adjusted
basis -- and enters into a 'constructive sale' of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or a futures contract entered into by
the 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 the 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.
42
<PAGE>
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type commonly
known as a 'Massachusetts business trust.' Under Massachusetts law, shareholders
of the fund could, under certain circumstances, be held personally liable for
the obligations of the fund or its Trust. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of the Trust or
the fund and requires that notice of such disclaimer be given in each note,
bond, contract, instrument, certificate or undertaking made or issued by the
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. The
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 the 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 the 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 fund will affect
the performance of those classes. Each share of the 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 the 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 the Trust, which has more than one series, may elect all of the board
members of the Trust. The shares of the fund will be voted together, except that
only the shareholders of a particular class of the 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 the Trust will be voted separately, except
when an aggregate vote of all the series is required by law.
The fund does not hold annual meetings. Shareholders of record of no less
than two-thirds of the outstanding shares of the 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 the Trust.
CLASS-SPECIFIC EXPENSES. The 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 July 26, 1996, Small Cap Fund was known as
'PaineWebber Small Cap Value Fund.' On July 26, 1996, Small Cap Fund was
combined in a tax-free reorganization with PaineWebber Small Cap Growth Fund, a
series of PaineWebber Investment Trust III. As a result of the reorganization,
each shareholder of PaineWebber Small Cap Growth Fund became a shareholder of
Small Cap Fund.
43
<PAGE>
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State Street
Bank and Trust Company, located at 1776 Heritage Drive, North Quincy,
Massachusetts 02171, serves as the fund's custodian and recordkeeping agent.
PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the fund.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York,
New York 10036, serves as independent accountants.
FINANCIAL STATEMENTS
The fund's Annual Report to Shareholders for the fiscal year ended July 31,
2000 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent accountants appearing
therein are incorporated herein by this reference.
44
<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
A-1
<PAGE>
than obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation; CCC. An obligation rated CCC is
currently vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation; CC. An obligation rated CC is currently
highly vulnerable to nonpayment; C. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued; D. An obligation
rated D is in payment default. The D rating category is used when payments on an
obligation are not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUND AND ITS 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 FUND IN ANY JURISDICTION WHERE THE FUND OR ITS DISTRIBUTOR MAY NOT
LAWFULLY SELL THOSE SHARES.
------------
'c'2000 PaineWebber Incorporated. All rights reserved.
PaineWebber
Small Cap Fund
------------------------------------------
Statement of Additional Information
December 1, 2000
------------------------------------------
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(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) Interim Investment Management and Administration Contract (filed
herewith)
(b) Interim Sub-Advisory Contract with Ariel Capital Management, Inc. with
respect to PaineWebber Small Cap Fund (filed herewith)
(c) Interim Sub-Advisory Contract with ICM Asset Management, Inc. with
respect to PaineWebber Small Cap Fund (filed herewith)
(d) Interim Sub-Advisory Contract with Pacific Investment Management
Company LLC with respect to PaineWebber Strategic Income Fund (filed
herewith)
(5) (a) Form of Distribution Contract (filed herewith)
(b) Form of Dealer Agreement (filed herewith)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 3/
(8) Transfer Agency Agreement 3/
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings and consents: Accountants' consent (to
be filed)
(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 4/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares 4/
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares 4/
(14) Multiple Class Plan Pursuant to Rule 18f-3 (filed herewith)
(15) (a) Code of Ethics for Registrant, its investment manager and its principal
distributor 5/
(b) Code of Ethics for Ariel Capital Management, Inc. (filed herewith)
(c) Code of Ethics for ICM Asset Management, Inc. (filed herewith)
(d) Code of Ethics for Pacific Investment Managment Company LLC (filed
herewith).
-------------
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. 21 to the
registration statement, SEC File - No. 33-55374, filed November 20, 1998.
5/ Incorporated by reference from Post-Effective Amendment No. 29 to the
registration statement of - PaineWebber Mutual Fund Trust, SEC File No.,
2-98149, filed June 27, 2000.
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 Interim Investment Management and Administration Contract
("Management Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") provides that Mitchell Hutchins shall not be liable for any error of
judgment or mistake of law or for any loss suffered by any series of the
Registrant in connection with the matters to which the Management Contract
relates, except for a loss resulting from the willful
C-2
<PAGE>
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 Management Contract. Section 10 of the Management Contract
provides that the Trustees shall not be liable for any obligations of the Trust
or any series under the Management 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 6 of each Interim Sub-Advisory Contract contains provisions similar
to Section 9 of the Management Contract, with respect to the applicable
sub-adviser.
Section 9 of the 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 the 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 Distribution Contract. Section 10 of the
Distribution Contract contains provisions similar to Section 10 of the
Management Contract, with respect to Mitchell Hutchins and PaineWebber, as
appropriate.
Section 9 of the Dealer Agreement contains provisions similar to Section 9
of the 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.
Ariel Capital Management, Inc. ("Ariel") serves as a sub-adviser for
PaineWebber Small Cap Fund. Information on the officers and directors of Ariel
is included in its Form ADV filed with the Securities and Exchange Commission
(registration number 801-18767) and is incorporated herein by reference.
C-3
<PAGE>
ICM Asset Management, Inc. ("ICM") serves as a sub-adviser for PaineWebber
Small Cap Fund. Information on the officers and directors of ICM is included in
its Form ADV filed with the Securities and Exchange Commission (registration
number 801- 16670) and is incorporated herein by reference.
