PAINEWEBBER CASHFUND, INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Cashfund, Inc. is a professionally managed, no load money
market fund designed to provide investors with current income, stability of
principal and high liquidity.
The fund's investment adviser, administrator and distributor is
PaineWebber Incorporated ("PaineWebber"); its sub-adviser is Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber. Mitchell Hutchins also serves as the fund's
sub-administrator.
Portions of the fund's Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information ("SAI"). The Annual
Report accompanies this SAI. You may obtain an additional copy of the Annual
Report by calling toll-free 1-800-441-7756.
This SAI is not a prospectus and should be read only in conjunction with
the fund's current Prospectus, dated August 1, 1999. A copy of the Prospectus
may be obtained by calling any PaineWebber Financial Advisor or correspondent
firm or by calling toll-free 1-800-441-7756. This SAI is dated August 1, 1999.
TABLE OF CONTENTS
PAGE
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The Fund and Its Investment Policies................... 2
The Fund's Investments, Related Risks and
Limitations............................................ 2
Organization of the Fund; Directors and Officers and
Principal Holders of Securities..................... 8
Investment Advisory, Administration and
Distribution Arrangements........................... 16
Portfolio Transactions................................. 18
Additional Information Regarding Redemptions;
Service Organizations............................... 19
Valuation of Shares.................................... 19
Performance Information................................ 20
Taxes.................................................. 22
Other Information...................................... 23
Financial Statements................................... 23
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THE FUND AND ITS INVESTMENT POLICIES
The fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of the fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.
The fund's investment objective is to provide current income, stability of
principal and high liquidity. The fund invests in high quality money market
instruments that have, or are deemed to have, remaining maturities of 13 months
or less. Money market instruments are short-term debt obligations and similar
securities. These instruments include (1) U.S. and foreign government
securities, (2) obligations of U.S. and foreign banks, (3) commercial paper and
other short-term obligations of U.S. and foreign corporations, partnerships,
trusts and similar entities, (4) repurchase agreements regarding any of the
foregoing and (5) investment company securities. Money market instruments also
include longer term bonds that have variable interest rates or other special
features that give them the financial characteristics of short-term debt.
The fund may invest in obligations (including certificates of deposit,
bankers' acceptances, time deposits and similar obligations) of U.S. and foreign
banks only if the institution has total assets at the time of purchase in excess
of $1.5 billion. The fund's investments in non-negotiable time deposits of these
institutions will be considered illiquid if they have maturities greater than
seven days.
The fund may purchase only those obligations that Mitchell Hutchins
determines, pursuant to procedures adopted by the board, present minimal credit
risks and are "First Tier Securities" as defined in Rule 2a-7 under the
Investment Company Act of 1940, as amended ("Investment Company Act"). A First
Tier Security is either (1) rated in the highest short-term rating category by
at least two nationally recognized statistical rating agencies ("rating
agencies"), (2) rated in the highest short-term rating category by a single
rating agency if only that rating agency has assigned the obligation a
short-term rating, (3) issued by an issuer that has received such a short-term
rating with respect to a security that is comparable in priority and security,
(4) subject to a guarantee rated in the highest short-term rating category or
issued by a guarantor that has received the highest short-term rating for a
comparable debt obligation or (5) unrated, but determined by Mitchell Hutchins
to be of comparable quality.
The fund generally may invest no more than 5% of its total assets in the
securities of a single issuer (other than U.S. government securities). The
fund may purchase only U.S. dollar-denominated obligations of foreign issuers.
The fund may invest up to 10% of its net assets in illiquid securities. It
may purchase securities on a when-issued or delayed delivery basis. The fund may
lend its portfolio securities to qualified broker-dealers or institutional
investors in an amount up to 33 1/3% of its total assets. The fund may borrow up
to 10% of its total assets for temporary purposes, including reverse repurchase
agreements. It may invest in the securities of other investment companies.
THE FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the fund's investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or the SAI, the fund has established no
policy limitations on its ability to use the investments or techniques discussed
in these documents.
YIELDS AND CREDIT RATINGS OF MONEY MARKET INSTRUMENTS; FIRST TIER
SECURITIES. The yields on the money market instruments in which the fund invests
are dependent on a variety of factors, including general money market
conditions, conditions in the particular market for the obligation, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and the ratings of the issue. The ratings assigned by rating agencies
represent their opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices.
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Subsequent to its purchase by the fund, an issue may cease to be rated or
its rating may be reduced. If a security in the fund's portfolio ceases to be a
First Tier Security or Mitchell Hutchins becomes aware that a security has
received a rating below the second highest rating by any rating agency, Mitchell
Hutchins and, in certain cases, the fund's board, will consider whether the fund
should continue to hold the obligation. A First Tier Security rated in the
highest short-term category at the time of purchase that subsequently receives a
rating below the highest rating category from a different rating agency may
continue to be considered a First Tier Security.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the
U.S. government, its agencies or its instrumentalities. U.S. government
securities include mortgage-backed securities issued or guaranteed by
government agencies or government-sponsored enterprises. Other U.S.
government securities may be backed by the full faith and credit of the U.S.
government or supported primarily or solely by the creditworthiness of the
government-related issuer or, in the case of mortgage-backed securities, by
pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
programs, the principal and interest components are individually numbered and
separately issued by the U.S. Treasury.
COMMERCIAL PAPER AND OTHER SHORT-TERM OBLIGATIONS. The fund may purchase
commercial paper, which includes short-term obligations issued by corporations,
partnerships, trusts or other entities to finance short-term credit needs. The
fund also may purchase other types of non-convertible debt obligations subject
to maturity constraints imposed by Rule 2a-7 under the Investment Company Act.
