-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GoWMMywWkt1jT7C3OGw80Dl2bdHkWX+kENJG8pfR+RKBKdBhR+2EM0YtU7Nx34aT LmaQNL6/fv0iVg1K/Ga6fQ== 0000889812-97-002532.txt : 19971126 0000889812-97-002532.hdr.sgml : 19971126 ACCESSION NUMBER: 0000889812-97-002532 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19971125 EFFECTIVENESS DATE: 19971201 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINEWEBBER AMERICA FUND /NY/ CENTRAL INDEX KEY: 0000703887 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133175781 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 002-78626 FILM NUMBER: 97728403 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-03502 FILM NUMBER: 97728404 BUSINESS ADDRESS: STREET 1: 1285 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127132421 MAIL ADDRESS: STREET 2: 1285 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: PAINE WEBBER GOVERNMENT FUND INC DATE OF NAME CHANGE: 19890402 485BPOS 1 POST-EFFECTIVE AMENDMENT NO. 42 As filed with the Securities and Exchange Commission on November 25, 1997 1933 Act Registration No. 2-78626 1940 Act Registration No. 811-3502 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-lA REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ] Pre-Effective Amendment No.______ [ ] Post-Effective Amendment No. 42 [X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 40 (Check appropriate box or boxes.) PAINEWEBBER AMERICA FUND (Exact name of registrant as specified in charter) 1285 Avenue of the Americas New York, New York 10019 (Address of principal executive offices) Registrant's telephone number, including area code: (212) 713-2000 DIANNE E. O'DONNELL, ESQ. Mitchell Hutchins Asset Management Inc. 1285 Avenue of the Americas New York, New York 10019 (Name and address of agent for service) Copies to: ELINOR W. GAMMON, ESQ. BENJAMIN J. HASKIN, ESQ. Kirkpatrick & Lockhart LLP 1800 Massachusetts Avenue, N.W.; Second Floor Washington, D.C. 20036-1800 Telephone (202) 778-9000 Approximate Date of Proposed Public Offering: Effective Date of this Post-Effective Amendment. It is proposed that this filing will become effective: / / Immediately upon filing pursuant to Rule 485(b) /X/ On December 1, 1997 pursuant to Rule 485(b) / / 60 days after filing pursuant to Rule 485(a)(i) / / On ______________ pursuant to Rule 485(a)(i) / / 75 days after filing pursuant to Rule 485(a)(ii) / / On ______________ pursuant to Rule 485(a)(ii) Title of Securities Being Registered: Shares of Beneficial Interest. PAINEWEBBER AMERICA FUND contents of Registration Statement This registration statement consists of the following papers and documents: Cover Sheet Contents of Registration Statement Cross Reference Sheets PaineWebber Growth and Income Fund Part A - Prospectus Part B - Statement of Additional Information Part C - Other Information Signature Page Exhibits PAINEWEBBER AMERICA FUND Form N-lA Cross Reference Sheet
Part A Item No.and Caption Prospectus Caption -------------------------- ------------------ 1. Cover Page Cover Page 2. Synopsis The Funds at a Glance; Expense Table 3. Condensed Financial Information Financial Highlights; Performance 4. General Description of Registrant The Funds at a Glance; Investment Objectives and Policies; Investment Philosophy and Process; The Funds' Investments; General Information 5. Management of the Fund Management; General Information 5A. Management's Discussion of Fund Performance Financial Highlights 6. Capital Stock and Other Securities Cover Page; Flexible Pricing; Dividends & Taxes; General Information 7. Purchase of Securities Being Offered Flexible Pricing; How to Buy Shares; Other Services; Determining the Shares' Net Asset Value 8. Redemption or Repurchase How to Sell Shares; Other Services 9. Pending Legal Proceedings Not Applicable Part B Item No.and Caption Statement of Additional Information Caption -------------------------- ------------------------------------------- 10. Cover Page Cover Page 11. Table of Contents Table of Contents 12. General Information and History Other Information 13. Investment Objectives and Policies Investment Policies and Restrictions; Hedging Strategies Using Derivative Instruments; Portfolio Transactions 14. Management of the Fund Trustees and Officers; Principal Holders of Securities 15. Control Persons and Principal Holders Trustees and Officers; Principal Holders of Securities of Securities 16. Investment Advisory and Other Services Investment Advisory and Distribution Arrangements; Other Information 17. Brokerage Allocation Portfolio Transactions 18. Capital Stock and Other Securities Conversion of Class B Shares; Other Information
Part B Item No.and Caption Statement of Additional Information Caption -------------------------- ------------------------------------------- 19. Purchase, Redemption and Pricing Reduced Sales Charges, Additional Exchange and of Securities Being Offered Redemption Information and Other Services; Valuation of Shares 20. Tax Status Taxes 21. Underwriters Investment Advisory and Distribution Arrangements 22. Calculation of Performance Data Performance Information 23. Financial Statements Financial Statements
Part C Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. PaineWebber Growth and Income Fund PaineWebber Growth Fund PaineWebber Small Cap Fund 1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019 PROSPECTUS -- DECEMBER 1, 1997 PaineWebber Stock Funds are designed for investors generally seeking capital appreciation by investing mainly in equity securities. PaineWebber Growth and Income Fund seeks to provide both current income and capital growth by investing primarily in dividend-paying equity securities believed to have potential for rapid earnings growth. PaineWebber Growth Fund seeks long-term capital appreciation by investing primarily in equity securities of companies believed to have substantial potential for capital growth. PaineWebber Small Cap Fund seeks long-term capital appreciation by investing primarily in equity securities of small capitalization companies. This Prospectus concisely sets forth information that an investor should know about the Funds before investing. Please read it carefully and retain a copy of this Prospectus for future reference. A Statement of Additional Information dated December 1, 1997 has been filed with the Securities and Exchange Commission and is legally part of this Prospectus. The Statement of Additional Information can be obtained without charge, and further inquiries can be made, by contacting an individual Fund, your PaineWebber investment executive, PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568. THE PAINEWEBBER FAMILY OF MUTUAL FUNDS The PaineWebber Family of Mutual Funds consists of six broad categories, which are presented here. Generally, investors seeking to maximize return must assume greater risk.The Funds in this Prospectus are all in the STOCK FUNDS category. / / MONEY MARKET FUND for income and / / ASSET ALLOCATION FUNDS for high stability by investing in high-quality, total return by investing in stocks short-term investments. and bonds. / / BOND FUNDS for income by investing / / STOCK FUNDS for long-term growth by mainly in bonds. investing mainly in equity securities. / / TAX-FREE BOND FUNDS for income exempt / / GLOBAL FUNDS for long-term growth by from federal income tax and, in some investing mainly in foreign stocks or cases, state and local income taxes, high current income by investing by investing in municipal bonds. mainly in global debt instruments.
A complete listing of the PaineWebber Family of Mutual Funds is found on the back cover of this Prospectus. INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- Prospectus Page 1 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund TABLE OF CONTENTS - --------------------------------------------------------------------------------
PAGE ---- The Funds at a Glance................... 3 Expense Table........................... 5 Financial Highlights.................... 8 Investment Objectives & Policies........ 18 Investment Philosophy & Process......... 18 Performance............................. 20 The Funds' Investments.................. 23 Flexible Pricing SM..................... 25 How to Buy Shares....................... 29 How to Sell Shares...................... 30 Other Services.......................... 31 Management.............................. 31 Determining the Shares' Net Asset Value................................. 34 Dividends & Taxes....................... 34 General Information..................... 35
-------------------- Prospectus Page 2 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund THE FUNDS AT A GLANCE - -------------------------------------------------------------------------------- The Funds (each a 'Fund') offered by this Prospectus are not intended to provide a complete investment program, but one or more of them may be appropriate as a component of an investor's overall portfolio. Some common reasons to invest in these Funds are to finance college educations, plan for retirement or diversify a portfolio. When selling shares, investors should be aware that they may get more or less for their shares than they originally paid for them. As with any mutual fund, there is no assurance that the Funds will achieve their goals. GROWTH AND INCOME FUND GOAL: To increase the value of your investment by investing primarily in dividend-paying equity securities believed to have potential for rapid earnings growth. INVESTMENT OBJECTIVE: Current income and capital growth. RISKS: Equity securities historically have shown greater growth potential than other types of securities, but they have also shown greater volatility. Because the Fund invests primarily in equity securities, its price will rise and fall. The Fund may invest in U.S. dollar-denominated securities of foreign companies, which involves more risk than investing in the securities of U.S. companies. The Fund may also invest up to 10% of its total assets in high yield, high risk convertible bonds, which are considered predominantly speculative and may involve major risk exposure to adverse conditions. The Fund may use derivatives, such as options and futures, in its hedging activities, which may involve special risks. Investors may lose money by investing in the Fund; the investment is not guaranteed. SIZE: On October 31, 1997, the Fund had over $1.0 billion in net assets. GROWTH FUND GOAL: To increase the value of your investment by investing primarily in equity securities of companies believed to have substantial potential for capital growth. INVESTMENT OBJECTIVE: Long-term capital appreciation. RISKS: Equity securities historically have shown greater growth potential than other types of securities, but they have also shown greater volatility. Because the Fund invests primarily in equity securities, its price will rise and fall. The Fund may invest in U.S. dollar-denominated securities of foreign companies, which involves more risk than investing in the securities of U.S. companies. The Fund may also invest up to 10% of its total assets in high yield, high risk bonds and convertible securities, which are considered predominantly speculative and involve major risk exposure to adverse conditions. The Fund may use derivatives, such as options and futures, in its hedging activities, which may involve special risks. Investors may lose money by investing in the Fund; the investment is not guaranteed. SIZE: On October 31, 1997, the Fund had over $370.6 million in net assets. SMALL CAP FUND GOAL: To increase the value of your investment by investing primarily in equity securities of small capitalization ('small cap') companies. INVESTMENT OBJECTIVE: Long-term capital appreciation. RISKS: Equity securities historically have shown greater growth potential than other types of securities, but they have also shown greater volatility. Because the Fund invests primarily in equity securities, its price will rise and fall. The Fund may invest in U.S. dollar-denominated securities of foreign companies, which involves more risk than investing in the securities of U.S. companies. Small cap companies typically are subject to a greater degree of change in earnings and business prospects than are larger, more established companies. In addition, equity securities of small cap companies may be less liquid and more volatile than those of larger companies. The Fund may also invest up to 10% of its total assets in high yield, high risk convertible bonds, which are considered predominantly speculative and may involve major risk exposure to adverse conditions. The Fund may use derivatives, such as options and futures, in its hedging activities, which may involve special risks. Investors may lose money by investing in the Fund; the investment is not guaranteed. SIZE: On October 31, 1997, the Fund had over $128.2 million in net assets. MANAGEMENT Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the investment adviser and administrator of each Fund. MINIMUM INVESTMENT To open an account, investors need $1,000; to add to an account, investors need only $100. -------------------- Prospectus Page 3 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund THE FUNDS AT A GLANCE (Continued) - -------------------------------------------------------------------------------- WHO SHOULD INVEST GROWTH AND INCOME FUND is designed for investors seeking current income and capital growth through investment in growth-oriented, dividend-paying equity securities of U.S. companies and foreign companies that are traded in the United States. Growth and Income Fund invests primarily in equity securities of larger growth companies and smaller issuers believed to have potential for rapid earnings growth that pay dividends. In addition, Growth and Income Fund can invest in high yield, high risk convertible bonds. These investments offer the potential for greater returns, but also entail a substantial degree of volatility and risk. Accordingly, Growth and Income Fund is designed for investors who are able to bear the risks that come with investments in the stocks and bonds of such companies. GROWTH FUND is designed for investors who want long-term capital appreciation through investment primarily in growth-oriented equity securities of U.S. companies and foreign companies that are traded in the United States. Growth Fund invests primarily in equity securities of both larger growth companies and smaller issuers believed to have greater appreciation potential. In addition, Growth Fund can invest in high yield, high risk bonds and convertible securities. These investments offer the potential for greater returns, but also entail a substantial degree of volatility and risk. Accordingly, Growth Fund is designed for investors who are able to bear the risks that come with investments in the stocks and bonds of such companies. SMALL CAP FUND is designed for investors who are seeking long-term capital appreciation through investments primarily in equity securities of small cap U.S. companies and foreign companies that are traded in the United States. Several statistical studies have been published indicating that the historical long-term returns of small cap equity securities have been higher than those of large cap equity securities. Equity securities of small cap companies generally exhibit greater market volatility than is the case with equity securities of larger companies, or equity securities in general. In addition, Small Cap Fund can invest in high yield, high risk convertible bonds. These investments offer the potential for greater returns, but also entail a substantial degree of volatility and risk. Accordingly, Small Cap Fund is designed for investors who are able to bear the risks and fluctuations associated with investment in smaller companies. HOW TO PURCHASE SHARES OF THE FUNDS Investors may select among these classes of shares: CLASS A SHARES The price is the net asset value plus the initial sales charge; the maximum sales charge is 4.5% of the public offering price. Although investors pay an initial sales charge when they buy Class A shares, the ongoing expenses for this class are lower than the ongoing expenses of Class B and Class C shares. CLASS B SHARES The price is the net asset value. Investors do not pay an initial sales charge when they buy Class B shares. As a result, 100% of their purchase is immediately invested. However, Class B shares have higher ongoing expenses than Class A shares. Depending upon how long they own the shares, investors may have to pay a sales charge when they sell Class B shares. This is called a 'contingent deferred sales charge' and applies when investors sell their Class B shares within six years after purchase. After six years, Class B shares convert to Class A shares, which have lower ongoing expenses and no contingent deferred sales charge. CLASS C SHARES The price is the net asset value. Investors do not pay an initial sales charge when they buy Class C shares. As a result, 100% of their purchase is immediately invested. However, Class C shares have higher ongoing expenses than Class A shares. A contingent deferred sales charge of 1% is charged on shares sold within one year of purchase. Class C shares never convert to any other class of shares. CLASS Y SHARES Class Y shares are offered only to limited groups of investors. The price is the net asset value. Investors do not pay an initial sales charge when they buy Class Y shares. As a result, 100% of their purchase is immediately invested. Investors also do not pay a contingent deferred sales charge when they sell Class Y shares. Class Y shares have lower ongoing expenses than any other class of shares. -------------------- Prospectus Page 4 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund EXPENSE TABLE - -------------------------------------------------------------------------------- The following tables are intended to assist investors in understanding the expenses associated with investing in each class of shares of the Funds. Expenses shown below represent those incurred for the most recent fiscal year.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS Y -------- -------- -------- -------- Maximum Sales Charge on Purchases of Shares (as a % of offering price)............................ 4.50% None None None Sales Charge on Reinvested Dividends (as a % of offering price)................................... None None None None Maximum Contingent Deferred Sales Charge (as a % of offering price or net asset value at the time of sale, whichever is less)..................... None 5% 1% None Exchange Fee...................................... None None None None ANNUAL FUND OPERATING EXPENSES (as a % of average net assets) GROWTH AND INCOME FUND Management Fees................................... 0.70% 0.70% 0.70% 0.70% 12b-1 Fees........................................ 0.23 1.00 1.00 None Other Expenses.................................... 0.22 0.23 0.22 0.18 -------- -------- -------- -------- Total Operating Expenses.......................... 1.15% 1.93% 1.92% 0.88% -------- -------- -------- -------- -------- -------- -------- -------- GROWTH FUND Management Fees................................... 0.75% 0.75% 0.75% 0.75% 12b-1 Fees........................................ 0.23 1.00 1.00 None Other Expenses.................................... 0.29 0.31 0.32 0.25 -------- -------- -------- -------- Total Operating Expenses.......................... 1.27% 2.06% 2.07% 1.00% -------- -------- -------- -------- -------- -------- -------- -------- SMALL CAP FUND Management Fees................................... 1.00% 1.00% 1.00% 1.00% 12b-1 Fees........................................ 0.25 1.00 1.00 None Other Expenses.................................... 0.75 0.75 0.77 0.72 -------- -------- -------- -------- Total Operating Expenses.......................... 2.00% 2.75% 2.77% 1.72% -------- -------- -------- -------- -------- -------- -------- --------
- ------------------ CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan are available. Purchases of $1 million or more are not subject to an initial sales charge. However, if an investor 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, whichever is less, is imposed. CLASS B SHARES: Sales charge waivers are available. 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. CLASS C SHARES: If an investor 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, whichever is less, is imposed. CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor are Class Y shares subject to 12b-1 distribution or service fees. Class Y shares may be purchased by participants in the INSIGHT Investment Advisory Program ('INSIGHT') sponsored by PaineWebber, when purchased through that program. Participation in INSIGHT is subject to payment of an advisory fee at the maximum annual rate of 1.50% of assets held through INSIGHT (generally charged quarterly in advance), which may be charged to the INSIGHT participant's PaineWebber account. This account charge is not included in the table because non-INSIGHT participants are permitted to purchase Class Y shares of the Funds. -------------------- Prospectus Page 5 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund EXPENSE TABLE (Continued) - -------------------------------------------------------------------------------- 12b-1 distribution fees are asset-based sales charges. Long-term Class B and Class C shareholders may pay more in direct and indirect sales charges (including 12b-1 distribution fees) than the economic equivalent of the maximum front-end sales charge permitted by the National Association of Securities Dealers, Inc. 12b-1 fees have two components, as follows:
GROWTH AND INCOME FUND CLASS A CLASS B CLASS C CLASS Y ------- ------- ------- ------- 12b-1 service fees...................... 0.23% 0.25% 0.25% None 12b-1 distribution fees................. None 0.75 0.75 None GROWTH FUND 12b-1 service fees...................... 0.23% 0.25% 0.25% None 12b-1 distribution fees................. None 0.75 0.75 None SMALL CAP FUND 12b-1 service fees...................... 0.25% 0.25% 0.25% None 12b-1 distribution fees................. None 0.75 0.75 None
The 12b-1 fees for Class A shares of Growth and Income Fund and Growth Fund reflect a blended annual rate of the Fund's average daily net assets of 0.25% and 0.15%, representing shares sold on or after December 2, 1988 and shares sold prior to that date, respectively. For more information, see 'Management' and 'Flexible Pricing SM.' EXAMPLES OF EFFECT OF FUND EXPENSES The following examples should assist investors in understanding various costs and expenses incurred as shareholders of a Fund. The assumed 5% annual return shown in the examples is required by regulations of the Securities and Exchange Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN. An investor would, directly or indirectly, pay the following expenses on a $1,000 investment in a Fund, assuming a 5% annual return: GROWTH AND INCOME FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------- ------ ------- ------- -------- Class A................................. $56 $80 $105 $178 Class B (Assuming sale of all shares at end of period)........................ $70 $91 $124 $187 Class B (Assuming no sale of shares).... $20 $61 $104 $187 Class C (Assuming sale of all shares at end of period)........................ $30 $60 $104 $224 Class C (Assuming no sale of shares).... $20 $60 $104 $224 Class Y................................. $ 9 $28 $ 49 $108
GROWTH FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------- ------ ------- ------- -------- Class A................................. $ 57 $83 $ 112 $191 Class B (Assuming sale of all shares at end of period)........................ $ 71 $95 $ 131 $200 Class B (Assuming no sale of shares).... $ 21 $65 $ 111 $200 Class C (Assuming sale of all shares at end of period)........................ $ 31 $65 $ 111 $240 Class C (Assuming no sale of shares).... $ 21 $65 $ 111 $240 Class Y................................. $ 10 $32 $ 55 $122
-------------------- Prospectus Page 6 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund EXPENSE TABLE (Continued) - -------------------------------------------------------------------------------- SMALL CAP FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------- ------ ------- ------- -------- Class A................................. $ 64 $ 105 $ 148 $267 Class B (Assuming sale of all shares at end of period)........................ $ 78 $ 115 $ 165 $274 Class B (Assuming no sale of shares).... $ 28 $ 85 $ 145 $274 Class C (Assuming sale of all shares at end of period)........................ $ 38 $ 86 $ 146 $310 Class C (Assuming no sale of shares).... $ 28 $ 86 $ 146 $310 Class Y................................. $ 17 $ 54 $ 93 $203
ASSUMPTIONS MADE IN THE EXAMPLES o ALL CLASSES: Reinvestment of all dividends and other distributions; percentage amounts listed under 'Annual Fund Operating Expenses' remain the same for years shown. o CLASS A SHARES: Deduction of the maximum 4.5% initial sales charge at the time of purchase. o CLASS B SHARES: Deduction of the maximum applicable contingent deferred sales charge at the time of redemption, which declines over a period of six years. Ten-year figures assume that Class B shares convert to Class A shares at the end of the sixth year. o CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for sales of shares within one year of purchase. -------------------- Prospectus Page 7 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- GROWTH AND INCOME FUND The following tables provide investors with data and ratios for one Class A, Class B, Class C and Class Y share for each of the periods shown. This information is supplemented by the financial statements, accompanying notes and the report of Ernst & Young LLP, independent auditors, which appear in the Fund's Annual Report to Shareholders for the fiscal year ended August 31, 1997, and are incorporated by reference into the Statement of Additional Information. The financial statements and notes, as well as the information for each of the five years in the period ended August 31, 1997 appearing in the following tables, have been audited by Ernst & Young LLP, independent auditors. Further information about the Fund's performance is also included in the Annual Report to Shareholders, which may be obtained without charge by calling 1-800-647-1568. Information shown below for periods prior to the year ended August 31, 1993 has also been audited by Ernst & Young LLP, independent auditors, whose reports thereon were unqualified.
GROWTH AND INCOME FUND ------------------------------------------------------------------------------------------------------------- CLASS A ------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Net asset value, beginning of period........... $ 24.35 $ 22.52 $ 20.43 $ 20.86 $ 20.48 $ 19.26 $ 15.87 $ 16.50 $ 13.32 $ 18.06 -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Net investment income........... 0.23 0.22 0.24 0.28 0.28 0.24 0.19 0.51 0.49 0.60 Net realized and unrealized gains (losses) from investments...... 9.29 3.46 3.18 (0.41) 0.37 1.25 3.50 (0.61) 3.17 (2.36) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Total increase (decrease) from investment operations....... 9.52 3.68 3.42 (0.13) 0.65 1.49 3.69 (0.10) 3.66 (1.76) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Dividends from investment income........... (0.25) (0.34) (0.12) (0.27) (0.27) (0.27) (0.30) (0.53) (0.48) (0.88) Distributions from net realized gains on investment transactions..... (3.02) (1.51) (1.21) (0.03) -- -- -- -- -- (2.10) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Total dividends and distributions to shareholders.. (3.27) (1.85) (1.33) (0.30) (0.27) (0.27) (0.30) (0.53) (0.48) (2.98) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Net asset value, end of period.... $ 30.60 $ 24.35 $ 22.52 $ 20.43 $ 20.86 $ 20.48 $ 19.26 $ 15.87 $ 16.50 $ 13.32 -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Total investment return (1)....... 42.42% 17.40% 18.30% (0.58)% 3.15% 7.78% 23.62% (0.72)% 28.03% (10.73)% -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Ratios/Supplemental data: Net assets, end of period (000's)... $441,699 $276,016 $187,057 $222,432 $359,073 $358,643 $232,555 $58,649 $61,617 $62,917 Expenses to average net assets**......... 1.15% 1.20%(2) 1.19% 1.20% 1.13% 1.22% 1.42% 1.41% 1.41% 1.26% Net investment income to average net assets**..... 0.88% 0.98%(2) 1.07% 1.29% 1.33% 1.26% 1.79% 3.11% 3.26% 4.24% Portfolio turnover rate............. 70% 112% 111% 94% 37% 16% 52% 32% 79% 89% Average commission rate paid (3).... $ 0.0598 $ 0.0598 -- -- -- -- -- -- -- --
- ------------------ * Annualized. ** During certain periods presented, PaineWebber/Mitchell Hutchins waived fees or reimbursed the Fund for portions of its operating expenses. If such waivers or reimbursements had not been made for the Class A shares, the annualized ratio of expenses to average net assets and the annualized ratio of net investment income to average net assets would have been 1.65% and 3.02%, respectively, for the year ended August 31, 1989 and 1.36% and 4.14%, respectively, for the year ended August 31, 1988. + Commencement of offering of shares. (1) Total investment return is calculated assuming a $1,000 investment on the first day of each period reported, reinvestment of all dividends and other distributions at net asset value on the payable dates and a sale at net asset value on the last day of each period reported. The figures do not include sales charges; results for each class of shares would be lower if sales charges were included. Total investment return information for periods of less than one year has not been annualized. (2) These ratios include non-recurring acquisition expenses of 0.04%. (3) Effective for fiscal years beginning on or after September 1, 1995, the Fund is required to disclose the average commission rate paid per share of common stock investments purchased or sold.
-------------------- Prospectus Page 8 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS (Continued) - --------------------------------------------------------------------------------
GROWTH AND INCOME FUND --------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------- FOR THE PERIOD JULY 1, FOR THE YEARS ENDED AUGUST 31, 1991+ TO -------------------------------------------------------------------- AUGUST 31, 1997 1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- ---------- Net asset value, beginning of period........... $ 24.26 $ 22.37 $ 20.37 $ 20.78 $ 20.41 $ 19.23 $ 18.04 -------- -------- -------- -------- -------- -------- ---------- Net investment income........... 0.04 0.04 0.06 0.10 0.12 0.13 0.02 Net realized and unrealized gains (losses) from investments...... 9.23 3.45 3.18 (0.37) 0.36 1.20 1.17 -------- -------- -------- -------- -------- -------- ---------- Total increase (decrease) from investment operations....... 9.27 3.49 3.24 (0.27) 0.48 1.33 1.19 -------- -------- -------- -------- -------- -------- ---------- Dividends from investment income........... (0.05) (0.09) (0.03) (0.11) (0.11) (0.15) -- Distributions from net realized gains on investment transactions..... (3.02) (1.51) (1.21) (0.03) -- -- -- -------- -------- -------- -------- -------- -------- ---------- Total dividends and distributions to shareholders.. (3.07) (1.60) (1.24) (0.14) (0.11) (0.15) -- -------- -------- -------- -------- -------- -------- ---------- Net asset value, end of period.... $ 30.46 $ 24.26 $ 22.37 $ 20.37 $ 20.78 $ 20.41 $ 19.23 -------- -------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- -------- -------- ---------- Total investment return (1)....... 41.33% 16.49% 17.38% (1.31)% 2.34% 6.99% 6.60% -------- -------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- -------- -------- ---------- Ratios/Supplemental data: Net assets, end of period (000's)... $376,840 $277,753 $247,543 $289,290 $461,389 $386,275 $ 57,539 Expenses to average net assets**......... 1.93% 1.99%(2) 1.97% 1.97% 1.90% 1.97% 2.10%* Net investment income to average net assets**..... 0.11% 0.17%(2) 0.29% 0.51% 0.57% 4.90% 1.18%* Portfolio turnover rate............. 70% 112% 111% 94% 37% 16% 52% Average commission rate paid (3).... $ 0.0598 $ 0.0598 -- -- -- -- -- -------------------------------------------------------------------- CLASS C -------------------------------------------------------------------- FOR THE PERIOD JULY 2, FOR THE YEARS ENDED AUGUST 31, 1992+ TO ------------------------------------------------------- AUGUST 31, 1997 1996 1995 1994 1993 1992 ---------- ------- ------- ------- ------- ---------- Net asset value, beginning of period........... $ 24.33 $ 22.43 $ 20.42 $ 20.83 $ 20.47 $ 20.95 ---------- ------- ------- ------- ------- ---------- Net investment income........... 0.05 0.05 0.06 0.11 0.11 0.02 Net realized and unrealized gains (losses) from investments...... 9.24 3.46 3.19 (0.38) 0.37 (0.44) ---------- ------- ------- ------- ------- ---------- Total increase (decrease) from investment operations....... 9.29 3.51 3.25 (0.27) 0.48 (0.42) ---------- ------- ------- ------- ------- ---------- Dividends from investment income........... (0.07) (0.10) (0.03) (0.11) (0.12) (0.06) Distributions from net realized gains on investment transactions..... (3.02) (1.51) (1.21) (0.03) -- -- ---------- ------- ------- ------- ------- ---------- Total dividends and distributions to shareholders... (3.09) (1.61) (1.24) (0.14) (0.12) (0.06) ---------- ------- ------- ------- ------- ---------- Net asset value, end of period.... $ 30.53 $ 24.33 $ 22.43 $ 20.42 $ 20.83 $ 20.47 ---------- ------- ------- ------- ------- ---------- ---------- ------- ------- ------- ------- ---------- Total investment return (1)....... 41.30% 16.52% 17.37% (1.29)% 2.35% 2.85% ---------- ------- ------- ------- ------- ---------- ---------- ------- ------- ------- ------- ---------- Ratios/Supplemental data: Net assets, end of period (000's)... $ 84,922 $43,148 $30,468 $37,287 $61,869 $ 13,019 Expenses to average net assets**......... 1.92% 1.99%(2) 1.98% 1.94% 1.87% 1.73%* Net investment income to average net assets**..... 0.10% 0.18%(2) 0.28% 0.54% 0.61% 0.94%* Portfolio turnover rate............. 70% 112% 111% 94% 37% 16% Average commission rate paid (3).... $ 0.0598 $0.0598 -- -- -- --
-------------------- Prospectus Page 9 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS (Continued) - --------------------------------------------------------------------------------
GROWTH AND INCOME FUND --------------------------------------------------------------------- CLASS Y --------------------------------------------------------------------- FOR THE PERIOD FEBRUARY 12, FOR THE YEARS ENDED AUGUST 31, 1992+ TO ----------------------------------------------------- AUGUST 31, 1997 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- ------------ Net asset value, beginning of period..... $ 23.45 $ 22.54 $ 20.42 $ 20.86 $ 20.48 $ 20.95 ------- ------- ------- ------- ------- ------------ Net investment income.... 0.32 0.30 0.30 0.33 0.33 0.16 Net realized and unrealized gains (losses) from investments............. 9.26 3.45 3.18 (0.40) 0.37 (0.49) ------- ------- ------- ------- ------- ------------ Total increase (decrease) from investment operations.............. 9.58 3.75 3.48 (0.07) 0.70 (0.33) ------- ------- ------- ------- ------- ------------ Dividends from investment income.................. (0.32) (0.43) (0.15) (0.34) (0.32) (0.14) Distributions from net realized gains one investment transactions............ (3.02) (1.51) (1.21) (0.03) -- -- ------- ------- ------- ------- ------- ------------ Total dividends and distributions to shareholders............ (3.34) (1.94) (1.36) (0.37) (0.32) (0.14) ------- ------- ------- ------- ------- ------------ Net asset value, end of period.................. $ 30.59 $ 24.35 $ 22.54 $ 20.42 $ 20.86 $ 20.48 ------- ------- ------- ------- ------- ------------ ------- ------- ------- ------- ------- ------------ Total investment return(1)............... 42.74% 17.77% 18.66% (0.31)% 3.44% (1.15)% ------- ------- ------- ------- ------- ------------ ------- ------- ------- ------- ------- ------------ Ratios/supplemental data: Net assets, end of period (000's)................. $46,745 $22,942 $14,680 $14,690 $17,005 $ 10,560 Expenses to average net assets.................. 0.88% 0.92%(2) 0.89% 0.90% 0.86% 0.93%* Net investment income to average net assets...... 1.14% 1.26%(2) 1.39% 1.60% 1.62% 1.56%* Portfolio turnover....... 70% 112% 111% 94% 37% 16% Average commission rate paid(3)................. $0.0598 $0.0598 -- -- -- --
- ------------------ * Annualized + Commencement of offering of shares. (1) Total investment return is calculated assuming a $1,000 investment on the first day of each period reported, reinvestment of all dividends and other distributions at net asset value on the payable dates and a sale at net asset value on the last day of each period reported. Total investment return information for periods of less than one year has not been annualized. (2) These ratios include non-recurring acquisition expenses of 0.04%. (3) Effective for fiscal years beginning on or after September 1, 1995, the Fund is required to disclose the average commission rate paid per share of common stock investments purchased or sold.
-------------------- Prospectus Page 10 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund [This page intentionally left blank] -------------------- Prospectus Page 11 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS (Continued) - -------------------------------------------------------------------------------- GROWTH FUND The following tables provide investors with data and ratios for one Class A, Class B and Class C and Class Y share for each of the periods shown. This information is supplemented by the financial statements, accompanying notes and the report of Ernst & Young LLP, independent auditors, which appear in the Fund's Annual Report to Shareholders for the fiscal year ended August 31, 1997, and are incorporated by reference into the Statement of Additional Information. The financial statements and notes, as well as the information for each of the five years in the period ended August 31, 1997 appearing in the following tables, have been audited by Ernst & Young LLP, independent auditors. Further information about the Fund's performance is also included in the Annual Report to Shareholders, which may be obtained without charge by calling 1-800-647-1568. Information shown below for periods prior to the year ended August 31, 1993 has also been audited by Ernst & Young LLP, independent auditors, whose reports thereon were unqualified.
GROWTH FUND ----------------------------------------------------------------------------------------------------------------- CLASS A ----------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED AUGUST 31, ----------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Net asset value, beginning of period........ $ 24.37 $ 22.27 $ 20.04 $ 20.60 $ 16.78 $ 17.50 $ 13.43 $ 15.57 $ 11.21 $ 15.30 -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Net investment income (loss)........ (0.08)(4) (0.12) 0.01 -- 0.07 -- 0.02 0.17 0.06 0.13 Net realized and unrealized gains (losses) from investment transactions.. 3.76(4) 4.06 2.25 0.51 4.37 (0.11) 4.68 (1.16) 4.40 (2.73) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Total increase (decrease) from investment operations.... 3.68 3.94 2.26 0.51 4.44 (0.11) 4.70 (0.99) 4.46 (2.60) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Dividends from net investment income........ -- -- -- -- -- (0.01) (0.17) -- (0.10) (0.08) Distributions from net realized gains from investment transactions to shareholders.. (2.11) (1.84) (0.03) (1.07) (0.62) (0.60) (0.46) (1.15) -- (1.41) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Total dividends and distributions to shareholders.. (2.11) (1.84) (0.03) (1.07) (0.62) (0.61) (0.63) (1.15) (0.10) (1.49) -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Net asset value, end of period........ $ 25.94 $ 24.37 $ 22.27 $ 20.04 $ 20.60 $ 16.78 $ 17.50 $ 13.43 $ 15.57 $ 11.21 -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Total investment return(1)..... 15.85% 18.43% 11.28% 2.33% 26.97% (0.85)% 37.02% (7.05)% 40.10% (15.37)% -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- -------- -------- -------- -------- -------- -------- -------- ------- ------- ------- Ratios/Supplemental data: Net assets, end of period (000's)....... $201,725 $203,882 $183,958 $141,342 $130,353 $102,640 $ 96,796 $72,805 $71,681 $70,551 Expenses to average net assets**...... 1.27% 1.28% 1.28%(2) 1.21% 1.22% 1.43% 1.56% 1.59% 1.37% 1.22% Net investment income (loss) to average net assets**...... (0.32)% (0.49)% 0.19%(2) 0.06% 0.38% 0.00% 0.10% 2.96% 0.14% 0.82% Portfolio turnover rate.......... 86% 60% 36% 24% 36% 32% 29% 39% 44% 59% Average commission rate paid(3)....... $ 0.0598 $ 0.0598 -- -- -- -- -- -- --
- ------------------ * Annualized. ** During certain periods presented, PaineWebber/Mitchell Hutchins waived fees or reimbursed the Fund for portions of its operating expenses. If such waivers or reimbursements had not been made for the Class A shares, the annualized ratio of expenses to average net assets and the annualized ratio of net investment income (loss) to average net assets would have been 1.76% and (0.25)%, respectively, for the year ended August 31, 1989, and 1.41% and 0.63%, respectively, for the year ended August 31, 1988. + Commencement of offering of shares. (1) Total investment return is calculated assuming a $1,000 investment on the first day of each period reported, reinvestment of all dividends and distributions at net asset value on the payable dates and a sale at net asset value on the last day of each period reported. The figures do not include sales charges; results would be lower if sales charges were included. Total investment return information for periods less than one year has not been annualized. (2) These ratios include non-recurring reorganization expenses of 0.06%. (3) Effective for fiscal years beginning on or after September 1, 1995, the Fund is required to disclose the average commission rate paid per share of common stock investments purchased or sold. (4) Calculated using the average shares outstanding for the year.