Pacific Investment Management Company LLC ("PIMCO") serves as sub-adviser
for PaineWebber Strategic Income Fund. Information on the officers and directors
of PIMCO is included in its Form ADV filed with the Securities and Exchange
Commission (registration number 801- 7260) and is incorporated herein by
reference.
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.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
MITCHELL HUTCHINS SECURITIES TRUST
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.
<TABLE>
<CAPTION>
Positions and Offices With
Name Positions and Offices With Registrant Underwriter or Dealer
---- ------------------------------------- ---------------------
<S> <C> <C>
Margo N. Alexander* Trustee and President Chairman and a Director of Mitchell
Hutchins and an Executive Vice President
and a Director of PaineWebber
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices With
Name Positions and Offices With Registrant Underwriter or Dealer
---- ------------------------------------- ---------------------
<S> <C> <C>
Brian M. Storms* Trustee Chief Executive Officer, President and
Chief Operating Officer of Mitchell Hutchins
Amy Doberman** Vice President Senior Vice President and General Counsel
of Mitchell Hutchins
John J. Lee*** Vice President and Assistant Treasurer Vice President and a Manager of the Mutual
Fund Finance Department of Mitchell Hutchins
Kevin J. Mahoney*** Vice President and Assistant Treasurer First Vice President and a Senior Manager of the
Mutual Fund Finance Department of Mitchell Hutchins
Ann E. Moran*** Vice President and Assistant Treasurer Vice President and a Manager of the Mutual
Fund Finance Department of Mitchell Hutchins
Dianne E. O'Donnell** Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
Paul H. Schubert*** Vice President and Treasurer Senior Vice President and Director of the
Mutual Fund Finance Department of Mitchell Hutchins
Barney A. Taglialatela*** Vice President and Assistant Treasurer Vice President and a Manager of the Mutual
Fund Finance Department of Mitchell Hutchins
Keith A. Weller** Vice President and Assistant Secretary First Vice President and Associate General
Counsel of Mitchell Hutchins
</TABLE>
---------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York, New
York, 10019-6028.
*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
c) None
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 at
1285 Avenue of the Americas, New York, New York 10019-6028 and 51 West 52nd
Street, New York, New York 10019-6114. 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.
C-5
<PAGE>
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 has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 30th day of October, 2000.
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 October 30, 2000
------------------------------------ (Chief Executive Officer)
Margo N. Alexander*
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman October 30, 2000
--------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.*
/s/ Richard Q. Armstrong Trustee October 30, 2000
---------------------------
Richard Q. Armstrong*
/s/ Richard R. Burt Trustee October 30, 2000
------------------------------------
Richard R. Burt*
/s/ Meyer Feldberg Trustee October 30, 2000
------------------------------------
Meyer Feldberg*
/s/ George W. Gowen Trustee October 30, 2000
------------------------------------
George W. Gowen*
/s/ Frederic V. Malek Trustee October 30, 2000
------------------------------------
Frederic V. Malek*
/s/ Carl W. Schafer Trustee October 30, 2000
------------------------------------
Carl W. Schafer*
/s/ Brian M. Storms Trustee October 30, 2000
------------------------------------
Brian M. Storms**
/s/ Paul H. Schubert Vice President and Treasurer (Chief October 30, 2000
------------------------------------ Financial and Accounting Officer)
Paul H. Schubert
</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
Exhibit
Number
(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) Interim Investment Management and Administration Contract (filed
herewith)
(b) Interim Sub-Advisory Contract with Ariel Capital Management, Inc. with
respect to PaineWebber Small Cap Fund (filed herewith)
(c) Interim Sub-Advisory Contract with ICM Asset Management, Inc. with
respect to PaineWebber Small Cap Fund (filed herewith)
(d) Interim Sub-Advisory Contract with Pacific Investment Management
Company LLC with respect to PaineWebber Strategic Income Fund (filed
herewith)
(5) (a) Form of Distribution Contract (filed herewith)
(b) Form of Dealer Agreement (filed herewith)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 3/
(8) Transfer Agency Agreement 3/
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings and consents: Accountants' consent (to
be filed)
(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 4/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares 4/
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares 4/
(14) Multiple Class Plan Pursuant to Rule 18f-3 (filed herewith)
(15) (a) Code of Ethics for Registrant, its investment manager and its principal
distributor 5/
(b) Code of Ethics for Ariel Capital Management, Inc. (filed herewith)
(c) Code of Ethics for ICM Asset Management, Inc. (filed herewith)
(d) Code of Ethics for Pacific Investment Managment Company LLC (filed
herewith).
-------------
<PAGE>
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.
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. 21 to the
registration statement, SEC File No. 33-55374, filed November 20, 1998.
5/ Incorporated by reference from Post-Effective Amendment No. 29 to the
registration statement of PaineWebber Mutual Fund Trust, SEC File No.,
2-98149, filed June 27, 2000.
STATEMENT OF DIFFERENCES
------------------------
The copyright symbol shall be expressed as ............................... 'c'
The registered trademark symbol shall be expressed as .................... 'r'
The dagger symbol shall be expressed as .................................. 'D'
The section symbol shall be expressed as.................................. 'SS'
Characters normally expressed as superscript shall be preceded by ........ 'pp'
The trademark symbol shall be expressed as................................ 'TM'
The service mark symbold shall be expressed as............................ 'sm'