Descriptions of certain types of short-term obligations are provided below.
ASSET-BACKED SECURITIES. The fund may invest in securities that are
comprised of financial assets. Such assets may include motor vehicle and other
installment sales contracts, home equity loans, leases of various types of real
and personal property and receivables from revolving credit (credit card)
agreements or other types of financial assets. Such assets are securitized
through the use of trusts or special purpose corporations or other entities.
Payments or distributions of principal and interest may be guaranteed up to a
certain amount and for a certain time period by a letter of credit or pool
insurance policy issued by a financial institution unaffiliated with the issuer,
or other credit enhancements may be present. See "The Fund's Investments,
Related Risks and Limitations -- Credit and Liquidity Enhancements."
VARIABLE AND FLOATING RATE SECURITIES AND DEMAND INSTRUMENTS. The fund may
purchase variable and floating rate securities with remaining maturities in
excess of 13 months issued by U.S. government agencies or instrumentalities or
guaranteed by the U.S. government. In addition, the fund may purchase variable
and floating rate securities of other issuers with remaining maturities in
excess of 13 months if the securities are subject to a demand feature
exercisable within 13 months or less. The yields on these securities are
adjusted in relation to changes in specific rates, such as the prime rate, and
different securities may have different adjustment rates. The fund's investment
in these securities must comply with conditions established by the Securities
and Exchange Commission ("SEC") under which they may be considered to have
remaining maturities of 13 months or less. Certain of these obligations carry a
demand feature that gives the fund the right to tender them back to a specified
party, usually the issuer or a remarketing agent, prior to maturity. See "The
Fund's Investments, Related Risks and Limitations -- Credit and Liquidity
Enhancements."
Generally, the fund may exercise demand features (1) upon a default under
the terms of the underlying security, (2) to maintain its portfolio in
accordance with its investment objective and policies or applicable legal or
regulatory requirements or (3) as needed to provide liquidity to the fund in
order to meet redemption requests. The ability of a bank or other financial
institution to fulfill its obligations under a letter of credit, guarantee or
other liquidity arrangement might be affected by possible financial difficulties
of its borrowers, adverse interest rate or economic conditions, regulatory
limitations or other factors. The interest rate on floating rate or variable
rate securities ordinarily is readjusted on the basis of the prime rate of the
bank that originated the financing or some other index or published rate, such
as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect market
rates of interest. Generally, these interest rate adjustments cause the market
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value of floating rate and variable rate securities to fluctuate less than the
market value of fixed rate securities.
VARIABLE AMOUNT MASTER DEMAND NOTES. The fund may invest in variable
amount master demand notes, which are unsecured redeemable obligations that
permit investment of varying amounts at fluctuating interest rates under a
direct agreement between the fund and an issuer. The principal amount of these
notes may be increased from time to time by the parties (subject to specified
maximums) or decreased by the fund or the issuer. These notes are payable on
demand (after any requisite notice period specified in related documentation)
and may or may not be rated.
INVESTING IN FOREIGN SECURITIES. The fund's investments in U.S.
dollar-denominated securities of foreign issuers may involve risks that are
different from investments in U.S. issuers. These risks may include future
unfavorable political and economic developments, possible withholding taxes,
seizure of foreign deposits, currency controls, interest limitations or other
governmental restrictions that might affect the payment of principal or interest
on the fund's investments. Additionally, there may be less publicly available
information about foreign issuers because they may not be subject to the same
regulatory requirements as domestic issuers.
CREDIT AND LIQUIDITY ENHANCEMENTS. The fund may invest in securities that
have credit or liquidity enhancements or the fund may purchase these types of
enhancements in the secondary market. Such enhancements may be structured as
demand features that permit the fund to sell the instrument at designated times
and prices. These credit and liquidity enhancements may be backed by letters of
credit or other instruments provided by banks or other financial institutions
whose credit standing affects the credit quality of the underlying obligation.
Changes in the credit quality of these financial institutions could cause losses
to the fund. The credit and liquidity enhancements may have conditions that
limit the ability of the fund to use them when the fund wishes to do so.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and SAI means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the fund
has valued the securities and includes, among other things, 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 the board. To the extent the fund invests in illiquid securities,
it may not be able readily to liquidate such investments and may have to sell
other investments if necessary to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of 1933,
as amended ("Securities Act"), and may be sold only in privately negotiated or
other exempted transactions or after a registration statement under the
Securities Act has become effective. Where registration is required, the fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the fund might obtain a less favorable price than prevailed when it
decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the Securities Act. Institutional investors generally will not
seek to sell these instruments to the general public but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A under the Securities Act, which establishes a "safe harbor"
from the registration requirements of that Act for resales of certain securities
to qualified institutional buyers. These markets include automated systems for
the trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
the fund, however, could affect adversely the marketability of such portfolio
securities, and the fund might be unable to dispose of such securities promptly
or at favorable prices.
