-----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, FNpLHN3g3FGHDrp54+8rfrKcOPCghX2aXzx5UYsVXTF7JruQOo7p1YVtmrZ2C3mi 60aFWtGqMga96U4e+kEu9A== 0000928385-96-000815.txt : 19960627 0000928385-96-000815.hdr.sgml : 19960627 ACCESSION NUMBER: 0000928385-96-000815 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960626 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-78626 FILM NUMBER: 96586254 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINEWEBBER OLYMPUS FUND/NY CENTRAL INDEX KEY: 0000759729 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-94983 FILM NUMBER: 96586255 BUSINESS ADDRESS: STREET 1: 1285 AVE OF THE AMERICAS STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127134000 MAIL ADDRESS: STREET 1: 1285 AVENUE OF THE AMERICAS STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: PAINEWEBBER OLYMPUS FUND DATE OF NAME CHANGE: 19901021 FORMER COMPANY: FORMER CONFORMED NAME: PAINEWEBBER GROWTH FUND INC DATE OF NAME CHANGE: 19890402 497 1 PAINEWEBBER GROWTH & INCOME CLASS Y PAINEWEBBER GROWTH AND INCOME FUND PAINEWEBBER GROWTH FUND CLASS Y SHARES 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 STATEMENT OF ADDITIONAL INFORMATION The two funds named above (each a "Fund" and, collectively, "Funds") are diversified series of professionally managed, open-end investment companies organized as Massachusetts business trusts (each a "Trust" and, collectively, "Trusts"). PaineWebber Growth and Income Fund ("Growth and Income Fund"), a series of PaineWebber America Fund ("America Fund"), seeks to provide current income and capital growth; it invests primarily in dividend-paying equity securities believed by its investment adviser to have the potential for rapid earnings growth. PaineWebber Growth Fund ("Growth Fund"), a series of PaineWebber Olympus Fund ("Olympus Fund"), seeks long-term capital appreciation; it invests primarily in equity securities issued by companies deemed by its investment adviser to have substantial potential for capital growth. The investment adviser, administrator and distributor for each Fund is Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber Incorporated ("PaineWebber"). As distributor for the Funds, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive dealer for the sale of Fund shares. This Statement of Additional Information is not a prospectus and should be read only in conjunction with the Funds' current Prospectus, dated May 1, 1996. 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 May 1, 1996. INVESTMENT POLICIES AND RESTRICTIONS The following supplements the information contained in the Prospectus concerning the Funds' investment policies and limitations. YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P") and other nationally recognized statistical rating organizations ("NRSROs") are private services that provide ratings of the credit quality of debt obligations. A description of the ratings assigned to corporate debt obligations by Moody's and S&P is included in the Appendix to this Statement of Additional Information. The Funds may use these ratings in determining whether to purchase, sell or hold a security. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, securities with the same maturity, interest rate and rating may have different market prices. Ratings of debt securities represent the NRSROs' opinions regarding their quality, are not a guarantee of quality, and may be reduced after a Fund has acquired the security. Mitchell Hutchins will consider such an event in determining whether a Fund should continue to hold the security but is not required to dispose of it. In the event that, due to a downgrade of one or more debt securities, an amount in excess of the permitted percentage of a Fund's net assets is held in securities rated below investment grade and comparable unrated securities, the Fund will engage in an orderly disposition of such securities to the extent necessary to ensure that its holdings of such securities does not exceed that percentage. Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably rated by another NRSRO or determined by Mitchell Hutchins to be of comparable quality are below investment grade, are deemed by those agencies to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal and may involve major risk exposure to adverse conditions. Lower rated debt securities generally offer a higher current yield than that available for investment grade issues, but they involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress which could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, such issuers may not have more traditional methods of financing available to them and may be unable to repay debt at maturity by refinancing. The risk of loss due to default by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. The market for lower rated debt securities has expanded rapidly in recent years, and its growth paralleled a long economic expansion. In the past, the prices of many lower rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields on lower rated debt securities rose dramatically. However, such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers' financial restructuring or default. There can be no assurance that such declines will not recur. The market for lower- rated debt issues generally is thinner and less active than that for higher quality securities, which may limit a Fund's ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower rated securities, especially in a thinly traded market. RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Securities of foreign issuers may not be registered with the Securities and Exchange Commission ("SEC"), nor may the issuers thereof be subject to its reporting requirements. Accordingly, there may be less publicly available information concerning foreign issuers of securities held by the Funds than is available concerning U.S. companies. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. The Funds may invest in foreign securities by purchasing American Depository Receipts ("ADRs"). Generally, ADRs, in registered form, are denominated in U.S. dollars and are designed for use in the U.S. securities markets. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. For purposes of each Fund's investment policies, ADRs are deemed to have the same classification as the underlying securities they represent. Thus, an ADR representing ownership of common stock will be treated as common stock. ADRs are publicly traded on exchanges or over-the- counter in the United States and are issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some or all of the depositary's transaction 2 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 in illiquid securities. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which a Fund has valued the securities and includes, among other things, purchased over-the-counter ("OTC") options, repurchase agreements maturing in more than seven days and restricted securities other than those Mitchell Hutchins has determined are liquid pursuant to guidelines established by each Trust's board of trustees. The assets used as cover for OTC options written by each Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. Illiquid restricted securities may be sold only in privately negotiated transactions or in public offerings with respect to which a registration statement is in effect under the Securities Act of 1933 ("1933 Act"). Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to sell. Not all restricted securities are illiquid. In recent years a large institutional market has developed for certain securities that are not registered under the 1933 Act, including private placements, repurchase agreements, commercial paper, foreign securities and corporate bonds and notes. These instruments are often restricted securities because the securities are sold in transactions not requiring registration. Institutional investors generally will not seek to sell these instruments to the general public, but instead will often depend either on an efficient institutional market in which such unregistered securities can be readily resold or on an issuer's ability to honor a demand for repayment. Therefore, the fact that there are contractual or legal restrictions on resale to the general public or certain institutions is not dispositive of the liquidity of such investments. Rule 144A under the 1933 Act establishes a "safe harbor" from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities have developed as a result of Rule 144A, providing both readily ascertainable values for restricted securities and the 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. 3 Each Trust's board of trustees has delegated the function of making day-to- day determinations of liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board. Mitchell Hutchins takes into account a number of factors in reaching liquidity decisions, including (1) the frequency of trades for the security, (2) the number of dealers that make quotes for the security, (3) the number of dealers that have undertaken to make a market in the security, (4) the number of other potential purchasers and (5) the nature of the security and how trading is effected (e.g., the time needed to sell the security, how offers are solicited and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of restricted securities in each Fund's portfolio and reports periodically on such decisions to the boards. CONVERTIBLE SECURITIES. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to non- convertible debt securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers. Convertible securities rank senior to common stock in a corporations' capital structure but are usually subordinated to comparable non-convertible securities. Convertible securities have unique investment characteristics in that they generally (1) have higher yields than common stocks, but lower yields than comparable non-convertible securities, (2) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics and (3) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its "investment value" (determined by its yield comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value, and generally the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. In addition, a convertible security generally will sell at a premium over its conversion value determined by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. If a convertible security held by a Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into underlying common stock or sell it to a third party. 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 4 traditional methods of financing available to them, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. GOVERNMENT SECURITIES. Government securities in which the Funds may invest include direct obligations of the United States Treasury and obligations issued or guaranteed by the United States government or one of its agencies or instrumentalities ("Government Securities"). Direct obligations of the United States Treasury include a variety of securities that differ in their interest rates, maturities and dates of issuance. Among the Government Securities that may be held by the Funds are instruments that are supported by the full faith and credit of the United States; instruments that are supported by the right of the issuer to borrow from the United States Treasury; and instruments that are supported solely by the credit of the instrumentality. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a Fund purchases securities from a bank or recognized securities dealer and simultaneously commits to resell the securities to the bank or dealer at an agreed-upon date and price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities. The Fund maintains custody of the underlying securities prior to their repurchase; thus, the obligation of the bank or dealer to pay the repurchase price on the date agreed to is, in effect, secured by such securities. If the value of these securities is less than the repurchase price, plus any agreed-upon additional amount, the other party to the agreement must provide additional collateral so that at all times the collateral is at least equal to the repurchase price, plus any agreed-upon additional amount. The difference between the total amount to be received upon repurchase of the securities and the price that was paid by a Fund upon acquisition is accrued as interest and included in its net investment income. Repurchase agreements carry certain risks not associated with direct investments in securities, including possible declines in the market value of the underlying securities and delays and costs to the Funds if the other party to a repurchase agreement becomes insolvent. The Funds intend to enter into repurchase agreements only with banks and dealers in transactions believed by Mitchell Hutchins to present minimal credit risks in accordance with guidelines established by each Trust's board of trustees. Mitchell Hutchins reviews and monitors the creditworthiness of those institutions under each board's general supervision. REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase agreements with banks and securities dealers up to an aggregate value of not more than 5% of the Fund's net assets. Such agreements involve the sale of securities held by a Fund subject to that Fund's agreement to repurchase the securities at an agreed-upon date and price reflecting a market rate of interest. Such agreements are considered to be borrowings and may be entered into only for temporary purposes. While a reverse repurchase agreement is outstanding, a Fund's custodian segregates assets to cover the Fund's obligations under the reverse repurchase agreement. See "Investment Policies and Restrictions--Segregated Accounts." LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 33 1/3% of the total value of its portfolio securities to broker-dealers or institutional investors that Mitchell Hutchins deems qualified, but only when the borrower maintains acceptable collateral with that Fund's custodian bank, marked to market daily, in an amount at least equal to the market value of the securities loaned, plus accrued interest and dividends. Acceptable collateral is limited to cash, U.S. government securities and irrevocable letters of credit that meet certain guidelines established by Mitchell Hutchins. In determining whether to lend securities to a particular broker-dealer or institutional investor, Mitchell Hutchins will consider, and during the period of the loan will monitor, all relevant facts and circumstances, including the creditworthiness of the borrower. 5 Each Fund will retain authority to terminate any loans at any time. Each Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. Each Fund will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest or other distributions on the securities loaned. Each Fund will regain record ownership of loaned securities to exercise beneficial rights, such as voting and subscription rights and rights to dividends, interest or other distributions, when regaining such rights is considered to be in the Fund's interest. SHORT SALES "AGAINST THE BOX". Each Fund may engage in short sales of securities it owns or has the right to acquire at no added cost through conversion or exchange of other securities it owns (short sales "against the box") to defer realization of gains or losses for tax or other purposes. To make delivery to the purchaser in a short sale, the executing broker borrows the securities being sold short on behalf of a Fund, and that Fund is obligated to replace the securities borrowed at a date in the future. When a Fund sells short, it will establish a margin account with the broker effecting the short sale, and will deposit collateral with the broker. In addition, that Fund will maintain with its custodian, in a segregated account, the securities that could be used to cover the short sale. Each Fund will incur transaction costs, including interest expense, in connection with opening, maintaining and closing short sales against the box. The Funds currently do not intend to have obligations under short sales that at any time during the coming year exceed 5% of a Fund's net assets. The Funds might make a short sale "against the box" in order to hedge against market risks when Mitchell Hutchins believes that the price of a security may decline, thereby causing a decline in the value of a security owned by a Fund or a security convertible into or exchangeable for a security owned by a Fund, or when Mitchell Hutchins wants to sell a security that a Fund owns at a current price, but also wishes to defer recognition of gain or loss for federal income tax purposes. In such case, any loss in a Fund's long position after the short sale should be reduced by a gain in the short position. Conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which gains or losses in the long position are reduced will depend upon the amount of the securities sold short relative to the amount of the securities a Fund owns, either directly or indirectly, and in the case where a Fund owns convertible securities, changes in the investment values or conversion premiums of such securities. WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase securities on a "when-issued" basis or may purchase or sell securities for "delayed delivery." In when-issued or delayed delivery transactions, delivery of the securities occurs beyond normal settlement periods, but a Fund generally would not pay for such securities or start earning interest or dividends on them until they are delivered. However, when a Fund purchases securities on a when-issued or delayed delivery basis, it immediately assumes the risks of ownership, including the risk of price fluctuation. Failure by a 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. 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 6 securities on a when-issued basis, its custodian segregates assets to cover the amount of the commitment. See "Investment Policies and Restrictions-- Segregated Accounts." The Funds purchase when-issued securities only with the intention of taking delivery, but may sell the right to acquire the security prior to delivery if Mitchell Hutchins deems it advantageous to do so, which may result in capital gain or loss to a Fund. SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that involve obligations to make future payments to third parties, such as reverse repurchase agreements or the purchase of securities on a when-issued or delayed delivery basis, it will maintain with an approved custodian in a segregated account cash, Government Securities or other liquid high-grade debt securities, marked to market daily, in an amount at least equal to the Fund's obligation or commitment under such transactions. As described below under "Hedging Strategies," segregated accounts may also be required in connection with certain transactions involving options and futures contracts. INVESTMENT LIMITATIONS OF THE FUNDS Each Fund will not: (1) purchase securities of any one issuer if, as a result, more than 5% of the Fund's total assets would be invested in securities of that issuer or the Fund would own or hold more than 10% of the outstanding voting securities of that issuer, except that up to 25% of the Fund's total assets may be invested without regard to this limitation, and except that this limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies and instrumentalities or to securities issued by other investment companies. The following interpretation applies to, but is not a part of, this fundamental limitation: Mortgage- and asset-backed securities will not be considered to have been issued by the same issuer by reason of the securities having the same sponsor, and mortgage- and asset-backed securities issued by a finance or other special purpose subsidiary that are not guaranteed by the parent company will be considered to be issued by a separate issuer from the parent company. (2) purchase any security if, as a result of that purchase, 25% or more of the Fund's total assets would be invested in securities of issuers having their principal business activities in the same industry, except that this limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or to municipal securities. (3) issue senior securities or borrow money, except as permitted under the 1940 Act and then not in excess of 33 1/3% of the Fund's total assets (including the amount of the senior securities issued but reduced by any liabilities not constituting senior securities) at the time of the issuance or borrowing, except that the Fund may borrow up to an additional 5% of its total assets (not including the amount borrowed) for temporary or emergency purposes. (4) make loans, except through loans of portfolio securities or through repurchase agreements, provided that for purposes of this restriction, the acquisition of bonds, debentures, other debt securities or instruments, or participations or other interests therein and investments in government obligations, commercial paper, certificates of deposit, bankers' acceptances or similar instruments will not be considered the making of a loan. (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. 7 (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. The foregoing fundamental investment limitations for each Fund cannot be changed without the affirmative vote of the lesser of (a) more than 50% of the outstanding shares of that Fund or (b) 67% or more of the shares present at a shareholders' meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. If a percentage restriction is adhered to at the time of an investment or transaction, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total assets will not be considered a violation of any of the foregoing limitations. The following investment restrictions are not fundamental and may be changed by each Trust's board of trustees without shareholder approval. Each Fund will not: (1) purchase or retain the securities of any issuer if the officers and trustees of its Trust and the officers and directors of Mitchell Hutchins (each owning beneficially more than 0.5% of the outstanding securities of an issuer) own in the aggregate more than 5% of the securities of the issuer. (2) purchase any security if as a result more than 5% of its total assets would be invested in securities of companies that together with any predecessors have been in continuous operation for less than three years. (3) invest more than 10% of its net assets in illiquid securities, a term which means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which it has valued the securities and includes, among other things, repurchase agreements maturing in more than seven days. (4) make investments in warrants if such investments, valued at the lower of cost or market, exceed 5% of the value of its net assets, which amount may include warrants that are not listed on the New York Stock Exchange, Inc ("NYSE") or the American Stock Exchange, Inc., provided that such unlisted warrants, valued at the lower of cost or market, do not exceed 2% of its net assets, and further provided that this restriction does not apply to warrants attached to, or sold as a unit with, other securities. For purposes of this restriction, the term "warrants" does not include options on securities, stock or bond indices or futures contracts. (5) change its investment policies to permit the Fund to invest more than 35% of its total assets in debt securities rated Ba or lower by Moody's or BB or lower by S&P, comparably rated by another NRSRO or determined by Mitchell Hutchins to be of comparable quality without giving at least 30 days' advance notice to shareholders. (6) invest in real estate limited partnerships. 