-------------------- Prospectus Page 12 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS (Continued) - --------------------------------------------------------------------------------
GROWTH FUND - --------------------------------------------------------------------------------------------------- CLASS B - --------------------------------------------------------------------------------------------------- FOR THE PERIOD JULY 1, FOR THE YEARS ENDED AUGUST 31, 1991+ TO - -------------------------------------------------------------------------------------- AUGUST 31, 1997 1996 1995 1994 1993 1992 1991 ------- -------- -------- ------- ------- ------- ----- Net asset value, beginning of period........ $ 23.30 $ 21.53 $ 19.53 $ 20.25 $ 16.64 $ 17.48 $15.63 ------- -------- -------- ------- ------- ------- ----- Net investment income (loss)........ (0.26)(4) (0.39) (0.02) (0.06) (0.05) (0.06) (0.02) Net realized and unrealized gains (losses) from investment transactions.. 3.58 (4) 4.00 2.05 0.41 4.28 (0.18) 1.87 ------- -------- -------- ------- ------- ------- ----- Total increase (decrease) from investment operations.... 3.32 3.61 2.03 0.35 4.23 (0.24) 1.85 ------- -------- -------- ------- ------- ------- ----- Dividends from net investment income........ -- -- -- -- -- -- -- Distributions from net realized gains from investment transactions to shareholders.. (2.11) (1.84) (0.03) (1.07) (0.62) (0.60) -- ------- -------- -------- ------- ------- ------- ----- Total dividends and distributions to shareholders.. (2.11) (1.84) (0.03) (1.07) (0.62) (0.60) -- ------- -------- -------- ------- ------- ------- ----- Net asset value, end of period........ $ 24.51 $ 23.30 $ 21.53 $ 19.53 $ 20.25 $ 16.64 $17.48 ------- -------- -------- ------- ------- ------- ----- ------- -------- -------- ------- ------- ------- ----- Total investment return(1)..... 14.98% 17.48% 10.40% 1.55% 25.91% (1.58)% 11.84% ------- -------- -------- ------- ------- ------- ----- ------- -------- -------- ------- ------- ------- ----- Ratios/Supplement data: Net assets, end of period (000's)....... $115,529 $140,551 $152,357 $97,272 $60,280 $35,867 $3,804 Expenses to average net assets**...... 2.06% 2.06% 2.06%(2) 2.00% 2.02% 2.20% 2.24%* Net investment income (loss) to average net assets**...... (1.12)% (1.27)% (0.60)%(2) (0.66)% (0.46)% (0.70)% (0.81)%* Portfolio turnover rate.......... 86% 60% 36% 24% 36% 32% 29% Average commission rate paid(3)....... $ 0.0598 $ 0.0598 -- -- -- -- -- -------------------------------------------------------------------- CLASS C -------------------------------------------------------------------- FOR THE PERIOD JULY 2, FOR THE YEARS ENDED AUGUST 31, 1992+ TO ------------------------------------------------------- AUGUST 31, 1997 1996 1995 1994 1993 1992 ---------- ------- ------- ------- ------- ---------- Net asset value, beginning of period........ $ 23.48 $ 21.68 $ 19.67 $ 20.38 $ 16.75 $17.04 ---------- ------- ------- ------- ------- ----- Net investment income (loss)........ (0.27)(4) (0.34) (0.10) (0.08) (0.06) (0.01) Net realized and unrealized gains (losses) from investment transactions.. 3.61(4) 3.98 2.14 0.44 4.31 (0.28) ---------- ------- ------- ------- ------- ----- Total increase (decrease) from investment operations.... 3.34 3.64 2.04 0.36 4.25 (0.29) ---------- ------- ------- ------- ------- ----- Dividends from net investment income........ -- -- -- -- -- -- Distributions from net realized gains from investment transactions to (2.11) (1.84) (0.03) (1.07) (0.62) -- shareholders.. ---------- ------- ------- ------- ------- ----- Total dividends and distributions to (2.11) (1.84) (0.03) (1.07) (0.62) -- shareholders.. ---------- ------- ------- ------- ------- ----- Net asset value, end of $ 24.71 $ 23.48 $ 21.68 $ 19.67 $ 20.38 $16.75 period........ ---------- ------- ------- ------- ------- ----- ---------- ------- ------- ------- ------- ----- Total investment 14.95% 17.50% 10.37% 1.59% 25.86% (2.95)% return(1)..... ---------- ------- ------- ------- ------- ----- ---------- ------- ------- ------- ------- ----- Ratios/Supplement data: Net assets, end of period (000's)....... $ 24,760 $29,923 $30,608 $28,561 $16,474 $2,275 Expenses to average net assets**...... 2.07% 2.07% 2.05%(2) 1.98% 2.06% 1.98%* Net investment income (loss) to average net assets**...... (1.13)% (1.28)% (0.57)%(2) (0.65)% (0.69)% (0.65)%* Portfolio turnover rate.......... 86% 60% 36% 24% 36% 32% Average commission rate paid(3)....... $ 0.0598 $0.0598 -- -- -- --
-------------------- Prospectus Page 13 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS (Continued) - --------------------------------------------------------------------------------
GROWTH FUND ------------------------------------------------------------------------ CLASS Y ------------------------------------------------------------------------ FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- ------- Net asset value, beginning of year....... $ 24.74 $ 22.53 $ 20.22 $ 20.71 $ 16.83 $ 17.50 ------- ------- ------- ------- ------- ------- Net investment income (loss).................. (0.01)(4) (0.02) 0.24 0.03 0.08 0.05 Net realized and unrealized gains (losses) from investments........ 3.84(4) 4.07 2.10 0.55 4.42 (0.11) ------- ------- ------- ------- ------- ------- Total increase (decrease) from investment operations.............. 3.83 4.05 2.34 0.58 4.50 (0.06) ------- ------- ------- ------- ------- ------- Dividends from net investment income....... -- -- -- -- -- (0.01) Distributions from net realized gains from investment transactions to shareholders......... (2.11) (1.84) (0.03) (1.07) (0.62) (0.62) ------- ------- ------- ------- ------- ------- Total dividends and distributions........... (2.11) (1.84) (0.03) (1.07) (0.62) (0.61) ------- ------- ------- ------- ------- ------- Net asset value, end of year.................... $ 26.46 $ 24.74 $ 22.53 $ 20.22 $ 20.71 $ 16.83 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total investment return(1)............... 16.24% 18.72% 11.58% 2.67% 27.26% (0.52)% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratios/supplemental data: Net assets, end of year (000's)................. $20,281 $21,409 $20,948 $30,521 $20,706 $11,581 Expenses to average net assets.................. 1.00% 1.02% 0.97%(2) 0.94% 0.95% 1.12% Net investment income (loss) to average net assets.................. (0.05)% (0.23)% 0.53%(2) 0.40% 0.60% 0.38% Portfolio turnover rate.................... 86% 60% 36% 24% 36% 32% Average commission rate paid(3)................. $0.0598 $0.0598 -- -- -- --
- ------------------ (1) Total investment return is calculated assuming a $1,000 investment on the first day of each year reported, reinvestment of all dividends and distributions at net asset value on the payable dates and a sale at net asset value on the last day of each year reported. (2) These ratios include non-recurring acquisition expenses of 0.05%. (3) Effective for fiscal years beginning on or after September 1, 1995, the Fund is required to disclose the average commission rate paid per share of common stock investments purchased or sold. (4) Calculated using the average shares outstanding for the year.
-------------------- Prospectus Page 14 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund [This page intentionally left blank] -------------------- Prospectus Page 15 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS (Continued) - -------------------------------------------------------------------------------- SMALL CAP FUND The following table provides investors with data and ratios for one Class A, Class B, Class C and Class Y share for each of the periods shown. This information is supplemented by the financial statements, accompanying notes and the report of Price Waterhouse LLP, independent accountants, which appear in the Fund's Annual Report to Shareholders for the fiscal year ended July 31, 1997, and are incorporated by reference into the Statement of Additional Information. The financial statements and notes, as well as the information appearing below, have been audited by Price Waterhouse LLP. Further information about the Fund's performance is also included in the Annual Report to Shareholders, which may be obtained without charge by calling 1-800-647-1568.
SMALL CAP FUND ------------------------------------------------------------- CLASS A ------------------------------------------------------------- FOR THE FOR THE FOR THE YEARS PERIOD YEAR ENDED JULY 31, ENDED ENDED -------------------------------- JULY 31, JANUARY 31, 1997 1996# 1995 1994+ 1994 ------- ------- -------- -------- ----------- Net asset value, beginning of period...................... $ 10.22 $ 11.30 $ 10.27 $ 10.61 $ 10.00 ------- ------- -------- -------- ----------- Net investment income (loss)...................... (0.14) 0.00@ 0.05 0.02 0.13 Net realized and unrealized gains (losses) from investments................. 3.75 0.50@ 1.50 (0.36) 0.62 ------- ------- -------- -------- ----------- Net increase (decrease) from investment operations....... 3.61 0.50 1.55 (0.34) 0.75 ------- ------- -------- -------- ----------- Dividends from net investment income...................... -- -- -- -- (0.12) Distributions from net realized gains from investments................. (0.41) (1.58) (0.52) -- (0.02) ------- ------- -------- -------- ----------- Total dividends and distributions............... (0.41) (1.58) (0.52) 0.00 (0.14) ------- ------- -------- -------- ----------- Net asset value, end of period...................... $ 13.42 $ 10.22 $ 11.30 $ 10.27 $ 10.61 ------- ------- -------- -------- ----------- ------- ------- -------- -------- ----------- Total investment return (1)... 36.11% 4.69% 15.80% (3.20)% 7.58% ------- ------- -------- -------- ----------- ------- ------- -------- -------- ----------- Ratios/Supplemental Data: Net assets, end of period (000's)..................... $32,968 $30,675 $ 20,494 $ 22,848 $25,226 Expenses to average net assets...................... 2.00% 2.11% 1.98% 1.91%* 1.75% Net investment income (loss) to average net assets....... (1.16)% 0.02% 0.41% 0.41%* 1.41% Portfolio turnover............ 54% 84% 19% 20% 98% Average commission rate paid (2)......................... $0.0597 -- -- -- --
- ------------------ * Annualized + For the period February 1, 1994 to July 31, 1994. ++ For the period July 26, 1996 (commencement of offering shares) to July 31, 1996. # Effective April 1, 1996, Mitchell Hutchins took over day-to-day management of the Fund's assets. @ Calculated using the average shares outstanding for the period. (1) Total investment return is calculated assuming a $1,000 investment on the first day of each period reported, reinvestment of all dividends and distributions, if any, at net asset value on the payable dates, and a sale at net asset value on the last day of each period reported. The figures do not include sales charges; results for each class would be lower if sales charges were included. Total investment return information for periods of less than one year has not been annualized. (2) Effective for fiscal years beginning on or after September 1, 1995, the Fund is required to disclose the average commission rate paid per share of common stock investments purchased or sold.
-------------------- Prospectus Page 16 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund FINANCIAL HIGHLIGHTS (Continued) - --------------------------------------------------------------------------------
SMALL CAP FUND --------------------------------------------------------------- CLASS B --------------------------------------------------------------- FOR THE FOR THE YEARS PERIOD FOR THE ENDED JULY 31, ENDED YEAR ENDED --------------------------------- JULY 31, JANUARY 31, 1997 1996# 1995 1994+ 1994 ------- ------- --------- --------- ----------- Net asset value, beginning of period...................... $ 9.98 $ 11.15 $ 10.22 $ 10.60 $ 10.00 ------- ------- --------- --------- ----------- Net investment income (loss)...................... (0.23) (0.09)@ (0.04) (0.02) 0.06 Net realized and unrealized gains (losses) from investments................. 3.66 0.50@ 1.49 (0.36) 0.62 ------- ------- --------- --------- ----------- Net increase (decrease) from investment operations....... 3.43 0.41 1.45 (0.38) 0.68 ------- ------- --------- --------- ----------- Dividends from net investment income...................... -- -- -- -- (0.06) Distributions from net realized gains from investments................. (0.41) (1.58) (0.52) -- (0.02) ------- ------- --------- --------- ----------- Total dividends and distributions............... (0.41) (1.58) (0.52) 0.00 (0.08) ------- ------- --------- --------- ----------- Net asset value, end of period...................... $ 13.00 $ 9.98 $ 11.15 $ 10.22 $ 10.60 ------- ------- --------- --------- ----------- ------- ------- --------- --------- ----------- Total investment return (1)... 35.16% 3.90% 14.86% (3.58)% 6.81% ------- ------- --------- --------- ----------- ------- ------- --------- --------- ----------- Ratios/Supplemental Data: Net assets, end of period (000's)..................... $40,749 $36,612 $46,142 $52,624 $59,993 Expenses to average net assets...................... 2.75% 2.90% 2.74% 2.69%* 2.50% Net investment income (loss) to average net assets....... (1.91)% (0.78)% (0.35)% (0.37)%* 0.67% Portfolio turnover............ 54% 84% 19% 20% 98% Average commission rate paid (2)......................... $0.0597 -- -- -- -- CLASS C CLASS Y --------------------------------------------------------------- ----------------------- FOR THE FOR THE FOR THE FOR THE YEARS PERIOD FOR THE YEAR PERIOD ENDED JULY 31, ENDED YEAR ENDED ENDED ENDED --------------------------------- JULY 31, JANUARY 31, JULY 31, JULY 31, 1997 1996# 1995 1994+ 1994 1997 1996++ -------- ------- --------- --------- ----------- --------- --------- Net asset value, beginning of period...................... $ 9.97 $ 11.14 $ 10.22 $ 10.59 $ 10.00 $ 10.21 $ 10.23 ------- ------- --------- --------- ----------- --------- --------- Net investment income (loss)...................... (0.24) (0.08)@ (0.05) (0.02) 0.06 (0.11) 00.0@ Net realized and unrealized gains (losses) from investments................. 3.66 0.49@ 1.49 (0.35) 0.62 3.77 (0.02)@ ------- ------- --------- --------- ----------- --------- --------- Net increase (decrease) from investment operations....... 3.42 0.41 1.44 (0.37) 0.68 3.66 (0.02) ------- ------- --------- --------- ----------- --------- --------- Dividends from net investment income...................... -- -- -- -- (0.07) -- -- Distributions from net realized gains from investments................. (0.41) (1.58) (0.52) -- (0.02) (0.41) -- ------- ------- --------- --------- ----------- --------- --------- Total dividends and distributions............... (0.41) (1.58) (0.52) 0.00 (0.09) (0.41) 0.00 ------- ------- --------- --------- ----------- --------- --------- Net asset value, end of period...................... $ 12.98 $ 9.97 $ 11.14 $ 10.22 $ 10.59 $ 13.46 $ 10.21 ------- ------- --------- --------- ----------- --------- --------- ------- ------- --------- --------- ----------- --------- --------- Total investment return (1)... 35.09% 3.90% 14.76% (3.49)% 6.77% 36.65% (0.20)% ------- ------- --------- --------- ----------- --------- --------- ------- ------- --------- --------- ----------- --------- --------- Ratios/Supplemental Data: Net assets, end of period (000's)..................... $18,812 $18,606 $13,263 $16,285 $20,941 $ 2,768 $ 2,801 Expenses to average net assets...................... 2.77% 2.91% 2.73% 2.69%* 2.50% 1.72% 1.72% Net investment income (loss) to average net assets....... (1.93)% (0.77)% (0.34)% (0.36)%* 0.64% (0.88)% 0.07% Portfolio turnover............ 54% 84% 19% 20% 98% 54% 84% Average commission rate paid (2)......................... $0.0597 -- -- -- -- $0.0597 --
-------------------- Prospectus Page 17 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund INVESTMENT OBJECTIVES & POLICIES - -------------------------------------------------------------------------------- The Funds' investment objectives may not be changed without shareholder approval. Their other investment policies, except where noted, are not fundamental and may be changed by the Funds' boards of trustees. GROWTH AND INCOME FUND The investment objective of Growth and Income Fund is current income and capital growth. The Fund seeks to achieve this objective by investing primarily in dividend-paying equity securities believed by Mitchell Hutchins to have the potential for rapid earnings growth. Normally, the Fund invests at least 65% of its total assets in such equity securities. The Fund may invest up to 35% of its total assets in equity securities not meeting these selection criteria, as well as in U.S. government bonds, corporate bonds and money market instruments, including up to 10% in convertible bonds rated below investment grade. Up to 25% of the Fund's total assets may be invested in U.S. dollar-denominated equity securities and bonds of foreign issuers that are traded on recognized U.S. exchanges or in the U.S. over-the-counter ('OTC') market. GROWTH FUND The investment objective of Growth Fund is long-term capital appreciation. The Fund seeks to achieve this objective by investing primarily in equity securities issued by companies believed by Mitchell Hutchins to have substantial potential for capital growth. Under normal circumstances, at least 65% of the Fund's total assets are invested in equity securities. The Fund may invest up to 35% of its total assets in U.S. government bonds and in corporate bonds (including up to 10% in bonds and convertible securities rated below investment grade). Up to 25% of the Fund's total assets may be invested in U.S. dollar-denominated equity securities and bonds of foreign issuers that are traded on recognized U.S. exchanges or in the U.S. OTC market. SMALL CAP FUND The investment objective of Small Cap Fund is long-term capital appreciation. Under normal circumstances, at least 65% of the Fund's total assets are invested in equity securities of small cap companies, which are defined as companies having market capitalizations of up to $1 billion. 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 U.S. government bonds, corporate bonds and money market instruments, including up to 10% of total assets in convertible bonds rated below investment grade. Up to 25% of the Fund's total assets may be invested in U.S. dollar-denominated equity securities of foreign issuers traded on recognized U.S. exchanges or in the U.S. OTC market. * * * * As with any mutual fund, there can be no assurance that any of these Funds will achieve its investment objective. Each Fund's net asset value fluctuates based upon changes in the value of its portfolio securities. - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY & PROCESS - -------------------------------------------------------------------------------- GROWTH AND INCOME FUND In seeking to balance capital growth with current income, Mitchell Hutchins follows a disciplined investment process that relies on the Mitchell Hutchins Equity Research Team and the Mitchell Hutchins Factor Valuation Model. In order to fulfill the income component, the Fund invests at least 65% of its total assets in dividend-paying stocks. The Model screens a universe of small to large cap companies from ten different business sectors to identify undervalued companies with strong earnings momentum that rank well in three measures: o VALUE: projected dividends, cash flow, earnings and book value; o MOMENTUM: earnings and price to identify companies that could surprise on the upside; and o ECONOMIC SENSITIVITY: to forecast how different equity securities and industries may perform under various economic scenarios. -------------------- Prospectus Page 18 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund The equity securities ranking in the top 20% of the Model's universe are screened twice a month. Then the Team takes a closer look at those equity securities that rank higher based on value and momentum. The Team applies traditional analysis and may speak to the management of these companies, as well as those of their competitors. Based on the Team's findings in the context of Mitchell Hutchins' economic forecast, Mitchell Hutchins decides whether to purchase or sell equity securities for the Fund. In seeking capital appreciation, the Fund would also invest in bonds when, for instance, Mitchell Hutchins anticipates that market interest rates may decline or credit factors or ratings affecting particular issuers may improve. GROWTH FUND In selecting equity securities with the potential for above-average growth in earnings, cash flow and/or book value that are selling at a reasonable value relative to that growth, Mitchell Hutchins follows a disciplined investment process that relies on the Mitchell Hutchins Equity Research Team and combines a 'bottom-up,' stock-by-stock approach with a modified, growth-oriented Mitchell Hutchins Factor Valuation Model. The Fund can invest in companies of large market capitalizations, medium-sized companies and smaller companies that are aggressively expanding their businesses. This flexibility allows the Fund to invest more of its assets in companies that have greater earnings growth potential regardless of their market capitalizations. When investing in small cap companies, the Team places more emphasis on the trading volume of the company's stock. The modified, growth-oriented Model, which the Team generally utilizes as part of the stock selection process, screens a universe of small to large capitalization companies from ten different business sectors to identify companies that rank especially well on growth variables, including earnings momentum, stock price movement, economic sensitivity and other growth factors. The equity securities ranking in the top 20% of the Model's universe are screened twice a month. Then the Team takes a closer look at those equity securities that rank higher based on earnings growth and applies traditional analysis. The Team may speak to the management of these companies, as well as those of their competitors. Based on the Team's findings in the context of Mitchell Hutchins' economic forecast, Mitchell Hutchins decides whether to purchase or sell equity securities for the Fund. In seeking capital appreciation, the Fund would also invest in bonds when, for instance, Mitchell Hutchins anticipates that market interest rates may decline or that credit factors or ratings affecting particular issuers may improve. SMALL CAP FUND In selecting small cap equity securities with the potential for capital appreciation, Mitchell Hutchins follows a disciplined investment process that relies on the Mitchell Hutchins Factor Valuation Model and the Mitchell Hutchins Equity Research Team. The Model screens a universe of small to large capitalization companies from ten different business sectors to identify undervalued companies with strong earnings momentum that rank well in three measures: o VALUE: projected dividends, cash flow, earnings and book value; o MOMENTUM: earnings and price to identify companies that could surprise on the upside; and o ECONOMIC SENSITIVITY: to forecast how different equity securities and industries may perform under various economic scenarios. Through this screening process, the Model identifies the equity securities of small cap companies ranking in the top 20% of the universe. Then the Team applies traditional analysis on the equity securities of these small cap companies. The Team may speak to the management of these companies, as well as to those of their competitors. Based on the Team's findings in the context of Mitchell Hutchins' economic forecast, Mitchell Hutchins decides whether to purchase or sell equity securities for the Fund. In seeking apital appreciation, the Fund would also invest in bonds when, for instance, Mitchell Hutchins anticipates that market interest rates may decline or credit factors or ratings affecting particular issuers may improve. -------------------- Prospectus Page 19 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund PERFORMANCE - -------------------------------------------------------------------------------- These charts show the total returns for the Funds. Sales charges have not been deducted from total returns for Class A, B and C shares. Returns would be lower if sales charges were deducted. Past results are not a guarantee of future results. Average annual total returns both before and after deducting the maximum sales charges are shown below in the tables that follow the performance charts. GROWTH AND INCOME FUND
12/20/83- 12/31/83 1984 1985 1986 1987 1988 1989 1990 1991 Class A -1.03% 14.90% 22.36% 12.68% -3.16% 17.83% 24.59% -1.01% 35.34% Class B 17.85% Class C Class Y 1992 1993 1994 1995 1996 Class A 3.90% -2.59% -5.87% 33.21% 23.46% Class B 3.09% -3.31% -6.62% 32.18% 22.55% Class C 9.58% -3.30% -6.61% 32.21% 22.55% Class Y 5.15% -2.31% -5.57% 33.63% 23.81%
The 1983 return for Class A shares represents the period from its inception on December 20, 1983 through December 31, 1983. The 1991 return for Class B shares represents the period from inception on July 1, 1991 through December 31, 1991. The 1992 return for Class C shares represents the period from inception on July 2, 1992 through December 31, 1992. The 1992 return for Class Y shares represents the period from inception on February 12, 1992 through December 31, 1992.
AVERAGE ANNUAL RETURNS As of August 31, 1997 CLASS A CLASS B CLASS C CLASS Y -------- -------- -------- -------- Inception Date..................... 12/20/83 7/1/91 7/2/92 2/12/92 ONE YEAR Before deducting maximum sales charges....................... 42.42% 41.33% 41.30% 42.74% After deducting maximum sales charges....................... 36.00% 36.33% 40.30% 42.74% FIVE YEARS Before deducting maximum sales charges....................... 15.19% 14.30% 14.31% 15.51% After deducting maximum sales charges....................... 14.12% 14.07% 14.31% 15.51% TEN YEARS (OR LIFE OF CLASS) Before deducting maximum sales charges....................... 11.85% 13.85% 14.44% 13.54% After deducting maximum sales charges....................... 11.34% 13.85% 14.44% 13.54%
-------------------- Prospectus Page 20 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund GROWTH FUND
3/18/85-12/31/85 1986 1987 1988 1989 1990 1991 1992 Class A 16.87% 7.64% 4.34% 22.05% 34.27% -7.72% 47.61% 4.15% Class B 22.18% 3.30% Class C 12.73% Class Y 12.21% 4.42% 1993 1994 1995 1996 Class A 19.17% -10.90% 33.02% 14.11% Class B 18.26% -11.61% 31.95% 13.24% Class C 18.19% -11.58% 32.00% 13.18% Class Y 19.47% -10.64% 33.40% 14.48%
The 1985 return for Class A shares represents the period from inception on March 18, 1985 through December 31, 1985. The 1991 return for Class B shares represents the period from inception on July 1, 1991 through December 31, 1991. The 1992 return for Class C shares represents the period from inception on July 2, 1992 through December 31, 1992. The 1991 return for Class Y represents the period from inception on August 26, 1991 through December 31, 1991.
AVERAGE ANNUAL RETURNS As of August 31, 1997 CLASS A CLASS B CLASS C CLASS Y -------- -------- -------- -------- Inception Date..................... 3/18/85 7/1/91 7/2/92 8/26/91 ONE YEAR Before deducting maximum sales charges....................... 15.85% 14.98% 14.95% 16.24% After deducting maximum sales charges....................... 10.63% 9.98% 13.95% 16.24% FIVE YEARS Before deducting maximum sales charges....................... 14.67% 13.77% 13.76% 14.99% After deducting maximum sales charges....................... 13.62% 13.53% 13.76% 14.99% TEN YEARS (OR LIFE OF CLASS) Before deducting maximum sales charges....................... 11.49% 12.77% 12.91% 12.65% After deducting maximum sales charges....................... 10.98% 12.77% 12.91% 12.65%
-------------------- Prospectus Page 21 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund SMALL CAP FUND
2/1/93- 12/31/93 1994 1995 1996 Class A 7.68% -1.20% 16.81% 17.45% Class B 6.91% -1.96% 15.90% 16.50% Class C 6.97% -1.96% 15.84% 16.52% Class Y 15.51%
The 1993 returns for Class A, Class B and Class C shares represents the period from inception on February 1, 1993 through December 31, 1993. The 1996 return for Class Y shares represents the period from inception on July 26, 1996 through December 31, 1996.
AVERAGE ANNUAL RETURNS As of July 31, 1997 CLASS A CLASS B CLASS C CLASS Y -------- --------- -------- -------- Inception Date..................... 2/1/93 2/1/93 2/1/93 7/26/96 ONE YEAR Before deducting maximum sales charges....................... 36.11% 35.16% 35.09% 36.65% After deducting maximum sales charges....................... 30.01% 30.16% 34.09% 36.65% LIFE Before deducting maximum sales charges....................... 12.79% 11.94% 11.92% 35.81% After deducting maximum sales charges....................... 11.64% 11.64% 11.92% 35.81%
PERFORMANCE INFORMATION The Funds perform a standardized computation of annualized total return and may show this return in advertisements or promotional materials. Standardized return shows the change in value of an investment in a Fund as a steady compound annual rate of return. Actual year-by-year returns fluctuate and may be higher or lower than standardized return. Standardized returns for Class A shares of the Funds reflect deduction of the Funds' maximum initial sales charge of 4.5% at the time of purchase, and standardized returns for the Class B and Class C shares of the Funds reflect deduction of the applicable contingent deferred sales charge imposed on the sale of shares held for the period. One-, five- and ten-year periods will be shown, unless the Fund or class has been in existence for a shorter period. If so, returns will be shown for the period since inception, known as 'Life.' Total return calculations assume reinvestment of dividends and other distributions. The Funds may use other total return presentations in conjunction with standardized return. These may cover the same or different periods as those used for standardized return and may include cumulative returns, average annual rates, actual year-by-year rates or any combination thereof. Non-standardized return does -------------------- Prospectus Page 22 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund not reflect initial or contingent deferred sales charges and would be lower if such charges were deducted. Total return information reflects past performance and does not indicate future results. The investment return and principal value of shares of the Funds will fluctuate. The amount investors receive when selling shares may be more or less than what they paid. Further information about each Fund's performance is contained in its Annual Report to Shareholders, which may be obtained without charge by contacting the Fund, your PaineWebber investment executive or PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568. - -------------------------------------------------------------------------------- THE FUNDS' INVESTMENTS - -------------------------------------------------------------------------------- EQUITY SECURITIES include common stocks, preferred stocks and securities that are convertible into them, including convertible debentures and notes and common stock purchase warrants and rights. Common stocks, the most familiar type, represent an equity (ownership) interest in a corporation. Preferred stock has certain fixed-income features, like a bond, but is actually equity in a company, like common stock. Convertible securities may include debentures, notes and preferred equity securities, which are convertible into common stock. BONDS (including notes and debentures) are used by corporations and governments to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and must repay the amount borrowed at maturity. Bonds have varying degrees of investment risk and varying levels of sensitivity to changes in interest rates. RISKS Under normal circumstances, each Fund invests primarily in equity securities. Following is a discussion of the risks of these investments and other risks that are common to each Fund: 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 overall market and economic conditions. Common stocks generally represent the riskiest investment in a company. It is possible that a Fund may experience a substantial or complete loss on an individual equity investment. FOREIGN SECURITIES. Each Fund may invest a portion of its assets in U.S. dollar-denominated securities of foreign companies that are traded on recognized U.S. exchanges or in the U.S. OTC market. Investing in the securities of foreign companies involves more risks than investing in securities of U.S. companies. Their value is subject to economic and political developments in the countries where the companies operate and to changes in foreign currency values. Values may also be affected by foreign tax laws, changes in foreign economic or monetary policies, exchange control regulations and regulations involving prohibitions on the repatriation of foreign currencies. In general, less information may be available about foreign companies than about U.S. companies, and foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. BOND RATINGS. Investment grade bonds are those rated within the four highest categories by Standard & Poor's, a division of The McGraw-Hill Companies ('S&P'), or Moody's Investors Service, Inc. ('Moody's'). Moody's fourth highest category (Baa) includes securities which, in its opinion, have speculative features. For example, changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case for higher-rated debt instruments. The Funds may also invest in securities that are comparably rated by another ratings agency and in unrated securities if they are deemed to be of comparable quality. Credit ratings attempt to evaluate the safety of principal and interest payments and do not evaluate the volatility of a bond's value or its liquidity. There is a risk that bonds will be downgraded by rating agencies. The ratings 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. -------------------- Prospectus Page 23 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest rates will rise and bond prices will fall, lowering the value of a Fund's bond investments. Long-term bonds are generally more sensitive to interest rate changes than short-term bonds. Credit risk is the risk that the issuer or a guarantor may be unable to pay interest or repay 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. NON-INVESTMENT GRADE (LOWER-RATED) BOND RATINGS. Bonds rated below investment grade are deemed by the ratings agencies to be predominantly speculative regarding the issuer's ability to pay principal and interest and may involve major risk exposure to adverse economic conditions. They are also known as 'junk bonds.' During an economic downturn or period of rising interest rates, issuers of these securities may experience financial stress that adversely affects their ability to pay interest and principal and may increase the possibility of default. Lower-rated bonds are frequently unsecured by collateral and will not receive payment until more senior claims are paid in full. The market for lower-rated bonds is thinner and less active, which may limit the Funds' ability to sell such bonds at a fair value in response to changes in the economy or financial markets. Growth and Income Fund can invest up to 10% of total assets in convertible securities rated as low as B by S&P or Moody's or comparably rated by another ratings agency. Growth Fund can invest up to 10% of total assets in bonds and convertible securities rated as low as B+ by S&P, B1 by Moody's or comparably rated by another ratings agency. Small Cap Fund can invest up to 10% of total assets in convertible securities rated as low as B by S&P or Moody's or comparably rated by another ratings agency. DERIVATIVES. Some of the instruments in which the Funds may invest may be referred to as 'derivatives,' because their value depends on (or 'derives' from) the value of an underlying asset, reference rate or index. These instruments include options, futures contracts and similar instruments that may be used in hedging strategies. There is only limited consensus as to what constitutes a 'derivative' security. The market value of derivative instruments and securities sometimes is more volatile than that of other investments, and each type of derivative instrument may pose its own special risks. Mitchell Hutchins takes these risks into account in its management of the Funds. COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or insolvency of another party. To help lessen those risks, Mitchell Hutchins, subject to the supervision of the respective boards of trustees, monitors and evaluates the creditworthiness of the parties with which each Fund does business. In addition to these general risks, Small Cap Fund is also subject to the following risk consideration: SMALL CAP COMPANIES. Small cap companies may be more vulnerable than larger companies to adverse business or economic developments. Small cap companies may also have limited product lines, markets or financial resources and may be dependent on a relatively small management group. Securities of such companies may be less liquid and more volatile than securities of larger companies or the market averages in general and, therefore, may involve greater risk than investing in larger companies. In addition, small cap companies may not be well-known to the investing public, may not have institutional ownership and may have only cyclical, static or moderate growth prospects. INVESTMENT TECHNIQUES AND STRATEGIES HEDGING STRATEGIES USING DERIVATIVES. Each Fund may use derivatives, such as options (on securities, futures contracts and stock indexes) and futures contracts (on stock indexes and interest rates) to reduce the overall risk of its investments ('hedge'). New financial products and risk management techniques continue to be developed and may be used if consistent with the Funds' investment objectives and policies. The Statement of Additional Information for the Funds contains further information on these strategies. The Funds might not use any of these derivatives, and there can be no assurance that any strategy used will succeed. If Mitchell Hutchins is incorrect in its judgment on market values, interest rates or other economic factors in using a hedging strategy, a Fund may have lower net income and a net loss on the investment. Each of these strategies involves certain risks, which include: o the fact that the skills needed to use hedging instruments are different from those needed to select securities for the Funds, o the possibility of imperfect correlation, or even no correlation, between price movements of hedging instruments and price movements of the securities being hedged, -------------------- Prospectus Page 24 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund o possible constraints placed on a Fund's ability to purchase or sell portfolio investments at advantageous times due to the need for the Fund to maintain 'cover' or to segregate securities, and o the possibility that the Fund is unable to close out or liquidate its hedged position. LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified broker-dealers or institutional investors in an amount up to 33 1/3% of that Fund's total assets taken at market value. Lending securities enables a Fund to earn additional income, but could result in a loss or delay in recovering these securities. PORTFOLIO TURNOVER. Each Fund's portfolio turnover rate may vary greatly from year to year and will not be a limiting factor when Mitchell Hutchins deems portfolio changes appropriate. A higher turn-over rate (100% or more) for a Fund will involve correspondingly greater transaction costs, which will be borne directly by the Fund, and may increase the potential for short-term capital gains. DEFENSIVE POSITIONS. When Mitchell Hutchins believes that unusual market or economic circumstances warrant a defensive posture, a Fund may temporarily commit all or any portion of its assets to cash or investment grade money market instruments, including repurchase agreements. In a typical repurchase agreement, a Fund buys a security and simultaneously agrees to sell it back at an agreed-upon price and time, usually no more than seven days after purchase. ILLIQUID SECURITIES. Growth and Income Fund and Growth Fund each may invest up to 10% of its net assets, and Small Cap Fund up to 15% of its net assets, in illiquid securities. These include certain cover for OTC options and securities whose disposition is restricted under the federal securities laws. The Funds do not consider securities that are eligible for resale pursuant to SEC Rule 144A to be illiquid securities if Mitchell Hutchins has determined such securities to be liquid, based upon the trading markets for the securities under procedures approved by the Funds' boards of trustees. OTHER INFORMATION. Each Fund may purchase securities on a when-issued basis or may purchase or sell securities for delayed delivery. A Fund generally would not pay for such securities or start earning interest on them until they are delivered, but it would immediately assume the risks of ownership, including the risk of price fluctuation. Each Fund may invest up to 35% of its total assets in investment grade money market instruments and/or cash for liquidity purposes or pending investment in other securities. Each Fund may borrow money for temporary or emergency purposes but not in excess of 10% of its total assets, including reverse repurchase agreements up to an aggregate value of 5% (10% for Small Cap Fund) of its net assets. - -------------------------------------------------------------------------------- FLEXIBLE PRICINGSM - -------------------------------------------------------------------------------- Each Fund offers four classes of shares that differ in terms of sales charges and expenses. An investor can select the class that is best suited to his or her investment needs, based upon the holding period and the amount of investment. CLASS A SHARES HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales charge (the maximum is 4.5% of the public offering price) next calculated after PaineWebber's New York City headquarters or PFPC Inc., the Funds' transfer agent ('Transfer Agent') receives the purchase order. Although investors pay an initial sales charge when they buy Class A shares, the ongoing expenses for this class are lower than those of Class B and Class C shares. Class A shares sales charges are calculated as follows: -------------------- Prospectus Page 25 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED ---------------------------------------- DEALERS AS PERCENTAGE AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OF OFFERING PRICE - ----------------------------------- -------------- ------------------- --------------------- 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)
- ------------------ (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. However, Class A shares representing reinvestment of any dividends or other distributions are not subject to the 1% charge. Withdrawals under the Systematic Withdrawal Plan are not subject to this charge. However, investors may not withdraw more than 12% of the value of the Fund account under the Plan in the first year after purchase. (2) Mitchell Hutchins pays 1% to PaineWebber. SALES CHARGE REDUCTIONS AND WAIVERS Investors purchasing Class A shares in more than one PaineWebber mutual fund may combine those purchases to get a reduced sales charge. Investors who already own Class A shares in one or more PaineWebber mutual funds may combine the amount they are currently purchasing with the value of such previously owned shares to qualify for a reduced sales charge. To determine the sales charge reduction, please refer to the chart above. Investors may also qualify for a reduced sales charge when they combine their purchases with those of: o their spouses, parents or children under age 21; o their Individual Retirement Accounts (IRAs); o certain employee benefit plans, including 401(k) plans; o any company controlled by the investor; o trusts created by the investor; o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created by the investor or group of investors for the benefit of the investors' children; or o accounts with the same adviser. Employers who own Class A shares for one or more of their qualified retirement plans may also qualify for the reduced sales charge. The sales charge will not apply when the investor: o is an employee, director, trustee or officer of PaineWebber, its affiliates or any PaineWebber mutual fund; o is the spouse, parent or child of any of the above; o buys these shares through a PaineWebber investment executive who was formerly employed as a broker with a competing brokerage firm that was registered as a broker-dealer with the SEC and o was the investment executive's client at the competing brokerage firm; o within 90 days of buying Class A shares in a Fund, the investor sells shares of one or more mutual funds that (a) were principally underwritten by the competing brokerage firm or its affiliates and (b) the investor either paid a sales charge to buy those shares, paid a contingent deferred sales charge when selling them or held those shares until the contingent deferred sales charge was waived; and o the amount that the investor purchases does not exceed the total amount of money the investor received from the sale of the other mutual fund; o is a certificate holder of unit investment trusts sponsored by PaineWebber and has elected to have dividends and other distributions from that investment automatically invested in Class A shares; o is an employer establishing an employee benefit plan qualified under section 401, including a salary reduction plan qualified under section 401(k), or Section 403(b) of the Internal Revenue Code ('Code') (each a 'qualified plan'). (This waiver is subject to minimum requirements, with respect to the number of employees and investment amount, established by Mitchell Hutchins. Currently, the plan must have 50 or more eligible employees and at least $1 million in plan assets.) 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; o is a participant in the PaineWebber Members Only Program(Trademark). 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; -------------------- Prospectus Page 26 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund o is a variable annuity offered only to qualified pension 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 1% of the amount invested; o acquires Class A 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 Class A 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 supplement a rebalancing feature of such an investment program, the minimum subsequent investment requirement is waived; or o acquires Class A shares in connection with a reorganization pursuant to which a Fund acquires substantially all of the assets and liabilities of another investment company in exchange solely for shares of the Fund. For more information on how to get any reduced sales charge, investors should contact a PaineWebber investment executive or a correspondent firm or call 1-800-647-1568. Investors must provide satisfactory information to PaineWebber or the Fund if they seek any of these sales charge reductions or waivers. CLASS B SHARES HOW PRICE IS CALCULATED: The price is the net asset value next calculated after PaineWebber's New York City headquarters or the Transfer Agent receives the purchase order. The ongoing expenses investors pay for Class B shares are higher than those of Class A shares. Because investors do not pay an initial sales charge when they buy Class B shares, 100% of their purchase is immediately invested. Depending on how long they own their Fund investment, investors may have to pay a sales charge when they sell their Fund shares. This sales charge is called a 'contingent deferred sales charge.' The amount of the charge depends on how long the investor owned the shares. The sales charge is calculated by multiplying the offering price (net asset value of the shares at the time of purchase) or the net asset value at the time of sale by the shareholder, whichever is less, by the percentage shown on the following table. Investors who own shares for more than six years do not have to pay a sales charge when selling those shares.
