============= Page 1 of 13 ============= LBF004-00005 This brochure contains a prospectus, which describes in detail the Fund's investment objective, investment policies, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest. GOVERNMENT EXHIBIT 267 Crim. No. H-04-25 (S-2) ============= Page 2 of 13 ============= 'By spotting major trends before they become well recognized, we aim to provide clients with specific investment opportunities that offer superior performance." ~a. For more than a decade, PaineWebbers Investment Strategy Group has analyzed emerging social, economic and political trends in order to develop broad investment themes. Identifying such themes before they become widely recognized has provided investors with insight into emerging trends and their impact on the financial markets. DEnnn nnnnF ============= Page 3 of 13 ============= -a C Not part of the prospectus is a hallmark of PaineWebber's Investment Strategy Group as well as the strategy behind PaineWebber Strategy Fund. Led by Edward M, Kerschner, PaineWebber's Chief Investment Strategist, the Investment Strategy Group analyzes economic, social and political data to spot emerging trends and identify investment themes based on those trends. PaineWebber's Investment Strategy Group maintains a Highlighted Stocks list of companies believed most likely to benefit from the identified investment themes. Individual investors can participate in the potential of this thematic approach by investing in PaineWebber Strategy Fund. PaineWebber Strategy Fund offers investors the only way to purchase, in one mutual fund, all the securities on the PaineWebber Highlighted Stocks lisi:. LBF004-00007 gauged that bonds offered compelling value. As it turned out that call was made at a time when bond yields had reached their highest levels in recent years, with interest rates declining steadily from that peak. ============= Page 4 of 13 ============= r~ Th Pau aWUbtael,Et{vp ! f h ,'°" '. ,9 s~rtzlaerrt S anion 0r, "A-I p ~, e&G Sp tt?fi`:4~ Ht4~i2 4 sY~j~<; re t4vvz,Tt~ 9,rr~~tts~r • Chief Investment Strategist of PaineWebber Incorporated and Chairman of the Investment Policy Committee, providing investment strategy advice to PaineWebber clients. • More than 20 years' experience in the securities industry; Mr. Kerschner joined PaineWebber in 1982, • Among the most well-respected investment strategists on Wall Street: -Consistently recognized by Institutional Investor magazine with positions on its All-America Research Team for both portfolio strategy and quantitative analysis. -Frequently featured as a capital markets expert in the The Wall Street Journal, The New York Times, Barron's, Money, Smart Money and other publications. -Developed PaineWebber's Highlighted Stocks list in the mid-1980s and has maintained it since then. 1989: Berlin Wall falls Edward M. Xerschner Chief Investment Stretegisl, PaineWebber I V Not !part of the prospectus s LBF004-00008 ============= Page 5 of 13 ============= l ` PaineWebber's Chief investment Strategist and the Investment Strategy Group analyze economic, social and political data. After discussion and debate, trends are identified and translated into specific investment themes. Identi ing January 1991: Persian Gulf War Q 4 Not pert of the prospectus I hemes LBF004-00009 yield would fall to 6% by 1996. Though that forecast was three months early (in the months subsequent to the call, interest rates rose, touching 8.5% by July), interest rates then began a steady decline, reaching 6% in September 1993. ============= Page 6 of 13 ============= markets, which would be no less powerful than the institutional- t Qin.~he-1.930s or the acceleration of inflation sr 'rr.l, xser errManie"of the 1980s. The individual consumerwesto become the individual investor. 46 c 5 °. 9 "•'Combir a expertis0+ f:;Edward OKers .h'ner nd Pa~F ~ Uebber ~'IEquity'. ;Res arch;'Dep;ai meat • A©rawn from t~' gr,Qt~~',of s°F~C~Cg rat9t~ ' Buy'for''A;ttractlv`e' wby'P'ain® bar ~~ r 1 ` L k ^"V`1M '~ f5 ar + . , n,.b V.