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The board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, which may include (1) the frequency of trades for the security, (2)
the number of dealers that make quotes for the security, (3) the nature of the
security and how trading is effected (E.G., the time needed to sell the
security, how bids are solicited and the mechanics of transfer) and (4) the
existence of demand features or similar liquidity enhancements. Mitchell
Hutchins monitors the liquidity of restricted securities in the fund's portfolio
and reports periodically on such decisions to the board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
Securities or other obligations subject to repurchase agreements may have
maturities in excess of 13 months. The fund maintains custody of the underlying
obligations prior to their repurchase, either through its regular custodian or
through a special "tri-party" custodian or sub-custodian that maintains separate
accounts for both the fund and its counterparty. Thus, the obligation of the
counterparty to pay the repurchase price on the date agreed to or upon demand
is, in effect, secured by such obligations. Repurchase agreements carry certain
risks not associated with direct investments in securities, including a possible
decline in the market value of the underlying obligations. If their value
becomes less than the repurchase price, plus any agreed-upon additional amount,
the counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the obligations and the price that was paid by the fund upon
acquisition is accrued as interest and included in its net investment income.
Repurchase agreements involving obligations other than U.S. government
securities (such as commercial paper and corporate bonds) may be subject to
special risks and may not have the benefit of certain protections in the event
of the counterparty's insolvency. If the seller or guarantor becomes insolvent,
the fund may suffer delays, costs and possible losses in connection with the
disposition of collateral. The fund intends to enter into repurchase agreements
only with counterparties in transactions believed by Mitchell Hutchins to
present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by the fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to the fund's
limitation on borrowings and may be entered into only with banks and securities
dealers. While a reverse repurchase agreement is outstanding, the fund will
maintain, in a segregated account with its custodian, cash or liquid securities,
marked to market daily, in an amount at least equal to its obligations under the
reverse repurchase agreement. See "The Fund's Investments, Related Risks and
Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the fund might be unable to deliver them when the fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or trustee or receiver may
receive an extension of time to determine whether to enforce that fund's
obligation to repurchase the securities, and the fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. The
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when the fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the fund on a when-issued or delayed delivery basis may
result in the fund's incurring a loss or missing an opportunity to make an
alternative investment.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect the fund's net asset value. When the fund commits to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
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assets to cover the amount of the commitment. See "The Fund's Investments,
Related Risks and Limitations--Segregated Accounts." The fund may sell the right
to acquire the security prior to delivery if Mitchell Hutchins deems it
advantageous to do so, which may result in a gain or loss to the fund.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The fund may invest in
securities of other money market funds, subject to Investment Company Act
limitations, which at present restrict these investments in the aggregate to no
more than 10% of the fund's total assets. The shares of other money market funds
are subject to the management fees and other expenses of those funds. At the
same time, the fund would continue to pay its own management fees and expenses
with respect to all its investments, including shares of other money market
funds. The fund may invest in the securities of other money market funds when
Mitchell Hutchins believes that (1) the amounts to be invested are too small or
are available too late in the day to be effectively invested in other money
market instruments, (2) shares of other money market funds otherwise would
provide a better return than direct investment in other money market instruments
or (3) such investments would enhance the fund's liquidity.
LENDING OF PORTFOLIO SECURITIES. The fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables the fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of the fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. The fund will retain authority to terminate any of its loans at any
time. The fund may pay reasonable fees in connection with a loan and may pay the
borrower or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. The fund will receive amounts
equivalent to any interest, dividends or other distributions on the securities
loaned. The fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the board governing the fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for the fund. The board also has authorized the payment of fees (including
fees calculated as a percentage of invested cash collateral) to PaineWebber for
these services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber acted as lending agent. PaineWebber also has
been approved as a borrower under the fund's securities lending program.
SEGREGATED ACCOUNTS. When the fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for the fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
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The fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
(2) purchase any security if, as a result of that purchase, 25% or more
of the fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities or to
certificates of deposit and bankers' acceptances of domestic branches of U.S.
banks.
The following interpretations apply to, but are not a part of, this
fundamental restriction: (a) domestic and foreign banking will be considered to
be different industries; and (b) asset-backed securities will be grouped in
industries based upon their underlying assets and not treated as constituting a
single, separate industry.
(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
The following interpretation applies to, but is not a part of, this
fundamental restriction: the fund's investments in master notes and similar
instruments will not be considered to be the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without shareholder
approval.
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The fund will not:
(1) 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.
(2) 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.
(3) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger and
except that the fund will not purchase securities of registered open-end
investment companies or registered unit investment trusts in reliance on
Sections 12(d)(1)(F) or 12(d)(1)(G) of the Investment Company Act.
(4) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
ORGANIZATION OF THE FUND; DIRECTORS AND OFFICERS
AND PRINCIPAL HOLDERS OF SECURITIES
The fund was organized on January 20, 1978 as a Maryland corporation. The
fund has authority to issue 20 billion shares of common stock, par value $.001
per share. The fund is governed by a board of directors, which oversees its
operations.
The directors and executive officers of the fund, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS*; AGE POSITION WITH FUND BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------ ----------------------------------------
<S> <C> <C>
Margo N. Alexander**; 52 Director and President Mrs. Alexander is chairman (since March
1999), chief executive officer and a
director of Mitchell Hutchins (since
January 1995), and an executive vice
president and a director of PaineWebber
(since March 1984). Mrs. Alexander is
president and a director or trustee of
32 investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
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NAME AND ADDRESS*; AGE POSITION WITH FUND BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------ ----------------------------------------
<S> <C> <C>
Richard Q. Armstrong; 64 Director Mr. Armstrong is chairman and principal
R.Q.A. Enterprises of R.Q.A. Enterprises (management
One Old Church Road consulting firm) (since April 1991 and
Unit #6 principal occupation since March 1995).