8 (7) purchase securities on margin, except for short-term credit necessary for clearance of portfolio transactions and except that the Fund may make margin deposits in connection with its use of financial options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments. (8) engage in short sales of securities or maintain a short position, except that the Fund may (a) sell short "against the box" and (b) maintain short positions in connection with its use of financial options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments. (9) invest in oil, gas or mineral exploration or development programs or leases, except that investments in securities of issuers that invest in such programs or leases and investments in asset-backed securities supported by receivables generated from such programs or leases are not subject to this prohibition. (10) purchase securities of other investment companies, except to the extent permitted by the 1940 Act and except that this limitation does not apply to securities received or acquired as dividends, through offers of exchange, or as a result of reorganization, consolidation, or merger. HEDGING STRATEGIES HEDGING INSTRUMENTS. Mitchell Hutchins may use a variety of financial instruments ("Hedging Instruments"), including certain options, futures contracts (sometimes referred to as "futures") and options on futures contracts, to attempt to hedge each Fund's portfolio. In particular, each Fund may use the hedging instruments described below: OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term contract pursuant to which the purchaser of the option, in return for a premium, has the right to buy the security underlying the option at a specified price at any time during the term of the option. The writer of the call option, who receives the premium, has the obligation, upon exercise of the option during the option term, to deliver the underlying security against payment of the exercise price. A put option is a similar contract that gives its purchaser, in return for a premium, the right to sell the underlying security at a specified price during the option term. The writer of the put option, who receives the premium, has the obligation, upon exercise of the option during the option term, to buy the underlying security at the exercise price. OPTIONS ON STOCK INDEXES--A stock index assigns relative values to the stocks included in the index and fluctuates with changes in the market values of those stocks. A stock index option operates in the same way as a more traditional stock option, except that exercise of a stock index option is effected with cash payment and does not involve delivery of securities. Thus, upon exercise of a stock index option, the purchaser will realize, and the writer will pay, an amount based on the difference between the exercise price and the closing price of the stock index. STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a bilateral agreement pursuant to which one party agrees to accept, and the other party agrees to make, delivery of an amount of cash equal to a specified dollar amount times the difference between the stock index value at the close of trading of the contract and the price 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 9 security at a specified future time and at a specified price. Although such futures contracts by their terms call for actual delivery or acceptance of debt securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to options on securities or currency, except that an option on a futures contract gives the purchaser the right, in return for the premium, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell a security or currency, at a specified price at any time during the option term. Upon exercise of the option, the delivery of the futures position to the holder of the option will be accompanied by delivery of the accumulated balance that represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the future. The writer of an option, upon exercise, will assume a short position in the case of a call and a long position in the case of a put. GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be broadly categorized as "short hedges" and "long hedges." A short hedge is a purchase or sale of a Hedging Instrument intended to partially or fully offset potential declines in the value of one or more investments held in a Fund's portfolio. Thus, in a short hedge, a Fund takes a position in a Hedging Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged. For example, a Fund might purchase a put option on a security to hedge against a potential decline in the value of that security. If the price of the security declined below the exercise price of the put, a Fund could exercise the put and thus limit its loss below the exercise price to the premium paid plus transactions costs. In the alternative, because the value of the put option can be expected to increase as the value of the underlying security declines, a Fund might be able to close out the put option and realize a gain to offset the decline in the value of the security. Conversely, a long hedge is a purchase or sale of a Hedging Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that a Fund intends to acquire. Thus, in a long hedge, a Fund takes a position in a Hedging Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. For example, a Fund might purchase a call option on a security it intends to purchase in order to hedge against an increase in the cost of the security. If the price of the security increased above the exercise price of the call, a Fund could exercise the call and thus limit its acquisition cost to the exercise price plus the premium paid and transactions costs. Alternatively, a Fund might be able to offset the price increase by closing out an appreciated call option and realizing a gain. Hedging Instruments on securities generally are used to hedge against price movements in one or more particular securities positions that a Fund owns or intends to acquire. Hedging Instruments on stock indices, in contrast, generally are used to hedge against price movements in broad equity market sectors in which a Fund has invested or expects to invest. Hedging Instruments on debt securities may be used to hedge either individual securities or broad fixed income market sectors. Because the Funds intend to use options and futures for hedging purposes, each Fund may enter into any futures contracts or options on futures contracts as long as the aggregate of the market value of the Fund's outstanding futures contracts and market value of the futures contracts subject to outstanding options written by that Fund does not exceed 50% of the market value of the total assets of that Fund. Under normal circumstances, however, the value of a Fund's portfolio assets so hedged generally will be a much smaller amount. 10 The use of Hedging Instruments is subject to applicable regulations of the SEC, the several options and futures exchanges upon which they are traded, the Commodity Futures Trading Commission ("CFTC") and various state regulatory authorities. In addition, a Fund's ability to use Hedging Instruments will be limited by tax considerations. See "Taxes." In addition to the products, strategies and risks described below and in the Prospectus, Mitchell Hutchins expects to discover additional opportunities in connection with options, futures contracts and other hedging techniques. These new opportunities may become available as Mitchell Hutchins develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new options, futures contracts, foreign currency contracts or other techniques are developed. Mitchell Hutchins may utilize these opportunities to the extent that they are consistent with each Fund's investment objective and permitted by each Fund's investment limitations and applicable regulatory authorities. The Funds' Prospectus or Statement of Additional Information will be supplemented to the extent that new products or techniques involve materially different risks than those described below or in the Prospectus. SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves special considerations and risks, as described below. Risks pertaining to particular Hedging Instruments are described in the sections that follow. (1) Successful use of most Hedging Instruments depends upon the ability of Mitchell Hutchins to predict movements of the overall securities and interest rate markets, which requires different skills than predicting changes in the prices of individual securities. While Mitchell Hutchins is experienced in the use of Hedging Instruments, there can be no assurance that any particular hedging strategy adopted will succeed. (2) There might be imperfect correlation, or even no correlation, between price movements of a Hedging Instrument and price movements of the investments being hedged. For example, if the value of a Hedging Instrument used in a short hedge increased by less than the decline in value of the hedged investment, the hedge would not be fully successful. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which Hedging Instruments are traded. The effectiveness of hedges using Hedging Instruments on indices will depend on the degree of correlation between price movements in the index and price movements in the securities being hedged. Because the Funds invest primarily in common stocks of issuers meeting the specific criteria described in the Prospectus, there might be a significant lack of correlation between the portfolio and the stock indices underlying any such Hedging Instruments used by a Fund. (3) Hedging strategies, if successful, can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. For example, if a Fund entered into a short hedge because Mitchell Hutchins projected a decline in the price of a security in that Fund's portfolio, and the price of that security increased instead, the gain from that might be wholly or partially offset by a decline in the price of the Hedging Instrument. Moreover, if the price of the Hedging Instrument declined by more than the increase in the price of the security, that Fund could suffer a loss. In either such case, the Fund would have been in a better position had it not hedged at all. (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 11 third parties (i.e., Hedging Instruments other than purchased options). If the Fund was unable to close out its positions in such Hedging Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the positions expired or matured. These requirements might impair a Fund's ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time. A Fund's ability to close out a position in a Hedging Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of a contra party to enter into a transaction closing out the position. Therefore, there is no assurance that any hedging position can be closed out at a time and price that is favorable to a Fund. COVER FOR HEDGING STRATEGIES. The Funds will not use Hedging Instruments for speculative purposes or for purposes of leverage. Transactions using Hedging Instruments, other than purchased options, expose the Funds to an obligation