~t } r v ., ~ r,1(i ,i r a}11b& i ! t T~bt[ P11 1, 9Yitff19`,d ~tf±e' ate Trhk ~~, i a 0yin,elIud,~gyd '~pf~tr,I i` ~' AJq e's no ~,'~ ^pfi * *'uras`1~if S' "I 0 'd r J r ~~( h + ~, '1 ~0,'\rr1 rt t~.f t21~v, ~l v, vt a1 a"r~-~•~ Jai' '~lttt Iwo ~y" i 6p duer,~q rimnd, rr~d'h d r of the decade would be microprocessor proliferation, and that one of the best ways for investors to exploit this trend was to buy stocks benefiting from explosive growth in the production and distribution of digital information- November 1992: Democrats retake White House ila~ pT dirt ihjq iii ` a$ ~ a ";v tat l~lrred "'~? ~a~i tfrie Fb'' C na~froin' „?, dhtel9r 'All s± F bl s~l,l~tt „" %` 9~t a nb a (h"Q'9i~rc~tb~iAtd4 lol~i r'7 ; i t CA frih6"' a k a Bt~r~dn ":16f h +. tds1C 4 `' :,;,.mdr . 8 § , 4b'9fii~lal il!?teKd ppks,; w L are~w' P'dttraq; '1aQ l11 a Fthrts e~{tjie 1.0 87~ OfY ~f $C f ~ SOS IOf' S)e*r '' '1C ` v &SthrHFjghid"''StaCks;tikfi'i`Aap~r lPo foltdok Is' »t;~1te'niged16184f " Dl ,;rifr',r' ' kgr~ r '; d ercfubla v9' ts;ar\(. rtiVtgi~VO }G~;~,~e aitsi9 'to ora{~§ @t ~-'from . ' T Klrkh.m Betnrby tkfs(Ifsi iTii fj nd ill~94 a°~be~i~ie Eto;daily'ra h,~ Chief Investment Orficer of Quantitative Investments and Panfotlo Manager, ;~,8916&,o31A0~S:8f~d pn~'OCioryEhBxp,9f1;ib8IktCludFng Mitchell Hutchins Asset Mantpement ";"br e'reg a co'r rni$gions, 9Swellv~'$'-~fce+edVi ry . teas and':other'ep6nses tfiattha:•Fl1nd bears. LBF004-00010 ============= Page 7 of 13 ============= in world markets. PaineWebber argued that, in this time of weak corporate profitability, companies would be "...viewed as portfolios of businesses that should be actively disassembled and restructured in order to maximize shareholder values." By year's end, the leadership of the QJIA had been delineated not by classic market segments such as "growth" or "cyclical," but by dastructuring stories such asl General Motors, Eastman Kodak, Goodyear Tire and Sears. site aime WeE i"s Investment Strategy Group review social, economic and political trends, gather insights from colleagues and add their own analysis to identify emerging investment themes. This process is ongoing. The Investment Strategy Group continually reviews existing themes, conducts research and evaluates individual securities to assess whether the companies on the Highlighted Stocks list remain appropriate in light of current themes and market conditions. Stocks are removed from the list if a company's fundamentals change so that it appears less able to capitalize on the identified themes or if the theme's potential appears to have been fully recognized. w 6 Not part of the prospectus LBF004-00011 ============= Page 8 of 13 ============= T. Kirkham Barneby is the Portfolio Manager of the Fund. As Mitchell Hutchins' Chief Investment Officer of Quantitative Investments, Mr. Barneby is responsible for asset allocation decisions on a (number of PaineWebber mutual funds and Mitchell Hutchins' managed portfolios totaling more than $3.7 billion in assets. Mr. Barneby, supported by the Quantitative Investments Team, performs the day-to-day management of the Fund, carrying out the trading, cash flow and rebalancing activities necessary to keep the Fund's portfolio in line with the composition of the PaineWebber I4ighlighted Stocks list. December 1994: Mexican peso crisis Mitchell Hutchins Asset Management Inc. is a subsidiary of PaineWebber Incorporated that manages more than $58 billion in mutual fund, institutional and pension plan assets, I'VE Economic Social Trends Trends Political Trends Discussion and debate, developing of investment themes PaineWebber Strategy Fund Stock n liahtn, company ,P•ana strong amentals Portfolio Manager T. Kirkham earneby purchases for the Fund only stocks on the Highlighted Stocks list and sells stocks that are removed from the list. Mr. Barneby executes the buys and sells after public announcement of changes to the list. Generally, the Fund's assets will be equally weighted among the stocks on the Highlighted Stocks list. Ongoing review of themes end those stocks identified as beneficiaries leads to adding names to or removing names from the Highlighted Stocks list. This process assesses whether the Highlighted Stocks remain likely to benefit from identified themes. .Fj 5 rJ 1 R ~ ~,~N i Not part of the prospectus P 7 LBF00-00012 PaineWebber Equity Research's Recommended Stocks ============= Page 9 of 13 ============= This theme focuses on the consumer, taking an approach more typical of Madison Avenue than of Wall Street. This investment theme attempts to understand consumer behavior and, in particular, the behavior of baby boomers--the largest, fastest-grow- ing and wealthiest segment of the population. Driven by "shared life experiences," the attitudes of baby boomers about everything from consumption to leisure to health care have changed dramatically as this generation has aged. With most of their material needs satisfied, boomers today place more value on experiences than on tangibles. Key Trends & Investment Implications • Cradle-to-grave entrepreneurialism: Beneficiaries include firms catering to small businesses, home offices and investors seeking asset management. ix.