Greenwich, CT 06830 Mr. Armstrong was chairman of the board,
chief executive officer and co-owner
of Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a partner of
The New England Consulting Group
(management consulting firm) (December
1992-September 1993). He was managing
director of LVMH U.S. Corporation (U.S.
subsidiary of the French luxury goods
conglomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
E. Garrett Bewkes, Jr.**; 72 Director and Chairman of Mr. Bewkes is a director of Paine Webber
the Board of Directors Group Inc. ("PW Group") (holding company
of PaineWebber and Mitchell Hutchins).
Prior to December 1995, he was a
consultant to PW Group. Prior to 1988,
he was chairman of the board, president
and chief executive officer of American
Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries
Corporation. Mr. Bewkes is a director or
trustee of 35 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Richard R. Burt; 52 Director Mr. Burt is chairman of IEP Advisors,
1275 Pennsylvania Ave, N.W. Inc. (international investments and
Washington, DC 20004 consulting firm) (since March 1994) and
a partner of McKinsey & Company
(management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International
Co. (publishing), Homestake Mining
Corp., Powerhouse Technologies Inc. and
Weirton Steel Corp. He was the chief
negotiator in the Strategic Arms
Reduction Talks with the former Soviet
Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
9
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH FUND BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------ ----------------------------------------
<S> <C> <C>
Mary C. Farrell**; 49 Director Ms. Farrell is a managing director,
senior investment strategist and member
of the Investment Policy Committee of
PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a member of
the Financial Women's Association and
Women's Economic Roundtable and appears
as a regular panelist on Wall $treet
Week with Louis Rukeyser. She also
serves on the Board of Overseers of New
York University's Stern School of
Business. Ms. Farrell is a director or
trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Meyer Feldberg; 57 Director Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior
New York, NY 10027 to 1989, he was president of the
Illinois Institute of Technology. Dean
Feldberg is also a director of
Primedia, Inc., Federated Department
Stores, Inc. and Revlon, Inc. Dean
Feldberg is a director or trustee of 34
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
George W. Gowen; 69 Director Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, NY 10017 Prior to May 1994, he was a partner
in the law firm of Fryer, Ross & Gowen.
Mr. Gowen is a director or trustee of 34
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
10
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH FUND BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------ ----------------------------------------
<S> <C> <C>
Frederic V. Malek; 62 Director Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank). From January
Suite 350 1992 to November 1992, he was campaign
Washington, DC 20004 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.). Prior to 1989, he was employed by
the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice president
and president of Marriott Hotels and
Resorts. Mr. Malek is also a director of
American Management Systems, Inc.
(management consulting and computer
related services), Automatic Data
Processing, Inc., CB Richard Ellis, Inc.
(real estate services), FPL Group, Inc.
(electric services), Global Vacation
Group (packaged vacations), HCR/Manor
Care, Inc. (health care) and Northwest
Airlines Inc. Mr. Malek is a director or
trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Carl W. Schafer; 63 Director Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation
Princeton, NJ 08542 supporting mainly oceanographic
exploration and research). He is a
director of Base Ten Systems, Inc.
(software), Roadway Express, Inc.
(trucking), The Guardian Group of Mutual
Funds, the Harding, Loevner Funds, Evans
Systems, Inc. (motor fuels, convenience
store and diversified company),
Electronic Clearing House, Inc.
(financial transactions processing),
Frontier Oil Corporation and
Nutraceutix, Inc. (biotechnology
company). Prior to January 1993, he was
chairman of the Investment Advisory
Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or
trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
11
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH FUND BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------ ----------------------------------------
<S> <C> <C>
Brian M. Storms;** 44 Trustee Mr. Storms is president and chief
operating officer of Mitchell Hutchins
(since March 1999). Prior to March 1999,
he was president of Prudential
Investments (1996-1999). Prior to
joining Prudential, he was a managing
director at Fidelity Investments. Mr.
Storms is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Prior
to September 1997, he was an audit
manager in the financial services
practice of Ernst & Young LLP. Mr. Lee
is a vice president and assistant
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as an
investment adviser.
Kevin J. Mahoney; 33 Vice President and Mr. Mahoney is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance department of Mitchell
Hutchins. From August 1996 through March
1999, he was the manager of the mutual
fund internal control group of Salomon
Smith Barney. Prior to August 1996, he
was an associate and assistant treasurer
of BlackRock Financial Management L.P.
Mr. Mahoney is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and
chief investment officer--fixed income
of Mitchell Hutchins. Prior to December
1994, he was director of fixed income
investments of IBM Corporation. Mr.
McCauley is a vice president of 22
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Ms.
Moran is a vice president and assistant
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
12
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH FUND BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------ ----------------------------------------
<S> <C> <C>
Dianne E. O'Donnell; 47 Vice President and Secretary Ms. O'Donnell is a senior vice president
and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice
president and secretary of 31 investment
companies and a vice president and
assistant secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president
and director of operations and control
for Mitchell Hutchins. Mr. Polito is a
vice president of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Susan Ryan; 39 Vice President Ms. Ryan is a senior vice president and
portfolio manager of Mitchell Hutchins
and has been with Mitchell Hutchins
since 1982. Ms. Ryan is a vice president
of five investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins
(since May 1994) and a senior vice
president of PaineWebber (since July
1995). Ms. Schonfeld is a vice president
of 31 investment companies and a vice
president and secretary of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Paul H. Schubert; 36 Vice President and Treasurer Mr. Schubert is a senior vice president
and director of the mutual fund finance
department of Mitchell Hutchins. Mr.
Schubert is a vice president and
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president
Assistant Treasurer and a manager of the mutual fund
finance department of Mitchell Hutchins.
Prior to February 1995, he was a manager
of the mutual fund finance division of
Kidder Peabody Asset Management, Inc.