IF THE INVESTOR PERCENTAGE BY WHICH THE SHARES' SELLS SHARES WITHIN: NET ASSET VALUE IS MULTIPLIED: - ------------------------ ------------------------------- 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
CONVERSION OF CLASS B SHARES Class B shares automatically convert to the appropriate number of Class A shares of equal dollar value after the investor has owned them for six years. Dividends and other distributions paid to the investor by the Fund in the form of additional Class B shares will also convert to Class A shares on a pro-rata basis. This benefits shareholders because Class A shares have lower ongoing expenses than Class B shares. If the investor has exchanged Class B shares between PaineWebber funds, the Fund uses the purchase date at which the initial investment was made to determine the conversion date. MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE When investors sell Class B shares they have owned for less than six years, the Fund automatically will minimize the sales charge by assuming the investors are selling: o First, Class B shares owned through reinvested dividends and capital gain distributions; and o Second, Class B shares held in the portfolio the longest. WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE The contingent deferred sales charge will not apply to: o sales of shares under the Fund's Systematic Withdrawal Plan (investors may not withdraw annually more than 12% of the value of the Fund account under the Plan); o a distribution from an IRA, a self-employed individual retirement plan ('Keogh Plan') or a custodial account under section 403(b) of the Code (after the investor reaches age 59 1/2); o a tax-free return of an excess IRA contribution; o a tax-qualified retirement plan distribution following retirement; or o Class B shares sold within one year of an investor's death if the investor owned the shares at the time of death either as the sole shareholder or with his or her spouse as a joint tenant with the right of survivorship. -------------------- Prospectus Page 27 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund An investor must provide satisfactory information to PaineWebber or the Fund if the investor seeks any of these waivers. CLASS C SHARES HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next calculated after PaineWebber's New York City headquarters or the Transfer Agent receives the purchase order. The ongoing expenses of Class C shares are higher than those of Class A shares. Investors do not pay an initial sales charge when they buy Class C shares, 100% of their purchase is immediately invested. A contingent deferred sales charge of 1% of the net asset value of the shares at the time of purchase or sale, whichever is less, is charged on sales of shares made within one year of the purchase date. Other PaineWebber mutual funds may impose a different contingent deferred sales charge on Class C shares sold within one year of the purchase date. A sale of Class C shares acquired through an exchange and held less than one year will be subject to the same contingent deferred sales charge that would have been imposed on the Class C shares of the PaineWebber mutual fund originally purchased. Class C shares representing reinvestment of any dividends or capital gains will not be subject to the 1% charge. Withdrawals under the Systematic Withdrawal Plan also will not be subject to this charge. However, investors may not withdraw more than 12% of the value of the Fund account under the Plan in the first year after purchase. CLASS Y SHARES HOW PRICE IS CALCULATED: Class Y shares are sold to eligible investors at the net asset value next calculated after PaineWebber's New York City headquarters or at the Transfer Agent. Because investors do not pay an initial sales charge when they buy Class Y shares, 100% of their purchase is immediately invested. No contingent deferred sales charge is imposed on Class Y shares, and the ongoing expenses for Class Y shares are lower than for the other classes because Class Y shares are not subject to 12b-1 distribution or service fees. LIMITED GROUPS OF INVESTORS. Only the following investors are eligible to buy Class Y shares. o a participant in INSIGHT when Class Y shares are purchased through that program; o an investor who buys $10 million or more at any one time in any combination of PaineWebber mutual funds in the Flexible Pricing(Service Mark) System; o a qualified plan that has either 5,000 or more eligible employees or $50 million or more in assets; o an investment company advised by PaineWebber or an affiliate of PaineWebber; and o for Growth and Income Fund and Growth Fund, the trustee of the PaineWebber Savings Investment Plan ('PW SIP') INSIGHT. An investor who purchases $50,000 or more of shares of the mutual funds that are available to INSIGHT participants (which include the PaineWebber mutual funds in the Flexible Pricing(Trademark) System and certain other specified mutual funds) may take part in INSIGHT, a total portfolio asset allocation program sponsored by PaineWebber, and thus become eligible to purchase Class Y shares. INSIGHT offers comprehensive investment services, including a personalized asset allocation investment strategy using an appropriate combination of funds, monitoring of investment performance and comprehensive quarterly reports that cover market trends, portfolio summaries and personalized account information. Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber at the maximum annual rate of 1.5% of assets held through the program (generally charged quarterly in advance), which covers all INSIGHT investment advisory services and program administration fees. Employees of PaineWebber and its affiliates are entitled to a 50% reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees charged to their PaineWebber accounts (by the automatic redemption of money market fund shares) or, if a qualifed plan, invoiced. Please contact your PaineWebber investment executive or PaineWebber's correspondent firms for more information concerning mutual funds that are available to INSIGHT participants or for other INSIGHT Information. -------------------- Prospectus Page 28 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund HOW TO BUY SHARES - -------------------------------------------------------------------------------- Prices are calculated for each class of a Fund's shares once each Business Day, at the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time). A 'Business Day' is any day, Monday through Friday, on which the New York Stock Exchange is open for business. The Funds and Mitchell Hutchins reserve the right to reject any purchase order and to suspend the offering of Fund shares for a period of time. When placing an order to buy shares, investors should specify which class of shares they want to buy. If investors fail to specify the class, they will automatically receive Class A shares, which include an initial sales charge. Investors in Class Y shares must provide satisfactory information to PaineWebber or an individual Fund that they are eligible to purchase Class Y shares. PAINEWEBBER CLIENTS Investors who are PaineWebber clients may buy shares through PaineWebber investment executives or its correspondent firms. Investors may buy shares in person, by mail, by telephone or by wire (the minimum wire purchase is $1 million). PaineWebber investment executives and correspondent firms are responsible for promptly sending investors' purchase orders to PaineWebber's New York City headquarters. Investors may pay for their purchases with checks drawn on U.S. banks or with funds they have in their brokerage accounts at PaineWebber or its correspondent firms. Payment is due on the third Business Day after PaineWebber's New York City headquarters receives the purchase order. OTHER INVESTORS Investors who are not PaineWebber clients may purchase Fund shares and set up an account through the Transfer Agent (PFPC Inc.) by completing and signing an account application which you may obtain by calling 1-800-647-1568. The application and check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, DE 19899. New investors to PaineWebber may complete and sign an account application and mail it along with a check. Investors may also open an account in person. Investors who already have money invested in a PaineWebber mutual fund, and want to invest in another PaineWebber mutual fund, can: o mail an application with a check; or o open an account by exchanging from another PaineWebber mutual fund. Investors do not have to send an application when making additional investments in the Fund. MINIMUM INVESTMENTS To open an account................. $1,000 To add to an account............... $ 100
A Fund may waive or reduce these minimums for: o employees of PaineWebber or its affiliates; or o participants in certain pension plans, retirement accounts, unaffiliated investment programs or the Fund's automatic investment plan. HOW TO EXCHANGE SHARES As shareholders, investors have the privilege of exchanging Class A, B and C shares for shares of the same class of other PaineWebber mutual funds. For classes of shares where no initial sales charge is imposed, a contingent deferred sales charge may apply if the investor sells the shares acquired through the exchange. Class Y shares are not exchangeable. Exchanges may be subject to minimum investment requirements of the fund into which exchanges are made. o Investors who purchased their shares through an investment executive at PaineWebber or one of its correspondent firms may exchange their shares by contacting their investment executive in person or by telephone, mail or wire. o Investors who do not have an account with an investment executive at PaineWebber or one of its correspondent firms may exchange their shares by writing a 'letter of instruction' to the Transfer Agent. The letter of instruction must include: o the investor's name and address; o the Fund's name; o the Fund account number; o the dollar amount or number of shares to be sold; and -------------------- Prospectus Page 29 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund o a guarantee of each registered owner's signature by an eligible institution, such as a commercial bank, trust company or stock exchange member. The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, DE 19899. No contingent deferred sales charge is imposed when Class B or C shares are exchanged for Class B or C shares of other PaineWebber mutual funds. A Fund will use the purchase date of the initial investment to determine any contingent deferred sales charge due when the acquired shares are sold. Fund shares may be exchanged only after the settlement date has passed and payment for the shares has been made. The exchange privilege is available only in those jurisdictions where the sale of the fund shares to be acquired is authorized. This exchange privilege may be modified or terminated at any time and, when required by SEC rules, upon a 60-day notice. See the back cover of this Prospectus for a listing of other PaineWebber mutual funds. - -------------------------------------------------------------------------------- HOW TO SELL SHARES - -------------------------------------------------------------------------------- Investors can sell (redeem) shares at any time. Shares will be sold at the share price for that class as next calculated after the order is received and accepted (less any applicable contingent deferred sales charge). Share prices are normally calculated at the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time). Investors who own more than one class of shares should specify which class they are selling. If they do not, the Fund will assume they are first selling their Class A shares, then Class C, then Class B and last, Class Y. If a shareholder wants to sell shares that were purchased recently, the Fund may delay payment until it verifies that good payment was received. In the case of purchases by check, this can take up to 15 days. Investors who have an account with PaineWebber or one of PaineWebber's correspondent firms can sell their shares by contacting their investment executive. Investors who do not have an account and have bought their shares through PFPC Inc., the Funds' Transfer Agent, may sell shares by writing a 'letter of instruction,' as detailed in 'How to Exchange Shares.' Because the Funds incur certain fixed costs in maintaining shareholder accounts, each Fund reserves the right to purchase back all of its shares in any shareholder account with a net asset value of less than $500. If a Fund elects to do so, it will notify the shareholder of the opportunity to increase the amount invested to $500 or more within 60 days of the notice. The Fund will not purchase back accounts that fall below $500 solely due to a reduction in net asset value per share. REINSTATEMENT PRIVILEGE Shareholders who sell their Class A shares may reinstate their Fund account without a sales charge up to the dollar amount sold by purchasing the Fund's Class A shares within 365 days after the sale. To take advantage of this reinstatement privilege, shareholders must notify their investment executive at PaineWebber or one of its correspondent firms at the time of purchase. -------------------- Prospectus Page 30 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund OTHER SERVICES - -------------------------------------------------------------------------------- Investors should consult their investment executives at PaineWebber or one of its correspondent firms to learn more about the following services available with respect to the Funds' Class A, Class B and C shares: AUTOMATIC INVESTMENT PLAN Investing on a regular basis helps investors meet their financial goals. PaineWebber offers an Automatic Investment Plan with a minimum initial investment of $1,000 through which the Fund will deduct $50 or more each month from the investor's bank account to invest directly in the Fund. In addition to providing a convenient and disciplined manner of investing, participation in the Automatic Investment Plan enables the investor to use the technique of 'dollar cost averaging.' SYSTEMATIC WITHDRAWAL PLAN The Systematic Withdrawal Plan allows investors to set up monthly, quarterly (March, June, September and December), semiannual (June and December) or annual (December) withdrawals from their Fund accounts. Minimum balances and withdrawals vary according to the class of shares: o CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum withdrawals of $100. o CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly, quarterly, semi-annual and annual withdrawals of $200, $400, $600 and $800, respectively. Withdrawals under the Systematic Withdrawal Plan will not be subject to a contingent deferred sales charge. Investors may not withdraw annually more than 12% of the value of the Fund account when the investor signed up for the Plan. Shareholders who elect to receive dividends or other distributions in cash may not participate in the Plan. INDIVIDUAL RETIREMENT ACCOUNTS Self-Directed IRAs are available through PaineWebber in which purchases of PaineWebber funds and other investments may be made. Investors considering establishing an IRA should review applicable tax laws and should consult their tax advisers. TRANSFER OF ACCOUNTS If investors holding shares of a Fund in a PaineWebber brokerage account transfer their brokerage accounts to another firm, the Fund shares will be moved to an account with the Transfer Agent. However, if the other firm has entered into a selected dealer agreement with Mitchell Hutchins relating to the Fund, the shareholder may be able to hold Fund shares in an account with the other firm. - -------------------------------------------------------------------------------- MANAGEMENT - -------------------------------------------------------------------------------- Each Fund is governed by its board of trustees, which oversees the Fund's operations. Each board has appointed Mitchell Hutchins as investment adviser and administrator responsible for the Fund's operations (subject to the authority of the board). As investment adviser and administrator, Mitchell Hutchins supervises all aspects of each Fund's operations and makes and implements all investment decisions for that Fund. The boards, as part of their overall management responsibility, oversee various organizations responsible for the day-to-day management of each Fund. In accordance with procedures adopted by the boards, brokerage transactions for the Funds may be conducted through PaineWebber or its affiliates and the Funds may pay fees to PaineWebber for its services as lending agent in their portfolio securities lending programs. ABOUT THE INVESTMENT ADVISER Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York, 10019, is the asset management subsidiary of PaineWebber, which is wholly owned by Paine Webber Group Inc., a publicly owned financial services holding company. On October 31, 1997, Mitchell Hutchins was adviser or sub-adviser of 29 investment companies with 64 separate portfolios and aggregate assets of approximately $35.6 billion. Personnel of Mitchell Hutchins may engage in securities transactions for their own accounts pursuant to a code of ethics that establishes procedures for personal investing and restricts certain transactions. -------------------- Prospectus Page 31 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund As investment adviser for Growth and Income Fund, Growth Fund and Small Cap Fund, Mitchell Hutchins makes and implements all investment decisions and supervises all aspects of each Fund's operations. Mark A. Tincher is a managing director and chief investment officer of equities of Mitchell Hutchins, responsible for overseeing the management of equity investments. Upon his arrival at Mitchell Hutchins, Mr. Tincher formed the Mitchell Hutchins Equity Research Team. Each analyst on the Team focuses on different industries. As a result, the Team provides PaineWebber Stock Funds with more specialized knowledge of the various industries in which the Funds generally invest. The Equity Research Team is also assisted by members of Mitchell Hutchins' fixed income groups, who provide input on market outlook, interest rate forecasts and other considerations pertaining to domestic equity and fixed income investments. GROWTH AND INCOME FUND Mr. Tincher has been responsible for the day-to-day management of Growth and Income Fund since April 1995. From March 1988 to March 1995, Mr. Tincher worked for Chase Manhattan Private Bank where he was a vice president. Mr. Tincher directed the U.S. funds management and equity research area at Chase and oversaw the management of all Chase U.S. equity funds (the Vista Funds and Trust Investment Funds). Mr. Tincher was the sole portfolio manager of Vista Growth and Income Fund ('Vista Fund'), with full discretionary authority over the selection of investments, from July 31, 1991 through March 16, 1995. Vista Fund's investment objectives of long-term capital appreciation and dividend income are substantially similar to Growth and Income Fund's investment objective of current income and capital growth. Mr. Tincher used and relied upon the same valuation model and analytical methods when managing the Vista Fund as he now uses for Growth and Income Fund. The cumulative total return for Vista Fund for the period it was managed by Mr. Tincher was 46.18%; 39.24% after deducting that Fund's maximum sales charge of 4.75%. As of March 31, 1995, the Vista Fund had $1.6 billion in net assets. The chart below shows calendar year total returns for Vista Fund; the 1991 return represents the period from July 31, 1991 when Mr. Tincher took over day-to-day management of the Vista Fund through December 31, 1991. Sales charges have not been deducted from total returns. Returns would be lower if sales charges were deducted. [BAR GRAPH] Mr. Tincher's Terms as Manager of Vista Growth and Income Fund 7/31/91-12/31/91 9.69% 1992 15.11% 1993 12.99% 1994 -3.41% Average annual returns both before and after deducting the maximum sales charges are shown in the table below. Average annual returns are for the one- and three-year periods ended December 31, 1994 and the entire period during which Mr. Tincher managed the Vista Fund (July 31, 1991 through March 16, 1995) and are compared with the performance of the Standard & Poor's 500 Composite Stock Price Index for each such period.
VISTA S&P 500 FUND(1) INDEX(2) ------------ ------- Mr. Tincher's Term as Manager 7/31/91 through 3/16/95 Before deducting maximum sales charges........................... 11.04% 10.17% After deducting maximum sales charges........................... 9.56% 10.17% Three Years Ended 12/31/94 Before deducting maximum sales charges........................... 7.90% 6.26% After deducting maximum sales charges........................... 6.16% 6.26% One Year Ended 12/31/94 Before deducting maximum sales charges........................... -3.41% 1.31% After deducting maximum sales charges........................... -8.00% 1.31%
- ------------------ 1. Average annual returns are for Class A shares and reflect the deduction of the maximum sales charge of 4.75%, changes in share prices, reinvestment of dividends and distributions and are net of fund expenses. For the fiscal years ended October 31, 1991 and October 31, 1992, expenses in the amount of 0.51% and 0.03%, respectively, were waived or reimbursed. (Footnotes on next page) -------------------- Prospectus Page 32 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund (Footnotes from previous page) 2. The Standard & Poor's 500 Composite Stock Price Index ('Index') is an unmanaged index of common stocks that is considered to be generally representative of the United States stock market. The Index is adjusted to reflect reinvestment of dividends. No sales charges are applicable. - ------------------ Historical performance is not indicative of future performance. Vista Fund is a separate fund and its historical performance is not indicative of the past or future performance of Growth and Income Fund. S&P 500 Index and Vista Fund performance information calculated by Lipper Analytical Services Inc; used with permission. GROWTH FUND Ellen R. Harris has been responsible for the day-to-day portfolio management of Growth Fund since its inception. Ms. Harris is a managing director of Mitchell Hutchins. Prior to joining Mitchell Hutchins in 1983 as a portfolio manager, Ms. Harris served as a vice president and portfolio manager at American General Capital Management (now American Capital Management). SMALL CAP FUND Donald R. Jones has been primarily responsible for day-to-day portfolio management of Small Cap Fund since April 1996. Mr. Jones has been a first vice president of Mitchell Hutchins since February 1996. Prior to joining Mitchell Hutchins, Mr. Jones was a vice president in the Asset Management Group of First Fidelity Bancorporation, which he joined in 1983. MANAGEMENT FEES & OTHER EXPENSES The Funds pay Mitchell Hutchins a monthly fee for its services. For the most recently ended fiscal year, the Funds paid advisory fees at the annual rate (as a percentage of average daily net assets) of 0.75% for Growth Fund, 0.70% for Growth and Income Fund and 1.00% for Small Cap Fund. DISTRIBUTION ARRANGEMENTS Mitchell Hutchins is the distributor of each Fund's shares and has appointed PaineWebber as the exclusive dealer for the sale of those shares. There is no distribution plan with respect to the Funds' Class Y shares. Under distribution plans for Class A, Class B and Class C shares ('Class A Plan,' 'Class B Plan' and 'Class C Plan,' collectively, 'Plans'), the Funds pay Mitchell Hutchins: o Monthly service fees at the annual rate of up to 0.25% of the average daily net assets of each class of shares. o Monthly distribution fees at the annual rate of 0.75% of the average daily net assets of Class B and Class C shares. Under the Plans, Mitchell Hutchins primarily uses the service fees to pay PaineWebber for shareholder servicing, currently at the annual rate of up to 0.25% of the aggregate investment amounts maintained in each Fund's Class A, Class B and Class C shares by PaineWebber clients. PaineWebber then compensates its investment executives for shareholder servicing that they perform and offsets its own expenses in servicing and maintaining shareholder accounts. Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans to: o Offset the commissions it pays to PaineWebber for selling each Fund's Class B and Class C shares, respectively. o Offset each Fund's marketing costs attributable to such classes, such as preparation, printing and distribution of sales literature, advertising and prospectuses to prospective investors and related overhead expenses, such as employee salaries and bonuses. PaineWebber compensates investment executives when Class B and Class C shares are bought by investors, as well as on an ongoing basis. Mitchell Hutchins receives no special compensation from any of the Funds or investors at the time Class B or C shares are bought. Mitchell Hutchins receives the proceeds of the initial sales charge paid when Class A shares are bought and of the contingent deferred sales charge paid upon sales of shares. These proceeds may be used to cover distribution expenses. The Plans and the related distribution contracts for each class of shares ('Distribution Contracts') specify that each Fund must pay service and distribution fees to Mitchell Hutchins for its activities, not as reimbursement for specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses exceed the service or distribution fees it receives, the Funds will not be obligated to pay more than those fees. On the other hand, if Mitchell Hutchins' expenses are less than such fees, it will retain its full fees and realize a profit. Expenses in excess of service and distribution fees received or accrued through the termination date of any Plan will be Mitchell Hutchins' sole responsibility and not that of the Funds. Annually, the board of trustees of each Fund reviews each Plan and Mitchell Hutchins' corresponding expenses for each class separately from the Plans and expenses of the other classes. -------------------- Prospectus Page 33 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund DETERMINING THE SHARES' NET ASSET VALUE - -------------------------------------------------------------------------------- The net asset value of a Fund's shares fluctuates and is determined separately for each class as of the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each Fund's net asset value per share is determined by dividing the value of the securities held by the Fund, plus any cash or other assets, minus all liabilities, by the total number of Fund shares outstanding. Each Fund values its assets based on their current market value when market quotations are readily available. If market quotations are not readily available, assets are valued at fair value as determined in good faith by or under the direction of its board of trustees. The amortized cost method of valuation generally is used to value debt obligations with 60 days or less remaining to maturity, unless a Fund's board of trustees determines that this does not represent fair value. It should be recognized that judgment plays a greater role in valuing lower-rated corporate bonds because there is less reliable, objective data available. - -------------------------------------------------------------------------------- DIVIDENDS & TAXES - -------------------------------------------------------------------------------- DIVIDENDS Growth Fund and Small Cap Fund each pays an annual dividend, and Growth and Income Fund pays a semi-annual dividend, from its net investment income and net short-term capital gain, if any. Each Fund also distributes annually substantially all of its net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any. Each Fund may make additional distributions, if necessary, to avoid a 4% excise tax on certain undistributed income and capital gain. If determined by its board of trustees to be in the best interests of its shareholders, Growth and Income Fund may also make additional distributions of net investment income and net short-term capital gain, if any. Dividends and other distributions paid on each class of shares of a Fund are calculated at the same time and in the same manner. Dividends on Class A, B and C shares of a Fund are expected to be lower than those on its Class Y shares because the other shares have higher expenses resulting from their service fees and, in the case of Class B and Class C shares, their distribution fees. Dividends on Class B and Class C shares of a Fund are expected to be lower than those on its Class A shares because Class B and Class C shares have higher expenses resulting from their distribution fees. Dividends on each class might be affected differently by the allocation of other class-specific expenses. See 'General Information.' Each Fund's dividends and other distributions are paid in additional Fund shares of the same class at net asset value, unless the shareholder has requested cash payments. Shareholders who wish to receive dividends and other distributions in cash, either mailed to them by check or credited to their PaineWebber accounts, should contact their investment executives at PaineWebber or one of its correspondent firms or complete the appropriate section of the account application. TAXES Each Fund intends to continue to qualify for treatment as a regulated investment company under the Code so that it will not have to pay federal income tax on that part of its investment company taxable income (generally consisting of net investment income and net short-term capital gain) and net capital gain that it distributes to its shareholders. Dividends from each Fund's investment company taxable income (whether paid in cash or additional shares) are generally taxable to its shareholders as ordinary income. Distributions of each Fund's net capital gain (whether paid in cash or additional shares) are taxable to its shareholders as long-term capital gain, regardless of how long they have held their Fund shares. Under the Taxpayer Relief Act of 1997, different maximum tax rates apply to net capital gain depending on the taxpayer's holding period and marginal rate of federal income tax -- generally, 28% for gain recognized on capital assets held for more than one -------------------- Prospectus Page 34 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund year but not more than 18 months and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain recognized on capital assets held for more than 18 months. A notice issued by the Internal Revenue Service in November 1997 permits each Fund to bifurcate each net capital gain distribution into a 20% rate gain distribution and a 28% rate gain distribution (in accordance with the Fund's holding periods for the securities it sold that generated the gain) and requires its shareholders to treat those portions accordingly. Shareholders who are not subject to tax on their income generally will not be required to pay tax on distributions from the Funds. YEAR-END TAX REPORTING Following the end of each calendar year, each Fund notifies its shareholders of the amounts of dividends and capital gain distributions paid (or deemed paid) by the Fund that year and any portion of those dividends that qualifies for special tax treatment. The information regarding capital gain distributions designates the portions thereof subject to the different maximum rates of tax applicable to individuals' net capital gain indicated above. BACKUP WITHHOLDING Each Fund must withhold 31% of all dividends, capital gain distributions and redemption proceeds payable to individuals and certain other non-corporate shareholders who do not provide the Funds with a correct taxpayer identification number. Withholding at that rate also is required from dividends and capital gain distributions payable to such shareholders who otherwise are subject to backup withholding. TAXES ON THE SALE OR EXCHANGE OF FUND SHARES A shareholder's sale (redemption) of Fund shares may result in a taxable gain or loss. This depends upon whether the shareholder receives more or less than the adjusted basis for the shares (which normally includes any initial sales charge paid on Class A shares). An exchange of any Fund's shares for shares of another PaineWebber mutual fund generally will have similar tax consequences. In addition, if a Fund's shares are bought within 30 days before or after selling other shares of that 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 TAX RULES FOR CLASS A SHAREHOLDERS Special tax rules apply when a shareholder sells (redeems) or exchanges Class A shares 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 would increase the basis of the PaineWebber mutual fund shares subsequently acquired. No gain or loss will be recognized to a shareholder as a result of conversion of Class B shares into Class A shares. * * * * Because the foregoing only summarizes some of the important considerations affecting the Funds and their shareholders, a further discussion is contained in the Statement of Additional Information. Prospective shareholders are urged to consult their tax advisers. - -------------------------------------------------------------------------------- GENERAL INFORMATION - -------------------------------------------------------------------------------- ORGANIZATION GROWTH AND INCOME FUND Growth and Income Fund is a diversified series of PaineWebber America Fund, an open-end management investment company that was formed on October 31, 1986 as a business trust under the laws of the Commonwealth of Massachusetts. The board has authority to issue an unlimited number of shares of beneficial interest of separate series, par value $0.001 per share. GROWTH FUND Growth Fund is a diversified series of PaineWebber Olympus Fund, an open-end management investment company that was formed on October 31, 1986 as a business trust under the laws of the Commonwealth of Massachusetts. The board has authority to issue an unlimited number of shares of beneficial interest of separate series, par value $0.001 per share. -------------------- Prospectus Page 35 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund SMALL CAP FUND Small Cap Fund is a diversified series of PaineWebber Securities Trust ('Securities Trust'), an open-end management investment company that was formed on December 3, 1992 as a business trust under the laws of the Commonwealth of Massachusetts. The board has authority to issue an unlimited number of shares of beneficial interest of separate series, par value $0.001 per share. In addition to Small Cap Fund, shares of one other series have been authorized. SHARES The shares of each Fund are divided into four classes, designated Class A, Class B, Class C and Class Y shares. Each class of shares of a Fund represents an identical interest in that Fund's investment portfolio and has the same rights, privileges and preferences. However, each class may differ with respect to sales charges, if any, distribution and/or service fees, if any, other expenses allocable exclusively to each class, voting rights on matters exclusively affecting that class, and its exchange privilege, if any. The different sales charges and other expenses applicable to the different classes of shares of the Funds will affect the performance of those classes. Each share of a Fund is entitled to participate equally in dividends, other distributions and the proceeds of any liquidation of that Fund. However, due to the differing expenses of the classes, dividends on a Fund's Class A, B, C and Y shares will differ. Although each Fund is offering only its own shares, it is possible that a Fund could become liable for a misstatement in the Prospectus about another Fund. The board of each Fund considered this factor in approving the use of a combined Prospectus. VOTING RIGHTS Shareholders of each Fund are entitled to one vote for each full share held and fractional votes for fractional shares held. Voting rights are not cumulative and, as a result, the holders of more than 50% of all the shares of any Fund (or Securities Trust, which has more than one series) may elect all of the trustees of that Fund or of Securities Trust. The shares of a Fund will be voted together except that only the shareholders of a particular class of a Fund may vote on matters affecting only that class, such as the terms of a Plan as it relates to the class. The shares of each series of Securities Trust will be voted separately except where an aggregate vote of all series is required by law. SHAREHOLDER MEETINGS The Funds do not hold annual meetings. Shareholders of record of no less than two-thirds of the outstanding shares of a Fund or Securities Trust may remove a trustee through a declaration in writing or by vote cast in person or by proxy at a meeting called for that purpose. A meeting will be called to vote on the removal of a trustee at the written request of holders of 10% of a Fund's or Securities Trust's outstanding shares. REPORTS TO SHAREHOLDERS Each Fund sends its shareholders audited annual and unaudited semiannual reports, each of which includes a list of the investment securities held by that Fund as of the end of the period covered by the report. The Statement of Additional Information, which is incorporated herein by reference, is available to shareholders upon request. CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND DISBURSING AGENT State Street Bank and Trust Company, located at One Heritage Drive, North Quincy, Massachusetts 02171, serves as each Fund's custodian and recordkeeping agent. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as each Fund's transfer and dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE 19809. PFPC (not the Funds) pays PaineWebber for certain transfer agency related services that PFPC has delegated to PaineWebber. -------------------- Prospectus Page 36 ------------------------------ PaineWebber Growth and Income Fund Growth Fund Small Cap Fund [This page intentionally left blank] -------------------- Prospectus Page 37 PaineWebber Growth and Income Fund PaineWebber Growth Fund PaineWebber Small Cap Fund PROSPECTUS--DECEMBER 1, 1997 / / PAINEWEBBER BOND FUNDS / / PAINEWEBBER STOCK FUNDS High Income Fund Capital Appreciation Fund Investment Grade Income Fund Financial Services Growth Fund Low Duration U.S. Government Growth Fund Income Fund Growth and Income Fund Strategic Income Fund Small Cap Fund U.S. Government Income Fund Utility Income Fund / / PAINEWEBBER TAX-FREE BOND FUNDS / / PAINEWEBBER GLOBAL FUNDS California Tax-Free Income Fund Asia Pacific Growth Fund Municipal High Income Fund Emerging Markets Equity Fund National Tax-Free Income Fund Global Equity Fund New York Tax-Free Income Fund Global Income Fund / / PAINEWEBBER ASSET / / PAINEWEBBER MONEY MARKET FUND ALLOCATION FUNDS Balanced Fund Tactical Allocation Fund
A prospectus containing more complete information for any of these funds, including charges and expenses, can be obtained from a PaineWebber investment executive or correspondent firm. Please read it carefully before investing. It is important you have all the information you need to make a sound investment decision. (Copyright) 1997 PaineWebber Incorporated --------------- PAINEWEBBER GROWTH AND INCOME FUND PAINEWEBBER GROWTH FUND PAINEWEBBER SMALL CAP FUND 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 STATEMENT OF ADDITIONAL INFORMATION The three funds named above (each a 'Fund' and, collectively, 'Funds') are diversified series of professionally managed, open-end management investment companies organized as Massachusetts business trusts (each a 'Trust' and, collectively, 'Trusts'). PaineWebber Growth and Income Fund ('Growth and Income Fund'), a series of PaineWebber America Fund ('America Fund'), seeks to provide current income and capital growth; it invests primarily in dividend-paying equity securities believed to have the potential for rapid earnings growth. PaineWebber Growth Fund ('Growth Fund'), a series of PaineWebber Olympus Fund ('Olympus Fund'), seeks long-term capital appreciation; it invests primarily in equity securities of companies believed to have substantial potential for capital growth. PaineWebber Small Cap Fund ('Small Cap Fund'), a series of PaineWebber Securities Trust ('Securities Trust'), also seeks long-term capital appreciation; it invests primarily in equity securities of small capitalization companies. Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly-owned asset management subsidiary of PaineWebber Incorporated ('PaineWebber'), serves as investment adviser, administrator and distributor for each Fund. As distributor, Mitchell Hutchins has appointed PaineWebber as the exclusive dealer for the sale of Fund shares. This Statement of Additional Information is not a prospectus and should be read only in conjunction with the Funds' current Prospectus, dated December 1, 1997. A copy of the Prospectus may be obtained by calling any PaineWebber investment executive or correspondent firm or by calling toll-free 1-800-647-1568. This Statement of Additional Information is dated December 1, 1997. INVESTMENT POLICIES AND RESTRICTIONS The following supplements the information contained in the Prospectus concerning the Funds' investment policies and limitations. Except as otherwise indicated in the Prospectus or Statement of Additional Information, there are no policy limitations on a Fund's ability to use the investments or techniques discussed in these documents. YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ('S&P'), and other nationally recognized statistical rating organizations ('NRSROs') are private services that provide ratings of the credit quality of debt obligations. A description of the ratings assigned to corporate debt obligations by Moody's and S&P is included in the Appendix to this Statement of Additional Information. The Funds may use these ratings in determining whether to purchase, sell or hold a security. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, securities with the same maturity, interest rate and rating may have different market prices. Ratings of debt securities represent the NRSROs' opinions regarding their quality, are not a guarantee of quality, and may be reduced after a Fund has acquired the security. Mitchell Hutchins will consider such an event in determining whether a Fund should continue to hold the security but is not required to dispose of it. In the event that, due to a downgrade of one or more debt securities, an amount in excess of the permitted percentage of a Fund's net assets is held in securities rated below investment grade and comparable unrated securities, the Fund will engage in an orderly disposition of such securities to the extent necessary to ensure that its holdings of such securities does not exceed that percentage. Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably rated by another NRSRO or determined by Mitchell Hutchins to be of comparable quality are below investment grade, are deemed by those agencies to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal and may involve major risk exposure to adverse conditions. Lower rated debt securities generally offer a higher current yield than that available for investment grade issues, but they involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress which could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, such issuers may not have more traditional methods of financing available to them and may be unable to repay debt at maturity by refinancing. The risk of loss due to default by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. The market for lower rated debt securities has expanded rapidly in recent years, and its growth generally paralleled a long economic expansion. In the past, the prices of many lower rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields on lower rated debt securities rose dramatically. However, such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers' financial restructuring or defaults. There can be no assurance that such declines will not recur. The market for lower rated debt issues generally is thinner and less active than that for higher quality securities, which may limit a Fund's ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower rated securities, especially in a thinly traded market. RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Securities of foreign issuers may not be registered with the Securities and Exchange Commission ('SEC'), nor may the issuers thereof be subject to its reporting requirements. Accordingly, there may be less publicly available information concerning foreign issuers of securities held by the Funds than is available concerning U.S. companies. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. The Funds may invest in foreign securities by purchasing American Depository Receipts ('ADRs'). Generally, ADRs, in registered form, are denominated in U.S. dollars and are designed for use in the U.S. securities markets. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. For purposes of each Fund's investment policies, ADRs are deemed to have the same classification as the underlying securities they represent. Thus, an ADR representing ownership of common stock will be treated as common stock. ADRs are publicly traded on exchanges or over-the-counter ('OTC') in the United States and are issued through 'sponsored' or 'unsponsored' arrangements. In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some or all of the depositary's transaction fees, whereas under an unsponsored arrangement, the foreign issuer assumes no obligations and the depositary's transaction fees are paid directly by the ADR holders. In addition, less information is available in the United States about an unsponsored ADR than about a sponsored ADR. Investment income on certain foreign securities in which the Funds may invest may be subject to foreign withholding or other taxes that could reduce the return on these securities. Tax treaties between the United States and foreign countries, however, may reduce or eliminate the amount of foreign taxes to which the Funds would be subject. ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets (15% for Small Cap Fund) in illiquid securities. The term 'illiquid securities' for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which a Fund has valued the securities and includes, among other things, purchased OTC options, repurchase agreements maturing in more than seven days and restricted securities other than those Mitchell Hutchins has determined are liquid pursuant to guidelines established by each Trust's board of trustees (each sometimes referred to as a 'board'). The assets used as cover for OTC options written by each Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option 2 written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. Illiquid restricted securities may be sold only in privately negotiated transactions or in public offerings with respect to which a registration statement is in effect under the Securities Act of 1933 ('1933 Act'). Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to sell. Not all restricted securities are illiquid. In recent years a large institutional market has developed for certain securities that are not registered under the 1933 Act, including private placements, repurchase agreements, commercial paper, foreign securities and corporate bonds and notes. These instruments are often restricted securities because the securities are sold in transactions not requiring registration. Institutional investors generally will not seek to sell these instruments to the general public, but instead will often depend either on an efficient institutional market in which such unregistered securities can be readily resold or on an issuer's ability to honor a demand for repayment. Therefore, the fact that there are contractual or legal restrictions on resale to the general public or certain institutions is not dispositive of the liquidity of such investments. Rule 144A under the 1933 Act establishes a 'safe harbor' from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities have developed as a result of Rule 144A, providing both readily ascertainable values for restricted securities and the ability to liquidate an investment to satisfy share redemption orders. Such markets include automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. An insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible restricted securities held by the Funds, however, could affect adversely the marketability of such portfolio securities, and the Funds might be unable to dispose of such securities promptly or at favorable prices. Each board has delegated the function of making day-to-day determinations of liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board. Mitchell Hutchins takes into account a number of factors in reaching liquidity decisions, including (1) the frequency of trades for the security, (2) the number of dealers that make quotes for the security, (3) the number of dealers that have undertaken to make a market in the security, (4) the number of other potential purchasers and (5) the nature of the security and how trading is effected (e.g., the time needed to sell the security, how offers are solicited and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of restricted securities in each Fund's portfolio and reports periodically on such decisions to the boards. CONVERTIBLE SECURITIES. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers. Convertible securities rank senior to common stock in a corporation's capital structure but are usually subordinated to comparable non-convertible securities. Convertible securities have unique investment characteristics in that they generally (1) have higher yields than common stocks, but lower yields than comparable non-convertible securities, (2) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics and (3) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its 'investment value' (determined by its yield comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its 'conversion value' (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is 3 low relative to the investment value, the price of the convertible security is governed principally by its investment value, and generally the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. In addition, a convertible security generally will sell at a premium over its conversion value determined by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. If a convertible security held by a Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into underlying common stock or sell it to a third party. Lower rated convertible securities generally offer a higher current yield than that available from higher grade issues, but they involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress, which could adversely affect their ability to make payments of principal and interest (or, in the case of convertible preferred stock, dividends) and increase the possibility of default. In addition, such issuers may not have more traditional methods of financing available to them, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. GOVERNMENT SECURITIES. Government securities in which the Funds may invest include direct obligations of the U.S. Treasury and obligations issued or guaranteed by the U.S. government or one of its agencies or instrumentalities ('Government Securities'). Direct obligations of the U.S. Treasury include a variety of securities that differ in their interest rates, maturities and dates of issuance. Among the Government Securities that may be held by the Funds are instruments that are supported by the full faith and credit of the United States; instruments that are supported by the right of the issuer to borrow from the U.S. Treasury; and instruments that are supported solely by the credit of the agency or instrumentality. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a Fund purchases securities from a bank or recognized securities dealer and simultaneously commits to resell the securities to the bank or dealer at an agreed-upon date or upon demand and at a price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities. The Fund maintains custody of the underlying securities prior to their repurchase; thus, the obligation of the bank or dealer to pay the repurchase price on the date agreed to or upon demand is, in effect, secured by such securities. If the value of these securities is less than the repurchase price, plus any agreed-upon additional amount, the other party to the agreement must provide additional collateral so that at all times the collateral is at least equal to the repurchase price, plus any agreed-upon additional amount. The difference between the total amount to be received upon repurchase of the securities and the price that was paid by a Fund upon acquisition is accrued as interest and included in its net investment income. Repurchase agreements carry certain risks not associated with direct investments in securities, including possible declines in the market value of the underlying securities and delays and costs to the Funds if the other party to a repurchase agreement becomes insolvent. The Funds intend to enter into repurchase agreements only with banks and dealers in transactions believed by Mitchell Hutchins to present minimal credit risks in accordance with guidelines established by each board. Mitchell Hutchins reviews and monitors the creditworthiness of those institutions under each board's general supervision. REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase agreements with banks and securities dealers up to an aggregate value of not more than 5% of the Fund's net assets (10% of total assets for Small Cap Fund). Such agreements involve the sale of securities held by a Fund subject to its agreement to repurchase the securities at an agreed-upon date and price reflecting a market rate of interest. Such agreements are considered to be borrowings and may be entered into only for temporary purposes. While a reverse repurchase agreement is outstanding, a Fund's custodian segregates assets to cover the Fund's 4 obligations under the reverse repurchase agreement. See 'Investment Policies and Restrictions--Segregated Accounts.' LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend portfolio securities up to 33 1/3% of its total assets taken at market value to broker-dealers or institutional investors that Mitchell Hutchins deems qualified, but only when the borrower maintains with that Fund's custodian bank acceptable collateral, marked to market daily, in an amount at least equal to the market value of the securities loaned, plus accrued interest and dividends. Acceptable collateral is limited to cash, U.S. government securities and irrevocable letters of credit that meet certain guidelines established by Mitchell Hutchins. In determining whether to lend securities to a particular broker-dealer or institutional investor, Mitchell Hutchins will consider, and during the period of the loan will monitor, all relevant facts and circumstances, including the creditworthiness of the borrower. Each Fund will retain authority to terminate any loans at any time. Each Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. Each Fund will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest or other distributions on the securities loaned. Each Fund will regain record ownership of loaned securities to exercise beneficial rights, such as voting and subscription rights and rights to dividends, interest or other distributions, when regaining such rights is considered to be in the Fund's interest. Pursuant to procedures adopted by the appropriate board governing each Fund's securities lending program, the boards have approved retention of PaineWebber to serve as lending agent for the Funds. The appropriate board also has authorized each Fund to pay fees (including fees calculated as a percentage of invested cash collateral) to PaineWebber for these services. Each board periodically reviews all portfolio securities loan transactions for which PaineWebber acted as lending agent. SHORT SALES 'AGAINST THE BOX'. Each Fund may engage in short sales of securities it owns or has the right to acquire at no added cost through conversion or exchange of other securities it owns (short sales 'against the box'). To make delivery to the purchaser in a short sale, the executing broker borrows the securities being sold short on behalf of a Fund, and that Fund is obligated to replace the securities borrowed at a date in the future. When a Fund sells short, it establishes a margin account with the broker effecting the short sale, and deposits collateral with the broker. In addition, that Fund maintains with its custodian, in a segregated account, the securities that could be used to cover the short sale. Each Fund will incur transaction costs, including interest expense, in connection with opening, maintaining and closing short sales against the box. No Fund currently expects to have obligations under short sales that at any time during the coming year exceed 5% of its net assets. The Funds might make a short sale 'against the box' in order to hedge against market risks when Mitchell Hutchins believes that the price of a security may decline, thereby causing a decline in the value of a security owned by a Fund or a security convertible into or exchangeable for a security owned by a Fund. In such case, any loss in a Fund's long position after the short sale should be reduced by a gain in the short position. Conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which gains or losses in the long position are reduced will depend upon the amount of the securities sold short relative to the amount of the securities a Fund owns, either directly or indirectly, and in the case where a Fund owns convertible securities, changes in the investment values or conversion premiums of such securities. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase securities on a 'when-issued' basis or may purchase or sell securities for 'delayed delivery.' In when-issued or delayed delivery transactions, delivery of the securities occurs beyond normal settlement periods, but a Fund generally would not pay for such securities or start earning interest or dividends on them until they are delivered. However, when a Fund purchases securities on a when-issued or delayed delivery basis, it immediately assumes the risks of ownership, including the risk of price fluctuation. Failure by a counter party to deliver a security purchased on a when-issued or delayed delivery basis may result in a loss or missed opportunity to make an alternative investment. Depending on market conditions, a Fund's when-issued and delayed delivery purchase commitments could cause its net asset value per share to be more volatile, because such securities may increase the amount by which the Fund's total assets, including the value of when-issued and delayed delivery securities held by the Fund, exceeds its net assets. 5 A security purchased on a when-issued or delayed delivery basis is recorded as an asset on the commitment date and is subject to changes in market value. Thus, fluctuation in the value of the security from the time of the commitment date will affect a Fund's net asset value. When a Fund agrees to purchase securities on a when-issued basis, its custodian segregates assets to cover the amount of the commitment. See 'Investment Policies and Restrictions--Segregated Accounts.' The Funds purchase when-issued securities only with the intention of taking delivery, but may sell the right to acquire the security prior to delivery if Mitchell Hutchins deems it advantageous to do so, which may result in capital gain or loss to a Fund. SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that involve obligations to make future payments to third parties, such as reverse repurchase agreements or the purchase of securities on a when-issued or delayed delivery basis, it will maintain with an approved custodian in a segregated account cash 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 'Hedging Strategies Using Derivative Instruments,' segregated accounts may also be required in connection with certain transactions involving options and futures contracts. FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment limitations cannot be changed for a Fund without the affirmative vote of the lesser of (a) more than 50% of the outstanding shares of that Fund or (b) 67% or more of the shares of that Fund present at a shareholders' meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. If a percentage restriction is adhered to at the time of an investment or transaction, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total assets will not be considered a violation of any of the following limitations. Each Fund will not: (1) purchase securities of any one issuer if, as a result, more than 5% of the Fund's total assets would be invested in securities of that issuer or the Fund would own or hold more than 10% of the outstanding voting securities of that issuer, except that up to 25% of the Fund's total assets may be invested without regard to this limitation, and except that this limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies and instrumentalities or to securities issued by other investment companies. The following interpretation applies to, but is not a part of, this fundamental limitation: Mortgage- and asset-backed securities will not be considered to have been issued by the same issuer by reason of the securities having the same sponsor, and mortgage- and asset-backed securities issued by a finance or other special purpose subsidiary that are not guaranteed by the parent company will be considered to be issued by a separate issuer from the parent company. (2) purchase any security if, as a result of that purchase, 25% or more of the Fund's total assets would be invested in securities of issuers having their principal business activities in the same industry, except that this limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or to municipal securities. (3) issue senior securities or borrow money, except as permitted under the Investment Company Act of 1940 ('1940 Act') and then not in excess of 33 1/3% of the Fund's total assets (including the amount of the senior securities issued but reduced by any liabilities not constituting senior securities) at the time of the issuance or borrowing, except that the Fund may borrow up to an additional 5% of its total assets (not including the amount borrowed) for temporary or emergency purposes. (4) make loans, except through loans of portfolio securities or through repurchase agreements, provided that for purposes of this restriction, the acquisition of bonds, debentures, other debt securities or instruments, or participations or other interests therein and investments in government obligations, commercial paper, certificates of deposit, bankers' acceptances or similar instruments will not be considered the making of a loan. (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 (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 in financial options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments. NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are not fundamental and may be changed by each board without shareholder approval. Each Fund will not: (1) invest more than 10% of its net assets (15% of net assets for Small Cap Fund) in illiquid securities, a term which means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which it has valued the securities and includes, among other things, repurchase agreements maturing in more than seven days. (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 1940 Act and except that this limitation does not apply to securities received or acquired as dividends, through offers of exchange, or as a result of reorganization, consolidation, or merger. HEDGING STRATEGIES USING DERIVATIVE INSTRUMENTS HEDGING INSTRUMENTS. Mitchell Hutchins may use a variety of financial instruments ('Derivative Instruments'), including certain options, futures contracts (sometimes referred to as 'futures') and options on futures contracts, to attempt to hedge each Fund's portfolio. A Fund may enter into transactions involving one or more types of Derivative Instruments under which the full value of its portfolio is at risk. Under normal circumstances, however, a Fund's use of Derivative Instruments will place at risk a much smaller portion of its assets. In particular, each Fund may use the Derivative Instruments described below: OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term contract pursuant to which the purchaser of the option, in return for a premium, has the right to buy the security underlying the option at a specified price at any time during the term of the option. The writer of the call option, who receives the premium, has the obligation, upon exercise of the option during the option term, to deliver the underlying security against payment of the exercise price. A put option is a similar contract that gives its purchaser, in return for a premium, the right to sell the underlying security at a specified price during the option term. The writer of the put option, who receives the premium, has the obligation, upon exercise of the option during the option term, to buy the underlying security at the exercise price. OPTIONS ON STOCK INDEXES--A stock index assigns relative values to the stocks included in the index and fluctuates with changes in the market values of those stocks. A stock index option operates in the same way as a more traditional stock option, except that exercise of a stock index option is effected with cash payment and does not involve delivery of securities. Thus, upon exercise of a stock index option, the purchaser will realize, and the writer will pay, an amount based on the difference between the exercise price and the closing price of the stock index. 7 STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a bilateral agreement pursuant to which one party agrees to accept, and the other party agrees to make, delivery of an amount of cash equal to a specified dollar amount times the difference between the stock index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the stocks comprising the index is made. Generally, contracts are closed out prior to the expiration date of the contract. INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are bilateral agreements pursuant to which one party agrees to make, and the other party agrees to accept, delivery of a specified type of debt security at a specified future time and at a specified price. Although such futures contracts by their terms call for actual delivery or acceptance of debt securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to options on securities, 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 HEDGING STRATEGIES. Hedging strategies can be broadly categorized as 'short hedges' and 'long hedges.' A short hedge is a purchase or sale of a Hedging Instrument intended to partially or fully offset potential declines in the value of one or more investments held in a Fund's portfolio. Thus, in a short hedge, a Fund takes a position in a Derivative Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged. For example, a Fund might purchase a put option on a security to hedge against a potential decline in the value of that security. If the price of the security declined below the exercise price of the put, a Fund could exercise the put and thus limit its loss below the exercise price to the premium paid plus transaction costs. In the alternative, because the value of the put option can be expected to increase as the value of the underlying security declines, a Fund might be able to close out the put option and realize a gain to offset the decline in the value of the security. Conversely, a long hedge is a purchase or sale of a Hedging Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that a Fund intends to acquire. Thus, in a long hedge, a Fund takes a position in a Derivative Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. For example, a Fund might purchase a call option on a security it intends to purchase in order to hedge against an increase in the cost of the security. If the price of the security increased above the exercise price of the call, a Fund could exercise the call and thus limit its acquisition cost to the exercise price plus the premium paid and transaction costs. Alternatively, a Fund might be able to offset the price increase by closing out an appreciated call option and realizing a gain. Derivative Instruments on securities generally are used to hedge against price movements in one or more particular securities positions that a Fund owns or intends to acquire. Derivative Instruments on stock indices, in contrast, generally are used to hedge against price movements in broad equity market sectors in which a Fund has invested or expects to invest. Derivative Instruments on debt securities may be used to hedge either individual securities or broad fixed income market sectors. The use of Derivative Instruments is subject to applicable regulations of the SEC, the several options and futures exchanges upon which they are traded and the Commodity Futures Trading Commission ('CFTC'). In addition, a Fund's ability to use Hedging Instruments will be limited by tax considerations. See 'Taxes.' In addition to the products, strategies and risks described below and in the Prospectus, Mitchell Hutchins expects to discover additional opportunities in connection with options, futures contracts and other hedging techniques. These new opportunities may become available as Mitchell Hutchins develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new options, futures contracts, or other techniques are developed. Mitchell Hutchins may utilize these opportunities to the extent that they are 8 consistent with a Fund's investment objective and permitted by the Fund's investment limitations and applicable regulatory authorities. The Funds' Prospectus or Statement of Additional Information will be supplemented to the extent that new products or techniques involve materially different risks than those described below or in the Prospectus. SPECIAL RISKS OF HEDGING STRATEGIES. The use of Derivative Instruments involves special considerations and risks, as described below. Risks pertaining to particular Derivative Instruments are described in the sections that follow. (1) Successful use of most Derivative Instruments depends upon the ability of Mitchell Hutchins to predict movements of the overall securities and interest rate markets, which requires different skills than predicting changes in the prices of individual securities. While Mitchell Hutchins is experienced in the use of Derivative Instruments, there can be no assurance that any particular hedging strategy adopted will succeed. (2) There might be imperfect correlation, or even no correlation, between price movements of a Derivative Instrument and price movements of the investments 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 unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Hedging Instruments are traded. The effectiveness of hedges using 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. Because the Funds invest primarily in common stocks of issuers meeting the specific criteria described in the Prospectus, there might be a significant lack of correlation between the portfolio and the stock indices underlying any such Hedging Instruments used by a Fund. (3) Derivative strategies, if successful, can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. For example, if a Fund entered into a short hedge because Mitchell Hutchins projected a decline in the price of a security in that Fund's portfolio, and the price of that security increased instead, the gain from that might be wholly or partially offset by a decline in the price of the Derivative Instrument. Moreover, if the price of the Hedging Instrument declined by more than the increase in the price of the security, that Fund could suffer a loss. In either such case, the Fund would have been in a better position had it not hedged at all. (4) As described below, a Fund might be required to maintain assets as 'cover,' maintain segregated accounts or make margin payments when it takes positions in Hedging Instruments involving obligations to third parties (i.e., Derivative Instruments other than purchased options). If the Fund were unable to close out its positions in such Derivative Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the positions expired or matured. These requirements might impair a Fund's ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time. A Fund's ability to close out a position in a Derivative Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of a contra party to enter into a transaction closing out the position. Therefore, there is no assurance that any hedging position can be closed out at a time and price that is favorable to a Fund. COVER FOR HEDGING STRATEGIES. The Funds will not use Derivative Instruments for speculative purposes or for purposes of leverage. Transactions using Derivative Instruments, other than purchased options, expose the Funds to an obligation to another party. A Fund will not enter into any such transactions unless it owns either (1) an offsetting ('covered') position in securities, other options or futures contracts or (2) cash and 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 Funds will comply with SEC guidelines regarding cover for hedging 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. 9 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, the commitment of a large portion of a Fund's assets to cover or segregated accounts could impede portfolio management or the Fund's ability to meet redemption requests or other current obligations. OPTIONS. The Funds may purchase put and call options, and write (sell) covered put or call options, on equity and debt securities and stock indices. The purchase of call options serves as a long hedge, and the purchase of put options serves as a short hedge. Writing covered call options serves as a limited short hedge, because declines in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security appreciates to a price higher than the exercise price of the call option, it can be expected that the option will be exercised and the affected Fund will be obligated to sell the security at less than its market value. Writing covered put options serves as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the Fund will be obligated to purchase the security at more than its market value. The securities or other assets used as cover for OTC options written by a Fund would be considered illiquid to the extent described under 'Investment Policies and Restrictions--Illiquid Securities.' The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, the historical price volatility of the underlying investment and general market conditions. Options normally have expiration dates of up to nine months. Options that expire unexercised have no value. A Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, a Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a Fund to realize profits or limit losses on an option position prior to its exercise or expiration. The Funds may purchase and write both exchange-traded and OTC options. Exchange markets for options on debt securities exist but are relatively new, and these instruments are primarily traded on the OTC market. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its contra party (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a Fund purchases or writes an OTC option, it relies on the contra party to make or take delivery of the underlying investment upon exercise of the option. Failure by the contra party to do so would result in the loss of any premium paid by the Fund as well as the loss of any expected benefit of the transaction. The Funds will enter into OTC option transactions only with contra parties that have a net worth of at least $20 million. Generally, the OTC debt options used by the Funds are European-style options. This means that the option is only exercisable immediately prior to its expiration. This is in contrast to American-style options, which are exercisable at any time prior to the expiration date of the option. The Funds' ability to establish and close out positions in exchange-traded options depends on the existence of a liquid market. The Funds intend to purchase or write only those exchange-traded options for which there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the contra party, or by a transaction in the secondary market if any such market exists. Although the Funds will enter into OTC options only with contra parties that are expected to be capable of entering into closing transactions with the Funds, there is no assurance that the Funds will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the contra party, the Funds might be unable to close out an OTC option position at any time prior to its expiration. 10 If a Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered put or call option written by a Fund could cause material losses because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised. LIMITATIONS ON THE USE OF OPTIONS. The Funds' use of options is governed by the following guidelines, which can be changed by each board without shareholder vote: (1) Each 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 that Fund, does not exceed 5% of its total assets. (2) The aggregate value of underlying securities on which a Fund writes covered calls will not exceed 50% of its total assets. (3) To the extent cash or cash equivalents, including Government Securities, are maintained in a segregated account to collateralize options written on securities or stock indexes, each Fund will limit collateralization to 20% of its net assets. FUTURES. The Funds may purchase and sell stock index futures contracts and interest rate futures contracts. The Funds may also 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. No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract a Fund is required to deposit in a segregated account with its custodian, in the name of the futures broker through whom the transaction was effected, 'initial margin' consisting of cash obligations of the U.S. government or obligations fully guaranteed as to principal and interest by the United States, in an amount generally equal to 10% or less of the contract value. Margin must also be deposited when writing a call option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to a Fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, a Fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action. Subsequent 'variation margin' payments are made to and from the futures broker daily as the value of the futures position varies, a process known as 'marking to market.' Variation margin does not involve borrowing, but rather represents a daily settlement of each Fund's obligations to or from a futures broker. When a Fund purchases an option on a future, the premium paid plus transaction costs is all that is at risk. In contrast, when a Fund purchases or sells a futures contract or writes a call option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If a Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous. Holders and writers of futures positions and options on futures can enter into offsetting closing transactions, similar to closing transactions on options, by selling or purchasing, respectively, an instrument identical to the instrument held or written. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. The Funds intend to enter into futures transactions only on exchanges or boards of trade where there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist for a particular contract at a particular time. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a future or related option can vary from the previous day's settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because 11 prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions. If a Fund were unable to liquidate a futures or related options position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account. Certain characteristics of the futures market might increase the risk that movements in the prices of futures contracts or related options might not correlate perfectly with movements in the prices of the investments being hedged. For example, all participants in the futures and related options markets are subject to daily variation margin calls and might be compelled to liquidate futures or related options positions whose prices are moving unfavorably to avoid being subject to further calls. These liquidations could increase price volatility of the instruments and distort the normal price relationship between the futures or options and the investments being hedged. Also, because initial margin deposit requirements in the futures market are less onerous than margin requirements in the securities markets, there might be increased participation by speculators in the futures markets. This participation also might cause temporary price distortions. In addition, activities of large traders in both the futures and securities markets involving arbitrage, 'program trading' and other investment strategies might result in temporary price distortions. LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The Funds' use of futures and related options is governed by the following guidelines, which can be changed by each board without shareholder vote: (1) To the extent a Fund enters into futures contracts and options on futures positions that are not for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums on those positions (excluding the amount by which options are 'in-the-money') may not exceed 5% of its net assets. (2) The aggregate premiums paid on all options (including options on securities and stock or bond indices and options on futures contracts) purchased by a Fund that are held at any one time will not exceed 20% of its net assets. (3) The aggregate margin deposits on all futures contracts and options thereon held at any one time by a Fund will not exceed 5% of its total assets. 12 TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES The trustees and executive officers of each Trust (the same positions are held in each of the three Trusts, except as otherwise indicated), their ages, business addresses and principal occupations during the past five years are:
BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ------------------------------------ --------------------------- --------------------------------------------- Margo N. Alexander**; 50 Trustee and Mrs. Alexander is president, chief executive President officer and a director of Mitchell Hutchins (since January 1995) and an executive vice president and a director of Paine- Webber. Mrs. Alexander is president and a director or trustee of 28 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Richard Q. Armstrong; 62 Trustee Mr. Armstrong is chairman and principal of 78 West Brother Drive RQA Enterprises (management consulting Greenwich, CT 06830 firm) (since April 1991 and principal occupation since March 1995). He is also a director of Hi Lo Automotive, Inc. He was chairman of the board, chief executive officer and co-owner of Adirondack Beverages (producer and distributor of soft drinks and sparkling/still waters) (Oc- tober 1993-March 1995). Mr. Armstrong was a partner of the New England Consulting Group (management consulting firm) (December 1992-September 1993). He was managing director of LVMH U.S. Corporation (U.S. subsidiary of the French luxury goods conglomerate, Luis Vuitton Moet Hennessey Corporation) (1987-1991) and chairman of its wine and spirits subsidiary, Schieffelin & Somerset Company (1987-1991). Mr. Armstrong is a director or trustee of 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. E. Garrett Bewkes, Jr.**; 71 Trustee and Mr. Bewkes is a director of Paine Webber Chairman of the Group Inc. ('PW Group') (holding company of Board of Trustees PaineWebber and Mitchell Hutchins). Prior to December 1995, he was a consultant to PW Group. Prior to 1988, he was chairman of the board, president and chief executive officer of American Bakeries Company. Mr. Bewkes is also a director of Interstate Bakeries Corporation and NaPro BioTherapeutics, Inc. Mr. Bewkes is a director or trustee of 28 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
13
BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ------------------------------------ --------------------------- --------------------------------------------- Richard R. Burt; 50 Trustee Mr. Burt is chairman of International Equity 1101 Connecticut Avenue, N.W. Partners (international investments and Washington, D.C. 20036 consulting firm) (since March 1994) and a partner of McKinsey & Company (management consulting firm) (since 1991). He is also a director of American Publishing Company and Archer-Daniels-Midland Co. (agricultural commodities). 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 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Mary C. Farrell**; 47 Trustee Ms. Farrell is a managing director, senior investment strategist, and member of the Investment Policy Committee of PaineWeb- ber. Ms. Farrell joined PaineWebber in 1982. She is a member of the Financial Women's Association and Women's Economic Roundtable and is employed as a regular panelist on Wall $treet Week with Louis Rukeyser. She also serves on the Board of Overseers of New York University's Stern School of Business. Ms. Farrell is a director or trustee of 27 investment com- panies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of Man- Columbia University agement of the Graduate School of Busi- 101 Uris Hall ness, Columbia University. Prior to 1989, New York, New York 10027 he was president of the Illinois Institute of Technology. Dean Feldberg is also a di- rector of K-III Communications, Federated Department Stores, Inc., and Revlon, Inc. Dean Feldberg is a director or trustee of 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. George W. Gowen; 68 Trustee Mr. Gowen is a partner in the law firm of 666 Third Avenue Dunnington, Bartholow & Miller. Prior to New York, New York 10017 May 1994, he was a partner in the law firm of Fryer, Ross & Gowen. Mr. Gowen is also a director of Columbia Real Estate Investments, Inc. Mr. Gowen is a director or trustee of 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
14
BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ------------------------------------ --------------------------- --------------------------------------------- Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer Capital 1455 Pennsylvania Avenue, N.W. Partners (merchant bank) and a co-chairman Suite 350 and director of CB Commercial Group Inc. Washington, D.C. 20004 (real estate). From January 1992 to November 1992, he was campaign manager of Bush-Quayle '92. From 1990 to 1992, he was vice chairman, and from 1989 to 1990, he was president of Northwest Airlines Inc., NWA Inc. (holding company of Northwest Airlines Inc.) and Wings Holdings Inc. (holding company of NWA Inc.) Prior to 1989, he was employed by the Marriott Corporation (hotels, restaurants, airline catering and contract feeding), where he most recently was an executive vice president and president of Marriott Hotels and Resorts. Mr. Malek is also a director of American Management Systems, Inc. (management consulting and computer-related services), Automatic Data Processing, Inc., CB Commercial Group, Inc. (real estate ser- vices), Choice Hotels International (hotel and hotel franchising), FPL Group, Inc. (electric services), Integra, Inc. (bio-medical), Manor Care, Inc. (health care), National Education Corporation and Northwest Airlines Inc. Mr. Malek is a director or trustee of 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Carl W. Schafer; 61 Trustee Mr. Schafer is president of the Atlantic P.O. Box 1164 Foundation (charitable foundation sup- Princeton, N.J. 08542 porting mainly oceanographic exploration and research). He is a director of Roadway Express, Inc. (trucking), The Guardian Group of Mutual Funds, Evans Systems, Inc. (a motor fuels, convenience store and diversified company), Electronic Clearing House, Inc. (financial transactions processing), Wainoco Oil Corporation and Nutraceutix Inc. (biotechnology). Prior to January 1993, Mr. Schafer was chairman of the Investment Advisory Committee of the Howard Hughes Medical Institute. Mr. Schafer is a director or trustee of 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
15
BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ------------------------------------ --------------------------- --------------------------------------------- Ellen R. Harris; 51 Vice President Ms. Harris is a managing director and a (Olympus Fund only) portfolio manager of Mitchell Hutchins. Ms. Harris is a vice president of two in- vestment companies for which Mitchell Hutchins or PaineWebber serves as in- vestment adviser. Donald R. Jones; 37 Vice President Mr. Jones is a first vice president and a (Securities Trust only) portfolio manager of Mitchell Hutchins. Prior to February 1996, he was a vice president in the asset management group of First Fidelity Bancorporation. Mr. Jones is a vice president of one investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior vice president and (Securities Trust only) portfolio manager of Mitchell Hutchins. Prior to May 1994, he was a vice president of Keystone Custodian Funds Inc. with portfolio management responsibility. Mr. Libassi is a vice president of four in- vestment companies for which Mitchell Hutchins or PaineWebber serves as invest- ment adviser. Dennis McCauley; 51 Vice President Mr. McCauley is a managing director and chief (Securities Trust only) investment officer--fixed income of Mitchell Hutchins. Prior to December 1994, he was director of fixed income in- vestments of IBM Corporation. Mr. McCauley is a vice president of 18 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Ann E. Moran; 40 Vice President and Ms. Moran is a vice president and a manager Assistant Treasurer of the mutual fund finance division of Mitchell Hutchins. Ms. Moran is a vice president and assistant treasurer of 28 in- vestment companies for which Mitchell Hutchins and or PaineWebber serves as in- vestment adviser. Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior vice president and Secretary deputy general counsel of Mitchell Hutchins. Ms. O'Donnell is a vice president and secretary of 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
16
BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ------------------------------------ --------------------------- --------------------------------------------- Emil Polito; 37 Vice President Mr. Polito is a senior vice president and director of operations and control for Mitchell Hutchins. From March 1991 to September 1993, he was director of the Mutual Funds Sales Support and Service Center for Mitchell Hutchins and PaineWebber. Mr. Polito is also vice pres- ident of 28 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director and general counsel of Mitchell Hutchins. Prior to May 1994, she was a partner in the law firm of Arnold & Porter. Ms. Schonfeld is a vice president of 27 investment companies and a vice president and secretary of one investment company for which Mitchell Hutchins or PaineWebber serves as in- vestment adviser. Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice president and Assistant Treasurer the director of the mutual fund finance division of Mitchell Hutchins. From August 1992 to August 1994, he was a vice president at BlackRock Financial Management Inc. Mr. Schubert is a vice president and assistant treasurer of 28 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Nirmal Singh; 41 Vice President Mr. Singh is a senior vice president and a (Securities Trust only) portfolio manager of Mitchell Hutchins. Prior to September 1993, he was a member of the portfolio management team at Merrill Lynch Asset Management, Inc. Mr. Singh is vice president of four investment compa- nies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Barney A. Taglialatela; 36 Vice President and Mr. Taglialatela is a vice president and a Assistant Treasurer manager of the mutual fund finance divi- sion of Mitchell Hutchins. Prior to Febru- ary 1995, he was a manager of the mutual fund finance division of Kidder Peabody Asset Management, Inc. Mr. Taglialatela is a vice president and assistant treasurer of 28 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
17
BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ------------------------------------ --------------------------- --------------------------------------------- Mark A. Tincher; 42 Vice President Mr. Tincher is a managing director and chief investment officer--U.S. equity invest- ments of Mitchell Hutchins. Prior to March 1995, he was a vice president and directed the U.S. funds management and equity re- search areas of Chase Manhattan Private Bank. Mr. Tincher is a vice president of 13 investment companies for which Mitchell Hutchins or PaineWebber serves as invest- ment adviser. Craig M. Varrelman; 38 Vice President Mr. Varrelman is a senior vice president and (Securities Trust only) a portfolio manager of Mitchell Hutchins. Mr. Varrelman is a vice president of four investment companies for which Mitchell Hutchins or PaineWebber serves as in- vestment adviser. Stuart Waugh; 42 Vice President Mr. Waugh is a managing director and a (Securities Trust only) portfolio manager of Mitchell Hutchins responsible for global fixed income in- vestments and currency trading. Mr. Waugh is a vice president of five investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Keith A. Weller; 36 Vice President and Mr. Weller is a first vice president and Assistant Secretary associate general counsel of Mitchell Hutchins. Prior to May 1995, he was an attorney in private practice. Mr. Weller is a vice president and assistant secretary of 27 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Ian W. Williams; 40 Vice President and Mr. Williams is a vice president and a man- Assistant Treasurer ager of the mutual fund finance division of Mitchell Hutchins. Mr. Williams is a vice president and assistant treasurer of 28 investment companies for which Mitchell Hutchins or PaineWebber serves as in- vestment adviser.
- ------------------ * Unless otherwise indicated, the business address of each listed person is 1285 Avenue of the Americas, New York, New York 10019. ** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of each Trust as defined in the 1940 Act by virtue of their positions with Mitchell Hutchins, PaineWebber, and/or PW Group. Olympus Fund and America Fund each pay trustees who are not 'interested persons' of the Trust $1,500 annually for each series. Olympus Fund and America Fund each presently has one series and thus pays each such trustee $1,500 annually; Securities Trust pays trustees who are not 'interested persons' of the Trust $1,500 for Small Cap Fund and $1,000 for the Trust's second series and thus pays each such trustee $2,500 annually. Each Trust pays $150 for each board meeting and separate meeting of a board committee (other than committee meetings held on the same day as a board meeting). In addition, each Trust pays any additional amounts due for board 18 or committee meetings. Each chairman of the audit and contract review committees of individual funds within the PaineWebber fund complex receives additional compensation, aggregating $15,000 each from the relevant funds. All Trustees are reimbursed for any expenses incurred in attending meetings. Trustees and officers own in the aggregate less than 1% of the outstanding shares of each Fund. Because PaineWebber and Mitchell Hutchins perform substantially all of the services necessary for the operation of the Trusts and each Fund, the Trusts require no employees. No officer, director or employee of Mitchell Hutchins or PaineWebber presently receives any compensation from any Trust for acting as a trustee or officer. The table below includes certain information relating to the compensation of each Trust's current trustees who held office with that Trust or with other PaineWebber funds during the fiscal year indicated. COMPENSATION TABLE
AGGREGATE COMPENSATION AGGREGATE AGGREGATE TOTAL FROM PW COMPENSATION COMPENSATION COMPENSATION AMERICA FUND FROM PW FROM PW FROM THE (GROWTH AND OLYMPUS FUND SECURITIES TRUSTS AND INCOME (GROWTH TRUST (SMALL THE FUND NAME OF PERSON, POSITION FUND)(1) FUND)(1) CAP FUND)(2) COMPLEX(3) - ----------------------------------- ------------ ------------ ------------ ------------ Richard Q. Armstrong, Trustee...... $2,400 $2,400 $2,950 $ 59,873 Richard R. Burt, Trustee........... $2,250 $2,250 $2,650 $ 51,173 Meyer Feldberg, Trustee............ $2,400 $2,400 $2,950 $ 96,181 George W. Gowen, Trustee........... $2,400 $2,400 $2,950 $ 92,431 Frederic V. Malek, Trustee......... $2,400 $2,400 $2,950 $ 92,431 Carl W. Schafer, Trustee........... $2,400 $2,400 $2,950 $ 62,307
- ------------------ Only independent members of the board are compensated by the Trusts and identified above; trustees who are 'interested persons,' as defined by the 1940 Act, do not receive compensation. (1) Represents fees paid to each trustee during the fiscal year ended August 31, 1997. (2) Represents fees paid to each trustee during the fiscal year ended July 31, 1997. (3) Represents total compensation paid to each trustee during the calendar year ended December 31, 1996; no fund within the fund complex has a bonus, pension, profit sharing or retirement plan. OWNERSHIP OF GREATER THAN 5% OF FUND SHARES The following shareholder is shown in Olympus Fund's records as owning more than 5% of Growth Fund's shares.