~ dllovember 1995.• OJIA tops 5,000 o . f a theme predicted that the consumer sector would drive the U.S. economy in the coming decade. AT the time, a consumer comeback seemed unlikely to many experts, given extreme pessimism on the state of the consumer- Today, the U.S. economy is performing remarkably well, real wages have been rising and consumer spending is strong. The Consumer Comeback's continuing rele- vance to investors can be seen in how it has evolved into "The New Millennium American,' a theme identified by the investment Strategy Group in September 1998. Not part of the prospectus Time drought Americans feel short of time and find themselves doing several things at once. Trusted brands and time-savers could flourish. • Stressless leisure: As baby boomers age, they seek leisure activities with less effort, less physical exertion and less risk. Cruise lines, airlines, casinos and hotels could benefit. Baby eoomere ore the taablal•prawiP9 9 gmuId et the U.S. population % Change by ape group, 1995-2005 50 00 40 30 70 10 0 -t0 .20 pndor s. 10. i5. 20- 25- 20- 55- 40- 45- 50- 55- 60- A0, 7M 75- W 5 9 14 19 2A 20 34 39 u 49 54 59 6a 09 74 70 source: 0anaus Bureau, LBF004-00013 ============= Page 10 of 13 ============= "Benign deflation" and the muting of the business cycle-infrequent and less severe recessions-have altered the old sector rotation, which typically followed this pattern: first, defensive stocks; second, interest-rate sensitive cyclicals; third, commodity cyclicals; and lastly, capital goods makers. Although the domestic economy has become less volatile, in addition to the muted business cycle, the "new profit pattern" has two other elcmenrs. industry mini-rccessions and global accession rotation. In this "new profit pattern," there are four types of cyclical companies whose earnings are affected by different variables: Capacity cyclicals, Demand cyclicals, Growth cyclicals and Credit cycle cyclicals Key Trends & Investment Implications • Capacity Cyclicals: Companies that could benefit from swings in industry capacity. Supply and demand situation appears favorable for airlines, papers and semiconductors. • Demand Cyclicals: Solid economic growth could prove favor- able for autos, diversified industrials, railroads and retailers. • Growth Cyclicals: Global rebound and global growth could be favorable for computer, household products, specialty chemicals and telecom equipment firms. • Credit Cycle Cyclicals: Rebounds in Japanese and Asian markets could benefit select U.S. financial services firms. *As of October 1, 1999. Investment themes and the stocks on the Highlighted Stocks list are subject to change. The Fund's partfolio changes as names on the list change. The quantity of global GDP (gross domestic product) that ultimately will be "digitizable" will likely surpass today's wildest speculation. Major technological revolutions are always bigger than anyone ever thinks. The First and Second Industrial Revolutions were violent upheavals marked by many simultaneous "wars" between competing interests, technologies and business models; so, too, will the Information Revolution witness many wars in which some firms perish while others flourish. Key Trends & Investment Implications • Information Age vs. Industrial Age: The distribution and manipulation of information is now the central wealth- creating activity. • Producer vs_ distributor: The Internet increases the power of producers and threatens distributors and middlemen that don't add value. • E -tailing vs. brick-and-mortar retailing; Companies with strong brands and sophisticated distribution could benefit more than retailers with weak brands. Commoditized information vs. proprietary content/ specialized insight Commoditization of information could hurt traditional information providers, such as newspapers. Proprietary content is valuable if consumers prove willing to pay for it. Consumers will pay for specialized insight tailored to their specific needs. Idemurtlee Pronw•iag