Mr. Taglialatela is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
13
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH FUND BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------ ----------------------------------------
<S> <C> <C>
Keith A. Weller; 37 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 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
- -------------
* 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, Ms. Farrell and Mr. Storms are "interested
persons" of the fund as defined in the Investment Company Act by virtue of
their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
The fund pays each board member who is not an "interested person" of the
fund $1,000 annually and up to $150 for each board meeting and each separate
meeting of a board committee. Each chairman of the audit and contract review
committees of individual funds within the PaineWebber fund complex receives
additional compensation, aggregating $15,000 annually, from the relevant funds.
All board members are reimbursed for any expenses incurred in attending
meetings. Board members and officers of the fund own in the aggregate less than
1% of the outstanding shares of the fund. Because PaineWebber and Mitchell
Hutchins perform substantially all the services necessary for the operation of
the fund, the fund requires no employees. No officer, director or employee of
Mitchell Hutchins or PaineWebber presently receives any compensation from the
fund for acting as a board member or officer.
14
<PAGE>
The table below includes certain information relating to the compensation
of the current board members who held office with the fund during the fiscal
year ended March 31, 1999 and the compensation of those board members from all
PaineWebber funds during the 1998 calendar year.
COMPENSATION TABLE+
AGGREGATE TOTAL COMPENSATION FROM
COMPENSATION FROM THE FUND AND THE FUND
NAME OF PERSON, POSITION THE FUND* COMPLEX**
------------------------ ----------------- -----------------------
Richard Q. Armstrong,
Director.................... $ 1,935 $ 101,372
Richard R. Burt,
Director.................... 1,905 101,372
Meyer Feldberg,
Director.................... 2,098 116,222
George W. Gowen,
Director.................... 2,133 108,272
Frederic V. Malek,
Director.................... 1,935 101,372
Carl W. Schafer,
Director.................... 1,935 101,372
- --------------------
+ Only independent board members are compensated by the funds and identified
above; board members who are "interested persons," as defined by the
Investment Company Act, do not receive compensation from the funds.
* Represents fees paid to each board member for the fiscal year ended March 31,
1999.
** Represents total compensation paid during the calendar year ended December
31, 1998, to each board member by 31 investment companies (33 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS OF SECURITIES
PaineWebber, 1285 Avenue of the Americas, New York, New York 10019, owned
of record all of the fund's shares as of June 30, 1999. None of the persons on
whose behalf those shares were held was known by the fund to own beneficially 5%
or more of those shares.
15
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION AND
DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. PaineWebber acts as the fund's
investment adviser and administrator pursuant to a contract with the Fund dated
July 23, 1987 ("PaineWebber Contract"). Under the PaineWebber Contract, the fund
pays PaineWebber an annual fee, computed daily and paid monthly, according to
the following schedule:
AVERAGE DAILY NET ASSETS ANNUAL RATE
------------------------ -----------
Up to $500 million..................................... 0.500%
In excess of $500 million up to $1.0 billion........... 0.425
In excess of $1.0 billion up to $1.5 billion........... 0.390
In excess of $1.5 billion up to $2.0 billion........... 0.380
In excess of $2.0 billion up to $2.5 billion........... 0.350
In excess of $2.5 billion up to $3.5 billion........... 0.345
In excess of $3.5 billion up to $4.0 billion........... 0.325
In excess of $4.0 billion up to $4.5 billion........... 0.315
In excess of $4.5 billion up to $5.0 billion........... 0.300
In excess of $5.0 billion up to $5.5 billion........... 0.290
In excess of $5.5 billion.............................. 0.280
Services provided by PaineWebber under the PaineWebber Contract, some of
which may be delegated to Mitchell Hutchins, as discussed below, include the
provision of a continuous investment program for the fund and supervision of all
matters relating to the operation of the fund. Under the PaineWebber Contract,
PaineWebber is also obligated to distribute the fund's shares on an agency, or
"best efforts," basis under which the fund only issues such shares as are
actually sold. Shares of the fund are offered continuously. Under the
PaineWebber Contract, during the fiscal years ended March 31, 1999, 1998 and
1997, the fund paid (or accrued) to PaineWebber investment advisory and
administrative fees in the amount of $20,847,408, $19,457,916 and $19,013,158,
respectively. During the fiscal year ended March 31, 1998, the fund did not pay
fees to PaineWebber for its services as lending agent because the fund did not
engage in any securities lending activities.
Under a contract with PaineWebber dated July 23, 1987 ("Sub-Advisory
Contract"), Mitchell Hutchins is responsible for the actual investment
management of the fund's assets, including the responsibility for making
decisions and placing orders to buy, sell or hold particular securities. Under
the Sub-Advisory Contract, PaineWebber (not the fund) pays Mitchell Hutchins an
annual fee, computed daily and paid monthly, according to the following
schedule:
AVERAGE DAILY NET ASSETS ANNUAL RATE
------------------------ -----------
Up to $500 million..................................... 0.0900%
In excess of $500 million up to $1.0 billion........... 0.0500
In excess of $1.0 billion up to $1.5 billion........... 0.0400
In excess of $1.5 billion up to $2.0 billion........... 0.0300
In excess of $2.0 billion up to $2.5 billion........... 0.0250
In excess of $2.5 billion up to $3.5 billion........... 0.0250
In excess of $3.5 billion up to $4.5 billion........... 0.0200
In excess of $4.5 billion up to $5.5 billion........... 0.0125
In excess of $5.5 billion.............................. 0.0100
Under the Sub-Advisory Contract, during the fiscal years ended March 31,
1999, 1998 and 1997, PaineWebber paid (or accrued) to Mitchell Hutchins fees in
the amount of $1,786,515, $1,734,233 and $1,715,007, respectively.