to another party. The Funds will not enter into any such transactions unless it owns either (1) an offsetting ("covered") position in securities, other options or futures contracts or (2) cash and short-term liquid debt securities, with a value sufficient at all times to cover its potential obligations to the extent not covered as provided in (1) above. The Funds will comply with SEC guidelines regarding cover for hedging transactions and will, if the guidelines so require, set aside cash, U.S. government securities or other liquid, high-grade debt securities in a segregated account with its custodian in the prescribed amount. Assets used as cover or held in a segregated account cannot be sold while the position in the corresponding Hedging Instrument is open, unless they are replaced with similar assets. As a result, the commitment of a large portion of a Fund's assets to cover or segregated accounts could impede portfolio management or the Fund's ability to meet redemption requests or other current obligations. OPTIONS. The Funds may purchase put and call options, and write (sell) covered put or call options, on equity and debt securities and stock indices and foreign currencies. The purchase of call options serves as a long hedge, and the purchase of put options serves as a short hedge. Writing covered call options serves as a limited short hedge, because declines in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security appreciates to a price higher than the exercise price of the call option, it can be expected that the option will be exercised and the affected Fund will be obligated to sell the security at less than its market value. Writing covered put options serves as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the Fund will be obligated to purchase the security at more than its market value. The securities or other assets used as cover for OTC options written by a Fund would be considered illiquid to the extent described under "Investment Policies and Restrictions--Illiquid Securities." The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, the historical price volatility of the underlying investment and general market conditions. Options normally have expiration dates of up to nine months. Options that expire unexercised have no value. A Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, a Fund 12 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 and foreign currencies exist but are relatively new, and these instruments are primarily traded on the OTC market. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed which, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its contra party (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a Fund purchases or writes an OTC option, it relies on the contra party to make or take delivery of the underlying investment upon exercise of the option. Failure by the contra party to do so would result in the loss of any premium paid by the Fund as well as the loss of any expected benefit of the transaction. The Funds will enter into OTC option transactions only with contra parties that have a net worth of at least $20 million. Generally, the OTC debt options or foreign currency options used by the Funds are European-style options. This means that the option is only exercisable immediately prior to its expiration. This is in contrast to American-style options, which are exercisable at any time prior to the expiration date of the option. The Funds' ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. The Funds intend to purchase or write only those exchange-traded options for which there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the contra party, or by a transaction in the secondary market if any such market exists. Although the Funds will enter into OTC options only with contra parties that are expected to be capable of entering into closing transactions with the Funds, there is no assurance that the Funds will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the contra party, the Funds might be unable to close out an OTC option position at any time prior to its expiration. If a Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered put or call option written by the Fund could cause material losses because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised. LIMITATIONS ON THE USE OF OPTIONS. The Funds' use of options is governed by the following guidelines, which can be changed by each Trust's board of trustees without shareholder vote: (1) Each Fund may purchase a put or call option, including any straddles or spreads, only if the value of its premium, when aggregated with the premiums on all other options held by that Fund, does not exceed 5% of its total assets. (2) The aggregate value of underlying securities on which covered calls are written will not exceed 50% of each Fund's total assets. (3) To the extent cash or cash equivalents, including Government Securities, are maintained in a segregated account to collateralize options written on currencies, securities or stock indexes, each Fund will limit collateralization to 20% of its net assets. 13 FUTURES. The Funds may purchase and sell stock index futures contracts, interest rate futures contracts and foreign currency futures contracts. The Funds may also purchase put and call options, and write covered put and call options, on futures in which it is allowed to invest. The purchase of futures or call options thereon can serve as a long hedge, and the sale of futures or the purchase of put options thereon can serve as a short hedge. Writing covered call options on futures contracts can serve as a limited short hedge, and writing covered put options on futures contracts can serve as a limited long hedge, using a strategy similar to that used for writing covered options on securities or indices. No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract a Fund is required to deposit in a segregated account with its custodian, in the name of the futures broker through whom the transaction was effected, "initial margin" consisting of cash, U.S. government securities, government securities or other liquid, high-grade debt securities, in an amount generally equal to 10% or less of the contract value. Margin must also be deposited when writing a call option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to a Fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, the Funds may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action. Subsequent "variation margin" payments are made to and from the futures broker daily as the value of the futures position varies, a process known as "marking to market." Variation margin does not involve borrowing, but rather represents a daily settlement of each Fund's obligations to or from a futures broker. When a Fund purchases an option on a future, the premium paid plus transaction costs is all that is at risk. In contrast, when a Fund purchases or sells a futures contract or writes a call option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If a Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous. Holders and writers of futures positions and options on futures can enter into offsetting closing transactions, similar to closing transactions on options, by selling or purchasing, respectively, an instrument identical to the instrument held or written. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. The Funds intend to enter into futures transactions only on exchanges or boards of trade where there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist for a particular contract at a particular time. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a future or related option can vary from the previous day's settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions. If a Fund were unable to liquidate a futures or related options position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account. 14 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. The Funds' use of futures and related options is governed by the following guidelines, which can be changed by each Trust's board of trustees without shareholder vote: (1) To the extent a Fund enters into futures contracts and options on futures positions that are not for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums on those positions (excluding the amount by which options are "in-the-money") may not exceed 5% of that Fund's net assets. (2) The aggregate premiums paid on all options (including options on securities and stock or bond indices and options on futures contracts) purchased by a Fund that are held at any time will not exceed 20% of that Fund's net assets. (3) The aggregate margin deposits on all futures contracts and options thereon held at any time by each Fund will not exceed 5% of its total assets. 15 TRUSTEES AND OFFICERS The trustees and executive officers of each Trust (positions are held for both Trusts, except as indicated), their ages, business addresses and principal occupations during the past five years are:
BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS ---------------------- ----------------------- -------------------- Margo N. Alexander**; 49 Trustee and President Mrs. Alexander is president, chief executive officer and a director of Mitchell Hutchins (since January 1995) and also an executive vice president and a director of PaineWebber Incorporated ("PaineWebber"). Mrs. Alexander is president and a director or trustee of 30 investment companies for which Mitchell Hutchins or PaineWebber serves an investment adviser. Richard Q. Armstrong; 60 Trustee Mr. Armstrong is chairman and prin- 78 West Brother Drive cipal of RQA Enterprises (manage- Greenwich, CT 06830 ment consulting firm) (since April 1991 and principal occupation since March 1995). Mr. Armstrong is also a director of Hi Lo Automotive, Inc. He was chairman of the board, chief executive officer and co- owner of Adirondack Beverages (pro- ducer and distributor of soft drinks and sparkling/still waters) (October 1993-March 1995). He was a partner of the New England Consult- ing Group (management consulting firm) (December 1992-September 1993). He was managing director of LVMH U.S. Corporation (U.S. subsid- iary of the French luxury goods conglomerate, Luis Vuitton Moet Hennessey Corporation) (1987-1991) and chairman of its wine and spir- its subsidiary, Schieffelin & Som- erset Company (1987-1991). Mr. Arm- strong is a director or trustee of 29 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
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BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS ---------------------- ----------------------- -------------------- E. Garrett Bewkes, Trustee and Mr. Bewkes is a director of Paine Jr.**; 69 Chairman of the Webber Group Inc. ("PW Group") Board of Trustees (holding company of PaineWebber and Mitchell Hutchins). Prior to Decem- ber 1995, he was a consultant to PW Group. Prior to 1988, he was chair- man of the board, president and chief executive officer of American Bakeries Company. Mr. Bewkes is a director of Interstate Bakeries Corporation and NaPro Bio-Therapeu- tics, Inc. and is a director or trustee of 30 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Richard Burt; 49 Trustee Mr. Burt is chairman of Interna- 1101 Connecticut Avenue, tional Equity Partners (interna- N.W. tional investments and consulting Washington, D.C. 20036 firm) (since March 1994) and a partner of McKinsey & Company (man- agement consulting firm) (since 1991). He is also a director of American Publishing Company. He was the chief negotiator in the Strate- gic Arms Reduction Talks with the former Soviet Union (1989-1991) and the U.S. Ambassador to the Federal Republic of Germany (1985-1989). Mr. Burt is a director or trustee of 29 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