NUMBER AND PERCENTAGE OF SHARES OWNED NAME AND ADDRESS* AS OF NOVEMBER 1, 1997 - ---------------------------------------- ---------------------- Northern Trust Company as Trustee for the benefit of PaineWebber 401(k) Plan.................................. 747,480.500 5.44%
- ------------------ * The shareholder listed may be contacted c/o Mitchell Hutchins Asset Management Inc., 1285 Avenue of the Americas, New York, NY 10019. 19 INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment adviser and administrator of each Fund pursuant to separate advisory contracts (each an 'Advisory Contract') with each Trust. Under the Advisory Contracts, each Fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate specified below. Prior to August 1, 1997, PaineWebber provided certain services to the Funds not otherwise provided by the transfer agent. These agreements were reviewed annually by each Trust's board. Effective August 1, 1997, PaineWebber provides transfer agency related services to the Funds pursuant to a delegation of authority from PFPC Inc. and is compensated for those services by PFPC Inc., not the Funds. Under the terms of the Advisory Contracts, each Fund bears all expenses incurred in its operation that are not specifically assumed by Mitchell Hutchins. Expenses borne by each Fund include the following: (1) the cost (including brokerage commissions) of securities purchased or sold by the Fund and any losses incurred in connection therewith; (2) fees payable to and expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational expenses; (4) filing fees and expenses relating to the registration and qualification of the Fund's shares under federal and state securities laws and maintenance of such registrations and qualifications; (5) fees and salaries payable to trustees and officers who are not interested persons (as defined in the 1940 Act) of the Fund or Mitchell Hutchins; (6) all expenses incurred in connection with the trustees' services, including travel expenses; (7) taxes (including any income or franchise taxes) and governmental fees; (8) costs of any liability, uncollectible items of deposit and other insurance or fidelity bonds; (9) any costs, expenses or losses arising out of a liability of or claim for damages or other relief asserted against the Trust or Fund for violation of any law; (10) legal, accounting and auditing expenses, including legal fees of special counsel for the independent trustees; (11) charges of custodians, transfer agents and other agents; (12) costs of preparing share certificates; (13) expenses of setting in type and printing prospectuses, statements of additional information and supplements thereto, reports and proxy materials for existing shareholders, and costs of mailing such materials to shareholders; (14) any extraordinary expenses (including fees and disbursements of counsel) incurred by the Fund; (15) fees, voluntary assessments and other expenses incurred in connection with membership in investment company organizations; (16) costs of mailing and tabulating proxies and costs of meetings of shareholders, the boards and any committees thereof; (17) the cost of investment company literature and other publications provided to trustees and officers; and (18) costs of mailing, stationery and communications equipment. Under each Advisory Contract, Mitchell Hutchins will not be liable for any error of judgment or mistake of law or for any loss suffered by a Fund in connection with the performance of the contracts, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in the performance of its duties or from reckless disregard of its duties and obligations thereunder. Each Advisory Contract terminates automatically upon assignment and is terminable at any time without penalty by the applicable board or by vote of the holders of a majority of a Fund's outstanding voting securities on 60 days' written notice to Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written notice to a Fund. GROWTH AND INCOME FUND. Pursuant to the Advisory Contract dated March 1, 1989, between America Fund and Mitchell Hutchins, Growth and Income Fund pays Mitchell Hutchins a fee at the annual rate of 0.70% of the Fund's average daily net assets, computed daily and paid monthly. For the fiscal years ended August 31, 1997, August 31, 1996 and August 31, 1995, Growth and Income Fund paid (or accrued) to Mitchell Hutchins investment advisory and administration fees of $5,312,189, $4,075,174 and $3,378,079, respectively. Pursuant to the applicable service agreement, during the fiscal years ended August 31, 1997, August 31, 1996 and August 31, 1995, Growth and Income Fund paid (or accrued) to PaineWebber service fees of $191,744, $206,622 and $219,613, respectively. Mitchell Hutchins Institutional Investors Inc. ('MHII'), a wholly owned subsidiary of Mitchell Hutchins, served as sub-adviser to Growth and Income Fund from May 19, 1994 to April 25, 1995 pursuant to a sub-advisory contract between MHII and Mitchell Hutchins under which Mitchell Hutchins (not the Fund) paid MHII a fee in the annual amount of 0.25% of the Fund's average daily net assets. During the period from September 1, 1994 to April 25, 1995 Mitchell Hutchins paid or accrued to MHII sub-advisory fees of $998,353. 20 GROWTH FUND. Pursuant to the Advisory Contract dated March 1, 1989, between Olympus Fund and Mitchell Hutchins, Growth Fund pays Mitchell Hutchins a fee at the annual rate of 0.75% of the Fund's average daily net assets, computed daily and paid monthly. For the fiscal years ended August 31, 1997, August 31, 1996 and August 31, 1995, Growth Fund paid (or accrued) to Mitchell Hutchins investment advisory and administration fees of $2,934,644, $2,985,925 and $1,993,930, respectively. Pursuant to the applicable service agreement, during the fiscal years ended August 31, 1997, August 31, 1996 and August 31, 1995, Growth Fund paid (or accrued) to PaineWebber service fees of $110,890, $134,864 and $114,163, respectively. SMALL CAP FUND. Pursuant to the Advisory Contract dated January 28, 1993, between Securities Trust and Mitchell Hutchins, Small Cap Fund pays Mitchell Hutchins a fee at the annual rate of 1.00% of the Fund's average daily net assets, computed daily and paid monthly. For the fiscal years ended July 31, 1997, July 31, 1996, and July 31, 1995, Small Cap Fund paid (or accrued) to Mitchell Hutchins investment advisory and administration fees of $873,636, $731,472 and $829,906, respectively. Pursuant to the applicable service agreement during the fiscal years ended July 31, 1997, July 31, 1996 and July 31, 1995, Small Cap Fund paid (or accrued) to PaineWebber service fees of $35,040, $36,944 and $72,929, respectively. Royce and Associates ('Royce'), formerly Quest Advisory Corp., served as a sub-adviser to Small Cap Fund from February 1, 1993 through March 31, 1996, pursuant to a sub-advisory contract between Royce and Mitchell Hutchins dated January 28, 1993, under which Mitchell Hutchins (not the Fund) paid or accrued to Royce Advisory during the fiscal years ended July 31, 1996 and July 31, 1995, $249,955 and $414,953, respectively, in sub-advisory fees. NET ASSETS. The following table shows the approximate net assets as of October 31, 1997, sorted by category of investment objective, of the investment companies for which Mitchell Hutchins serves as adviser or sub-adviser. An investment company may fall into more than one of the categories below.
NET ASSETS INVESTMENT CATEGORY ($ MIL) ---------------------------------------- ---------- Domestic (excluding Money Market)....... $ 6,349.3 Global.................................. 3,280.3 Equity/Balanced......................... 4,776.0 Fixed Income (excluding Money Market)... 4,853.6 Taxable Fixed Income.................. 3,287.5 Tax-Free Fixed Income................. 1,566.1 Money Market Funds...................... 26,066.9
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in securities for their own accounts pursuant to a code of ethics that describes the fiduciary duty owed to shareholders of PaineWebber mutual funds and other Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors, officers and employees, establishes procedures for personal investing and restricts certain transactions. For example, employee accounts generally must be maintained at PaineWebber, personal trades in most securities require pre-clearance and short-term trading and participation in initial public offerings generally are prohibited. In addition, the code of ethics puts restrictions on the timing of personal investing in relation to trades by PaineWebber funds and other Mitchell Hutchins advisory clients. DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of each class of shares of each Fund under separate distribution contracts with each Trust (collectively, 'Distribution Contracts') that require Mitchell Hutchins to use its best efforts, consistent with its other businesses, to sell shares of each Fund. Shares of each of the Funds are offered continuously. Under separate exclusive dealer agreements between Mitchell Hutchins and PaineWebber relating to each class of shares (collectively, 'Exclusive Dealer Agreements'), PaineWebber and its correspondent firms sell the Funds' shares. Under separate plans of distribution pertaining to the Class A, Class B and Class C shares adopted by each Trust in the manner prescribed under Rule 12b-1 under the 1940 Act ('Class A Plan,' 'Class B Plan' and 'Class C Plan,' collectively, 'Plans'), each 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, except that the Class A Plans for Growth and Income Fund and Growth Fund provide that the service fee paid with respect to shares sold 21 prior to December 2, 1988 ('Old Shares') is paid at the annual rate of 0.15% of the Fund's net assets represented by such Old Shares. Shares acquired through new purchases, reinvestment of dividends and other distributions and exchanges on/or after December 2, 1988 are not considered 'Old Shares' for this purpose. Under the Class B Plan and the Class C Plan, those Funds also pay Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at the annual rate of 0.75% of the average daily net assets of the Class B shares and Class C shares, respectively. There is no distribution plan with respect to the Funds' Class Y shares. Among other things, each Plan provides that (1) Mitchell Hutchins will submit to the applicable board at least quarterly, and the trustees will review, reports regarding all amounts expended under the Plan and the purposes for which such expenditures were made, (2) the Plan will continue in effect only so long as it is approved at least annually, and any material amendment thereto is approved, by the applicable board, including those trustees who are not 'interested persons' of the relevant Trust and who have no direct or indirect financial interest in the operation of the Plan or any agreement related to the Plan, acting in person at a meeting called for that purpose, (3) payments by a Fund under the Plan shall not be materially increased without the affirmative vote of the holders of a majority of the outstanding shares of the relevant class of the Fund, and (4) while the Plan remains in effect, the selection and nomination of trustees who are not 'interested persons' of a Trust shall be committed to the discretion of the trustees who are not 'interested persons' of the respective Trust. In reporting amounts expended under the Plans to the trustees, Mitchell Hutchins allocates expenses attributable to the sale of each class of each Fund's shares to such class based on the ratio of sales of shares of such class to the sales of all three classes of shares. The fees paid by one class of a Fund's shares will not be used to subsidize the sale of any other class of Fund shares. For the fiscal year ended August 31, 1997, (for Growth and Income Fund and Growth Fund) and July 31, 1997 (for Small Cap Fund), the Funds paid (or accrued) the following fees to Mitchell Hutchins under the Plans:
GROWTH AND GROWTH INCOME SMALL CAP FUND FUND FUND ---------- ---------- --------- Class A................................. $ 478,075 $ 784,677 $ 75,231 Class B................................. $1,326,859 $3,245,358 $ 367,939 Class C................................. $ 287,127 $ 596,262 $ 177,393
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber, incurred the following shareholder service-related and distribution-related expenses with respect to each Fund during the fiscal years ended August 31, 1997 (for Growth and Income Fund and Growth Fund) and July 31, 1997 (for Small Cap Fund): CLASS A
GROWTH AND GROWTH INCOME SMALL CAP FUND FUND FUND ---------- ---------- --------- Marketing and advertising............... $ 132,602 $ 137,579 $ 38,909 Printing of prospectuses and statements of additional information to other than current shareholders............ 1,256 1,770 1,806 Branch network costs allocated and interest expense..................... 604,346 737,383 94,235 Service fees paid to PaineWebber investment executives................ 180,442 296,483 28,201
22 CLASS B
GROWTH AND GROWTH INCOME SMALL CAP FUND FUND FUND ---------- ---------- --------- Marketing and advertising............... $ 84,008 $ 130,498 $ 47,577 Amortization of commissions............. 400,905 1,042,924 111,944 Printing of prospectuses and statements of additional information to other than current shareholders............ 796 1,679 2,208 Branch network costs allocated and interest expense..................... 415,934 773,637 125,942 Service fees paid to PaineWebber investment executives................ 125,142 306,470 34,485
CLASS C
GROWTH AND GROWTH INCOME SMALL CAP FUND FUND FUND ---------- ---------- --------- Marketing and advertising............... $ 18,167 $ 24,166 $ 22,935 Amortization of commissions............. 81,244 169,049 49,855 Printing of prospectuses and statements of additional information to other than current shareholders............ 172 311 1,065 Branch network costs allocated and interest expense..................... 81,848 133,397 55,902 Service fees paid to PaineWebber investment executives................ 27,082 56,351 16,619
'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(Service Mark) system of distribution, each board considered several factors, including that implementation of Flexible Pricing would (1) enable investors to choose the purchasing option best suited to their individual situation, thereby encouraging current shareholders to make additional investments in the Funds and attracting new investors and assets to the Funds to the benefit of each Fund and its shareholders, (2) facilitate distribution of the Fund's shares and (3) maintain the competitive position of a Fund in relation to other funds that have implemented or are seeking to implement similar distribution arrangements. In approving the Class A Plan, each board considered all the features of the distribution system, including (1) the conditions under which initial sales charges would be imposed and the amount of such charges, (2) Mitchell Hutchins' belief that the initial sales charge combined with a service fee would be attractive to PaineWebber investment executives and correspondent firms, resulting in greater growth of the Funds than might otherwise be the case, (3) the advantages to the shareholders of economies of scale resulting from growth in each Fund's assets and potential continued growth, (4) the services provided to each Fund and its shareholders by Mitchell Hutchins, (5) the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and costs. In approving the Class B Plan, each board considered all the features of the distribution system, including (1) the conditions under which contingent deferred sales charges would be imposed and the amount of such charges, (2) the advantage to investors in having no initial sales charges deducted from Fund purchase payments and instead having the entire amount of their purchase payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief that the ability of PaineWebber investment executives and correspondent firms to receive sales commissions when Class B shares are sold and continuing service fees thereafter while their customers invest their entire purchase payments immediately in Class B shares would prove attractive to the investment executives and correspondent firms, resulting in greater growth of each Fund than might otherwise be the case, (4) the advantages to the shareholders of economies of scale resulting from growth in each Fund's assets and potential continued growth, (5) the services provided to a Fund and its shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins 23 and (7) Mitchell Hutchins' shareholder service- and distribution-related expenses and costs. The trustees also recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its investment executives, without the concomitant receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its expectation of being compensated under the Class B Plan. In approving the Class C Plan, each board considered all the features of the distribution system, including (1) the advantage to investors in having no initial sales charges deducted from Fund purchase payments 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 each Fund than might otherwise be the case, (4) the advantages to the shareholders of economies of scale resulting from growth in each Fund's assets and potential continued growth, (5) the services provided to each Fund and its shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and distribution-related expenses and costs. The trustees also recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its investment executives without the concomitant receipt by Mitchell Hutchins of initial sales charges or contingent deferred sales charges upon redemption, was conditioned upon its expectation of being compensated under the Class C Plan. With respect to each Plan, the boards considered all compensation that Mitchell Hutchins would receive under the Plan and the Distribution Contract, including service fees and, as applicable, initial sales charges, distribution fees and contingent deferred sales charges. The boards also considered the benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell Hutchins would receive service, distribution and advisory fees which are calculated based upon a percentage of the average net assets of each Fund, which fees would increase if the Plan were successful and the Funds attained and maintained significant asset levels. Under the Distribution Contract for the Class A shares and similar prior distribution contracts, 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.
FISCAL YEAR --------------------------------- 1997 1996 1995 ---------- -------- ------- GROWTH FUND Earned.................................. $ 113,033 $104,474 $62,298 Retained................................ $ 6,886 $ 6,032 $ 3,619 GROWTH AND INCOME FUND Earned.................................. $1,057,894 $369,006 $68,358 Retained................................ $ 28,748 $ 21,741 $ 3,619 SMALL CAP FUND Earned.................................. $ 39,599 $ 16,418 $41,750 Retained................................ $ 2,303 $ 1,131 $ 1,208
For the last fiscal year of the relevant Fund, Mitchell Hutchins earned and retained $251,694 from Growth Fund, $375,279 from Growth and Income Fund and $85,036 from Small Cap Fund in contingent deferred sales charges paid upon certain redemptions of Class A, B and C shares. 24 PORTFOLIO TRANSACTIONS Subject to policies established by each board, Mitchell Hutchins is responsible for the execution of each Fund's portfolio transactions and the allocation of brokerage transactions. In executing portfolio transactions, Mitchell Hutchins seeks to obtain the best net results for the Funds, taking into account such factors as the price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved. While Mitchell Hutchins generally seeks reasonably competitive commission rates, payment of the lowest commission is not necessarily consistent with obtaining the best net results. Prices paid to dealers in principal transactions, through which most debt securities and some equity securities are traded, generally include a 'spread,' which is the difference between the prices at which the dealer is willing to purchase and sell a specific security at the time. The Funds may invest in securities traded in the OTC market and will engage primarily in transactions directly with the dealers who make markets in such securities, unless a better price or execution could be obtained by using a broker. During the indicated fiscal years ended August 31 (for Growth and Income Fund and Growth Fund) and July 31 (for Small Cap Fund), the Funds paid the brokerage commissions set forth below:
FISCAL YEAR -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Growth and Income Fund........................................ $1,139,813 $1,246,465 $1,241,906 Growth Fund................................................... 665,156 400,232 273,991 Small Cap Fund................................................ 147,913 211,004 120,717
The Funds have no obligation to deal with any broker or group of brokers in the execution of portfolio transactions. The Funds contemplate that, consistent with the policy of obtaining the best net results, brokerage transactions may be conducted through PaineWebber. Each board has adopted procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory Contracts authorize PaineWebber to effect portfolio transactions for the Funds on such exchange and to retain compensation in connection with such transactions. Any such transactions will be effected and related compensation paid only in accordance with applicable SEC regulations. During the indicated fiscal years ended August 31 (for Growth and Income Fund and Growth Fund) and July 31 (for Small Cap Fund), the Funds paid to PaineWebber the brokerage commissions set forth below:
FISCAL YEAR ----------------------------- 1997 1996 1995 ------- ------- ------- Growth and Income Fund................................................. $43,440 $22,470 $65,991 Growth Fund............................................................ 32,130 2,400 4,200 Small Cap Fund......................................................... 3,900 0 665
The amounts paid by the Funds to PaineWebber in brokerage commissions for their most recent fiscal years represent (1) for Growth and Income Fund, 3.81% of the total brokerage commission paid and 3.36% of the total dollar amount of transactions involving the payment of brokerage commissions, (2) for Growth Fund, 4.90% of the total brokerage commission paid and 5.04% of the total dollar amount of transactions involving the payment of brokerage commissions, and (3) for Small Cap Fund, 2.64% of the total brokerage commission paid and 2.00% of the total dollar amount of transactions involving the payment of brokerage commissions. Transactions in futures contracts are executed through futures commission merchants ('FCMs'), who receive brokerage commissions for their services. The Funds' procedures in selecting FCMs to execute their transactions in futures contracts, including procedures permitting the use of PaineWebber, are similar to those in effect with respect to brokerage transactions in securities. Consistent with the interests of each Fund and subject to the review of each Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase and sell portfolio securities from and to dealers or through brokers who provide the Fund with research, analysis, advice and similar services. In return for such services, the Fund may pay to those brokers a higher commission than may be charged by other brokers, provided that Mitchell Hutchins determines in good faith that such commission is reasonable in terms either of that particular transaction or of the overall responsibility of Mitchell Hutchins to the particular Fund and its other clients and that the total commissions paid by the Fund will be reasonable in relation to the benefits to the Fund over the long 25 term. During the fiscal years ended August 31, 1997 (for Growth and Income Fund and Growth Fund) and July 31, 1997 (for Small Cap Fund), the Funds directed the portfolio transactions indicated below to brokers chosen because they provide research and analysis, for which the Funds paid the brokerage commissions indicated below:
AMOUNT OF PORTFOLIO BROKERAGE COMMISSIONS TRANSACTIONS PAID ------------------- --------------------- Growth and Income Fund...................................... $70,042,961 $93,938 Growth Fund................................................. 56,438,985 66,329 Small Cap Fund.............................................. 10,390,512 27,170
For purchases or sales with broker-dealer firms which act as principal, Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive certain research or execution services in connection with these transactions, Mitchell Hutchins will not purchase securities at a higher price or sell securities at a lower price than would otherwise be paid if no weight were attributed to the services provided by the executing dealer. Moreover, Mitchell Hutchins will not enter into any explicit soft dollar arrangements relating to principal transactions and will not receive in principal transactions the types of services which could be purchased for hard dollars. Mitchell Hutchins may engage in agency transactions in OTC equity and debt securities in return for research and execution services. These transactions are entered into only in compliance with procedures ensuring that the transaction (including commissions) is at least as favorable as it would have been if effected directly with a market-maker that did not provide research or execution services. These procedures include Mitchell Hutchins receiving multiple quotes from dealers before executing the transactions on an agency basis. Information and research services furnished by brokers or dealers through which or with which the Funds effect securities transactions may be used by Mitchell Hutchins in advising other funds or accounts and, conversely, information and research services furnished to Mitchell Hutchins by brokers or dealers in connection with other funds or accounts that either of them advises may be used in advising the Funds. Information and research received from brokers or dealers will be in addition to, and not in lieu of, the services required to be performed by Mitchell Hutchins under the Advisory Contracts. Investment decisions for the Funds and for other investment accounts managed by Mitchell Hutchins are made independently of each other in light of differing considerations for the various accounts. However, the same investment decision may occasionally be made for a Fund and one or more of such accounts. In such cases, simultaneous transactions are inevitable. Purchases or sales are then averaged as to price and allocated between that Fund and such other account(s) as to amount according to a formula deemed equitable to the Fund and such account(s). While in some cases this practice could have a detrimental effect upon the price or value of the security as far as the Funds are concerned, or upon their ability to complete their entire order, in other cases it is believed that coordination and the ability to participate in volume transactions will be beneficial to the Funds. The Funds will not purchase securities that are offered in underwritings in which PaineWebber is a member of the underwriting or selling group, except pursuant to procedures adopted by each board pursuant to Rule 10f-3 under the 1940 Act. Among other things, these procedures require that the spread or commission paid in connection with such a purchase be reasonable and fair, the purchase be at not more than the public offering price prior to the end of the first business day after the date of the public offering and that PaineWebber or any affiliate thereof not participate in or benefit from the sale to the Funds. PORTFOLIO TURNOVER. The Funds' annual portfolio turnover rates may vary greatly from year to year, but they will not be a limiting factor when management deems portfolio changes appropriate. The portfolio turnover rate is calculated by dividing the lesser of each Fund's annual sales or purchases of portfolio securities (exclusive of purchases or sales of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of securities in the portfolio during the year. 26
PORTFOLIO TURNOVER RATE ------------- GROWTH AND INCOME FUND Fiscal Year Ended August 31, 1997................. 70% Fiscal Year Ended August 31, 1996................. 112% GROWTH FUND Fiscal Year Ended August 31, 1997................. 86% Fiscal Year Ended August 31, 1996................. 60% SMALL CAP FUND Fiscal Year Ended July 31, 1997................... 54% Fiscal Year Ended July 31, 1996................... 84%
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION AND OTHER SERVICES COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups of related Fund investors may combine purchases of Class A shares of the Funds with concurrent purchases of Class A shares of any other PaineWebber mutual fund and thus take advantage of the reduced sales charges indicated in the table of sales charges for Class A shares in the Prospectus. The sales charge payable on the purchase of Class A shares of the Funds and Class A shares of such other funds will be at the rates applicable to the total amount of the combined concurrent purchases. An 'eligible group of related Fund investors' can consist of any combination of the following: (a) an individual, that individual's spouse, parents and children; (b) an individual and his or her Individual Retirement Account ('IRA'); (c) an individual (or eligible group of individuals) and any company controlled by the individual(s) (a person, entity or group that holds 25% or more of the outstanding voting securities of a corporation will be deemed to control the corporation, and a partnership will be deemed to be controlled by each of its general partners); (d) an individual (or eligible group of individuals) and one or more employee benefit plans of a company controlled by such 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) an individual's accounts with the same investment adviser. RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are available through a right of accumulation, under which investors and eligible groups of related Fund investors (as defined above) are permitted to purchase Class A shares of the Funds among related accounts at the offering price applicable to the total of (1) the dollar amount then being purchased plus (2) an amount equal to the then-current net asset value of the purchaser's combined holdings of Class A Fund shares and Class A shares of any other PaineWebber mutual fund. The purchaser must provide sufficient information to permit confirmation of his or her holdings, and the acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the contingent deferred sales charge on Class B shares is waived where a total or partial redemption is made within one year following the 27 death of the shareholder. The contingent deferred sales charge waiver is available where the decedent is either the individual shareholder or owns the shares with his or her spouse as a joint tenant with right of survivorship. This waiver applies only to redemption of shares held at the time of death. ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the Prospectus, eligible shares of the Funds may be exchanged for shares of the corresponding class of most other PaineWebber mutual funds. This exchange privilege is available only in those jurisdictions where the sale of PaineWebber fund shares to be acquired through such exchange may be legally made. Shareholders will receive at least 60 days' notice of any termination or material modification of the exchange offer, except no notice need be given of an amendment whose only material effect is to reduce the exchange fee and no notice need be given if, under extraordinary circumstances, either redemptions are suspended under the circumstances described below or a Fund temporarily delays or ceases the sales of its shares because it is unable to invest amounts effectively in accordance with the Fund's investment objective, policies and restrictions. If conditions exist that make cash payments undesirable, the Funds reserve the right to honor any request for redemption by making payment in whole or in part in securities chosen by the Funds and valued in the same way as they would be valued for purposes of computing the Funds' net asset value. Any such redemption in kind will be made with readily marketable securities, to the extent available. If payment is made in securities, a shareholder may incur brokerage expenses in converting these securities into cash. Each Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which a Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day period for one shareholder. This election is irrevocable unless the SEC permits its withdrawal. The Funds may suspend redemption privileges or postpone the date of payment during any period (1) when the New York Stock Exchange ('NYSE') is closed or trading on the NYSE is restricted as determined by the SEC, (2) when an emergency exists, as defined by the SEC, that makes it not reasonably practicable for a Fund to dispose of securities owned by it or fairly to determine the value of its assets or (3) as the SEC may otherwise permit. The redemption price may be more or less than the shareholder's cost, depending on the market value of a Fund's portfolio at the time. AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan enables an investor to use the technique of 'dollar cost averaging.' When the investor invests the same dollar amount each month under the Plan, the investor will purchase more shares when a Fund's net asset value per share is low and fewer shares when the net asset value per share is high. Using this technique, an investor's average purchase price per share over any given period will be lower than if the investor purchased a fixed number of shares on a monthly basis during the period. Of course, investing through the automatic investment plan does not assure a profit or protect against loss in declining markets. Additionally, because the automatic investment plan involves continuous investing regardless of price levels, an investor should consider his or her financial ability to continue purchases through periods of low price levels. SYSTEMATIC WITHDRAWAL 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 $5,000 for Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases of additional Fund shares 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 each month for monthly, quarterly, semiannual or annual plans, PaineWebber will arrange for redemption by a Fund of sufficient Fund shares to provide the withdrawal payment specified by participants in the Funds' systematic withdrawal plan. The payment generally is mailed approximately five business days (defined under 'Valuation of Shares') after the redemption date. Withdrawal payments should not be considered dividends, but redemption proceeds, with the tax consequences described under 'Dividends & Taxes' in the Prospectus. If periodic withdrawals continually exceed reinvested dividends, a shareholder's investment may be correspondingly reduced. A shareholder may change the amount of the systematic withdrawal or terminate participation in the systematic withdrawal plan at any time without charge or penalty by written 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 28 forms needed to establish a systematic withdrawal plan from their PaineWebber investment executives, correspondent firms or the Transfer Agent at 1-800-647-1568. REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus, shareholders who have redeemed their Class A shares may reinstate their account in the Funds without a sales charge. Shareholders may exercise the reinstatement privilege by notifying the Transfer Agent of such desire and forwarding a check for the amount to be purchased within 365 days after the date of redemption. The reinstatement will be made at the net asset value per share next computed after the notice of reinstatement and check are received. The amount of a purchase under this reinstatement privilege cannot exceed the amount of the redemption proceeds. Gain on a redemption is taxable regardless of whether the reinstatement privilege is exercised; however, a loss arising out of a redemption will not be deductible to the extent the reinstatement privilege is exercised within 30 days after redemption, and an adjustment will be made to the shareholder's tax basis for shares acquired pursuant to the reinstatement privilege. Gain or loss on a redemption also will be adjusted for federal income tax purposes by the amount of any sales charge paid on Class A shares, under the circumstances and to the extent described in 'Dividends & Taxes' in the Prospectus. PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICE MARK); PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED)(RMA)(REGISTERED) Shares of PaineWebber mutual funds (each a 'PW Fund' and, collectively, the 'PW Funds') are available for purchase by customers of PaineWebber and its correspondent firms who maintain Resource Management Accounts ('RMA Accountholders') through the RMA Resource Accumulation Plan ('Plan') by customers of PaineWebber and its correspondent firms who maintain Resource Management Accounts ('RMA accountholders'). The Plan allows an RMA accountholder to continually invest in one or more of the PW Funds at regular intervals, with payment for shares purchased automatically deducted from the client's RMA account. The client may elect to invest at monthly or quarterly intervals and may elect either to invest a fixed dollar amount (minimum $100 per period) or to purchase a fixed number of shares. A client can elect to have Plan purchases executed on the first or fifteenth day of the month. Settlement occurs three Business Days (defined under 'Valuation of Shares') after the trade date, and the purchase price of the shares is withdrawn from the investor's RMA account on the settlement date from the following sources and in the following order: uninvested cash balances, balances in RMA money market funds, or margin borrowing power, if applicable to the account. To participate in the Plan, an investor must be an RMA accountholder, must have made an initial purchase of the shares of each PW Fund selected for investment under the Plan (meeting applicable minimum investment requirements) and must complete and submit the RMA Resource Accumulation Plan Client Agreement and Instruction Form available from PaineWebber. The investor must have received a current prospectus for each PW Fund selected prior to enrolling in the Plan. Information about mutual fund positions and outstanding instructions under the Plan are noted on the RMA accountholder's account statement. Instructions under the Plan may be changed at any time, but may take up to two weeks to become effective. The terms of the Plan, or an RMA accountholder's participation in the Plan, may be modified or terminated at any time. It is anticipated that, in the future, shares of other PW Funds and/or mutual funds other than the PW Funds may be offered through the Plan. PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW Funds or other mutual funds, whether through the Plan or otherwise, helps investors establish and maintain a disciplined approach to accumulating assets over time, de-emphasizing the importance of timing the market's highs and lows. Periodic investing also permits an investor to take advantage of 'dollar cost averaging.' By investing a fixed amount in mutual fund shares at established intervals, an investor purchases more shares when the price is lower and fewer shares when the price is higher, thereby increasing his or her earning potential. Of course, dollar cost averaging does not guarantee a profit or protect against a loss in a declining market, and an investor should consider his or her financial ability to continue investing through periods of low share prices. However, over time, dollar cost averaging generally results in a lower average original investment cost than if an investor invested a larger dollar amount in a mutual fund at one time. PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan, an investor must have opened an RMA account with PaineWebber or one of its correspondent firms. The RMA account is 29 PaineWebber's comprehensive asset management account and offers investors a number of features, including the following: o monthly Premier account statements that itemize all account activity, including investment transactions, checking activity and Gold MasterCard(Registered) transactions during the period, and provide unrealized and realized gain and loss estimates for most securities held in the account; o comprehensive preliminary 9-month and year-end summary statements that provide information on account activity for use in tax planning and tax return preparation; o automatic 'sweep' of uninvested cash into the RMA accountholder's choice of one of the six RMA money market funds--RMA Money Market Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money Fund, RMA New Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each money market fund attempts to maintain a stable price per share of $1.00, although there can be no assurance that it will be able to do so. Investments in the money market funds are not insured or guaranteed by the U.S. government; o check writing, with no per-check usage charge, no minimum amount on checks and no maximum number of checks that can be written. RMA accountholders can code their checks to classify expenditures. All canceled checks are returned each month; o Gold MasterCard, with or without a line of credit, which provides RMA accountholders with direct access to their accounts and can be used with automatic teller machines worldwide. Purchases on the Gold MasterCard are debited to the RMA account once monthly, permitting accountholders to remain invested for a longer period of time; o 24-hour access to account information through toll-free numbers, and more detailed personal assistance during business hours from the RMA Service Center; o expanded account protection to $100 million in the event of the liquidation of PaineWebber. This protection does not apply to shares of the RMA money market funds or the PW Funds because those shares are held at the transfer agent and not through PaineWebber; and o automatic direct deposit of checks into your RMA account and automatic withdrawals from the account. The annual account fee for an RMA account is $85, which includes the Gold MasterCard, with an additional fee of $40 if the investor selects an optional line of credit with the Gold MasterCard. CONVERSION OF CLASS B SHARES Class B shares of a Fund will automatically convert to Class A shares of that Fund, based on the relative net asset values per share of the two classes, as of the close of business on the first Business Day (as defined under 'Valuation of Shares') of the month in which the sixth anniversary of the initial issuance of such Class B shares occurs. For the purpose of calculating the holding period required for conversion of Class B shares, the date of initial issuance shall mean (i) the date on which such Class B shares were issued, or (ii) for Class B shares obtained through an exchange, or a series of exchanges, the date on which the original Class B shares were issued. For purposes of conversion to Class A shares, Class B shares purchased through the reinvestment of dividends and other distributions paid in respect of Class B shares will be held in a separate sub-account. Each time any Class B shares in the shareholder's regular account (other than those in the sub-account) convert to Class A shares, a pro rata portion of the Class B shares in the sub-account will also convert to Class A shares. The portion will be determined by the ratio that the shareholder's Class B shares converting to Class A shares bears to the shareholder's total Class B shares not acquired through dividends and other distributions. The availability of the conversion feature is subject to the continuing availability of an opinion of counsel to the effect that the dividends and other distributions paid on Class A and Class B shares will not result in 'preferential dividends' under the Internal Revenue Code and the conversion of shares will 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 30 of purchase. Mitchell Hutchins has no reason to believe that this condition for the availability of the conversion feature will not be met. VALUATION OF SHARES The Funds determine their net asset values per share separately for each class of shares as of the close of regular trading (currently 4:00 p.m., Eastern time) on the NYSE on each Business Day, which is defined as each Monday through Friday when the NYSE is open. Currently the NYSE is closed on the observance of the following holidays: New Year's Day, 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 OTC market and listed on The Nasdaq Stock Market ('Nasdaq') are valued at the last trade price on Nasdaq at 4:00 p.m., Eastern time; other OTC securities are valued at the last bid price available prior to valuation. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of each Trust's board. PERFORMANCE INFORMATION The Funds' performance data quoted in advertising and other promotional materials ('Performance Advertisements') represent past performance and are not intended to indicate future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. TOTAL RETURN CALCULATIONS. Average annual total return quotes ('Standardized Return') used in each Fund's Performance Advertisements are calculated according to the following formula: P(1 + T)n = ERV where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified class T = average annual total return of shares of that class n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance Advertisements will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertisement for publication. Total return, or 'T' in the formula above, is computed by finding the average annual change in the value of an initial $1,000 investment over the period. In calculating the ending redeemable value, for Class A shares, the maximum 4.5% sales charge is deducted from the initial $1,000 payment and, for Class B and Class C shares, the applicable contingent deferred sales charge imposed on a redemption of Class B or Class C shares held for the period is deducted. All dividends and other distributions are assumed to have been reinvested at net asset value. The Funds also may refer in Performance Advertisements to total return performance data that are not calculated according to the formula set forth above ('Non-Standardized Return'). The Funds calculate Non-Standardized Return for specified periods of time by assuming an investment of $1,000 in Fund shares and assuming the reinvestment of all dividends and other distributions. The rate of return is determined by subtracting the initial value of the investment from the ending value and by dividing the remainder by the initial value. Neither initial nor contingent deferred sales charges are taken into account in calculating Non-Standardized Return; the inclusion of those charges would reduce the return. Both Standardized Return and Non-Standardized Return for Class B shares for periods of over six years reflect conversion of the Class B shares to Class A shares at the end of the sixth year. 31 The following table shows performance information for each classs of shares of the Funds for the periods indicated. All returns for periods of more than one year are expressed as an average return. GROWTH AND INCOME FUND
CLASS A CLASS B CLASS C CLASS Y ------- ------- ------- ------- Year ended August 31, 1997: Standardized Return*.................. 36.00% 36.33% 40.30% 42.74% Non-Standardized Return............... 42.42% 41.33% 41.30% 42.74% Five years ended August 31, 1997: Standardized Return*.................. 14.12% 14.07% 14.31% 15.51% Non-Standardized Return............... 15.19% 14.30% 14.31% 15.51% Ten years ended August 31, 1997 Standardized Return*.................. 11.34% NA NA N/A Non-Standardized Return............... 11.85% NA NA N/A Inception** to August 31, 1997: Standardized Return*.................. 13.43% 13.85% 14.44% 13.54% Non-Standardized Return............... 13.81% 13.85% 14.44% 13.54%
- ------------------ * All Standardized Return figures for Class A shares reflect deduction of the current maximum sales charge of 4.5%. All Standardized Return figures for Class B and Class C shares reflect deduction of the applicable contingent deferred sales charges imposed on a redemption of shares held for the period. Class Y shares do not impose an initial or contingent deferred sales charge; therefore, Non-Standardized Return is identical to Standardized Return. ** The inception date for each class of shares is as follows: Class A--December 20, 1983, Class B--July 1, 1991, Class C--July 2, 1992 and Class Y--February 12, 1992. GROWTH FUND
CLASS A CLASS B CLASS C CLASS Y ------- ------- ------- ------- Fiscal year ended August 31, 1997: Standardized Return*.................. 10.63% 9.98% 13.95% 16.24% Non-Standardized Return............... 15.85% 14.98% 14.95% 16.24% Five years ended August 31, 1997: Standardized Return*.................. 13.62% 13.53% 13.76% 14.99% Non-Standardized Return*.............. 14.67% 13.77% 13.76% 14.99% Ten years ended August 31, 1997: Standardized Return*.................. 10.98% NA NA NA Non-Standardized Return*.............. 11.49% NA NA NA Inception** to August 31, 1997: Standardized Return*.................. 13.83% 12.77% 12.91% 12.65% Non-Standardized Return............... 14.25% 12.77% 12.91% 12.65%