16
<PAGE>
Under a contract with PaineWebber dated May 24, 1988 ("Sub-Administration
Contract"), Mitchell Hutchins also serves as the fund's sub-administrator. Under
the Sub-Administration Contract, PaineWebber (not the fund) pays Mitchell
Hutchins 20% of the fees received by PaineWebber under the PaineWebber Contract,
such amount to be paid monthly and reduced by any amount paid by PaineWebber in
each such month under the Sub-Advisory Contract. Under the Sub-Administration
Contract, during the fiscal years ended March 31, 1999, 1998 and 1997,
PaineWebber paid (or accrued) to Mitchell Hutchins fees in the amount of
$2,382,967, $2,157,350 and $2,087,625, respectively.
Each of the advisory, sub-advisory and sub-administration contracts noted
above provides that PaineWebber or Mitchell Hutchins, as the case may be, shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the fund in connection with the performance of the contract, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
part of PaineWebber or Mitchell Hutchins, in the performance of its duties or
from reckless disregard of its duties and obligations thereunder. The
PaineWebber Contract also provides that PaineWebber shall not be liable for
losses arising out of the receipt by PaineWebber of inadequate consideration in
connection with an order to purchase fund shares whether in the form of a
fraudulent check, draft or wire; a check returned for insufficient funds; or any
other such inadequate consideration (hereinafter "check losses"), except under
the circumstances noted above, but the fund shall not be liable for check losses
resulting from negligence on the part of PaineWebber. Each of the advisory,
sub-advisory and sub-administration contracts is terminable by vote of the
fund's board or by the holders of a majority of the outstanding voting
securities of the fund at any time without penalty, on 60 days' written notice
to PaineWebber or Mitchell Hutchins, as the case may be. Each of the advisory
and sub-advisory contracts may also be terminated by PaineWebber or Mitchell
Hutchins, as the case may be, on 90 days' written notice to the fund. The
sub-administration contract may also be terminated by Mitchell Hutchins on 60
days' written notice to the fund. Each of the advisory, sub-advisory and
sub-administration contracts terminates automatically upon its assignment.
Under the terms of the PaineWebber Contract, the fund bears all expenses
incurred in its operation that are not specifically assumed by PaineWebber.
Expenses borne by the fund include the following: (a) the cost (including
brokerage commissions, if any) of securities purchased or sold by the fund or
any losses incurred in connection therewith; (b) fees payable to and expenses
incurred on behalf of the fund by PaineWebber; (c) filing fees and expenses
relating to the registration and qualification of the fund's shares under
federal or state securities laws and maintaining such registrations and
qualifications; (d) fees and salaries payable to the fund's directors and
officers who are not officers or employees of PaineWebber or interested persons
(as defined in the Investment Company Act) of any investment adviser or
underwriter of the fund ("Independent Directors"); (e) taxes (including any
income or franchise taxes) and governmental fees; (f) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (g) any
costs, expenses or losses arising out of any liability of or claim for damage or
other relief asserted against the fund for violation of any law; (h) legal,
accounting and auditing expenses, including legal fees of special counsel for
the Independent Directors; (i) charges of custodians, transfer agents and other
agents; (j) costs of preparing share certificates; (k) expenses of setting in
type and printing prospectuses, statements of additional information and
supplements thereto for existing shareholders, reports and statements to
shareholders and proxy materials; (l) any extraordinary expenses (including fees
and disbursements of counsel) incurred by the fund; and (m) fees and other
expenses incurred in connection with membership in investment company
organizations.
Prior to August 1, 1997, PaineWebber provided certain services to the fund
not otherwise provided by its transfer agent. Pursuant to a separate agreement
between PaineWebber and the fund relating to those services, PaineWebber earned
(or accrued) $1,002,742 for the period April 1, 1997 to July 31, 1997; and
$2,893,343 for the fiscal year ended March 31, 1997. Effective August 1, 1997,
PFPC, the fund's transfer agent, (not the fund) pays PaineWebber for certain
transfer agency related services that PFPC has delegated to PaineWebber.
17
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
June 30, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
Domestic (excluding Money Market)............. $ 8,339.4
Global........................................ 4,552.9
Equity/Balanced............................... 7,961.5
Fixed Income (excluding Money Market)......... 4,930.8
Taxable Fixed Income.................... 3,401.3
Tax-Free Fixed Income................... 1,529.5
Money Market Funds............................ 34,337.7
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber 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.
PORTFOLIO TRANSACTIONS
The fund purchases portfolio securities from dealers and underwriters as
well as from issuers. Securities are usually traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. Prices
paid to dealers in principal transactions generally include a "spread," which is
the difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. When securities are purchased directly
from an issuer, no commissions or discounts are paid. When securities are
purchased in underwritten offerings, they include a fixed amount of compensation
to the underwriter.
The Sub-Advisory Contract authorizes Mitchell Hutchins (with the approval
of the board) to select brokers and dealers to execute purchases and sales of
the fund's portfolio securities. It directs Mitchell Hutchins to use its best
efforts to obtain the best available price and most favorable execution with
respect to all transactions for the fund. To the extent that the execution and
price offered by more than one dealer are comparable, Mitchell Hutchins may, in
its discretion, effect transactions in portfolio securities with dealers who
provide the fund or Mitchell Hutchins with research, analysis, advice and
similar services. 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 had no services been provided by the executing
dealer. Agency transactions in over-the-counter securities 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 a requirement that Mitchell Hutchins obtain multiple quotes
from dealers before executing the transaction on an agency basis. 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 that could be purchased for hard dollars.