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BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS ---------------------- ----------------------- -------------------- Mary C. Farrell**; 46 Trustee Ms. Farrell is a managing director, senior investment strategist, and member of the Investment Policy Committee of PaineWebber. Ms. Farrell joined PaineWebber in 1982. She is a member of Financial Women's Association and Women's Economic Roundtable and is employed as a regular panelist on Wall $treet Week with Louis Rukeyser. She also serves on the Board of Overseers of New York University's Stern School of Business Ms. Farrell is also a director or trustee of 29 investment compa- nies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Meyer Feldberg; 54 Trustee Mr. Feldberg is Dean and Professor Columbia University of Management of the Graduate 101 Uris Hall School of Business, Columbia Uni- New York, New York 10027 versity. Prior to 1989, he was president of the Illinois Institute of Technology. Dean Feldberg is also a director of AMSCO Interna- tional Inc., Federated Department Stores, Inc., and New World Commu- nications Group Incorporated and is a director or trustee of 29 invest- ment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. George W. Gowen; 66 Trustee Mr. Gowen is a partner in the law 666 Third Avenue firm of Dunnington, Bartholow & New York, New York 10017 Miller. Prior to May 1994, he was a partner in the law firm of Fryer, Ross & Gowen. Mr. Gowen is also a director of Columbia Real Estate Investments, Inc. and is a director or trustee of 29 investment compa- nies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
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BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ---------------------- ----------------------- -------------------- Frederic V. Malek; 59 Trustee Mr. Malek is chairman of Thayer Cap- 901 15th Street, N.W. ital Partners (investment bank) and Suite 300 a co-chairman and director of CB Washington, D.C. 20005 Commercial Group Inc. (real es- tate). From January 1992 to Novem- ber 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 Manage- ment Systems, Inc. (management con- sulting and computer-related serv- ices), Automatic Data Processing, Inc., Avis, Inc. (passenger car rental), FPL Group, Inc. (electric services), National Education Cor- poration, and Northwest Airlines, Inc. and is a director or trustee of 29 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
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BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS ---------------------- ----------------------- -------------------- Carl W. Schafer; 60 Trustee Mr. Schafer is president of the At- P.O. Box 1164 lantic Foundation (charitable foun- Princeton, N.J. 08542 dation supporting mainly oceano- graphic exploration and research). He also is a director of Roadway Express, Inc. (trucking), The Guardian Group of Mutual Funds, Ev- ans Systems, Inc. (a motor fuels, convenience store and diversified company), Hidden Lake Gold Mines Ltd. (gold mining), Electronic Clearing House, Inc. (financial transactions processing), Wainoco Oil Corporation and Nutraceutix Inc. (biotechnology). Prior to Jan- uary 1993, Mr. Schafer was chairman of the Investment Advisory Commit- tee of the Howard Hughes Medical Institute. Mr Schafer is a director or trustee of 29 other investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. John R. Torell III; 56 Trustee Mr. Torell is chairman of Torell 767 Fifth Avenue Management, Inc. (financial advi- Suite 4605 sory firm) (since 1989), chairman New York, New York 10153 of Telesphere Corporation (elec- tronic provider of financial information) and a partner of Zilkha & Company (merchant banking and private investment company). He is the former chairman and chief executive officer of Fortune Bancorp (1990-1991 and 1990-1994, respectively), the former chairman, president and chief executive offi- cer of CalFed, Inc. (savings asso- ciation) (1988 to 1989) and former president of Manufacturers Hanover Corp. (bank) (prior to 1988). Mr. Torell is also a director of Ameri- can Home Products Corp., New Colt Inc. (armament manufacturer) and Volt Information Sciences Inc. Mr. Torell is a director or trustee of 29 other investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
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BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS ---------------------- ----------------------- -------------------- Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president and manager--advisory administra- tion of Mitchell Hutchins. Prior to November 1993, she was compliance manager of Hyperion Capital Manage- ment, Inc., an investment advisory firm. Prior to April 1993, Ms. Boyle was a vice president and man- ager--legal administration of Mitchell Hutchins. Ms. Boyle is a vice president of 30 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Ellen R. Harris; 49 Vice President Ms. Harris is a managing director (Olympus Fund) and a portfolio manager of Mitchell Hutchins. Ms. Harris is also a vice president of three investment com- panies for which Mitchell Hutchins or PaineWebber serves as investment adviser. C. William Maher; 35 Vice President and Mr. Maher is a first vice president Assistant Treasurer and a senior manager of the mutual fund finance division of Mitchell Hutchins. Mr. Maher is a vice pres- ident and assistant treasurer of 30 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of Assistant Treasurer Mitchell Hutchins. Ms. Moran is a vice president and assistant trea- surer of 30 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice pres- Secretary ident and deputy general counsel of Mitchell Hutchins. Ms. O'Donnell is a vice president and secretary of 30 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
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BUSINESS EXPERIENCE; NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS - ---------------------- ----------------------- -------------------- Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director 45 and general counsel of Mitchell Hutchins. Prior to May 1994, she was a partner in the law firm of Arnold & Porter. Ms. Schonfeld is a vice president of 30 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice presi- Assistant Treasurer dent and a senior manager of the mutual fund finance division of Mitchell Hutchins. From August 1992 to August 1994, he was a vice pres- ident at BlackRock Financial Man- agement, Inc. Prior to August 1992, he was an audit manager with Ernst & Young LLP. Mr. Schubert is a vice president and assistant treasurer of 30 investment companies for which Mitchell Hutchins or Paine- Webber serves as investment adviser. Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice presi- Treasurer dent and the director of the mutual fund finance division of Mitchell Hutchins. Prior to 1991, he was an audit senior manager with Ernst & Young LLP. Mr. Sluyters is a vice president and treasurer of 30 in- vestment companies for which Mitch- ell Hutchins or PaineWebber serves as investment adviser.
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NAME, ADDRESS* AND BUSINESS EXPERIENCE; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS ------------------ ----------------------- -------------------- Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director and chief investment officer--U.S. equity investments of Mitchell Hutchins. Prior to March 1995, he was a vice president and directed the U.S. funds management and eq- uity research areas of Chase Man- hattan Private Bank. Mr. Tincher is a vice president of 14 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser. Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president Assistant Secretary and associate general counsel of Mitchell Hutchins. Prior to May 1995, he was an attorney in private practice. Mr. Weller is a vice president and assistant secretary of 29 investment companies for which Mitchell Hutchins or PaineWebber serves as investment adviser.
- -------- * Unless otherwise indicated, the business address of each listed person is 1285 Avenue of the Americas, New York, New York 10019. ** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of each Trust as defined in the Investment Company Act of 1940 ("1940 Act") by virtue of their positions with Mitchell Hutchins, PaineWebber, and/or PW Group. Each Trust pays trustees who are not "interested persons" of the Trust $1,000 annually for each series and $150 for each board meeting and separate meeting of a board committee. Each Trust presently has one series and thus pays each such trustee $1,000 annually, plus any additional amounts due for board or committee meetings. Certain committee chairs receive additional compensation aggregating $15,000 annually from all the funds within the PaineWebber fund complex. All trustees are reimbursed for any expenses incurred in attending meetings. Trustees own in the aggregate less than 1% of the outstanding shares of each Fund. Because Mitchell Hutchins and PaineWebber perform substantially all of the services necessary for the operation of the Trusts, the Trusts require no employees. No officer, director or employee of Mitchell Hutchins or PaineWebber presently receives any compensation from any Trust for acting as a trustee or officer. 23 The table below includes certain information relating to the compensation of each Trust's current trustees who held office during the last fiscal year and by all investment companies in the same complex during the calendar year ended December 31, 1995. COMPENSATION TABLE
AGGREGATE TOTAL COMPENSATION AGGREGATE COMPENSATION FROM PW COMPENSATION FROM THE AMERICA FUND FROM PW TRUST AND (GROWTH AND OLYMPUS FUND THE FUND INCOME (GROWTH COMPLEX PAID NAME OF PERSON, POSITION FUND)(1) FUND)(1) TO TRUSTEES(2) - ------------------------ ------------ ------------ -------------- Richard Q. Armstrong, Trustee.............................. -- -- $ 9,000 Richard R. Burt, Trustee.............................. -- -- 7,750 Meyer Feldberg, Trustee.............................. $3,750 $2,125 106,375 George W. Gowen, Trustee.............................. 3,750 2,125 99,750 Frederic V. Malek, Trustee.............................. 3,750 2,125 99,750 Carl W. Schafer, Trustee.............................. -- -- 118,175 John R. Torell, III, Trustee.............................. -- -- 28,125