- ------------------ * All Standardized Return figures for Class A shares reflect deduction of the current maximum sales charge of 4.5%. All Standardized Return figures for Class B and Class C shares reflect deduction of the applicable contingent deferred sales charges imposed on a redemption of shares held for the period. Class Y shares do not impose an initial or contingent deferred sales charge; therefore, Non-Standardized Return is identical to Standardized Return. ** The inception date for each class of shares is as follows: Class A--March 18, 1985, Class B--July 1, 1991, Class C--July 2, 1992 and Class Y--August 26, 1991. 32 SMALL CAP FUND
CLASS A CLASS B CLASS C CLASS Y ------- ------- ------- ------- One year ended July 31, 1997: Standardized Return*.................. 30.01% 30.16 % 34.09% 36.65% Non-Standardized Return............... 36.11% 35.16 % 35.09% 36.65% Inception** to July 31, 1997: Standardized Return*.................. 11.64% 11.64 % 11.92% 35.81% Non-Standardized Return............... 12.79% 11.94 % 11.92% 35.81%
- ------------------ * 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 Class A, Class B and Class C shares is February 1, 1993. The inception date for Class Y shares is July 26, 1996. OTHER INFORMATION. In Performance Advertisements, the Funds may compare their Standardized Return and/or their Non-Standardized Return with data published by Lipper Analytical Services, Inc. ('Lipper'), CDA Investment Technologies, Inc. ('CDA'), Wiesenberger Investment Companies Service ('Wiesenberger'), Investment Company Data, Inc. ('ICD') or Morningstar Mutual Funds ('Morningstar'), with the performance of recognized stock and other indices, including 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 Nasdaq Composite Index, the Russell 2000 Index, the Russell 1000 Index (including Value and Growth sub-indexes), the Wilshire 5000 Index, the Lehman Bond Index, 30-year and 10-year U.S. Treasury bonds, the Morgan Stanley Capital International World Index and changes in the Consumer Price Index as published by the U.S. Department of Commerce. The Funds also may refer in such materials to mutual fund performance rankings and other data, such as comparative asset, expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to discussions of the Funds and comparative mutual fund data and ratings reported in independent periodicals, including THE WALL STREET JOURNAL, MONEY, SMART MONEY, MUTUAL FUNDS, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic form. The Funds may include discussions or illustrations of the effects of compounding in Performance Advertisements. 'Compounding' refers to the fact that, if dividends or other distributions on a Fund investment are reinvested in additional Fund shares, any future income or capital appreciation of a Fund would increase the value, not only of the original Fund investment, but also of the additional Fund shares received through reinvestment. As a result, the value of a Fund investment would increase more quickly than if dividends or other distributions had been paid in cash. The Funds may also compare their performance with the performance of bank certificates of deposit (CDs) as measured by the CDA Certificate of Deposit Index, the Bank Rate Monitor National Index and the averages of yields of CDs of major banks published by Banxquote(Registered) Money Markets. In comparing the Funds' performance to CD performance, investors should keep in mind that bank CDs are insured in whole or in part by an agency of the U.S. government and offer fixed principal and fixed or variable rates of interest, and that bank CD yields may vary depending on the financial institution offering the CD and prevailing interest rates. Shares of the Funds are not insured or guaranteed by the U.S. government and returns and net asset value will fluctuate. The debt securities held by the Funds generally have longer maturities than most CDs and may reflect interest rate fluctuations for longer term securities. An investment in any Fund involves greater risks than an investment in either a money market fund or a CD. The Funds may also compare their performance to general trends in the stock and bond markets, as illustrated by the following graph prepared by Ibbotson Associates, Chicago. 33 [GRAPHICS -- CAMERA READY CHART] 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 indices are unmanaged and are not available for investment. - ------------------ Source: Stocks, Bonds, Bills and Inflation 1996 YearbookTM Ibbotson Assoc., Chi., (annual updates work by Roger C. Ibbotson & Rex A Sinquefield). Over time, stocks have outperformed all other investments by a wide margin, offering a solid hedge against inflation. From 1926 to 1996, stocks beat all other traditional asset classes. A $10,000 investment in the stocks comprising the S&P 500 grew to $13,710,736, significantly more than any other investment. 34 TAXES In order to continue to qualify for treatment as a regulated investment company ('RIC') under the Internal Revenue Code, each Fund must distribute to its shareholders for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income and net short-term capital gain) ('Distribution Requirement') and must meet several additional requirements. For each Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities, or other income (including gains from options or futures) derived with respect to its business of investing in securities ('Income Requirement'); (2) at the close of each quarter of the Fund's taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with these other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund's total assets and that does not represent more than 10% of the issuer's outstanding voting securities; and (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. In addition, through the end of its current taxable year (July 31, 1998), Small Cap Fund must derive less than 30% of its gross income from the sale or other disposition of securities, options or futures held for less than three months ('Short-Short Limitation'). Thereafter, Small Cap Fund will no longer need to satisfy the Short-Short Limitation to qualify as a RIC, as a result of the Taxpayer Relief Act of 1997 ('Tax Act'). Dividends and other distributions declared by a Fund in October, November or December of any year and payable to shareholders of record on a date in any of those months will be deemed to have been paid by the Fund and received by the shareholders on December 31 of that year if the distributions are paid by the Fund during the following January. Accordingly, those distributions will be taxed to shareholders for the year in which that December 31 falls. A portion of the dividends from each Fund's investment company taxable income (whether paid in cash or additional shares) may be eligible for the dividends-received deduction allowed to corporations. The eligible portion may not exceed the aggregate dividends received by a Fund from U.S. corporations. However, dividends received by a corporate shareholder and deducted by it pursuant to the dividends-received deduction are subject indirectly to the alternative minimum tax. If shares of a Fund are sold at a loss after being held for six months or less, the loss will be treated as long-term, instead of short-term, capital loss to the extent of any capital gain distributions received on those shares. Investors also should be aware that if shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the price back as a taxable distribution. Each Fund will be subject to a nondeductible 4% excise tax ('Excise Tax') to the extent it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts. Each Fund may invest in the stock of 'passive foreign investment companies' ('PFICs') if such stock is a permissible investment. A PFIC is a foreign corporation--other than a 'controlled foreign corporation' (i.e., a foreign corporation in which, on any day during its taxable year, more than 50% of the total voting power of all voting stock therein or the total value of all stock therein is owned, directly, indirectly, or constructively, by 'U.S. shareholders,' defined as U.S. persons that individually own, directly, indirectly, or constructively, at least 10% of that voting power) as to which a Fund is a U.S. shareholder (effective for its taxable year beginning in 1998)--that, in general, meets either of the following tests: (1) at least 75% of its gross income is passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, a Fund will be subject to federal income tax on a portion of any 'excess distribution' received on the stock of a PFIC or of any gain from disposition of such stock (collectively 'PFIC income'), plus interest thereon, even if the Fund distributes the PFIC income as a taxable dividend to its shareholders. The balance of the PFIC income will be included in each Fund's investment company taxable income and, accordingly, will not be taxable to it to the extent that income is distributed to its shareholders. If a Fund invests in a PFIC and elects to treat the PFIC as a 'qualified electing fund' ('QEF'), then in lieu of the foregoing tax 35 and interest obligation, the Fund would be required to include in income each year its pro rata share of the QEF's annual ordinary earnings and net capital gain (the excess of net long-term capital gain over net short-term capital loss)--which likely would have to be distributed by the Fund to satisfy the Distribution Requirement and avoid imposition of the Excise Tax--even if those earnings and gain were not distributed to the Fund by the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof. Effective for its taxable year beginning in 1998, each Fund may elect to 'mark to market' its stock in any PFIC. 'Marking-to-market,' in this context, means including in ordinary income each taxable year the excess, if any, of the fair market value of a PFIC's stock over a Fund's adjusted basis therein as of the end of that year. Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock included by the Fund for prior taxable years. A Fund's adjusted basis in each PFIC's stock with respect to which it makes this election will be adjusted to reflect the amounts of income included and deductions taken under the election. Regulations proposed in 1992 would provide a similar election with respect to the stock of certain PFICs. The use of hedging strategies, such as writing (selling) and purchasing options and futures contracts, involves complex rules that will determine for income tax purposes the amount, character and timing of recognition of the gains and losses a Fund realizes in connection therewith. Gains from options and futures derived by a Fund with respect to its business of investing in securities will qualify as permissible income under the Income Requirement. However, for Small Cap Fund, income from the disposition of options and futures contracts will be subject to the Short-Short Limitation if they are held for less than three months. If Small Cap Fund satisfies certain requirements, any increase in value of a position that is part of a 'designated hedge' will be offset by any decrease in value (whether realized or not) of the offsetting hedging position during the period of the hedge for purposes of determining whether the Fund satisfies the Short-Short Limitation. Thus, only the net gain (if any) from the designated hedge will be included in gross income for purposes of that limitation. Small Cap Fund will consider whether it should seek to qualify for this treatment for its hedging transactions. To the extent Small Cap Fund does not qualify for this treatment, it may be forced to defer the closing out of certain options and futures beyond the time when it otherwise would be advantageous to do so, in order for the Fund to continue to qualify as a RIC. OTHER INFORMATION Growth and Income Fund's name was changed from 'PaineWebber Dividend Growth Fund' to its current name effective April 3, 1995. Effective July 26, 1996, the name of Small Cap Fund was changed from 'PaineWebber Small Cap Value Fund' to its current name. On July 26, 1996, Small Cap Fund was combined in a tax-free reorganization with PaineWebber Small Cap Growth Fund, a series of PaineWebber Investment Trust III. As a result of the reorganization, each shareholder of PaineWebber Small Cap Growth Fund became a shareholder of Small Cap Fund. Prior to November 10, 1995, each Fund's Class C shares were known as 'Class D' shares. Prior to November 10, 1995, the Class Y shares of Growth and Income Fund and Growth Fund were known as Class C shares. Each Trust is an entity of the type commonly known as a 'Massachusetts business trust.' Under Massachusetts law, shareholders of a Fund could, under certain circumstances, be held personally liable for the obligations of the applicable Trust or Fund. However, each Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust or the Fund and requires that notice of such disclaimer be given in each note, bond, contract, instrument, certificate or undertaking made or issued by the trustees or by any officers or officer by or on behalf of the Trust or Fund, the trustees or any of them in connection with the Trust. Each Declaration of Trust provides for indemnification from a Fund's property for all losses and expenses of any shareholder held personally liable for the obligations of that Fund. Thus, the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances in which a Fund itself would be unable to meet its obligations, a possibility that Mitchell Hutchins believes is remote and not material. Upon payment of any liability incurred by a shareholder solely by reason of being or having been a shareholder, the shareholder paying such liability will be entitled to reimbursement from the general assets of that Fund. The trustees intend to 36 conduct the operations of each Fund in such a way as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Funds. CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of its expenses (in addition to distribution fees) to the specific classes of its shares to which those expenses are attributable. For example, Class B shares bear higher transfer agency fees per shareholder account than those borne by other classes. The higher fee is imposed due to the higher costs incurred by the Transfer Agent in tracking shares subject to a contingent deferred sales charge because, upon redemption, the duration of the shareholder's investment must be determined in order to determine the applicable charge. Moreover, the tracking and calculations required by the automatic conversion feature of the Class B shares will cause the Transfer Agent to incur additional costs. Although the transfer agency fee will differ on a per account basis as stated above, the specific extent to which the transfer agency fees will differ between the classes as a percentage of net assets is not certain, because the fee as a percentage of net assets will be affected by the number of shareholder accounts in each class and the relative amounts of net assets in each class. COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Funds. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell Hutchins in connection with other matters. AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as independent auditors for Growth Fund and Growth and Income Fund. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036, serves as independent accountants for Small Cap Fund. FINANCIAL STATEMENTS Each Fund's Annual Report to Shareholders for its last fiscal year is a separate document supplied with this Statement of Additional Information, and the financial statements, accompanying notes and report of independent auditors appearing therein are incorporated herein by this reference. 37 APPENDIX DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as 'gilt edge.' Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues; Aa. Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities; A. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future; Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well; Ba. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class; B. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small; Caa. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest; Ca. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings; C. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's apply numerical modifiers, 1, 2 and 3 in each generic rating classification from 'Aa' through 'B' in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. DESCRIPTION OF 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 higher rated issues only in small degree; 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 debt 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; BB. An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation; B. An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its A-1 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 commitments 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. A-2 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY ANY FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. ------------------ TABLE OF CONTENTS
PAGE ---- Statement of Additional Information............ 1 Investment Policies and Restrictions........... 1 Hedging Strategies Using Derivative Instruments.................................. 7 Trustees and Officers; Principal Holders of Securities................................... 13 Investment Advisory and Distribution Arrangements................................. 20 Portfolio Transactions......................... 25 Reduced Sales Charges, Additional Exchange and Redemption Information and Other Services.... 27 Conversion of Class B Shares................... 30 Valuation of Shares............................ 31 Performance Information........................ 31 Taxes.......................................... 35 Other Information.............................. 36 Financial Statements........................... 37 Appendix....................................... A-1
(Copyright)1997 PaineWebber Incorporated PaineWebber Growth and Income Fund PaineWebber Growth Fund PaineWebber Small Cap Fund Statement of Additional Information December 1, 1997 PAINEWEBBER PART C. OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements (filed herewith) PaineWebber Growth and Income Fund Included in Part A of the Registration Statement: Financial Highlights for one Class A share of the Fund for each of the ten years in the period ended August 31, 1997. Financial Highlights for one Class B share of the Fund for each of the six years in the period ended August 31, 1997 and for the period July 1, 1991 (commencement of offering) to August 31, 1991. Financial Highlights for one Class C share of the Fund for each of the five years in the period ended August 31, 1997 and for the period July 2, 1992 (commencement of offering) to August 31, 1992. Financial Highlights for one Class Y share of the Fund for each of the five years in the period ended August 31, 1997 and for the period February 12, 1992 (commencement of offering) to August 31, 1992. Included in Part B of the Registration Statement through incorporation by reference from the Annual Report to Shareholders, previously filed with the Securities and Exchange Commission through EDGAR on October 29, 1997 (Accession No. 0000703887-97-000002): Portfolio of Investments at August 31, 1997. Statement of Assets and Liabilities at August 31, 1997. Statement of Operations for the year ended August 31, 1997. Statement of Changes in Net Assets for the two years in the period ended August 31, 1997. Notes to Financial Statements Financial Highlights for one Class A, Class B, Class C and Class Y share of the Fund for each of the five years in the period ended August 31, 1997. Report of Ernst & Young LLP, Independent Auditors, dated October 14, 1997 (b) Exhibits: (1) Amended and Restated Declaration of Trust (filed herewith) (2) Restated By-laws (filed herewith) (3) Voting trust agreement - none (4) Instruments defining the rights of holders of Registrant's shares of beneficial interest 1/ (5) Investment Advisory and Administration Contract 2/ (6) (a) Distribution Contract with respect to Class A shares 3/ (b) Distribution Contract with respect to Class B shares 3/ (c) Distribution Contract with respect to Class C shares 4/ (d) Distribution Contract with respect to Class Y shares 4/ (e) Exclusive Dealer Agreement with respect to Class A shares 3/ (f) Exclusive Dealer Agreement with respect to Class B shares 3/ C-1 (g) Exclusive Dealer Agreement with respect to Class C shares 4/ (h) Exclusive Dealer Agreement with respect to Class Y shares 4/ (7) Bonus, profit sharing or pension plans - none (8) Custodian Agreement 5/ (9) Form of Transfer Agency Agreement (filed herewith) (10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to Class A and Class B shares 6/ (b) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to Class Y shares 7/ (c) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to Class C shares 8/ (11) Other opinions, appraisals, rulings and consents: Independent Auditor's Consent (filed herewith) (12) Financial statements omitted from prospectus-none (13) Letter of investment intent 9/ (14) Prototype Retirement Plan 10/ (15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A shares 7/ (b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B shares 7/ (c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C shares 11/ (16) (a) Schedule for Computation of Performance Quotations with respect to Class A and Class B Shares 7/ (b) Schedule for Computation of Performance Quotations with respect to Class Y and Class C Shares 11/ (17) and (27) Financial Data Schedule (filed herewith) (18) Plan pursuant to Rule 18f-3 12/ - ------------------------------- 1/ 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. 2/ Incorporated by reference from Post-Effective Amendment No. 16 to the registration statement, SEC File No. 2-78626, filed December 29, 1989. 3/ Incorporated by reference from Post-Effective Amendment No. 28 to the registration statement, SEC File No. 2-78626, filed December 29, 1993. 4/ Incorporated by reference from Post-Effective Amendment No. 38 to the registration statement, SEC File No. 2-78626, filed November 15, 1995. 5/ Incorporated by reference from Post-Effective Amendment No. 11 to the registration statement, SEC File No. 2-78626, filed December 22, 1987. 6/ Incorporated by reference from Post-Effective Amendment No. 21 to the registration statement, SEC File No. 2-78626, filed May 3, 1991. 7/ Incorporated by reference from Post-Effective Amendment No. 23 to the registration statement, SEC File No. 2-78626, filed December 24, 1991. 8/ Incorporated by reference from Post-Effective Amendment No. 25 to the registration statement, SEC File No. 2-78626, filed June 23, 1992. C-2 9/ Incorporated by reference from Pre-Effective Amendment No. 2 to the registration statement, SEC File No. 2-78626, filed September 26, 1983. 10/ Incorporated by reference from Post-Effective Amendment No. 20 to the registration statement of PaineWebber Managed Investments Trust, SEC File No. 2-91362, filed April 1, 1992. 11/ Incorporated by reference from Post-Effective Amendment No. 27 to the registration statement, SEC File No. 2-78626, filed December 21, 1992. 12/ Incorporated by reference from Post-Effective Amendment No. 40 to the registration statement, SEC File No. 2-78626, filed September 25, 1996. Item 25. Persons Controlled by or under Common Control with Registrant None. Item 26. Number of Holders of Securities Number of Record Shareholders Title of Class as of October 31, 1997 - -------------- ---------------------- Shares of beneficial interest, par value $0.001 per share, in PaineWebber Growth and Income Fund Class A shares 29,202 Class B shares 25,638 Class C shares 6,585 Class Y shares 182 Item 27. Indemnification Section 2 of "Indemnification" in Article X of the Declaration of Trust provides that the appropriate series of the Registrant will indemnify its Trustees and officers 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 or her action was in the best interest of the Registrant. Section 2 of "Indemnification" in 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 Trust or a particular series thereof; 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, or for any act or omission in accordance with advice of counsel or other experts, or failing to follow such advice, with respect to the meaning and operation of the Declaration of Trust. C-3 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 Trust, or is or was serving at the request of the Trust as a Trustee, officer or employee of a corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the Registrant would have the power to indemnify him or her against such liability, provided that the Registrant may not acquire insurance protecting any Trustee or officer against liability to the Registrant or its shareholders to which he or she 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 or her office. Section 9 of the Investment Advisory and Administration Contract with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") provides that Mitchell Hutchins shall not be liable for any error of judgment or mistake of law or for any loss suffered by any series of the Registrant in connection with the matters to which the Contract relates, except for a loss resulting from the willful misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the performance of its duties or from its reckless disregard of its obligations and duties under the Contract. Section 10 of the Contract provides that the Trustees shall not be liable for any obligations of the Trust or any series under the Contract and that Mitchell Hutchins shall look only to the assets and property of the Registrant in settlement of such right or claim and not to the assets and property of the Trustees. Section 9 of each Distribution Contract provides that the Trust will indemnify Mitchell Hutchins and its officers, directors and controlling persons against all liabilities arising from any alleged untrue statement of material fact in the Registration Statement or from any alleged omission to state in the Registration Statement a material fact required to be stated in it or necessary to make the statements in it, in light of the circumstances under which they were made, not misleading, except insofar as liability arises from untrue statements or omissions made in reliance upon and in conformity with information furnished by Mitchell Hutchins to the Trust for use in the Registration Statement; and provided that this indemnity agreement shall not protect any such persons against liabilities arising by reason of their bad faith, gross negligence or willful misfeasance; and shall not inure to the benefit of any such persons unless a court of competent jurisdiction or controlling precedent determines that such result is not against public policy as expressed in the Securities Act of 1933. Section 9 of each Distribution Contract also provides that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its officers and Trustees free and harmless of any claims arising out of any alleged untrue statement or any alleged omission of material fact contained in information furnished by Mitchell Hutchins for use in the Registration Statement or arising out of an agreement between Mitchell Hutchins and any retail dealer, or arising out of supplementary literature or advertising used by Mitchell Hutchins in connection with the Contract. Section 9 of each Exclusive Dealer Agreement contains provisions similar to Section 9 of the Distribution Contract, with respect to PaineWebber Incorporated ("PaineWebber"). Section 10 of each Distribution Contract contains provisions similar to Section 10 of the Investment Advisory and Administration Contract, with respect to Mitchell Hutchins and PaineWebber, as appropriate. 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 Trust, pursuant to the foregoing provisions or otherwise, the Trust 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 Trust of expenses incurred or paid by a Trustee, officer or controlling person of the Trust in connection with the successful defense of any action, suit or proceeding or payment pursuant to any insurance policy) is asserted against the Trust by such Trustee, officer or controlling person in connection with the securities being registered, the Trust will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court C-4 of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 28. Business and Other Connections of Investment Adviser Mitchell Hutchins, a Delaware corporation, is a registered investment adviser and is a wholly owned subsidiary of PaineWebber which is, in turn, a wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is primarily engaged in the investment advisory business. Information as to the officers and directors of Mitchell Hutchins is included in its Form ADV, as filed with the Securities and Exchange Commission (registration number 801-13219), and is incorporated herein by reference. Item 29. Principal Underwriters a) Mitchell Hutchins serves as principal underwriter and/or investment adviser for the following investment companies: ALL-AMERICAN TERM TRUST INC. GLOBAL HIGH INCOME DOLLAR FUND INC. GLOBAL SMALL CAP FUND INC. INSURED MUNICIPAL INCOME FUND INC. INVESTMENT GRADE MUNICIPAL INCOME FUND INC. MANAGED HIGH YIELD FUND INC. 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 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. Unless otherwise indicated, the principal business address of each person named is 1285 Avenue of the Americas, New York, NY 10019. C-5
Position and Offices With Underwriter or Name Position and Offices With Registrant Exclusive Dealer ---- ------------------------------------ ---------------------------------------- Margo N. Alexander President and Trustee President, Chief Executive Officer and Director of Mitchell Hutchins; Executive Vice President and Director of PaineWebber Mary C. Farrell Trustee Managing Director, Senior Investment Strategist and Member of the Investment Policy Committee of PaineWebber Ann E. Moran Vice President and Assistant Treasurer Vice President and a Manager of the Mutual Fund Finance Division of Mitchell Hutchins Diane E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General Counsel of Mitchell Hutchins Emil Polito Vice President Senior Vice President and Director of Operations and Control for Mitchell Hutchins Victoria E. Schonfeld Vice President Managing Director and General Counsel of Mitchell Hutchins Paul H. Schubert Vice President and Treasurer First Vice President and Director of the Mutual Fund Finance Division of Mitchell Hutchins Barney A. Taglialatela Vice President and Assistant Treasurer Vice President and a Manager of the Mutual Fund Finance Division of Mitchell Hutchins Mark A. Tincher Vice President Managing Director and Chief Investment Officer - U.S. Equity Investments of Mitchell Hutchins Keith A. Weller Vice President and Assistant Secretary First Vice President and Associate General Counsel of Mitchell Hutchins Ian W. Williams Vice President and Assistant Treasurer Vice President and a Manager of the Mutual Fund Finance Division of Mitchell Hutchins
(c) None. C-6 Item 30. Location of Accounts and Records The books and other documents required by paragraphs (b)(4), (c) and (d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the physical possession of Registrant's investment adviser and administrator, Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019. All other accounts, books and documents required by Rule 31a-1 are maintained in the physical possession of Registrant's transfer agent and custodian. Item 31. Management Services Not applicable. Item 32. Undertakings Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all the requirements for effectiveness of this Post-Effective Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York, on the 20th day of November, 1997. PAINEWEBBER AMERICA FUND By: /s/ Dianne E. O'Donnell --------------------------- Dianne E. O'Donnell Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date - --------- ----- ---- /s/ Margo N. Alexander President and Trustee November 20, 1997 - --------------------------- (Chief Executive Officer) Margo N. Alexander * /s/ E. Garrett Bewkes, Jr. Trustee and Chairman November 20, 1997 - --------------------------- of the Board of Trustees E. Garrett Bewkes, Jr. * /s/ Richard Q. Armstrong Trustee November 20, 1997 - --------------------------- Richard Q. Armstrong * /s/ Richard R. Burt Trustee November 20, 1997 - --------------------------- Richard R. Burt * /s/ Mary C. Farrell Trustee November 20, 1997 - --------------------------- Mary C. Farrell * /s/ Meyer Feldberg Trustee November 20, 1997 - --------------------------- Meyer Feldberg * /s/ George W. Gowen Trustee November 20, 1997 - --------------------------- George W. Gowen * /s/ Frederic V. Malek Trustee November 20, 1997 - --------------------------- Frederic V. Malek * /s/ Carl W. Schafer Trustee November 20, 1997 - --------------------------- Carl W. Schafer * /s/ Paul H. Schubert Vice President and Treasurer November 20, 1997 - --------------------------- Chief Financial and Paul H. Schubert Accounting Officer
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. PAINEWEBBER AMERICA FUND EXHIBIT INDEX Exhibits (1) Amended and Restated Declaration of Trust (filed herewith) (2) Restated By-laws (filed herewith) (3) Voting trust agreement - none (4) Instruments defining the rights of holders of Registrant's shares of beneficial interest 1/ (5) Investment Advisory and Administration Contract 2/ (6) (a) Distribution Contract with respect to Class A shares 3/ (b) Distribution Contract with respect to Class B shares 3/ (c) Distribution Contract with respect to Class C shares 4/ (d) Distribution Contract with respect to Class Y shares 4/ (e) Exclusive Dealer Agreement with respect to Class A shares 3/ (f) Exclusive Dealer Agreement with respect to Class B shares 3/ (g) Exclusive Dealer Agreement with respect to Class C shares 4/ (h) Exclusive Dealer Agreement with respect to Class Y shares 4/ (7) Bonus, profit sharing or pension plans - none (8) Custodian Agreement 5/ (9) Form of Transfer Agency Agreement (filed herewith) (10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to Class A and Class B shares 6/ (b) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to Class Y shares 7/ (c) Opinion and consent of Kirkpatrick & Lockhart LLP with respect to Class C shares 8/ (11) Other opinions, appraisals, rulings and consents: Independent Auditor's Consent (filed herewith) (12) Financial statements omitted from prospectus-none (13) Letter of investment intent 9/ (14) Prototype Retirement Plan 10/ (15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A shares 7/ (b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B shares 7/ (c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C shares 11/ (16) (a) Schedule for Computation of Performance Quotations with respect to Class A and Class B Shares 7/ (b) Schedule for Computation of Performance Quotations with respect to Class Y and Class C Shares 11/ (17) and (27) Financial Data Schedule (filed herewith) (18) Plan pursuant to Rule 18f-3 12/ - ------------------------------- 1/ 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. 2/ Incorporated by reference from Post-Effective Amendment No. 16 to the registration statement, SEC File No. 2-78626, filed December 29, 1989. 3/ Incorporated by reference from Post-Effective Amendment No. 28 to the registration statement, SEC File No. 2-78626, filed December 29, 1993. 4/ Incorporated by reference from Post-Effective Amendment No. 38 to the registration statement, SEC File No. 2-78626, filed November 15, 1995. 5/ Incorporated by reference from Post-Effective Amendment No. 11 to the registration statement, SEC File No. 2-78626, filed December 22, 1987. 6/ Incorporated by reference from Post-Effective Amendment No. 21 to the registration statement, SEC File No. 2-78626, filed May 3, 1991. 7/ Incorporated by reference from Post-Effective Amendment No. 23 to the registration statement, SEC File No. 2-78626, filed December 24, 1991. 8/ Incorporated by reference from Post-Effective Amendment No. 25 to the registration statement, SEC File No. 2-78626, filed June 23, 1992. 9/ Incorporated by reference from Pre-Effective Amendment No. 2 to the registration statement, SEC File No. 2-78626, filed September 26, 1983. 10/ Incorporated by reference from Post-Effective Amendment No. 20 to the registration statement of PaineWebber Managed Investments Trust, SEC File No. 2-91362, filed April 1, 1992. 11/ Incorporated by reference from Post-Effective Amendment No. 27 to the registration statement, SEC File No. 2-78626, filed December 21, 1992. 12/ Incorporated by reference from Post-Effective Amendment No. 40 to the registration statement, SEC File No. 2-78626, filed September 25, 1996. EX-99.B(1) 2 AMENDED AND RESTATED DECLARATION OF TRUST PAINEWEBBER AMERICA FUND AMENDED AND RESTATED DECLARATION OF TRUST DECLARATION OF TRUST, made at Boston, Massachusetts, this 31st day of October1986 and amended and restated this 19th day of November, 1997 by the Trustees: WHEREAS, the Trustees desire to establish a trust fund for the investment and reinvestment of funds contributed thereto; NOW, THEREFORE, the Trustees declare that all money and property contributed to the trust fund hereunder shall be held and managed in trust under this Declaration of Trust as herein set forth below. ARTICLE I NAME AND DEFINITIONS NAME Section 1. This Trust shall be known as "PaineWebber America Fund." The resident agent for the Trust in Massachusetts shall be CT Corporation System, whose address is 2 Oliver Street, Boston, Massachusetts, or such other person as the Trustees may from time to time designate. DEFINITIONS Section 2. Wherever used herein, unless otherwise required by the context or specifically provided: (a) The Terms "Affiliated Person", "Assignment", "Commission", "Interested Person", "Majority Shareholder Vote" (the 67% or 50% requirement of the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) and "Principal Underwriter" shall have the meanings given them in the 1940 Act, as amended from time to time; (b) The "Trust" refers to PaineWebber America Fund and reference to the Trust, when applicable to one or more Series of the Trust, shall refer to any such Series; (c) "Net Asset Value" means the net asset value of each Series of the Trust determined in the manner provided in Article IX, Section 3; (d) "Shareholder" means a record owner of Shares of the Trust; (e) The "Trustees" means the person who has signed this Declaration of Trust so long as he shall continue in office in accordance with the terms hereof, and all other persons who may from time to time be duly elected or appointed, qualified and serving as Trustees in accordance with the provisions of Article IV hereof, and reference herein to a Trustee or the Trustees shall refer to such person or persons in his capacity or their capacities as trustees hereunder. (f) "Shares" means the equal proportionate transferable units of interest into which the beneficial interest of each Series or Class thereof shall be divided from time to time and includes fractions of shares as well as whole shares (all of the transferable units of a Series or of a single Class may be referred to as "Shares" as the context may require); (g) The "1940 Act" refers to the Investment Company Act of 1940, as amended from time to time; (h) "Series" refers to series of Shares of the Trust established in accordance with the provisions of Article III; (i) "Class" refers to the class of Shares of a Series of the Trust established in accordance with the Provisions of Article III. ARTICLE II PURPOSE OF TRUST The purpose of this Trust is to provide investors a continuous source of managed investment in securities. ARTICLE III BENEFICIAL INTEREST SHARES OF BENEFICIAL INTEREST Section 1. The beneficial interest in the Trust shall be divided into such transferable Shares of one or more separate and distinct Series or Classes thereof as the Trustees shall from time to time create and establish. The number of Shares is unlimited and each Share shall have a par value of $0.001 per Share and upon issuance in accordance with the terms hereof shall be fully paid and nonassessable. The Trustees shall have full power and authority, in their sole discretion and without obtaining any prior authorization or vote of the Shareholders of the Trust, to create and establish (and to change in any manner) Shares with such preferences, terms of conversion, voting powers, rights and privileges as the Trustees may from time to time determine, to divide or combine the Shares into a greater or lesser number, to classify or reclassify any unissued Shares into one or more Series or Classes of Shares, to abolish any one or more Series or Classes of Shares, and to take such other action with respect to the Shares as the Trustees may deem desirable. The Trustees, in their discretion without a vote of the Shareholders, may divide the Shares of any Series into Classes. In such event, each Class of a Series shall represent interests in the assets of that Series and have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that expenses allocated to a Class of a Series may be borne solely by such Class as shall be determined by the Trustees and a Class of a Series may have exclusive voting rights with respect to matters affecting only that Class. Without limiting the authority of the Trustees set forth in this Section 1 to establish and designate any further Series or Classes, the Trustees have established and designated the Series of Shares and Classes listed in Schedule A attached hereto and made a part hereof. ESTABLISHMENT OF SERIES OR CLASS Section 2. The establishment of any Series or Class in addition to those set forth in Section 1 shall be effective upon the adoption of a resolution by a majority of the then Trustees setting forth such establishment and designation and the relative rights and preferences of the Shares of such Series or Class thereof. At any time that there are no Shares outstanding of any particular Series previously established and designated, the Trustees may by a majority vote abolish that Series and the establishment and designation thereof. At any time that there are no shares outstanding of any 2 particular Class of a Series, the Trustees may by a majority vote abolish that Class and the establishment and designation thereof. The Trustees by a majority vote may change the name of any Series or Class. OWNERSHIP OF SHARES Section 3. The ownership of Shares shall be recorded in the books of the Trust. The Trustees may make such rules as they consider appropriate for the transfer of Shares and similar matters. The record books of the Trust shall be conclusive as to who are the holders of Shares and as to the number of Shares held from time to time by each Shareholder. INVESTMENT IN THE TRUST Section 4. The Trustees shall accept investments in the Trust from such persons and on such terms as they may from time to time authorize. Such investments may be in the form of cash or securities in which the appropriate Series is authorized to invest, valued as provided in Article IX, Section 3. After the date of the initial contribution of capital, the number of Shares to represent the initial contribution may in the Trustees' discretion be considered as outstanding and the amount received by the Trustees on account of the contribution shall be treated as an asset of the Trust or a Series thereof, as appropriate. Subsequent investments in the Trust shall be credited to each Shareholder's account in the form of full Shares at the Net Asset Value per Share next determined after the investment is received; provided, however, that the Trustees may, in their sole discretion, (a) impose a sales charge upon investments in the Trust or Series and (b) issue fractional Shares. The Trustees shall have the right to refuse to accept investments in the Trust or any Series at any time without any cause or reason therefor whatsoever. ASSETS AND LIABILITIES OF SERIES Section 5. All consideration received by the Trust for the issue or sale of Shares of a particular Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall be referred to as "assets belonging to" that Series. In addition, any assets, income, earnings, profits, and proceeds thereof, funds, or payments which are not readily identifiable as belonging to any particular Series shall be allocated by the Trustees between and among one or more of the Series in such manner as they, in their sole discretion, deem fair and equitable. Each such allocation shall be conclusive and binding upon the Shareholders of all Series for all purposes, and shall be referred to as assets belonging to that Series. The assets belonging to a particular Series shall be so recorded upon the books of the Trust, and shall be held by the Trustees in Trust for the benefit of the holders of Shares of that Series. The assets belonging to each particular Series shall be charged with the liabilities of that Series and all expenses, costs, charges and reserves attributable to that Series except that liabilities and expenses allocated solely to a particular Class shall be borne by that Class. Any general liabilities, expenses, costs, charges or reserves of the Trust or Series which are not readily identifiable as belonging to any particular Series or Class shall be allocated and charged by the Trustees between or among any one or more of the Series or Classes in such manner as the Trustees in their sole discretion deem fair and equitable. Each such allocation shall be conclusive and binding upon the Shareholders of all Series or Classes for all purposes. Any creditor of any Series may look only to the assets of that Series to satisfy such creditor's debt. See Article X, Section 1. 3 NO PREEMPTIVE RIGHTS Section 6. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust or the Trustees. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY Section 7. Shares shall be deemed to be personal property giving only the rights provided in this Declaration of Trust. Every Shareholder by virtue of having become a Shareholder shall be held expressly to have assented and agreed to the terms of this Declaration of Trust and to have become a party hereto. The death of a Shareholder during the continuance of the Trust shall not operate to terminate the Trust nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but only to the rights of said decedent under this Trust. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders partners. Neither the Trust nor the Trustees shall have any power to bind any Shareholder personally or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay by way of subscription for any Shares or otherwise. ARTICLE IV THE TRUSTEES MANAGEMENT OF THE TRUST Section 1. The business and affairs of the Trust shall be managed by the Trustees, and they shall have all powers necessary and desirable to carry out that responsibility. A Trustee shall not be required to be a Shareholder of the Trust. ELECTION OF TRUSTEES AND APPOINTMENT OF INITIAL TRUSTEE Section 2. On a date fixed by the Trustees, the Shareholders shall elect the Trustees. Until such election, the Trustees shall be the initial Trustee and such other persons as may be hereafter appointed pursuant to Section 4 of this Article IV. The initial Trustee shall be Dianne E. O'Donnell. TERM OF OFFICE OF TRUSTEES Section 3. The Trustees shall hold office during the lifetime of this Trust, and until its termination as hereinafter provided; except (a) that any Trustee may resign his trust by written instrument signed by him and delivered to the other Trustees or to any officer of the Trust, which shall take effect upon such delivery or upon such later date as is specified therein; (b) that any Trustee may be removed with or without cause at any time by written instrument, signed by at least two-thirds of the number of Trustees prior to such removal, specifying the date when such removal shall become effective; (c) that any Trustee who requests in writing to be retired or who has become incapacitated by illness or injury may be retired by written instrument signed by a majority of other Trustees, specifying the date of his retirement; and (d) that any Trustee may be removed at any Special Meeting of the Trust by a vote of at least two-thirds of the outstanding Shares. 4 RESIGNATION AND APPOINTMENT OF TRUSTEES Section 4. In case of the declination, death, resignation, retirement, removal, incapacity, or inability of any of the Trustees, or in case a vacancy shall exist by reason of an increase in number or for any other reason, the remaining Trustees shall fill such vacancy by appointment of such other person as they in their discretion shall see fit consistent with the limitations under the 1940 Act. Such appointment shall be evidenced by a written instrument signed by a majority of the Trustees in office or by a recording in the records of the Trust, whereupon the appointment shall take effect. An appointment of a Trustee may be made by the Trustees then in office as aforesaid in anticipation of a vacancy to occur by reason of retirement, resignation or increase in number of Trustees effective at a later date, provided that said appointment shall become effective only at or after the effective date of said retirement, resignation or increase in number of Trustees. As soon as any Trustee so appointed shall have accepted this trust, the trust estate shall vest in the new Trustee or Trustees, together with the continuing Trustees, without any further act or conveyance, and he shall be deemed a Trustee hereunder. The power of appointment is subject to the provisions of Section 16(a) of the 1940 Act. TEMPORARY ABSENCE OF TRUSTEE Section 5. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six months at any one time to any other Trustee or Trustees, provided that in no case shall less than two Trustees personally exercise the other powers hereunder except as herein otherwise expressly provided. NUMBER OF TRUSTEES Section 6. The number of Trustees shall initially be one (1) and thereafter shall be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees (or by an officer of the Trust pursuant to a vote of the majority of such Trustees); provided, however, that the number of Trustees serving hereunder at any time shall in no event be less than one (1) nor more than fifteen (15). Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is filled, or while any Trustee is absent from his state of domicile (unless said Trustee has made arrangements to be informed about, and to participate in, the affairs of the Trust during such absence), or is physically or mentally incapacitated by reason of disease or otherwise, the other Trustees shall have all the powers hereunder and the certificate of the other Trustees of such vacancy, absence or incapacity, shall be conclusive. EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE Section 7. The death, declination, resignation, retirement, removal, incapacity, or inability of the Trustee, or any one of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. OWNERSHIP OF ASSETS OF THE TRUST Section 8. The assets of the Trust shall be held separate and apart from any assets now or hereafter held in any capacity other than as Trustee hereunder by the Trustees or any successor Trustees. All of the assets of the Trust shall at all times be considered as vested in the Trustees. 5 ARTICLE V POWERS OF THE TRUSTEES POWERS Section 1. The Trustees in all instances shall act as principals, and are and shall be free from the control of the Shareholders. The Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts and instruments that they may consider necessary or appropriate in connection with the management of the Trust. The Trustees shall not in any way be bound or limited by present or future laws or customs in regard to trust investments, but shall have full authority and power to make any and all investments which they, in their uncontrolled discretion, shall deem proper to accomplish the purposes of this Trust. Subject to any applicable limitation in this Declaration of Trust or the By-Laws of the Trust, the Trustees shall have power and authority, without limitation: (a) To invest and reinvest cash and other property, and to hold cash or other property uninvested, without in any event being bound or limited by any present or future law or custom in regard to investments by trustees, and to sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or all of the assets of the Trust; to purchase and sell (or write) options on securities, currencies, indices, futures contracts and other financial instruments and enter into closing transactions in connection therewith; to enter into all types of commodities contracts, including without limitation the purchase and sale of futures contracts and forward contracts on securities, indices, currencies, and other financial instruments; to engage in forward commitment, "when issued" and delayed delivery transactions; to enter into repurchase agreements and reverse repurchase agreements; and to employ all kinds of hedging techniques and investment management strategies. (b) To adopt By-Laws not inconsistent with this Declaration of Trust providing for the conduct of the business of the Trust and to amend and repeal them to the extent that they do not reserve the right to the Shareholders. (c) To elect and remove such officers and appoint and terminate such agents as they consider appropriate. (d) To employ as custodian of any assets of the Trust subject to any conditions set forth in this Declaration of Trust or in the By-Laws, if any, a bank, trust company, or other entity permitted by the Commission to serve as such. (e) To retain a transfer agent and Shareholder servicing agent, or both. (f) To provide for the distribution of interests of the Trust either through a principal underwriter in the manner hereinafter provided for or by the Trust itself, or both. (g) To set record dates in the manner hereinafter provided for. (h) To delegate such authority as they consider desirable to any officers of the Trust and to any agent, independent contractor, custodian or underwriter. (i) To sell or exchange any or all of the assets of the Trust, subject to the provisions of Article XI, Section 4(b) hereof. 6 (j) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper. (k) To exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities. (l) To hold any security or property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form; or either in its own name or in the name of a custodian or a nominee or nominees, subject in either case to proper safeguards according to the usual practice of Massachusetts trust companies or investment companies. (m) To establish separate and distinct Series with separately defined investment objectives and policies and distinct investment purposes in accordance with the provisions of Article III and to establish separate Classes thereof. (n) To allocate assets, liabilities and expenses of the Trust to a particular Series and liabilities and expenses to a particular Class thereof or to apportion the same between or among two or more Series or Classes, provided that any liabilities or expenses incurred by a particular Series or Class shall be payable solely out of the assets belonging to that Series or Class as provided for in Article III. (o) To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or concern, any security of which is held in the Trust; to consent to any contract, lease, mortgage, purchase, or sale of property by such corporation or concern, and to pay calls or subscriptions with respect to any security held in the Trust. (p) To compromise, arbitrate, or otherwise adjust claims in favor of or against the Trust or any matter in controversy including, but not limited to, claims for taxes. (q) To make distributions of income and of capital gains to Shareholders in the manner hereinafter provided for. (r) To borrow money. (s) To establish, from time to time, a minimum total investment for Shareholders, and to require the redemption of the Shares of any Shareholders whose investment is less than such minimum upon giving notice to such Shareholder. No one dealing with the Trustees shall be under any obligation to make any inquiry concerning the authority of the Trustees, or to see to the application of any payments made or property transferred to the Trustees or upon their order. TRUSTEES AND OFFICERS AS SHAREHOLDERS Section 2. Any Trustee, officer, other agent or independent contractor of the Trust may acquire, own and dispose of Shares to the same extent as if he were not a Trustee, officer, agent or independent contractor; and the Trustees may issue and sell or cause to be issued and sold Shares to and buy such Shares from any such person or any firm or company in which he is interested, subject only to the general limitations herein contained as to the sale and purchase of such Shares; and all subject to any restrictions which may be contained in the By-Laws. 7 ACTION BY THE TRUSTEES Section 3. The Trustees shall act by majority vote at a meeting duly called or by unanimous written consent without a meeting or by telephone consent provided a quorum of Trustees participate in any such telephonic meeting, unless the 1940 Act requires that a particular action be taken only at a meeting in person of the Trustees. At any meeting of the Trustees, a majority of the Trustees shall constitute a quorum. Meetings of the Trustees may be called orally or in writing by the Chairman of the Trustees or by any two other Trustees. Notice of the time, date and place of all meetings of the Trustees shall be given by the party calling the meeting to each Trustee by telephone or telegram sent to his home or business address at least twenty-four hours in advance of the meeting or by written notice mailed to his home or business address at least seventy-two hours in advance of the meeting. Notice need not be given to any Trustee who attends the meeting without objecting to the lack of notice or who executes a written waiver of notice with respect to the meeting either before or after such meeting. Subject to the requirements of the 1940 Act, the Trustees by majority vote may delegate to any one of their number their authority to approve particular matters or take particular actions on behalf of the Trust. CHAIRMAN OF THE TRUSTEES Section 4. The Trustees may appoint one of their number to be Chairman of the Board of Trustees. The Chairman shall preside at all meetings of the Trustees, shall be responsible for the execution of policies established by the Trustees and the administration of the Trust, and may be the chief executive, financial and/or accounting officer of the Trust. ARTICLE VI EXPENSES OF THE TRUST TRUSTEE REIMBURSEMENT Section 1. Subject to the provisions of Article III, Section 5, the Trustees shall be reimbursed from the Trust estate or the assets belonging to the appropriate Series for their expenses and disbursements, including, without limitation, fees and expenses of Trustees who are not Interested Persons of the Trust, interest expense, taxes, fees and commissions of every kind, expenses of pricing Trust portfolio securities, expenses of issue, repurchase and redemption of Shares including expenses attributable to a program of periodic repurchases or redemptions, expenses of distributing its Shares and providing services to Shareholders, expenses of registering and qualifying the Trust and its Shares under Federal and State laws and regulations, charges of investment advisers, administrators, custodians, transfer agents, and registrars, expenses of preparing and setting in type prospectuses and statements of additional information, expenses of printing and distributing prospectuses and statements of additional information sent to existing Shareholders, auditing and legal expenses, reports to Shareholders, expenses of meetings of Shareholders and proxy solicitations therefor, insurance expense, association membership dues and for such non-recurring items as may arise, including litigation to which the Trust is a party (except those losses and expenses the indemnification of which is not permitted under Article X hereof), and for all losses and liabilities by them incurred in administering the Trust; and for the payment of such expenses, disbursements, losses and liabilities the Trustees shall have a lien on the assets belonging to the appropriate Series prior to any rights or interests of the Shareholders thereto. This section shall not preclude the Trust from directly paying any of the aforementioned fees and expenses. 8 ARTICLE VII INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT INVESTMENT ADVISER Section 1. Subject to a Majority Shareholder Vote, the Trustees may in their discretion from time to time enter into an investment advisory or management contract(s) with respect to the Trust or any Series thereof whereby the other party(ies) to such contract(s) shall undertake to furnish the Trustees such management, investment advisory, statistical and research facilities and services and such other facilities and services, if any, and all upon such terms and conditions, as the Trustees may in their discretion determine. Notwithstanding any provisions of this Declaration of Trust, the Trustees may authorize the investment adviser(s) (subject to such general or specific instruments as the Trustees may from time to time adopt) to effect purchases, sales or exchanges of portfolio securities and other investment instruments of the Trust on behalf of the Trustees or may authorize any officer, agent, or Trustee to effect such purchases, sales or exchanges pursuant to recommendations of the investment adviser (and all without further action by the Trustees). Any such purchases, sales and exchanges shall be deemed to have been authorized by all of the Trustees. The Trustees may, subject to applicable requirements of the 1940 Act, including those relating to Shareholder approval, authorize the investment adviser to employ one or more sub-advisers from time to time to perform such of the acts and services of the investment adviser, and upon such terms and conditions, as may be agreed upon between the investment adviser and sub-adviser. PRINCIPAL UNDERWRITER Section 2. The Trustees may in their discretion from time to time enter into one or more contract(s) providing for the sale of the Shares, whereby the Trust may either agree to sell the Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions as may be prescribed in the By-Laws, if any, and such further terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article VII, or of the By-Laws, if any; and such contract may also provide for the repurchase or sale of Shares by such other party as principal or as agent of the Trust. The Trustees may in their discretion adopt a plan or plans of distribution and enter into any related agreements whereby the Trust finances directly or indirectly any activity that is primarily intended to result in sales of Shares. Such plan or plans of distribution and any related agreements may contain such terms and conditions as the Trustees may in their discretion determine subject to the requirements of Section 12 of the 1940 Act, Rule 12b-1 thereunder and any other applicable rules and regulations. TRANSFER AGENT Section 3. The Trustees may in their discretion from time to time enter into a transfer agency and Shareholder service contract whereby the other party shall undertake to furnish the Trustees and Trust with transfer agency and shareholder services. The contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Declaration of Trust or of the By-Laws, if any. Such services may be provided by one or more entities, including one or more agents of such other party. 9 PARTIES TO CONTRACT Section 4. Any contract of the character described in Sections 1, 2 and 3 of this Article VII or that relates to the provision of custodian services to the Trust may be entered into with any corporation, firm, partnership, trust or association, although one more of the Trustees or officers of the Trust may be an officer, director, trustee, shareholder, or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any relationship, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was reasonable and fair and not inconsistent with the provisions of this Article VII or the By-Laws, if any. The same person (including a firm, corporation, partnership, trust, or association) may be the other party to contracts entered into pursuant to Sections 1, 2 and 3 above or with respect to the provision of custodian services to the Trust, and any individual may be financially interested in or otherwise affiliated with persons who are parties to any or all of the contracts mentioned in this Section 4. PROVISIONS AND AMENDMENTS Section 5. Any contract entered into pursuant to Sections 1 and 2 of this Article VII shall be consistent with and subject to the applicable requirements of Sections 12 and 15 of the 1940 Act and the rules and orders thereunder (including any amendments thereto or other applicable Act of Congress hereafter enacted) with respect to its continuance in effect, its termination, and the method of authorization and approval of such contract or renewal thereof. ARTICLE VIII SHAREHOLDERS' VOTING POWERS AND MEETINGS VOTING POWERS Section 1. The Shareholders shall have power to vote (i) for the election of Trustees as provided in Article IV, Section 2, (ii) for the removal of Trustees as provided in Article IV, Section 3(d), (iii) with respect to any investment advisory or management contract as provided in Article VII, Section 1, (iv) with respect to any termination or reorganization of the Trust as provided in Article XI, Section 4, (v) with respect to the amendment of this Declaration of Trust to the extent and as provided in Article XI, Section 7, (vi) to the same extent as the shareholders of a Massachusetts business corporation, as to whether or not a court action, proceeding or claim should be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders, provided, however, that a Shareholder of a particular Series shall not be entitled to bring any derivative or class action on behalf of any other Series of the Trust, and provided further that, within a Series, a Shareholder of a particular Class shall not be entitled to bring any derivative or class action on behalf of any other Class except with respect to matters sharing a common fact pattern with said Shareholder's own Class; and (vii) with respect to such additional matters relating to the Trust as may be required or authorized by law, by this Declaration of Trust, or the By-Laws of the Trust, if any, or any registration of the Trust with the Commission or any State, or as the Trustees may consider desirable. On any matter submitted to a vote of the Shareholders, all Shares shall be voted by individual Series, except (i) when required by the 1940 Act, Shares shall be voted in the aggregate and not by individual Series; and (ii) when the Trustees have determined that the matter affects only the interests of one or more Classes, then only the Shareholders of such Class or Classes shall be entitled to vote thereon. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote, and each fractional Share shall be entitled to a proportionate fractional vote. There shall be no cumulative voting in the election of Trustees. Shares may be 10 voted in person or by proxy. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required or permitted by law, this Declaration of Trust or any By-Laws of the Trust to be taken by Shareholders. MEETINGS Section 2. The first Shareholders' meeting shall be held as specified in Section 2 of Article IV at the principal office of the Trust or such other place as the Trustees may designate. Special meetings of the Shareholders or any Series or Class thereof may be called by the Trustees and shall be called by the Trustees upon the written request of Shareholders owning at least one-tenth of the outstanding Shares entitled to vote. Whenever ten or more Shareholders meeting the qualifications set forth in Section 16(c) of the 1940 Act, as the same may be amended from time to time, seek the opportunity of furnishing materials to the other Shareholders with a view to obtaining signatures on such a request for a meeting, the Trustees shall comply with the provisions of said Section 16(c) and any rules or orders thereunder with respect to providing such Shareholders access to the list of the Shareholders of record of the Trust or the mailing of such materials to such Shareholders of record. Shareholders shall be entitled to at least fifteen days' notice of any meeting. QUORUM AND REQUIRED VOTE Section 3. A majority of Shares entitled to vote in person or by proxy shall be a quorum for the transaction of business at a Shareholders' meeting, except that where any provision of law or of this Declaration of Trust permits or requires that holders of any Series or Class thereof shall vote as a Series or Class, then a majority of the aggregate number of Shares of that Series or Class thereof entitled to vote shall be necessary to constitute a quorum for the transaction of business by that Series or Class. Any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held, within one hundred twenty (120) days after the date set for the original meeting, without the necessity of further notice. Except when a larger vote is required by any provision of this Declaration of Trust or the By-Laws, a majority of the Shares voted in person or by proxy shall decide any questions and a plurality shall elect a Trustee, provided that where any provision of law or of this Declaration of Trust permits or requires that the holders of any Series or Class shall vote as a Series or Class, then a majority of the Shares of that Series or Class voted on the matter shall decide that matter insofar as that Series or Class is concerned. ARTICLE IX DISTRIBUTIONS AND REDEMPTIONS DISTRIBUTIONS Section 1. (a) The Trustees may from time to time declare and pay dividends and other distributions. The amount of such dividends and the payment of them shall be wholly in the discretion of the Trustees. (b) The Trustees shall have power, to the fullest extent permitted by the laws of the Commonwealth of Massachusetts, at any time to declare and cause to be paid dividends on Shares of a particular Series, from the assets belonging to that Series, which dividends and other distributions, at the election of the Trustees, may be paid daily or otherwise pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may determine, and may be payable in Shares of that Series or Class thereof, as appropriate, at the election of each Shareholder of that Series or Class. All dividends and distributions on Shares of a particular Series 11 shall be distributed pro rata to the holders of that Series in proportion to the number of Shares of that Series held by such holders at the date and time of record established for the payment of such dividends or distributions, except that such dividends and distributions shall appropriately reflect expenses allocated to a particular Class of such Series. (c) Anything in this instrument to the contrary notwithstanding, the Trustees may at any time declare and distribute a "stock dividend" pro rata among the Shareholders of a particular Series or of a Class thereof as of the record date of that Series (fixed as provided in Section 3 of Article XI hereof). REDEMPTIONS Section 2. In case any holder of record of Shares of a particular Series or Class desires to dispose of his Shares, he may deposit at the office of the transfer agent or other authorized agent of that Series a written request or such other form of request as the Trustees may from time to time authorize, requesting that the Series purchase the Shares in accordance with this Section 2; and the Shareholder so requesting shall be entitled to require the Series to purchase, and the Series or the principal underwriter of the Series shall purchase his said Shares, but only at the Net Asset Value of the Series or Class held by the Shareholder (as described in Section 3 hereof) minus any applicable sales charge or redemption or repurchase fee. The Series shall make payment for any such Shares to be redeemed, as aforesaid, in cash or property from the assets of that Series and payment for such Shares shall be made by the Series or the principal underwriter of the Series to the Shareholder of record within seven (7) days after the date upon which the request is effective; provided, however, that if Shares being redeemed have been purchased by check, the Trust may postpone payment until the Trust has assurance that good payment has been collected for the purchase of the Shares. The Trust may require Shareholders to pay a sales charge to the Trust, the underwriter or any other person designated by the Trustees upon redemption or repurchase of Shares of any Series or Class thereof, in such amount as shall be determined from time to time by the Trustees. The amount of such sales charge may but need not vary depending on various factors, including without limitation the holding period of the redeemed or repurchased Shares. The Trustees may also charge a redemption or repurchase fee in such amount as may be determined from time to time by the Trustees. DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS Section 3. The term "Net Asset Value" of any Series shall mean that amount by which the assets of that Series exceed its liabilities, all as determined by or under the direction of the Trustees. Net Asset Value per Share shall be determined separately for each Series of Shares and shall be determined on such days and at such times as the Trustees may determine. Such determination may be made on a Series-by-Series or Class-by-Class basis, as appropriate, and shall include any expenses allocated to a specific Series or Class. The determination shall be made with respect to securities for which market quotations are readily available at the market value of such securities; and with respect to other securities and assets, at the fair value as determined in good faith by the Trustees, provided, however, that the Trustees, without Shareholder approval, may alter the method of appraising portfolio securities insofar as permitted under the 1940 Act and the rules, regulations and interpretations thereof promulgated or issued by the Commission or insofar as permitted by any order of the Commission applicable to the Series. The Trustees may delegate any of their powers and duties under this Section 3 with respect to appraisal of assets and liabilities. At any time the Trustees may cause the Net Asset Value per Share last determined to be determined again in a similar manner and may fix the time when such redetermined values shall become effective. 12 SUSPENSION OF THE RIGHT OF REDEMPTION Section 4. Notwithstanding Section 2 hereof, the Trustees may declare a suspension of the right of redemption or postpone the date of payment as permitted under the 1940 Act. Such suspension shall take effect at such time as the Trustees shall specify but not later than the close of business on the business day next following the declaration of suspension, and thereafter there shall be no right of redemption or payment until the Trustees shall declare the suspension at an end. In the case of a suspension of the right of redemption, a Shareholder may either withdraw his request for redemption or receive payment based on the Net Asset Value per Share existing after the termination of the suspension. ARTICLE X LIMITATION OF LIABILITY AND INDEMNIFICATION LIMITATION OF LIABILITY Section 1. All persons extending credit to, contracting with or having any claim against the Trust or a particular Series shall look only to the assets of the Trust or such Series, as the case may be, for payment under such credit, contract or claim; and neither the Shareholders nor the Trustees, nor any of the Trust's officers, employees or agents, whether past, present or future, nor any other Series shall be personally liable therefor. Every note, bond, contract, instrument, certificate or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust, any Series, or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in or with respect to their or his capacity as Trustees or Trustee and neither such Trustees or Trustee nor the Shareholders shall be personally liable thereon. Every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officers or officer shall give notice that the same was executed or made by them on behalf of the Trust or by them as Trustees or Trustee or as officers or officer and not individually and that the obligations of such instrument are not binding upon any of them or the Shareholders individually but are binding only upon the assets and property of the Trust or the particular Series in question, as the case may be, but the omission thereof shall not operate to bind any Trustees or Trustee or officers or officer or Shareholders or Shareholder individually. Section 2. Provided they have exercised reasonable care and have acted under the reasonable belief that their actions are in the best interest of the Trust, the Trustees and officers of the Trust shall not be responsible for or liable in any event for neglect or wrongdoing of them or any officer, agent, employee, investment adviser or independent contractor of the Trust, but nothing contained in this Declaration of Trust shall protect any Trustee or officer 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. INDEMNIFICATION Section 3. (a) Subject to the exceptions and limitations contained in Section 3(b) below: (i) every person who is, or has been a Trustee or officer of the Trust (hereinafter referred to as "Covered Person") shall be indemnified by the appropriate Series to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in 13 connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Covered Person: (i) who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (B) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or (ii) in the event of a settlement, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither interested persons of the Trust nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry); provided, however, that any Shareholder may, by appropriate legal proceedings, challenge any such determination by the Trustees, or by independent counsel. (c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such Trustee or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel, other than Trustees and officers, and other persons may be entitled to by contract or otherwise under law. (d) Expenses in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in paragraph (a) of this Section 3 may be paid by the applicable Series from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the applicable Series if it is ultimately determined that he is not entitled to indemnification under this Section 3; provided, however, that either (a) such Covered Person shall have provided appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any such advance payments or (c) either a majority of the Trustees who are neither interested persons of the Trust nor parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily available facts (as opposed to a trial-type inquiry or full investigation), that there is reason to believe that such Covered Person will not be disqualified from indemnification under this Section 3. 14 SHAREHOLDERS Section 4. In case any Shareholder or former Shareholder of any Series of the Trust shall be held to be personally liable solely by reason of his being or having been a Shareholder and not because of his acts or omissions or for some other reason, the Shareholder or former Shareholder (or his heirs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled out of the assets belonging to the applicable Series to be held harmless from and indemnified against all loss and expense arising from such liability. The Series shall, upon request by the Shareholder, assume the defense of any claim made against the Shareholder for any act or obligation of the Series and satisfy any judgment thereon. ARTICLE XI MISCELLANEOUS TRUST NOT A PARTNERSHIP Section 1. It is hereby expressly declared that a trust and not a partnership is created hereby. No Trustee hereunder shall have any power to bind personally either the Trust's officers or any Shareholder. TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY Section 2. The exercise by the Trustees of their powers and discretion hereunder in good faith and with reasonable care under the circumstances then prevailing, shall be binding upon everyone interested. Subject to the provisions of Article X, the Trustees shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and subject to the provisions of Article X, shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is obtained. ESTABLISHMENT OF RECORD DATES Section 3. The Trustees may close the stock transfer books of the Trust for a period not exceeding sixty (60) days preceding the date of any meeting of Shareholders, or the date for the payment of any dividends, or the date for the allotment of rights, or the date when any change or conversion or exchange of Shares shall go into effect; or in lieu of closing the stock transfer books as aforesaid, the Trustees may fix in advance a date, not exceeding ninety (90) days preceding the date of any meeting of Shareholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of Shares shall go into effect, as a record date for the determination of the Shareholders entitled to notice of, and to vote at, any such meeting, or to receive payment of such dividend, or to receive such allotment or rights, or to exercise such rights in respect of any such change, conversion or exchange of Shares, and in such case such Shareholders and only such Shareholders as shall be Shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any Shares on the books of the Trust after any such record date fixed or aforesaid. 15 TERMINATION OF TRUST Section 4. (a) This Trust shall continue without limitation of time but subject to the provisions of sub-section (b) of this Section 4. (b) Subject to a Majority Shareholder Vote of each Series affected by the matter or, if applicable, to a Majority Shareholder Vote of the Trust, the Trustees may (i) sell, convey, merge and transfer all or substantially all of the assets of the Trust or any affected Series to another Series or to a trust, partnership, association or corporation organized under the laws of any state which is an investment company as defined in the 1940 Act, for adequate consideration which may include the assumption of all outstanding obligations, taxes and other liabilities, accrued or contingent, of the Trust or any affected Series, and which may include shares of beneficial interest or stock of such Series, trust, partnership, association or corporation; or (ii) at any time sell and convert into money all or substantially all of the assets of the Trust or any affected Series. Upon making provision for the payment of all known liabilities of the Trust or any affected Series in either (i) or (ii), by such assumption or otherwise, the Trustees shall distribute the remaining proceeds or assets (as the case may be) ratably among the holders of the Shares of the Trust or any affected Series then outstanding; however, the payment to any particular Class within such Series may be reduced by any fees, expenses or charges allocated to that Class. Nothing in this Declaration of Trust shall preclude the Trustees from distributing such remaining proceeds or assets so that holders of the Shares of a particular Class of the Trust or any affected Series receive as their ratable distribution shares solely of an analogous class, as determined by the Trustees, of such trust, partnership, association or corporation. The Trustees may take any of the actions specified in clauses (i) and (ii) above without obtaining a Majority Shareholder Vote of any Series or the Trust if a majority of the Trustees makes a determination that the continuation of a Series or the Trust is not in the best interests of such Series, the Trust or their respective Shareholders as a result of factors or events adversely affecting the ability of such Series or the Trust to conduct its business and operations in an economically viable manner. Such factors and events may include the inability of a Series or the Trust to maintain its assets at an appropriate size, changes in laws or regulations governing the Series or Trust or affecting assets of the type in which such Series or the Trust invests or economic developments or trends having a significant adverse impact on the business or operations of such Series or the Trust. (c) Upon completion of the distribution of the remaining proceeds or the remaining assets as provided in sub-section (b), the Trust or any affected Series shall terminate and the Trustees shall be discharged of any and all further liabilities and duties hereunder with respect thereto and the right, title and interest of all parties therein shall be canceled and discharged. FILING OF COPIES, REFERENCES, HEADINGS Section 5. The original or a copy of this instrument and of each amendment hereto shall be kept at the office of the Trust where it may be inspected by any shareholder. A copy of this instrument and of each amendment hereto shall be filed by the Trustees with the Secretary of the Commonwealth of Massachusetts and the Boston City Clerk, as well as any other governmental 16 office where such filing may from time to time be required. Anyone dealing with the Trust may rely on a certificate by an officer or Trustee of the Trust as to whether or not any such amendments to this Declaration of Trust have been made and as to any matters in connection with the Trust hereunder, and with the same effect as if it were the original, may rely on a copy certified by an officer or Trustee of the Trust to be a copy of this instrument or of any such amendments. In this instrument or in any such amendments, references to this instrument, and all expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to this instrument as amended from time to time. The masculine gender shall include the feminine and neuter genders. Headings are placed herein for convenience of reference only, and in case of any conflict, the text of this instrument, rather than the headings, shall control. This instrument may be executed in any number of counterparts each of which shall be deemed an original. APPLICABLE LAW Section 6. The Trust set forth in this instrument is made in the Commonwealth of Massachusetts, and it is created under and is to be governed by and construed and administered according to the laws of said Commonwealth. The Trust shall be of the type commonly called a Massachusetts business trust, and, without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a trust. AMENDMENTS Section 7. All rights granted to the Shareholders under this Declaration of Trust are granted subject to the reservation of the right to amend this Declaration of Trust as herein provided, except that no amendment shall repeal the limitations on personal liability of any Shareholder or Trustee or repeal the prohibition of assessment upon the Shareholders without the express consent of each Shareholder or Trustee involved. Subject to the foregoing, the provisions of this Declaration of Trust (whether or not related to the rights of Shareholders) may be amended at any time, so long as such amendment does not adversely affect the rights of any Shareholder with respect to which such amendment is or purports to be applicable and so long as such amendment is not in contravention of applicable law, including the 1940 Act, by an instrument in writing signed by a majority of the then Trustees (or by an officer of the Trust pursuant to the vote of a majority of such Trustees). Except as provided in the first sentence of this Section 7, any amendment to this Declaration of Trust that adversely affects the rights of Shareholders may be adopted at any time by an instrument signed in writing by a majority of the then Trustees (or by an officer of the Trust pursuant to the vote of a majority of such Trustees) when authorized to do so by Majority Shareholder Vote; provided, however, that an amendment that shall affect the Shareholders of one or more Series (or of one or more Classes), but not the Shareholders of all outstanding Series (or Classes), shall be authorized by a Majority Shareholder Vote of each Series (or Class, as the case may be) affected, and no vote of a Series (or Class) not affected shall be required. Subject to the foregoing, any such amendment shall be effective as provided in the instrument containing the terms of such amendment or, if there is no provision therein with respect to effectiveness, upon the execution of such instrument and of a certificate (which may be a part of such instrument) executed by a Trustee or officer to the effect that such amendment has been duly adopted. Copies of the amendment to this Declaration of Trust shall be filed as specified in Section 5 of this Article XI. A restated Declaration of Trust, integrating into a single instrument all of the provisions of the Declaration of Trust which are then in effect and operative, may be executed from time to time by a majority of the Trustees and shall be effective upon filing as specified in such Section 5. 17 FISCAL YEAR Section 8. The fiscal year of the Trust shall be determined by the Trustees in accordance with the By-Laws, provided, however, that the Trustees may, without Shareholder approval, change the fiscal year of the Trust. 18 Schedule A Series of the Trust PaineWebber Growth and Income Fund Classes of Shares of Each Series An unlimited number of shares of beneficial interest have been established by the Board as Class A shares, Class B shares, Class C shares and Class Y shares of each of the above Series. Each of the Class A shares, Class B shares, Class C shares and Class Y shares of a Series represents interests in the assets of only that Series and has the same preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of shares, except as provided in the Trust's Declaration of Trust and as set forth below with respect to the Class B shares of each Series: 1. Each Class B share, other than a share purchased through the reinvestment of a dividend or a distribution with respect to the Class B share, shall be converted automatically, and without any action or choice on the part of the holder thereof, into Class A shares of the same Series, based on the relative net asset value of each such class at the time of the calculation of the net asset value of such class of shares on the date that is the first Business Day (as defined in the Series' prospectus and/or statement of additional information) of the month in which the sixth anniversary of the issuance of such Class B shares occurs (which, for the purpose of calculating the holding period required for conversion, shall mean (i) the date on which the issuance of such Class B shares occurred or (ii) for Class B shares obtained through an exchange, the date on which the issuance of the Class B shares of an eligible PaineWebber fund occurred, if such shares were exchanged directly, or through a series of exchanges for the Series' Class B shares (the "Conversion Date")). 2. Each Class B share purchased through the reinvestment of a dividend or a distribution with respect to the Class B shares and the dividends and distributions on such shares shall be segregated in a separate sub-account on the stock records of the Series for each of the holders of record thereof. On any Conversion Date, a number of the shares held in the sub-account of the holder of record of the share or shares being converted, calculated in accordance with the next following sentence, shall be converted automatically, and without any action or choice on the part of the holder thereof, into Class A shares of the same Series. The number of shares in the holder's sub-account so converted shall bear the same relation to the total number of shares maintained in the sub-account on the Conversion Date as the number of shares of the holder converted on the Conversion Date pursuant to Paragraph 2(a) hereof bears to the total number of Class B shares of the holder on the Conversion Date not purchased through the automatic reinvestment of dividends or distributions with respect to the Class B shares. 3. The number of Class A shares into which a Class B share is converted pursuant to paragraphs 1 and 2 hereof shall equal the number (including for this purpose fractions of a share) obtained by dividing the net asset value per share of the Class B shares for purposes of sales and redemptions thereof at the time of the calculation of the net asset value on the Conversion Date by the net asset value per share of the Class A 19 shares for purposes of sales and redemptions thereof at the time of the calculation of the net asset value on the Conversion Date. 4. On the Conversion Date, the Class B shares converted into Class A shares will cease to accrue dividends and will no longer be outstanding and the rights of the holders thereof will cease (except the right to receive declared but unpaid dividends to the Conversion Date). For purposes of Paragraph 1 above, the term "eligible PaineWebber fund" includes any and all mutual funds for which PaineWebber Incorporated or Mitchell Hutchins Asset Management Inc. serves as investment adviser that offer shares with a contingent deferred sales charge imposed upon certain redemptions of such shares and that are exchangeable with the Class B shares of the Series. 20 IN WITNESS WHEREOF, the undersigned, being the all the Trustees of the Trust, have executed this Amended and Restated Declaration of Trust as of the day and year first above written. /s/ Margo N. Alexander /s/ Meyer Feldberg - ---------------------------------- ------------------------------- Margo N. Alexander Meyer Feldberg /s/ E. Garrett Bewkes, Jr. /s/ George W. Gowen - ---------------------------------- ------------------------------- E. Garrett Bewkes, Jr. George W. Gowen /s/ Richard Q. Armstrong /s/ Frederic V. Malek - ---------------------------------- ------------------------------- Richard Q. Armstrong Frederic V. Malek /s/ Richard R. Burt /s/ Carl W. Schafer - ---------------------------------- ------------------------------- Richard R. Burt Carl W. Schafer /s/ Mary C. Farrell - ---------------------------------- Mary C. Farrell 21 EX-99.B(2) 3 RESTATED BY-LAWS PAINEWEBBER AMERICA FUND A Massachusetts Business Trust RESTATED BY-LAWS November 19, 1997 BY-LAWS OF PAINEWEBBER AMERICA FUND ARTICLE I DECLARATION OF TRUST, LOCATION OF OFFICES AND SEAL Section 1.01. Declaration of Trust: These By-Laws shall be subject to the Declaration of Trust, as from time to time in effect (the "Declaration of Trust"), of PaineWebber America Fund, the Massachusetts business trust established by the Declaration of Trust (the "Trust"). Section 1.02. Principal Office of the Trust: Resident Agent: The principal office of the Trust shall be located in the City of New York, New York. Its resident agent in Massachusetts shall be CT Corporation System, 2 Oliver Street, Boston, Massachusetts, or such other person as the Trustees may from time to time designate. The Trust may establish and maintain such other offices and places of business as the Trustees may, from time to time, determine. Section 1.03. Seal: The seal of the Trust shall be circular in form and shall bear the name of the Trust. The form of the seal shall be subject to alteration by the Trustees and the seal may be used by causing it or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any officer or Trustee of the Trust shall have authority to affix the seal of the Trust to any document, instrument or other paper executed and delivered by or on behalf of the Trust; however, unless otherwise required by the Trustees, the seal shall not be necessary to be placed on and its absence shall not impair the validity of any document, instrument, or other paper executed by or on behalf of the Trust. ARTICLE II SHAREHOLDERS Section 2.01. Shareholder Meetings: Meetings of the shareholders may be called at any time by the Trustees or, if the Trustees shall fail to call any meeting for a period of 30 days after written request of Shareholders owning at least one-tenth of the outstanding shares entitled to vote, then such Shareholders may call such meeting. Each call of a meeting shall state the place, date, hour and purposes of the meeting. Section 2.02. Place of Meetings: All meetings of the Shareholders shall be held at the principal office of the Trust, except that the Trustees may designate a different place of meeting within the United States. Section 2.03. Notice of Meeting: The secretary or an assistant secretary or such other officer as may be designated by the Trustees shall cause notice of the place, date and hour, and purpose or purposes for which the meeting is called, to be mailed, not less than fifteen days before the date of the meeting, to each Shareholder entitled to vote at such meeting, at his address as it appears on the records of the Trust at the time of such mailing. Notice of any Shareholders' meeting need not be given to any Shareholder if a written waiver of notice, executed before or after such meeting, is filed with the records of such meeting, or to any Shareholder who shall attend such meeting in person or by proxy. Notice of adjournment of a Shareholders' meeting to another time or place need not be given, if such time and place are announced at the meeting. Section 2.04. Ballots: The vote upon any question shall be by ballot whenever requested by any person entitled to vote, but, unless such a request is made, voting may be conducted in any way approved by the meeting. Section 2.05. Voting; Proxies: Shareholders entitled to vote may vote either in person or by proxy, provided that such proxy to act is authorized to act by (1) a written instrument, dated not more than eleven months before the meeting and executed either by the Shareholder or by his or her duly authorized attorney in fact (who may be so authorized by a writing or by any non-written means permitted by the laws of the Commonwealth of Massachusetts) or (2) such electronic, telephonic, computerized or other alternative means as may be approved by a resolution adopted by the Trustees. Proxies shall be delivered to the secretary of the Trust or other person responsible for recording the proceedings before being voted. A proxy with respect to shares held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of such proxy the Trust receives a specific written notice to the contrary from any one of them. Unless otherwise specifically limited by their terms, proxies shall entitle the holder thereof to vote at any adjournment of a meeting. A proxy purporting to be exercised by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. At all meetings of the Shareholders, unless the voting is conducted by inspectors, all questions relating to the qualifications of voters, the validity of proxies, and the acceptance or rejection of votes shall be decided by the chairman of the meeting. Section 2.06. Action Without a Meeting: Any action to be taken by Shareholders may be taken without a meeting if all Shareholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of meetings of Shareholders of the Trust. Such consent shall be treated for all purposes as a vote at a meeting. ARTICLE III TRUSTEES Section 3.01. Regular Meetings: Regular meetings of the Trustees may be held without further call or notice at such places and at such times as the Trustees may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent Trustees. A regular meeting of the Trustees may be held without further call or notice immediately after and at the same place as any meeting of the Shareholders. Section 3.02. Special Meetings: Special meetings of the Trustees may be held at any time and at any place designated in the call of the meeting, when called by the chairman of the Trustees or by two or more Trustees, provided that notice thereof shall being given to each Trustee as set forth in the Declaration of Trust. Section 3.03. Committees: The Trustees, by vote of a majority of the Trustees then in office, may elect from their number an executive committee or other committees and may delegate thereto some or all of their powers except those which by law, by the Declaration of Trust, or by 2 these By-Laws may not be delegated. Except as the Trustees may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Trustees or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-Laws for the Trustees themselves. All members of such committees shall hold such offices at the pleasure of the Trustees. The Trustees may abolish any such committee at any time. Any committee to which the Trustees delegate any of their powers or duties shall keep records of its meetings and shall report its actions to the Trustees. The Trustees shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect. Any such committee may act by meeting in person, by unanimous written consent, or by telephonic meeting provided a quorum of members participates in any such telephonic meeting. Section 3.04. Other Committees: The Trustees may appoint other committees, each consisting of one or more persons, who need not be Trustees. Each such committee shall have such powers perform such duties and abide by such procedures as may be determined from time to time by the Trustees, but shall not exercise any power which may lawfully be exercised only by the Trustees or a committee of Trustees. Section 3.05. Compensation: Each Trustee and each committee member may receive such compensation for his services and reimbursement for his expenses as may be fixed from time to time by resolution of the Trustees. ARTICLE IV OFFICERS Section 4.01. General: The officers of the Trust shall be a president, a treasurer, a secretary and such other officers, if any, as the Trustees from time to time may in their discretion elect or appoint. The Trust may also have such agents, if any, as the Trustees from time to time may in their discretion appoint. Any officer may be but need not be a Trustee or shareholder. Any two or more offices may be held by the same person. Section 4.02. Election and Term of Office: The president, the treasurer and the secretary shall be elected annually by the Trustees at their first meeting in each calendar year or at such later meeting in such year as the Trustees shall determine ("Annual Meeting"). Other officers or agents, if any, may be elected or appointed by the Trustees at said meeting or at any other time. The president, treasurer and secretary shall hold office until the next Annual Meeting and until their respective successors are chosen and qualified, or in each case until he dies, resigns, is removed or become disqualified. Each other officer shall hold office and each agent shall retain his authority at the pleasure of the Trustees. Section 4.03. Powers: Subject to the other provisions of these By-Laws, each officer shall have, in addition to the duties and powers herein and in the Declaration of Trust set forth, such duties and powers as are commonly incident to his office as if the Trust were organized as a Massachusetts business corporation and such other duties and powers as the Trustees may from time to time designate. 