AS a percentegn attotal real equipment investment so 50 40 so Zo a Not part of the prospectus I RF004-00014 Sauna: 54reau of EaonomI Anely$iu ============= Page 11 of 13 ============= T_Wj I U~'v 1 t~ 4 u C `, 'jlainaWel ~iolaer Strategy Fw a offers individual investors the opportunity to participate in a thematic approach to investing with the convenience of a mutual fund. Convenience: An investment in the Fund provides a convenient way to maintain a portfolio of the stocks featured on the Highlighted Stocks list. Investors do not have to buy and sell individual securities to keep up with changes on the list or to rebalance their portfolios to reflect changes in the value of those securities. Professional Management: The Fund is managed by Mitchell Hutchins Asset Management, the Fund's investment advisor. Portfolio Manager T. Kirkham Barneby, supported by the Quantitative Investments Team, makes all trading, cash flow and rebalancing decisions in the day-to-day management of the Fund. 10 Not part of the prospectus BF004-00015 years all recessions have been accompanied by inventory corrections. Lower inventory levels and the result dampening of inventory volatility are helping to moderate sharp fluctuations in U.S. economic growth. ============= Page 12 of 13 ============= Asian economic crisis S®p fiber-1997 rsohel'computer base in the office and the home, and the shiftto inter-networking, has laid the groundwork e'%to an Information Age in which creation, distribution and manipulation of information is the central wealth- GVity. The implications of this theme still remain powerful fortoday's investor, as evidenced by its evolution into n Revolution Wars," a theme identified in May 1999, Concentrated Portfolio: PaineWebber Strategy Fund invests in stocks on the PaineWebber Highlighted Stocks list (usually 25 stocks believed by PaineWebber to be most likely to benefit from identified investment themes). Lower transaction fees: By owning the stocks on the Highlighted Stocks list in a mutual fund, investors do not incur the significant transaction costs of buying and selling smaller lots of securities as the names on the list change. Low investment minimums: The initial investment minimum for the Fund is $1,000 with subsequent investments of $100. These minimums provide investors the ability to invest in a portfolio of selected stocks at significantly lower investment levels than if they were to purchase comparable securities individually. 3 la Not part of the prospectus ii i RFnna_nnn1F ============= Page 13 of 13 ============= has dedicated a significant level of resources and commitment to risk management, which is conducted by a separate risk management and performance analysis team. Using many of the same analytical tools employed by PaineWebber and other leading firms to manage their own capital risk, the Risk Management Team performs regular analysis of fund portfolios and individual securities in an effort to ensure that each Fund's investment risk remains within its defined parameters. November 1998' Internet stuck boom March 1999: DJIA tops 10.006-% "r, I0"19911:• TliiIi.S. in Euroland February 1991- The Big Shift--Barely Begun April 1999: Muted Cycle cyclicals January-'19918 "gp kar & ~~1~ 1Nevu Millennium American May 1999: Information Revolution Wars minimal, firms had both the need to do deals to generate revenue growth, and the ability to do deals, After six years of uninterrupted profit expansion, cash flow and balance sheets were strong, and dividend hikes were modest. 12 Not part of the prospectus The Risk Management Team monitors each Fund's performance daily versus its respective investment universe and its historical volatility of return. Portfolios are constructed and compared to actual monthly Fund perfor- mance to identify returns attributable to active management resulting from factors such as security selection and sector and industry concentration. Mitchell Hutchins' three Chief Investment Officers and the Director of Risk Management regularly monitor each Fund's performance versus its objective and its respective peer group. The goal of this intensive system of checks and balances is to thoroughly oversee the investment management process. Of course, these steps cannot guarantee safety of principal or total return, but we think they help provide a consistent investment process across all categories of funds. LBF004-00017