Research services furnished by the dealers with which the fund effects
securities transactions may be used by Mitchell Hutchins in advising other funds
or accounts and, conversely, research services furnished to Mitchell Hutchins in
connection with other funds or accounts that Mitchell Hutchins advises may be
used in advising the fund. Information and research received from dealers will
be in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Sub-Advisory Contract.
18
<PAGE>
During the last three fiscal years, the fund paid no brokerage
commissions. Therefore, the fund has not allocated any brokerage transactions
for research, analysis, advice and similar services.
Investment decisions for the fund 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 the fund and one or more of such accounts.
In such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the fund and such other
account(s) as to amount 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 fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the fund.
As of March 31, 1999, the fund owned securities issued by the following
companies which are regular broker-dealers for the fund:
<TABLE>
<CAPTION>
ISSUER TYPE OF SECURITY VALUE
------ ---------------- -----
<S> <C> <C>
Bear Stearns Companies Incorporated short-term corporate obligation $ 80,300,000
Bear Stearns Companies Incorporated commercial paper 24,837,257
Credit Suisse First Boston Incorporated short-term corporate obligation 53,400,000
Goldman Sachs Group L.P. commercial paper 50,000,000
Merrill Lynch & Company Incorporated short-term corporate obligation 105,002,062
Morgan Stanley, Dean Witter & Company commercial paper 124,661,806
</TABLE>
ADDITIONAL INFORMATION REGARDING REDEMPTIONS;
SERVICE ORGANIZATIONS
ADDITIONAL REDEMPTION INFORMATION. The fund may suspend redemption
privileges or postpone the date of payment during any period (1) when the New
York Stock Exchange is closed or trading on the New York Stock Exchange is
restricted as determined by the SEC, (2) when an emergency exists, as defined by
the SEC, that makes it not reasonably practicable for the fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3) as
the SEC may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of the fund's portfolio at the
time; although the fund attempts to maintain a constant net asset value of $1.00
per share.
Under normal circumstances, the fund will redeem shares when so requested
by a shareholder's broker-dealer other than PaineWebber by telegram or telephone
to PaineWebber. Such a redemption order will be executed at the net asset value
next determined after the order is received by PaineWebber. Redemptions of fund
shares effected through a broker-dealer other than PaineWebber may be subject to
a service charge by that broker-dealer.
SERVICE ORGANIZATIONS. The fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form" in accordance with the policies of those service organizations The
fund will be deemed to have received these purchase and redemption orders when a
service organization or its agent accepts them. Like all customer orders, these
orders will be priced based on the fund's net asset value next computed after
receipt of the order by the service organizations or their agents. Service
organizations may include retirement plan service providers who aggregate
purchase and redemption instructions received from numerous retirement plans or
plan participants.
VALUATION OF SHARES
The fund uses its best efforts to maintain its net asset value at $1.00
per share. The fund's net asset value per share is determined by State Street
Bank and Trust Company ("State Street") as of 2:00 p.m., Eastern time, on each
Business Day. As defined in the Prospectus, "Business Day" means any day on
which State Street's Boston offices, and the New York City offices of
19
<PAGE>
PaineWebber and PaineWebber's bank, The Bank of New York, are all open for
business. One or more of these institutions will be closed on the observance of
the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veteran's Day, Thanksgiving Day and Christmas Day.
The fund values its portfolio securities in accordance with the amortized
cost method of valuation under Rule 2a-7 ("Rule") under the Investment Company
Act. To use amortized cost to value its portfolio securities, the fund must
adhere to certain conditions under the Rule relating to its investments, some of
which are discussed in this SAI. Amortized cost is an approximation of market
value of an instrument, whereby the difference between its acquisition cost and
value at maturity is amortized on a straight-line basis over the remaining life
of the instrument. The effect of changes in the market value of a security as a
result of fluctuating interest rates is not taken into account, and thus the
amortized cost method of valuation may result in the value of a security being
higher or lower than its actual market value. If a large number of redemptions
take place at a time when interest rates have increased, the fund might have to
sell portfolio securities prior to maturity and at a price that might not be
desirable.
The board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share, which include a review of the
extent of any deviation of net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. If that deviation exceeds
1/2 of 1% for the fund, the board will promptly consider whether any action
should be initiated to eliminate or reduce material dilution or other unfair
results to shareholders. Such action may include redeeming shares in kind,
selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will not purchase any instrument
having, or deemed to have, a remaining maturity of more than 397 days, will
limit portfolio investments, including repurchase agreements, to those U.S.
dollar-denominated instruments that are of high quality under the Rule and that
Mitchell Hutchins, acting pursuant to the procedures, determines present minimal
credit risks, and will comply with certain reporting and recordkeeping
procedures. There is no assurance that constant net asset value per share will
be maintained. If amortized cost ceases to represent fair value per share, the
board will take appropriate action.
In determining the approximate market value of portfolio investments, the
fund may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula method not been used. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board.
PERFORMANCE INFORMATION
The fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. Investment return will fluctuate.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in the fund's Performance Advertisements are
calculated according to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase fund
shares
T = average annual total return of fund shares 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
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period. All dividends are assumed to have been reinvested at net asset value.
The fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends. 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 fund's shares
outstanding for the periods indicated. All returns for periods of more than one
year are expressed as an average annual return.