3 Section 4.04. Chairman of the Board: The chairman of the Board of Trustees, if one is so appointed, shall be chosen from among the Trustees and may hold office only so long as he continues to be a Trustee. Unless the Trustees otherwise provide, the chairman, if any is so appointed, shall preside at all meetings of the Shareholders and of the Trustees at which he is present; may be ex officio a member of all committees established by the Trustees; and shall have such other duties and powers as specified herein and as may be assigned to him by the Trustees. Section 4.05. President: The president shall be the chief executive officer of the Trust and, subject to the supervision of the Trustees, shall have general charge of the business, affairs and property of the Trust and general supervision over its officers, employees and agents. He shall exercise such other powers and perform such other duties as from time to time may be assigned to him by the Trustees. Section 4.06. Vice Presidents: The Trustees may from time to time designate and elect one or more vice presidents who shall have such powers and perform such duties as from time to time may be assigned to them by the Trustees or the president. At the request or in the absence or disability of the president, the vice president (or, if there are two or more vice presidents, then the senior of the vice presidents present and able to act) may perform all the duties of the president and, when so acting, shall have all the powers of and be subject to all the restrictions upon the president. Section 4.07. Treasurer and Assistant Treasurers: The treasurer shall be the principal financial and accounting officer of the Trust and shall have general charge of the finances and books of account of the Trust. Except as otherwise provided by the Trustees, he shall have general supervision of the funds and property of the Trust and of the performance by the custodian of its duties with respect thereto. He shall render to the Trustees, whenever directed by the Trustees, an account of the financial condition of the Trust and of all his transactions as treasurer; and as soon as possible after the close of each financial year he shall make and submit to the Trustees a like report for such financial year. He shall perform all the acts incidental to the office of treasurer, subject to the control of the Trustees. Any assistant treasurer may perform such duties of the treasurer as the treasurer or the Trustees may assign, and, in the absence of the treasurer, (or, if there are two or more assistant treasurers, then the senior of the assistant treasurers present and able to act) may perform all the duties of the treasurer, subject to the control of the Trustees. Section 4.08. Secretary and Assistant Secretaries: The secretary shall attend to the giving and serving of all notices of the Trust and shall record all proceedings of the meetings of the Shareholders and Trustees in books to be kept for that purpose. He shall keep in safe custody the seal of the Trust, and shall have charge of the records of the Trust, all of which shall at all reasonable times be open to inspection by the Trustees. He shall perform such other duties as appertain to his office or as may be required by the Trustees. Any assistant secretary may perform such duties of the secretary as the secretary or the Trustees may assign, and, in the absence of the secretary, (or, if there are two or more assistant secretaries. then the senior of the assistant secretaries present and able to act) may perform all the duties of the secretary. 4 Section 4.09. Subordinate Officers: The Trustees from time to time may appoint such other officers or agents as they may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Trustees may determine. The Trustees from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Section 4.10. Remuneration: The salaries or other compensation of the officers of the Trust shall be fixed from time to time by resolution of the Trustees, except that the Trustees may by resolution delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents appointed in accordance with the provisions of Section 4.09 hereof. Section 4.11. Surety Bonds: The Trustees may require any officer or agent of the Trust to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940, as amended, ("1940 Act") and the rules and regulations of the Securities and Exchange Commission ("Commission")) to the Trust in such sum and with such surety or sureties as the Trustees may determine, conditioned upon the faithful performance of his duties to the Trust including responsibility for negligence and for the accounting of any of the Trust's property, funds or securities that may come into his hands. Section 4.12. Resignation: Any officer may resign his office at any time by delivering a written resignation to the Trustees, the president, the secretary, or any assistant secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 4.13. Removal: Any officer may be removed from office whenever in the judgment of the Trustees the best interest of the Trust will be served thereby, by the vote of a majority of the Trustees given at a regular meeting or any special meeting of the Trustees called for such purpose. In addition, any officer or agent appointed in accordance with the provision of Section 4.09 hereof may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Trustees. Section 4.14. Vacancies and Newly Created Offices: If any vacancy shall occur in any office by reason of death, resignation, removal, disqualification or other cause, or if any new office shall be created, such vacancies or newly created offices may be filled by the Trustees at any regular or special meeting of the Trustees or, in the case of any office created pursuant to Section 4.09 hereof, by any officer upon whom such power shall have been conferred by the Trustees. ARTICLE V CUSTODIAN Section 5.01. Employment of Custodian: The Trustees shall at all times employ one or more banks or trust companies organized under the laws of the U.S. or one of the states thereof provided that each such bank or trust company has capital, surplus and undivided profits of at least two million dollars ($2,000,000) as custodian with authority as the Trust's agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in these By-Laws: 5 (1) to hold the securities owned by the Trust and deliver the same upon written order, or oral order if confirmed in writing, or order delivered by such electromechanical or electronic devices as are agreed to by the Trust and the custodian, if such procedures have been authorized in writing by the Trust; (2) to receive and give receipt for any moneys due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct; and (3) to disburse such moneys upon orders or vouchers; and the Trust may also enjoy such custodian as its agent: (1) to keep the books and accounts of the Trust and furnish clerical and accounting services; and (2) to compute, if authorized to do so by the Trustees, the Net Asset Value of any Series or Class (which terms are defined in the Declaration of Trust) in accordance with the provisions of the Declaration of Trust; all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. If so directed by a vote of a majority of the outstanding shares of the Trust entitled to vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote. The Trustees may also authorize the custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian, and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall be a bank or trust company organized under the laws of the United States or one of the states thereof and having capital, surplus and undivided profits of at least two million dollars ($2,000,000) or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act. Section 5.02. Use of Central Securities Handling System: Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to deposit any or all of the securities owned by the Trust (1) in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust; or (2) with such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act. ARTICLE VI EXECUTION OF PAPERS Section 6.01. General: Except as the Trustees may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, 6 notes, checks, drafts, and other obligations made, accepted, or endorsed by the Trust shall be executed by the president, any vice president, or the treasurer, or by whomever else shall be designated for that purpose by the Trustees, and need not bear the seal of the Trust. ARTICLE VII SHARES OF BENEFICIAL INTEREST Section 7.01. Share Certificates: No certificates certifying the ownership of Shares shall be issued except as the Trustees may otherwise authorize. In the event that the Trustees authorize the issuance of Share certificates, subject to the provisions of Section 7.03, each Shareholder shall be entitled to a certificate stating the number of shares owned by him, in such form as shall be prescribed from time to time by the Trustees. Such certificate shall be signed by the president or a vice president and by the treasurer, assistant treasurer, secretary or assistant secretary. Such signatures may be facsimiles if the certificate is signed by a transfer or shareholder services agent or by a registrar, other than a Trustee, officer or employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Trust with the same effect as if he were such officer at the time of its issue. In lieu of issuing certificates for shares, the Trustees, the transfer agent or shareholder services agent may either issue receipts therefor or may keep accounts upon the books of the Trust for the record holders of such shares, who shall in either case be deemed, for all purposes hereunder, to be the holders of certificates for such shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof. Section 7.02. Loss of Certificates: In the case of the alleged loss or destruction or the mutilation of a Share certificate, a duplicate certificate may be issued in place thereof, upon such terms as the Trustees may prescribe. Section 7.03. Discontinuance of Issuance of Certificates: The Trustees may at any time discontinue the issuance of Share certificates and may, by written notice to each Shareholder, require the surrender of Share certificates to the Trust for cancellation. Such surrender and cancellation shall not affect the ownership of Shares in the Trust. Section 7.04. Equitable Interest Not Recognized: The Trust shall be entitled to treat the holder of record of any Share or Shares of the Trust as the holder in fact thereof, and shall not be bound to recognize any equitable or other claim of interest in such Share or Shares on the part of any other person except as may be otherwise expressly provided by law. Section 7.05. Transfer of Shares: The Shares of the Trust shall be transferable only by transfer recorded on the books of the Trust, in person or by attorney. 7 ARTICLE VIII FISCAL YEAR; ACCOUNTANT Section 8.01. Fiscal Year: The fiscal year of the Trust shall end on such date in each year as the Trustees shall from time to time determine. Section 8.02. Accountant: (a) The Trust shall employ an independent public accountant or firm of independent public accountants as its accountant to examine the accounts of the Trust and to sign and certify the financial statements of the Trust. The accountant's certificates and reports shall be addressed both to the Trustees and to the Shareholders of the Trust. (b) Any vacancy occurring due to the death or resignation of the accountant may be filled by a majority vote of the Trustees who are not interested persons of the Trust. ARTICLE IX INSURANCE Section 9.01. Insurance of Officers, Trustees, and Employees: The Trust may purchase and maintain insurance on behalf of any person who is or was a Trustee, officer or employee of the Trust, or is or was serving at the request of the Trust 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 Trust would have the power to indemnify him against such liability. The Trust may not acquire or obtain a contract for insurance that protects or purports to protect any Trustee or officer of the Trust against any liability to the Trust or its Shareholders 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. ARTICLE X AMENDMENTS; REPORTS; MISCELLANEOUS Section 10.1. Amendments: These By-Laws may be amended or repealed, in whole or in part, by a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such majority. Section 10.2. Reports: The Trustees shall at least semiannually submit to the Shareholders a written report of the transactions of the Trust, including financial statements that shall at least annually be certified by independent public accountants. Section 10.3. Gender: As used in these By-Laws, the masculine gender shall include the feminine and neuter genders. 8 Section 10.3. Headings: Headings are placed in these bylaws for convenience of reference only and in case of any conflict, the text of these By-Laws rather than the headings shall control. Section 10.4. Inspection of Books: The Trustees shall from time to time determine whether and to what extent, and at what times and places, and under what conditions and regulations the accounts and books of the Trust or any of them shall be open to the inspection of the Shareholders, and no Shareholder shall have any right to inspect any account or book or document of the Trust except as conferred by law or otherwise by the Trustees. 9 EX-99.B(9) 4 FORM OF TRANSFER AGENCY SERVICES AGREEMENT TRANSFER AGENCY SERVICES AGREEMENT THIS AGREEMENT is made as of ___________, 1997 by and between PFPC INC., a Delaware corporation ("PFPC"), and PaineWebber ___ Fund, a [Maryland corporation] [Massachusetts business trust](the "Fund"). W I T N E S S E T H: WHEREAS, the Fund is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund, and PFPC wishes to furnish such services. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Definitions. As Used in this Agreement: (a) "1933 Act" means the Securities Act of 1933, as amended. (b) "1934 Act" means the Securities Exchange Act of 1934, as amended. (c) "Authorized Person" means any officer of the Fund and any other person duly authorized by the Fund's Board of Directors or Trustees ("Board") to give Oral Instructions and Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PFPC. An Authorized Person's scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix. (d) "CEA" means the Commodities Exchange Act, as amended. (e) "Oral Instructions" mean oral instructions received by PFPC from an Authorized Person. (f) "SEC" means the Securities and Exchange Commission. (g) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act and the CEA. (h) "Shares" mean the shares of common stock or beneficial interest of any series or class of the Fund. (i) "Written Instructions" mean written instructions signed by an Authorized Person and received by PFPC. The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device. 2. Appointment. The Fund hereby appoints PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund in accordance with the terms set forth in this Agreement. PFPC accepts such appointment and agrees to furnish such services. 3. Delivery of Documents. The Fund has provided or, where applicable, will provide PFPC with the following: 2 DRAFT (a) Certified or authenticated copies of the resolutions of the Fund's Board approving the appointment of PFPC to provide services to the Fund and approving this Agreement; (b) A copy of each executed broker-dealer agreement with respect to each Fund; and (c) Copies (certified or authenticated if requested by PFPC) of any post-effective amendment to the Fund's registration statement, advisory agreement, distribution agreement, shareholder servicing agreement and all amendments or supplements to the foregoing upon request. 4. Compliance with Rules and Regulations. PFPC undertakes to comply with all applicable requirements of the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder. Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund or any of its series or investment portfolios (each, a "Portfolio"). 5. Instructions. (a) Unless otherwise provided in this Agreement, PFPC shall act only upon Oral Instructions and Written Instructions. (b) PFPC shall be entitled to rely upon any Oral Instructions and Written Instructions it receives from an Authorized Person pursuant to this Agreement. PFPC may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or of any vote, resolution or proceeding of the Fund's Board or of the Fund's shareholders, unless and until PFPC receives 3 DRAFT Written Instructions to the contrary. (c) The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions so that PFPC receives the Written Instructions by the close of business on the next day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, PFPC shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that PFPC's actions comply with the other provisions of this Agreement. 6. Right to Receive Advice. (a) Advice of the Fund. If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral Instructions or Written Instructions, from the Fund. (b) Advice of Counsel. If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PFPC, at the option of PFPC). (c) Conflicting Advice. In the event of a conflict between directions, advice or Oral Instructions or Written 4 DRAFT Instructions PFPC receives from the Fund, and the advice it receives from counsel, PFPC may rely upon and follow the advice of counsel. In the event PFPC so relies on the advice of counsel, PFPC remains liable for any action or omission on the part of PFPC which constitutes willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement. (d) Protection of PFPC. PFPC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from the Fund or from counsel and which PFPC believes, in good faith, to be consistent with those directions, advice or Oral Instructions or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC's properly taking or not taking such action. Nothing in this subsection shall excuse PFPC when an action or omission on the part of PFPC constitutes willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement. 7. Records; Visits. PFPC shall prepare and maintain in complete and accurate form all books and records necessary for it 5 DRAFT to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund, including (a) all those records required to be prepared and maintained by the Fund under the 1940 Act, by other applicable Securities Laws, rules and regulations and by state laws and (b) such books and records as are necessary for PFPC to perform all of the services it agrees to provide in this Agreement and the appendices attached hereto, including but not limited to the books and records necessary to effect the conversion of Class B shares, the calculation of any contingent deferred sales charges and the calculation of front-end sales charges. The books and records pertaining to the Fund, which are in the possession or under the control of PFPC, shall be the property of the Fund. The Fund and Authorized Persons shall have access to such books and records in the possession of PFPC at all times during PFPC's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records in the possession of PFPC shall be provided by PFPC to the Fund or to an Authorized Person, at the Fund's expense. Upon reasonable notice by the Fund, PFPC shall make available during regular business hours its facilities and premises employed in connection with its performance of this Agreement for reasonable visits by the Fund, any agent or person designated by the Fund or any regulatory agency having authority over the Fund. 8. Confidentiality. PFPC agrees to keep confidential all records of the Fund and information relating to the Fund and its 6 DRAFT shareholders (past, present and future), its investment adviser and its principal underwriter, unless the release of such records or information is otherwise consented to, in writing, by the Fund prior to its release. The Fund agrees that such consent shall not be unreasonably withheld and may not be withheld where PFPC may be exposed to civil or criminal contempt proceedings or when required to divulge such information or records to duly constituted authorities. 9. Coogeration with Accountants. PFPC shall cooperate with the Fund's independent public accountants and shall take all reasonable actions in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund. 10. Disaster Recovery. PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for periodic backup of computer files and data with respect to the Fund and emergency use of electronic data processing equipment. In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC's own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under 7 DRAFT this Agreement and provided further that PFPC has complied with the provisions of this paragraph 10. 11. Compensation. As compensation for services rendered by PFPC during the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC. 12. Indemnification. (a) The Fund agrees to indemnify and hold harmless PFPC and its affiliates from all taxes, charges, expenses, assessments, penalties, claims and liabilities (including, without limitation, liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws, and amendments thereto), and expenses, including (without limitation) reasonable attorneys' fees and disbursements, arising directly or indirectly from (i) any action or omission to act which PFPC takes (a) at the request or on the direction of or in reliance on the advice of the Fund or (b) upon Oral Instructions or Written Instructions or (ii) the acceptance, processing and/or negotitation of checks or other methods utilized for the purchase of Shares. Neither PFPC, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC's or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement, provided that in the absence of a finding to the contrary the acceptance, processing and/or negotiation of a 8 DRAFT fraudulent payment for the purchase of Shares shall be presumed not to have been the result of PFPC's or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard of such duties and obligations. (b) PFPC agrees to indemnify and hold harmless the Fund from all taxes, charges, expenses, assessments, penalties, claims and liabilities arising from PFPC's obligations pursuant to this Agreement (including, without limitation, liabilities arising under the Securities Laws, and any state and foreign securities and blue sky laws, and amendments thereto) and expenses, including (without limitation) reasonable attorneys' fees and disbursements arising directly or indirectly out of PFPC's or its nominee's own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement. (c) In order that the indemnification provisions contained in this Paragraph 12 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's 9 DRAFT prior written consent. (d) The members of the Board of the Fund and Shareholders of the Fund, or any Portfolio thereof, shall not be liable for any obligations of the Fund, or any such Portfolio, under this Agreement, and PFPC agrees that in asserting any rights or claims under this Agreement, it shall look only to the assets and property of the Fund or the particular Portfolio in settlement of such rights or claims and not to such members of the Board or Shareholders. PFPC further agrees that it will look only to the assets and property of a particular Portfolio of the Fund, should the Fund have established separate series, in asserting any rights or claims under this Agreement with respect to services rendered with respect to that Portfolio and will not seek to obtain settlement of such rights or claims from the assets of any other Portfolio of the Fund. Notwithstanding the foregoing, in asserting any rights or claims under this Agreement, PFPC shall not be prevented from looking to the assets and property of the Fund sponsor or any other appropriate party(ies) in settlement of such rights or claims. 13. Insurance. PFPC shall maintain insurance of the types and in the amounts deemed by it to be appropriate. To the extent that policies of insurance may provide for coverage of claims for liability or indemnity by the parties set forth in this Agreement, the contracts of insurance shall take precedence, and no provision of this Agreement shall be construed to relieve an insurer of any 10 DRAFT obligation to pay claims to the Fund, PFPC or other insured party which would otherwise be a covered claim in the absence of any provision of this Agreement. 14. Security. (a) PFPC represents and warrants that, to the best of its knowledge, the various procedures and systems which PFPC has implemented with regard to the safeguarding from loss or damage attributable to fire, theft or any other cause (including provision for twenty-four hours a day restricted access) of the Fund's blank checks, certificates, records and other data and PFPC's equipment, facilities and other property used in the performance of its obligations hereunder are adequate, and that it will make such changes therein from time to time as in its judgment are required for the secure performance of its obligations hereunder. PFPC shall review such systems and procedures on a periodic basis and the Fund shall have reasonable access to review these systems and procedures. (b) Y2K Compliance. PFPC further represents and warrants that any and all electronic data processing systems and programs that it uses in connection with the provision of services hereunder and over which PFPC has control prior to 1999 will be year 2000 compliant. 15. Responsibility of PFPC. (a) PFPC shall be under no duty to take any action on behalf of the Fund except as specifically set forth herein or as 11 DRAFT may be specifically agreed to by PFPC in writing. PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder, to act in good faith and to use its best efforts in performing services provided for under this Agreement. PFPC shall be liable for any damages arising out of PFPC's failure to perform its duties under this Agreement to the extent such damages arise out of PFPC's willful misfeasance, bad faith, negligence or reckless disregard of such duties. (b) Without limiting the generality of the foregoing or of any other provision of this Agreement, PFPC shall not be under any duty or obligation to inquire into and shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PFPC reasonably believes to be genuine; or (B) subject to Section 10, delays or errors or loss of data occurring by reason of circumstances beyond PFPC's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply. (c) Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PFPC's 12 DRAFT or its affiliates' performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates. 16. Description of Services. (a) Services Provided on an Ongoing Basis, If Applicable. (i) Calculate 12b-1 payments to financial intermediaries and financial intermediary trail commissions; (ii) Develop, monitor and maintain, in consultation with the Fund, all systems necessary to implement and operate the four-tier distribution system, including Class B conversion feature, as described in the registration statement and related documents of the Fund, as they may be amended from time to time; (iii) Calculate contingent deferred sales charge amounts upon redemption of Fund shares and deduct such amounts from redemption proceeds; (iv) Calculate front-end sales load amounts at time of purchase of shares; (v) Determine dates of Class B conversion and effect the same; (vi) Establish and maintain proper shareholder registrations; (vii) Review new applications and correspond with shareholders to complete or correct information; (viii) Direct payment processing of checks or wires; (ix) Prepare and certify stockholder lists in conjunction with proxy solicitations; (x) Prepare and mail to shareholders confirmation of activity; 13 DRAFT (xi) Provide toll-free lines for direct shareholder use, plus customer liaison staff for on-line inquiry response; (xii) Send duplicate confirmations to broker-dealers of their clients' activity, whether executed through the broker-dealer or directly with PFPC; (xiii) Provide periodic shareholder lists, outstanding share calculations and related statistics to the clients as agreed to by PFPC and the Fund from time to time; (xiv) Provide detailed data for underwriter/broker confirmations; (xv) Prepare periodic mailing of year-end tax and statement information; (xvi) Notify on a daily basis the investment adviser, accounting agent, and custodian of fund activity; and (xvii) Perform, itself or through a delegate, all of the services, whether or not included within the scope of another paragraph of this Paragraph 16(a), specified on Annex A hereto; and (xviii) Perform other participating broker-dealer shareholder services as may be agreed upon from time to time. (b) Services Provided by PFPC Under Oral Instructions or Written Instructions. (i) Accept and post daily Fund and class purchases and redemptions; (ii) Accept, post and perform shareholder transfers and exchanges; (iii) Pay dividends and other distributions; (iv) Solicit and tabulate proxies; and (v) Cancel certificates. 14 DRAFT (c) Purchase of Shares. PFPC shall issue and credit an account of an investor, in the manner described in the Fund's prospectus, once it receives: (i) A purchase order; (ii) Proper information to establish a shareholder account; and (iii) Confirmation of receipt or crediting of funds for such order to the Fund's custodian. (d) Redemption of Shares. PFPC shall redeem Shares only if that function is properly authorized by the Fund's organizational documents or resolutions of the Fund's Board. Shares shall be redeemed and payment therefor shall be made in accordance with the Fund's or Portfolio's prospectus. (i) Broker-Dealer Accounts. When a broker-dealer notifies PFPC of a redemption desired by a customer, and the Fund's Custodian (the "Custodian") provides PFPC with funds, PFPC shall prepare and send the redemption check to the broker-dealer and made payable to the broker-dealer on behalf of its customer. (ii) Fund-Only Accounts. If Shares are received in proper form, at the Fund's request Shares may be redeemed before the funds are provided to PFPC from the 15 DRAFT Custodian. If the recordholder has not directed that redemption proceeds be wired, when the Custodian provides PFPC with funds, the redemption check shall be sent to and made payable to the recordholder, unless: (i) the surrendered certificate is drawn to the order of an assignee or holder and transfer authorization is signed by the recordholder; or [(ii) transfer authorizations are signed by the recordholder when Shares are held in book-entry form. (e) Dividends and Distributions. Upon receipt of a resolution of the Fund's Board authorizing the declaration and payment of dividends and distributions, PFPC shall issue dividends and distributions declared by the Fund in Shares, or, upon shareholder election, pay such dividends and distributions in cash, if provided for in the appropriate Fund's or Portfolio's prospectus. Such issuance or payment, as well as payments upon redemption as described above, shall be made after deduction and payment of the required amount of funds to be withheld in accordance with any applicable tax laws or other laws, rules or regulations. PFPC shall mail to the Fund's shareholders such tax forms and other information, or permissible substitute notice, relating to dividends and distributions paid by the Fund as are required to be filed and mailed by applicable law, rule or regulation. PFPC shall prepare, maintain and file with the IRS and 16 DRAFT other appropriate taxing authorities reports relating to all dividends above a stipulated amount paid by the Fund to its shareholders as required by tax or other law, rule or regulation. (f) Shareholder Account Services. (i) PFPC will arrange, in accordance with the appropriate Fund's or Portfolio's prospectus, for issuance of Shares obtained through: - The transfer of funds from shareholders' accounts at financial institutions, provided PFPC receives advance Oral Instruction of such transfer; - Any pre-authorized check plan; and - Direct purchases through broker wire orders, checks and applications. (ii) PFPC will arrange, in accordance with the appropriate Fund's or Portfolio's prospectus, for a shareholder's: - Exchange of Shares for shares of another fund with which the Fund has exchange privileges; - Automatic redemption from an account where that shareholder participates in a systematic withdrawal plan; and/or - Redemption of Shares from an account with a checkwriting privilege. (g) Communications to Shareholders. Upon timely Written Instructions, PFPC shall mail all communications by the Fund to its shareholders, including: (i) Reports to shareholders; (ii) Confirmations of purchases and sales of Fund shares; 17 DRAFT (iii) Monthly or quarterly statements; (iv) Dividend and distribution notices; (v) Proxy material; and (vi) Tax form information. If requested by the Fund, PFPC will receive and tabulate the proxy cards cards for the meetings of the Fund's shareholders and supply personnel to serve as inspectors of election. (h) Records. PFPC shall maintain those records required by the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdication with respect to the duties to be performed by PFPC hereunder with respect to shareholder accounts or by transfer agents generally, including records of the accounts for each shareholder showing the following information: (i) Name, address and United States Tax Identification or Social Security number; (ii) Number and class of Shares held and number and class of Shares for which certificates, if any, have been issued, including certificate numbers and denominations; (iii) Historical information regarding the account of each shareholder, including dividends and distributions paid and the date and price for all transactions on a shareholder's account; (iv) Any stop or restraining order placed against a shareholder's account; (v) Any correspondence relating to the current maintenance of a shareholder's account; (vi) Information with respect to withholdings; and (vii) Any information required in order for the transfer agent to perform any calculations contemplated or required by this Agreement. (i) Lost or or Stolen Certificates. PFPC shall place a 18 DRAFT stop notice against any certificate reported to be lost or stolen and comply with all applicable federal regulatory requirements for reporting such loss or alleged misappropriation. (j) Shareholder Inspection of Stock Records. Upon a request from any Fund shareholder to inspect stock records, PFPC will notify the Fund, and the Fund will issue instructions granting or denying each such request. Unless PFPC has acted contrary to the Fund's instructions, the Fund agrees and does hereby, release PFPC from any liability for refusal of permission for a particular shareholder to inspect the Fund's shareholder records. (k) Withdrawal of Shares and Cancellation of Certificates. Upon receipt of Written Instructions, PFPC shall cancel outstanding certificates surrendered by the Fund to reduce the total amount of outstanding shares by the number of shares surrendered by the Fund. 17. Duration and Termination. (a) This Agreement shall be effective on the date first written above and shall continue for a period of three (3) years (the "Initial Term"). Upon the expiration of the Initital Term, this Agreement shall automatically renew for successive terms of one (1) year ("Renewal Terms") each provided that it may be terminated by either party during a Renewal Term upon written notice given at least ninety (90) days prior to termination. During either the Initial Term or the Renewal Terms, this Agreement 19 DRAFT may also be terminated on an earlier date by either party for cause. (b) With respect to the Fund, cause includes, but is not limited to, (i) PFPC's material breach of this Agreement causing it to fail to substantially perform its duties under this Agreement. In order for such material breach to constitute "cause" under this Paragraph, PFPC must receive written notice from the Fund specifying the material breach and PFPC shall not have corrected such breach within a 15-day period; (ii) financial difficulties of PFPC evidenced by the authorization or commencement of a voluntary or involuntary bankruptcy under the U.S. Bankruptcy Code or any applicable bankruptcy or similar law, or under any applicable law of any jurisdiction relating to the liquidation or reorganization of debt, the appointment of a receiver or to the modification or alleviation of the rights of creditors; and (iii) issuance of an administrative or court order against PFPC with regard to the material violation or alleged material violation of the Securities Laws or other applicable laws related to its business of performing transfer agency services; (c) With respect to PFPC, cause includes, but is not limited to, the failure of the Fund to pay the compensation set forth in writing pursuant to Paragraph 11 of this Agreement. (d) Any notice of termination for cause in conformity with subparagraphs (a), (b) and (c) of this Paragraph by the Fund shall be effective thirty (30) days from the date of any such notice. 20 DRAFT Any notice of termination for cause by PFPC shall be effective 90 days from the date of such notice. (e) Upon the termination hereof, the Fund shall pay to PFPC such compensation as may be due for the period prior to the date of such termination. In the event that the Fund designates a successor to any of PFPC's obligations under this Agreement, PFPC shall, at the direction and expense of the Fund, transfer to such successor all relevant books, records and other data established or maintained by PFPC hereunder including, a certified list of the shareholders of the Fund or any Portfolio thereof with name, address, and if provided, taxpayer identification or Social Security number, and a complete record of the account of each shareholder. To the extent that PFPC incurs expenses related to a transfer of responsibilities to a successor, other than expenses involved in PFPC's providing the Fund's books and records described in the preceding sentence to the successors, PFPC shall be entitled to be reimbursed for such extraordinary expenses, including any out-of-pocket expenses reasonably incurred by PFPC in connection with the transfer. (f) Any termination effected pursuant to this Paragraph shall not affect the rights and obligations of the parties under Paragraph 12 hereof. (g) Notwithstanding the foregoing, this Agreement shall terminate with respect to the Fund or any Portfolio thereof upon the liquidation, merger, or other dissolution of the Fund or 21 DRAFT Portfolio or upon the Fund's ceasing to be a registered investment company. 18. Registration as a Transfer Agent. PFPC represents that it is currently registered with the appropriate federal agency for the registration of transfer agents, or is otherwise permitted to lawfully conduct its activities without such registration and that it will remain so registered or able to so conduct such activities for the duration of this Agreement. PFPC agrees that it will promptly notify the Fund in the event of any material change in its status as a registered transfer agent. Should PFPC fail to be registered with the SEC as a transfer agent at any time during this Agreement, and such failure to register does not permit PFPC to lawfully conduct its activities, the Fund may, on written notice to PFPC, terminate this Agreement upon five days written notice to PFPC. 19. Notices. All notices and other communications, including Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. Notices shall be addressed (a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address of the Fund or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device during regular business hours, it shall be deemed to have been 22 DRAFT given immediately; if sent at a time other than regular business hours, such notice shall be deemed to have been given at the opening of the next business day. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered. All postage, cable, telegram, telex and facsimile sending device charges arising from the sending of a notice hereunder shall be paid by the sender. 20. Amendments. This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought. 21. Additional Series. In the event that the Fund establishes one or more investment series in addition to and with respect to which it desires to have PFPC render services as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent under the terms set forth in this Agreement, it shall so notify PFPC in writing, and PFPC shall agree in writing to provide such services, and such investment series shall become a Portfolio hereunder, subject to such additional terms, fees and conditions as are agreed to by the parties. 22. Delegation; Assignment. (a) PFPC may, at its own expense, assign its rights and delegate its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund thirty (30) days' 23 DRAFT prior written notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the Securities Laws; and (iii) PFPC and such delegate (or assignee) promptly provide such information as the Fund may request, and respond to such questions as the Fund may ask, relative to the delegation (or assignment), including (without limitation) the capabilities of the delegate (or assignee). The assignment and delegation of any of PFPC's duties under this subparagraph (a) shall not relieve PFPC of any of its responsibilities liabilities under this Agreement. (b) PFPC may delegate to PaineWebber Incorporated its obligation to perform the services described on Annex A hereto. In addition, PFPC may assign its rights and delegate its other duties hereunder to PaineWebber Incorporated or Mitchell Hutchins Asset Management Inc. or an affiliated person of either, provided that (i) PFPC gives the Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide such information as the Fund may request, and respond to such questions as the Fund may ask, relative to the delegation (or assignment), including (without limitation) the capabilities of the delegate (or assignee). In assigning its rights and delegating its duties under this paragraph, PFPC may impose such conditions or limitations as it determines appropriate including the condition that PFPC be 24 DRAFT retained as a sub-transfer agent. (c) In the event that PFPC assigns its rights and delegates its duties under this section, no amendment of the terms of this Agreement shall become effective without the written consent of PFPC. 23. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 24. Further Actions. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. 25. Miscellaneous. (a) Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to services to be performed and fees payable under this Agreement. (b) Captions. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (c) Governing Law. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law. 25 DRAFT (d) Partial Invalidity. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. (e) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. (f) Facsimile Signatures. The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party. 26 DRAFT IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. PFPC INC. By: --------------------------------- Title: ------------------------------ PAINEWEBBER _____ FUND By: --------------------------------- Title: ------------------------------ 27 DRAFT AUTHORIZED PERSONS APPENDIX Name (Type) Signature - ------------------------- ------------------------------ - ------------------------- ------------------------------ - ------------------------- ------------------------------ - ------------------------- ------------------------------ - ------------------------- ------------------------------ - ------------------------- ------------------------------ - ------------------------- ------------------------------ - ------------------------- ------------------------------ 28 EX-11 5 INDEPENDENT AUDITORS REPORT CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Financial Highlights" and "Auditors" and to the incorporation by reference of our report dated October 14, 1997, in this Registration Statement (Form N-1A No. 2-78626) of PaineWebber Growth & Income Fund (a series of PaineWebber America Fund). /s/ Ernst & Young LLP -------------------------------- ERNST & YOUNG LLP New York, New York November 21, 1997 EX-27.1(A) 6 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000703887 PAINEWEBBER AMERICA FUND 1 GROWTH & INCOME CLASS A 12-MOS AUG-31-1996 SEP-01-1995 AUG-31-1996 232,487,216 269,505,180 7,295,721 0 36,558 276,837,459 0 0 821,763 821,763 0 211,622,643 11,334,133 8,306,737 371,841 0 27,003,249 0 37,017,964 276,015,697 4,029,964 1,593,162 0 (3,134,755) 2,488,371 38,617,819 (869,835) 40,236,355 0 (3,309,904) (14,113,535) 0 4,206,132 (1,907,414) 728,678 89,552,750 809,932 4,044,941 0 0 1,814,627 0 3,134,755 257,244,438 22.52 0.22 3.46 (0.34) (1.51) 0 24.35 1.20 0 0
EX-27.1(B) 7 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000703887 PAINEWEBBER AMERICA FUND 1 GROWTH & INCOME CLASS B 12-MOS AUG-31-1996 SEP-01-1995 AUG-31-1996 233,950,341 271,201,273 7,341,636 0 36,788 278,579,697 0 0 826,934 826,934 0 212,954,460 11,448,219 11,065,771 374,181 0 27,173,190 0 37,250,932 277,752,763 4,055,326 1,603,188 0 (5,235,918) 422,596 38,860,855 (875,309) 38,408,142 0 (985,947) (16,674,335) 0 2,145,465 (2,507,693) 744,676 28,636,732 1,071,827 5,352,890 0 0 1,826,047 0 5,235,918 267,681,844 22.37 0.04 3.45 (0.09) (1.51) 0 24.26 1.99 0 0
EX-27.1(C) 8 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000703887 PAINEWEBBER AMERICA FUND 1 GROWTH & INCOME CLASS C 12-MOS AUG-31-1996 SEP-01-1996 AUG-31-1996 36,343,226 42,130,005 1,140,493 0 5,715 43,276,213 0 0 128,461 128,461 0 33,081,602 1,773,624 1,358,205 58,128 0 4,221,243 0 5,786,779 43,147,752 629,978 249,049 0 (773,939) 105,088 6,036,874 (135,976) 6,005,986 0 (142,026) (2,139,119) 0 678,294 (361,631) 98,756 13,298,017 131,922 658,840 0 0 283,669 0 773,939 37,639,574 22.43 0.05 3.46 (0.10) (1.51) 0 24.33 1.99 0 0
EX-27.1(Y) 9 FINANCIAL DATA SCHEDULE
6 0000703887 PAINEWEBBER AMERICA FUND 1 GROWTH & INCOME CLASS Y 12-MOS AUG-31-1996 SEP-01-1995 AUG-31-1996 19,324,199 22,401,110 606,416 0 3,038 23,010,564 0 0 68,304 68,304 0 17,589,948 942,279 651,225 30,907 0 2,244,494 0 3,076,911 22,942,260 334,968 132,423 0 (211,380) 256,011 3,209,890 (72,300) 3,393,601 0 (323,508) (1,066,345) 0 353,430 (125,158) 62,782 8,623,096 63,562 317,438 0 0 150,831 0 211,380 19,601,845 22.54 0.30 3.45 (0.43) (1.51) 0 24.35 0.92 0 0
-----END PRIVACY-ENHANCED MESSAGE-----