- -------- Only independent members of the board are compensated by the Trusts and identified above; trustees who are "interested persons," as defined by the 1940 Act, do not receive compensation. (1) Represents fees paid to each trustee during the fiscal year ended August 31, 1995; the Trusts do not have pension or retirement plans. (2) Represents total compensation paid to each trustee during the calendar year ended December 31, 1995. 24 INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment adviser and administrator of each Fund pursuant to advisory contracts (each an "Advisory Contract") with each Trust. Under the Advisory Contracts, each Fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate specified below. Furthermore, under a service agreement with each Trust that is reviewed by each Trust's board of trustees annually, PaineWebber provides certain services to the Funds not otherwise provided by the Funds' transfer agent. Under the terms of the Advisory Contracts, each Fund bears all expenses incurred in its operation that are not specifically assumed by Mitchell Hutchins. Expenses borne by each Fund include the following: (1) the cost (including brokerage commissions) of securities purchased or sold by the Fund and any losses incurred in connection therewith; (2) fees payable to and expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational expenses; (4) filing fees and expenses relating to the registration and qualification of the Fund's shares under federal and state securities laws and maintenance of such registrations and qualifications; (5) fees and salaries payable to trustees and officers who are not interested persons (as defined in the 1940 Act) of the Fund or Mitchell Hutchins; (6) all expenses incurred in connection with the trustees' services, including travel expenses; (7) taxes (including any income or franchise taxes) and governmental fees; (8) costs of any liability, uncollectible items of deposit and other insurance or fidelity bonds; (9) any costs, expenses or losses arising out of a liability of or claim for damages or other relief asserted against the Trust or Fund for violation of any law; (10) legal, accounting and auditing expenses, including legal fees of special counsel for the independent trustees; (11) charges of custodians, transfer agents and other agents; (12) costs of preparing share certificates; (13) expenses of setting in type and printing prospectuses, statements of additional information and supplements thereto, reports and proxy materials for existing shareholders, and costs of mailing such materials to shareholders; (14) any extraordinary expenses (including fees and disbursements of counsel) incurred by the Fund; (15) fees, voluntary assessments and other expenses incurred in connection with membership in investment company organizations; (16) costs of mailing and tabulating proxies and costs of meetings of shareholders, the boards and any committees thereof; (17) the cost of investment company literature and other publications provided to trustees and officers; and (18) costs of mailing, stationery and communications equipment. As required by state regulation, Mitchell Hutchins will reimburse a Fund if and to the extent that the aggregate operating expenses of the Fund in any fiscal year exceed applicable limits. Currently, the most restrictive such limit applicable to the Funds is 2.5% of the first $30 million of a Fund's average daily net assets, 2.0% of the next $70 million of its average daily net assets and 1.5% of its average daily net assets in excess of $100 million. Certain expenses, such as brokerage commissions, taxes, interest, distribution fees and extraordinary items, are excluded from this limitation. For the last three fiscal years, no reimbursements were required pursuant to such limitation for either Fund. Under each Advisory Contract, Mitchell Hutchins will not be liable for any error of judgment or mistake of law or for any loss suffered by a Fund in connection with the performance of the contracts, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in the performance of its duties or from reckless disregard of its duties and obligations thereunder. Each Advisory Contract terminates automatically upon assignment and are terminable at any time without penalty by the board of trustees or by vote of the holders of a majority of a Fund's outstanding voting securities on 60 days' written notice to Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written notice to a Fund. 25 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, 1995, August 31, 1994 and August 31, 1993, Growth and Income Fund paid (or accrued) to Mitchell Hutchins investment advisory and administration fees of $3,378,079, $4,892,163 and $6,413,944, respectively. Pursuant to the applicable service agreement, during the fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993, Growth and Income Fund paid (or accrued) to PaineWebber service fees of $219,613, $303,496 and $355,724, respectively. Mitchell Hutchins Institutional Investors Inc. ("MHII"), a wholly owned subsidiary of Mitchell Hutchins, served as sub-adviser to Growth and Income Fund from May 19, 1994 to April 25, 1995 pursuant to a sub-advisory contract between MHII and Mitchell Hutchins under which Mitchell Hutchins (not the Fund) paid MHII a fee in the annual amount of 0.25% of the Fund's average daily net assets. During the periods from September 1, 1994 to April 25, 1995 and May 19, 1994 to August 31, 1994, Mitchell Hutchins paid or accrued to MHII sub-advisory fees of $998,353 and $405,821, respectively. GROWTH FUND. Pursuant to the Advisory Contract dated March 1, 1989, between Olympus Fund and Mitchell Hutchins, Growth Fund pays Mitchell Hutchins a fee at the annual rate of 0.75% of the Fund's average daily net assets, computed daily and paid monthly. For the fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993, the Growth Fund paid (or accrued) to Mitchell Hutchins investment advisory and administration fees of $1,993,930, $2,069,033 and $1,402,141, respectively. Pursuant to the applicable service agreement, during the fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993, Growth Fund paid (or accrued) to PaineWebber service fees of $114,163, $103,435 and $75,713, respectively. NET ASSETS. The following table shows the approximate net assets as of February 29, 1996, sorted by category of investment objective, of the investment companies as to which Mitchell Hutchins serves as adviser or sub- adviser. An investment company may fall into more than one of the categories below.
NET ASSETS INVESTMENT CATEGORY ($ MIL) ------------------- ---------- Domestic (excluding Money Market).............................. $5,653.6 Global......................................................... 2,836.8 Equity/Balanced................................................ 2,922.3 Fixed Income (excluding Money Market).......................... 5,568.1 Taxable Fixed Income......................................... 3,854.2 Tax-Free Fixed Income........................................ 1,713.9 Money Market Funds............................................. 22,732.0
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in securities for their own accounts pursuant to a code of ethics that describes the fiduciary duty owed to shareholders of PaineWebber mutual funds and other Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors, officers and employees, establishes procedures for personal investing and restricts certain transactions. For example, employee accounts generally must be maintained at PaineWebber, personal trades in most securities require pre- clearance and short-term trading and participation in initial public offerings generally are prohibited. In addition, the code of ethics puts restrictions on the timing of personal investing in relation to trades by PaineWebber funds and other Mitchell Hutchins advisory clients. 26 DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the Class Y shares of each Fund under separate distribution contracts with each Trust dated July 1, 1991 that require Mitchell Hutchins to use its best efforts, consistent with its other businesses, to sell shares of the Funds. Class Y shares of the Funds are offered continuously. Under exclusive dealer agreements between Mitchell Hutchins and PaineWebber dated July 1, 1991, PaineWebber and its correspondent firms sell each Fund's Class Y shares. PORTFOLIO TRANSACTIONS Subject to policies established by each Trust's board of trustees, Mitchell Hutchins is responsible for the execution of each Fund's portfolio transactions and the allocation of brokerage transactions. In executing portfolio transactions, Mitchell Hutchins seeks to obtain the best net results for the Funds, taking into account such factors as the price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved. While Mitchell Hutchins generally seeks reasonably competitive commission rates, payment of the lowest commission is not necessarily consistent with obtaining the best net results. Prices paid to dealers in principal transactions, through which most debt securities and some equity securities are traded, generally include a "spread," which is the difference between the prices at which the dealer is willing to purchase and sell a specific security at the time. The Funds may invest in securities traded in the OTC market and will engage primarily in transactions directly with the dealers who make markets in such securities, unless a better price or execution could be obtained by using a broker. For the fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993, Growth and Income Fund paid $1,241,906, $1,901,499 and $1,131,909, respectively, in brokerage commissions. For the fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993, Growth Fund paid $273,991, $222,490 and $150,432, respectively, in brokerage commissions. The Funds have no obligation to deal with any broker or group of brokers in the execution of portfolio transactions. The Funds contemplate that, consistent with the policy of obtaining the best net results, brokerage transactions may be conducted through PaineWebber. The Trusts' boards of trustees have adopted procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory Contracts authorize PaineWebber to effect portfolio transactions for the Funds on such exchange and to retain compensation in connection with such transactions. Any such transactions will be effected and related compensation paid only in accordance with applicable SEC regulations. For the fiscal year ended August 31, 1995, Growth and Income Fund paid $65,991 in brokerage commissions to PaineWebber, which represented 5.31% of the total brokerage commissions paid by the Fund and 5.20% of the total dollar amount of transactions involving payment of commissions. For the fiscal years ended August 31, 1994 and August 31, 1993, Growth and Income Fund paid $47,142 and $108,080, respectively, in brokerage commissions to PaineWebber. For the fiscal year ended August 31, 1995, Growth Fund paid $4,200 in brokerage commissions to PaineWebber, which represented 1.53% of the total brokerage commissions paid by the Fund and 2.13% of the total dollar amount of transactions involving payment of commissions. For the fiscal years ended August 31, 1994 and August 31, 1993, Growth Fund paid $9,326 and $3,500, respectively, in brokerage commissions to PaineWebber. 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. 