Year ended March 31, 1999:
Standardized Return................. 4.98%
Five Years ended March 31, 1999:
Standardized Return................. 4.98%
Ten Years ended March 31, 1999:
Standardized Return................. 5.25%
CALCULATION OF YIELD. The fund computes its yield and effective yield
quotations using standardized methods required by the SEC. The fund from time to
time advertises (1) its current yield based on a recently ended seven-day
period, computed by determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account having a balance of one share
at the beginning of the period, subtracting a hypothetical charge reflecting
deductions from that shareholder account, dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return and then multiplying the base period return by (365/7), with the
resulting yield figure carried to at least the nearest hundredth of one percent;
and (2) its effective yield based on the same seven-day period by compounding
the base period return by adding 1, raising the sum to a power equal to (365/7)
and subtracting 1 from the result, according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1
The fund may also advertise other performance data, which may consist of
the annual or cumulative return (including net short-term capital gain, if any)
earned on a hypothetical investment in the fund since it began operations or for
shorter periods. This return data may or may not assume reinvestment of
dividends (compounding).
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of the fund fluctuates, it cannot be compared
with yields on savings accounts or other investment alternatives that provide an
agreed to or guaranteed fixed yield for a stated period of time. However, yield
information may be useful to an investor considering temporary investments in
money market instruments. In comparing the yield of one money market fund to
another, consideration should be given to each fund's investment policies,
including the types of investments made, the average maturity of the portfolio
securities and whether there are any special account charges that may reduce the
yield.
The fund's yield and effective yield for the seven-day period ended March
31, 1999 were 4.39% and 4.49%, respectively.
OTHER INFORMATION. The fund's performance data quoted in advertising and
other promotional materials ("Performance Advertisements") represent past
performance and are not intended to predict or indicate future results. The
return on an investment in the fund will fluctuate. In Performance
Advertisements, the fund may compare its yield with data published by Lipper
Analytical Services, Inc. for money funds ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), IBC Financial Data, Inc. ("IBC"), Wiesenberger
Investment Companies Service ("Wiesenberger") or Investment Company Data Inc.
("ICD"), or with the performance of recognized stock and other indexes,
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<PAGE>
including the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Morgan Stanley Capital International World Index, the
Lehman Brothers Treasury Bond Index, the Lehman Brothers Government/Corporate
Bond Index, the Salomon Brothers Government Bond Index and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. The fund
also may refer in such materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper,
CDA, IBC, Wiesenberger or ICD. Performance Advertisements also may refer to
discussions of the fund and comparative mutual fund data and ratings reported in
independent periodicals, including THE WALL STREET JOURNAL, MONEY MAGAZINE,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES,
THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons
in Performance Advertisements may be in graphic form.
The fund may also compare its performance with the performance of bank
certificates of deposit ("CDs") as measured by the CDA Certificate of Deposit
Index and the Bank Rate Monitor National Index and the average of yields of CDs
of major banks published by Banxquotes(R) Money Markets. In comparing the fund's
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. Bank accounts are insured in whole or in part by an agency of
the U.S. government and may offer a fixed rate of return. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon will fluctuate.
While the fund seeks to maintain a stable net asset value of $1.00 per share,
there can be no assurance that it will be able to do so.
The fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends on the fund's shares are reinvested, any future income of the
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 the fund investment would increase more quickly than if dividends
had been paid in cash. The fund may also make available to shareholders a daily
accrual factor or "mil rate" representing dividends accrued to shareholder
accounts on a given day or days. Certain shareholders may find that this
information facilitates accounting or recordkeeping.
TAXES
To continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code, the fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gains, if any) and must meet several additional requirements. Among
these requirements are the following: (1) the fund must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities and certain other income; (2) at the close of each quarter of the
fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the fund's total assets;
and (3) at the close of each quarter of the fund's taxable year, not more than
25% of the value of its total assets may be invested in securities (other than
U.S. government securities or the securities of other RICs) of any one issuer.
If the fund failed to qualify for treatment as a RIC for any taxable year, (a)
it would be taxed as an ordinary corporation on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (b) the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the fund's earnings and
profits. In addition, the fund could be required to recognize unrealized gains,
pay substantial taxes and interest, and make substantial distributions before
requalifying for RIC treatment.
22
<PAGE>
OTHER INFORMATION
VOTING RIGHTS. Shareholders of the fund are entitled to one vote for each
full share held and fractional votes for fractional shares held. Voting rights
are not cumulative, and as a result the holders of more than 50% of all the
shares of the fund may elect all its board members.
The fund does not hold annual meetings. There normally will be no meetings
of shareholders to elect directors unless fewer than a majority of the directors
holding office have been elected by shareholders. The directors are required to
call a meeting of shareholders when requested in writing to do so by the
shareholders of record holding at least 25% of the fund's outstanding shares.
Each share of the fund has equal voting, dividend and liquidation rights.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for the fund.
PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the fund.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for the fund.
FINANCIAL STATEMENTS
The fund's Annual Report to Shareholders for its last fiscal year ended March
31, 1999 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated herein by this reference.
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<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION. THE FUND AND ITS
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS AND THIS
STATEMENT OF ADDITIONAL INFORMATION IS
NOT AN OFFER TO SELL SHARES OF THE FUND
IN ANY JURISDICTION WHERE THE FUND OR
ITS DISTRIBUTOR MAY NOT LAWFULLY SELL PaineWebber
THOSE SHARES. Cashfund, Inc.
-----------
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Statement of Additional Information
August 1, 1999
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PAINEWEBBER
(COPYRIGHT)1999 PaineWebber Incorporated