27 Consistent with the interests of each Fund and subject to the review of each Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase and sell portfolio securities from and to dealers or through brokers who provide the Fund with research, analysis, advice and similar services. In return for such services, the Fund may pay to those brokers a higher commission than may be charged by other brokers, provided that Mitchell Hutchins determines in good faith that such commission is reasonable in terms either of that particular transaction or of the overall responsibility of Mitchell Hutchins to the particular Fund and its other clients and that the total commissions paid by the Fund will be reasonable in relation to the benefits to the Fund over the long term. For Growth and Income Fund and Growth Fund, for the fiscal year ended August 31, 1995, Mitchell Hutchins (or, for Growth and Income Fund, MHII) directed $125,000,872 and $6,914,330, respectively, in portfolio transactions to brokers chosen because they provided research services, for which the Funds paid $168,587 and $9,720, respectively, in commissions. For purchases or sales with broker-dealer firms which act as principal, Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive certain research or execution services in connection with these transactions, Mitchell Hutchins will not purchase securities at a higher price or sell securities at a lower price than would otherwise be paid if no weight was attributed to the services provided by the executing dealer. Moreover, Mitchell Hutchins will not enter into any explicit soft dollar arrangements relating to principal transactions and will not receive in principal transactions the types of services which could be purchased for hard dollars. Mitchell Hutchins may engage in agency transactions in OTC equity and debt securities in return for research and execution services. These transactions are entered into only in compliance with procedures ensuring that the transaction (including commissions) is at least as favorable as it would have been if effected directly with a market-maker that did not provide research or execution services. These procedures include Mitchell Hutchins receiving multiple quotes from dealers before executing the transactions on an agency basis. Information and research services furnished by brokers or dealers through which or with which the Funds effect securities transactions may be used by Mitchell Hutchins in advising other funds or accounts and, conversely, information and research services furnished to Mitchell Hutchins by brokers or dealers in connection with other funds or accounts that either of them advises may be used in advising the Funds. Information and research received from brokers or dealers will be in addition to, and not in lieu of, the services required to be performed by Mitchell Hutchins under the Advisory Contract. Investment decisions for the Funds and for other investment accounts managed by Mitchell Hutchins are made independently of each other in light of differing considerations for the various accounts. However, the same investment decision may occasionally be made for a Fund and one or more of such accounts. In such cases, simultaneous transactions are inevitable. Purchases or sales are then averaged as to price and allocated between that Fund and such other account(s) as to amount according to a formula deemed equitable to the Fund and such account(s). While in some cases this practice could have a detrimental effect upon the price or value of the security as far as the Funds are concerned, or upon their ability to complete their entire order, in other cases it is believed that coordination and the ability to participate in volume transactions will be beneficial to the Funds. The Funds will not purchase securities that are offered in underwritings in which PaineWebber is a member of the underwriting or selling group, except pursuant to procedures adopted by each Trust's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among other things, these procedures require that the spread or commission paid in connection with such a purchase be reasonable and fair, the purchase be at not more than the public offering price prior to the end of the first business day after the date of the public offering and that PaineWebber or any affiliate thereof not participate in or benefit from the sale to the Funds. 28 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.
PORTFOLIO TURNOVER RATE ------------- GROWTH AND INCOME FUND Fiscal Year Ended August 31, 1995................................. 111% Fiscal Year Ended August 31, 1994................................. 94% GROWTH FUND Fiscal Year Ended August 31, 1995................................. 36% Fiscal Year Ended August 31, 1994................................. 24%
VALUATION OF SHARES The Funds determine their net asset values per share separately for each Class of shares as of the close of regular trading (currently 4:00 p.m., Eastern time) on the NYSE on each Business Day, which is defined as each Monday through Friday when the NYSE is open. Currently the NYSE is closed on the observance of the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Securities that are listed on U.S. stock exchanges are valued at the last sale price on the day the securities are valued or, lacking any sales on such day, at the last available bid price. In cases where securities are traded on more than one exchange, the securities are generally valued on the exchange considered by Mitchell Hutchins as the primary market. Securities traded in the OTC market and listed on Nasdaq are valued at the last trade price on Nasdaq at 4:00 p.m., Eastern time; other OTC securities are valued at the last bid price available prior to valuation. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of each Trust's board of trustees. In valuing lower rated corporate debt securities it should be recognized that judgment often plays a greater role than is the case with respect to securities for which a broader range of dealer quotations and last-sale information is available. PERFORMANCE INFORMATION The Funds' performance data quoted in advertising and other promotional materials ("Performance Advertisements") represents past performance and is not intended to indicate future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 29 TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized Return") used in each Fund's Performance Advertisements are calculated according to the following formula: P(1 + T)n = ERV where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified Class T = average annual total return of shares of that Class n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance Advertisements will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertisement for publication. Total return, or "T" in the formula above, is computed by finding the average annual change in the value of an initial $1,000 investment over the period. Each Fund also may refer in Performance Advertisements to total return performance data that are not calculated according to the formula set forth above ("Non-Standardized Return"). A Fund calculates Non-Standardized Return for specified periods of time by assuming an investment of $1,000 in Fund shares and assuming the reinvestment of all dividends and other distributions. The rate of return is determined by subtracting the initial value of the investment from the ending value and by dividing the remainder by the initial value. The following table shows performance information for the Class Y (formerly Class C) 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 GROWTH FUND ----------- ----------- CLASS Y CLASS Y ----------- ----------- Fiscal year ended August 31, 1995 Standardized Return*.................................. 18.66% 11.58% Non-Standardized Return............................... 18.66% 11.58% Five years ended August 31, 1995: Standardized Return*.................................. NA NA Non-Standardized Return............................... NA NA Inception** to August 31, 1995: Standardized Return*.................................. 5.37% 10.33% Non-Standardized Return............................... 5.37% 10.33%
- -------- NOTE: * Class Y shares do not impose an initial or contingent deferred sales charge; therefore, Non-Standardized Return is identical to Standardized Return. ** The inception dates for the Class Y shares of the Funds are as follows: Growth and Income Fund--February 12, 1992; Growth Fund--August 26, 1991. OTHER INFORMATION. In Performance Advertisements, the Funds may compare their Standardized Return and/or their Non-Standardized Return with data published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), 30 with the performance of recognized stock and other indices, including (but not limited to) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, the Nasdaq Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman Bond Index, 30-year and 10-year U.S. Treasury bonds, the Morgan Stanley Capital International World Index and changes in the Consumer Price Index as published by the U.S. Department of Commerce. The Funds also may refer in such materials to mutual fund performance rankings and other data, such as comparative asset, expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to discussions of the Funds and comparative mutual fund data and ratings reported in independent periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic form. The Funds may include discussions or illustrations of the effects of compounding in Performance Advertisements. "Compounding" refers to the fact that, if dividends or other distributions on a Fund investment are reinvested in additional Fund shares, any future income or capital appreciation of a Fund would increase the value, not only of the original Fund investment, but also of the additional Fund shares received through reinvestment. As a result, the value of a Fund investment would increase more quickly than if dividends or other distributions had been paid in cash. The Funds may also compare their performance with the performance of bank certificates of deposit (CDs) as measured by the CDA Certificate of Deposit Index, the Bank Rate Monitor National Index and the averages of yields of CDs of major banks published by Banxquote(R) Money Markets. In comparing the Funds' performance to CD performance, investors should keep in mind that bank CDs are insured in whole or in part by an agency of the U.S. government and offer fixed principal and fixed or variable rates of interest, and that bank CD yields may vary depending on the financial institution offering the CD and prevailing interest rates. Shares of the Funds are not insured or guaranteed by the U.S. government and returns and net asset value will fluctuate. The debt securities held by the Funds generally have longer maturities than most CDs and may reflect interest rate fluctuations for longer term securities. An investment in any of the Funds involves greater risks than an investment in either a money market fund or a CD. The Funds may also compare their performance to general trends in the stock and bond markets, as illustrated by the following graph prepared by Ibbotson Associates, Chicago. [GRAPHICS] 31 Over time, stocks have outperformed all other investments by a wide margin, offering a solid hedge against inflation. From 1926 to 1993, stocks beat all other traditional asset classes. A $10 investment in the S&P 500 grew to $8,001, significantly more than any other investment. The chart shown is for illustrative purposes only and does not represent the Funds' performance and should not be considered an indication or guarantee of future results. Year-to-year fluctuations of the S&P 500 have been significant, and total return for some periods has been negative. The S&P 500 includes companies with larger market capitalizations than those in which the Funds invest. Unlike investors in bonds and Treasury bills, common stock investors do not receive fixed income payments and are not entitled to repayment of principal. These differences contribute to investment risk. Returns shown for long-term government bonds are based on Treasury bonds with 20-year maturities. TAXES In order to continue to qualify for treatment as a regulated investment company ("RIC") under the Internal Revenue Code, each Fund must distribute to its shareholders for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income net short-term capital gain and net gains from certain foreign currency transactions) ("Distribution Requirement") and must meet several additional requirements. Among these requirements are the following: (1) each Fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in securities or those currencies ("Income Requirement"); (2) each Fund must derive less than 30% of its gross income each taxable year from the sale or other disposition of securities, or any of the following, that were held for less than three months--options, futures or forward contracts (other than those on foreign currencies), or foreign currencies (or options, futures or forward contracts thereon) that are not directly related to the Fund's principal business of investing in securities (or options and futures with respect to securities) ("Short-Short Limitation"); (3) at the close of each quarter of each Fund's taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with these other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of that Fund's total assets and that does not represent more than 10% of the issuer's outstanding voting securities; and (4) at the close of each quarter of each Fund's taxable year, not more than 25% of the value of its total assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer. Dividends and other distributions declared by the Funds in October, November or December of any year and payable to shareholders of record on a date in any of those months will be deemed to have been paid by the Funds and received by the shareholders on December 31 of that year if the distributions are paid by the Funds during the following January. Accordingly, those distributions will be taxed to shareholders for the year in which that December 31 falls. A portion of the dividends from each Fund's investment company taxable income (whether paid in cash or reinvested in additional Fund shares) may be eligible for the dividends-received deduction allowed to corporations. The eligible portion may not exceed the aggregate dividends received by each Fund from U.S. corporations. However, dividends received by a corporate shareholder and deducted by it pursuant to the dividends-received deduction are subject indirectly to the alternative minimum tax. 32 If shares of any Fund are sold at a loss after being held for six months or less, the loss will be treated as long-term, instead of short-term, capital loss to the extent of any capital gain distributions received on those shares. Investors also should be aware that if shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the price back as a taxable distribution. Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the extent it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts. Each Fund may invest in the stock of "passive foreign investment companies" ("PFICs") if such stock is a permissible investment. A PFIC is a foreign corporation that, in general, meets either of the following tests: (1) at least 75% of its gross income is passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, each Fund will be subject to federal income tax on a portion of any "excess distribution" received on the stock of a PFIC or of any gain from disposition of such stock (collectively "PFIC income"), plus interest thereon, even if the Fund distributes the PFIC income as a taxable dividend to its shareholders. The balance of the PFIC income will be included in each Fund's investment company taxable income and, accordingly, will not be taxable to it to the extent that income is distributed to its shareholders. If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing fund," then in lieu of the foregoing tax and interest obligation, the Fund will be required to include in income each year its pro rata share of the qualified electing fund's annual ordinary earnings and net capital gain (the excess of net long-term capital gain over net short-term capital loss)--which would have to be distributed to satisfy the Distribution Requirement and avoid imposition of the Excise Tax--even if those earnings and gain are not distributed to the Fund. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof. Pursuant to proposed regulations, open-end RICs, such as the Funds, would be entitled to elect to "mark-to-market" their stock in certain PFICs. "Marking- to-market," in this context, means recognizing as gain for each taxable year the excess, as of the end of that year, of the fair market value of each such PFIC's stock over the owner's adjusted basis in that stock (including mark-to- market gain for each prior year for which an election was in effect). The use of hedging strategies, such as writing ("selling") and purchasing options and futures contracts, involves complex rules that will determine for income tax purposes the character, timing and amount of recognition of the gains and losses the Fund realizes in connection therewith. Income from foreign currencies (except certain gains therefrom that may be excluded by futures regulations), and income from transactions in options, futures and forward currency contracts derived by each Fund with respect to its business of investing in securities or foreign currencies, will qualify as permissible income under the Income Requirement. However, income from the disposition of options and futures contracts (other than those on foreign currencies) will be subject to the Short-Short Limitation if they are held for less than three months. Income from the disposition of foreign currencies, and options, futures and forward contracts on foreign currencies, that are not directly related to the Fund's principal business of investing in securities (or options and futures with respect to securities) also will be subject to the Short-Short Limitation if they are held for less than three months. 33 If a Fund satisfies certain requirements, any increase in value of a position that is part of a "designated hedge" will be offset by any decrease in value (whether realized or not) of the offsetting hedging position during the period of the hedge for purposes of determining whether the Fund satisfies the Short-Short Limitation. Thus, only the net gain (if any) from the designated hedge will be included in gross income for purposes of that limitation. Each Fund will consider whether it should seek to qualify for this treatment for its hedging transactions. To the extent the Fund does not qualify for this treatment, it may be forced to defer the closing out of certain options and futures beyond the time when it otherwise would be advantageous to do so, in order for the Fund to continue to qualify as a RIC. OTHER INFORMATION Effective July 1, 1991, the name of Growth Fund was changed from "PaineWebber Classic Growth Fund" to its current name. Growth and Income Fund's name was changed from "PaineWebber Classic Growth and Income Fund" to "PaineWebber Dividend Growth Fund" effective May 17, 1991 and to its current name effective April 3, 1995. Effective on May 17, 1991, Growth and Income Fund was combined in a tax-free reorganization with PaineWebber Classic Dividend Growth Fund, which was at that time another series of PaineWebber America Fund. As a result of the reorganization, each shareholder of PaineWebber Classic Dividend Growth Fund became a shareholder of Growth and Income Fund. Prior to November 10, 1995, each Fund's Class Y shares were known as "Class C" shares. PaineWebber America Fund and PaineWebber Olympus Fund are entities of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of the Funds could, under certain circumstances, be held personally liable for the obligations of the Trusts or Funds. However, each Declaration of Trust disclaims shareholder liability for acts or obligations of the Trusts or the Funds and requires that notice of such disclaimer be given in each note, bond, contract, instrument, certificate or undertaking made or issued by the trustees or by any officers or officer by or on behalf of any Trust or Fund, the trustees or any of them in connection with a Trust. Each Declaration of Trust provides for indemnification from a Fund's property for all losses and expenses of any shareholder held personally liable for the obligations of that Fund. Thus, the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances in which a Fund itself would be unable to meet its obligations, a possibility that Mitchell Hutchins believes is remote and not material. Upon payment of any liability incurred by a shareholder solely by reason of being or having been a shareholder, the shareholder paying such liability will be entitled to reimbursement from the general assets of that Fund. The trustees intend to conduct the operations of each Fund in such a way as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Funds. COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Funds, has passed upon the legality of the shares offered by the Funds' Prospectus. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell Hutchins in connection with other matters. AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as independent auditors for Growth Fund and Growth and Income Fund. FINANCIAL STATEMENTS Each Fund's Annual Report to Shareholders for the 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. 34 APPENDIX DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC. ("MOODY'S") CORPORATE BOND RATINGS AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as a "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues; AA. Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities; A. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future; BAA. Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well; BA. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class; B. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small; CAA. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest; CA. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings; C. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's apply numerical modifiers, 1, 2 and 3 in each generic rating classification from "AA" through "B" in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE DEBT RATINGS AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong; AA. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree; A. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories; BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories; BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the 35 terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions; C1. The rating C1 is reserved for income bonds on which no interest is being paid; D. Debt rated D is in default, and payment of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. 36 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 ---- Investment Policies and Restrictions....................................... 1 Investment Limitations of the Funds........................................ 7 Hedging Strategies......................................................... 9 Trustees and Officers...................................................... 16 Investment Advisory and Distribution Arrangements.......................... 25 Portfolio Transactions..................................................... 27 Valuation of Shares........................................................ 29 Performance Information.................................................... 29 Taxes...................................................................... 32 Other Information.......................................................... 34 Financial Statements....................................................... 34 Appendix................................................................... 35
(C)1996 PaineWebber Incorporated PaineWebber Growth and Income Fund PaineWebber Growth Fund Class Y Shares - -------------------------------------------------------------------------------- Statement of Additional Information May 1, 1996 - -------------------------------------------------------------------------------- LOGO -----END PRIVACY-ENHANCED MESSAGE-----