<PAGE>
PAINEWEBBER/
KIDDER, PEABODY
PREMIUM ACCOUNT
FUND
ANNUAL REPORT
March 31, 1995
<PAGE>
- --------------------------------------------------------------------------------
May 15, 1995
Dear Shareholder,
During the year ended March 31, 1995, the United States economy exhibited steady
growth. In a series of monetary tightenings that began early in 1994, the
Federal Reserve Board raised the benchmark Federal Funds rate, the rate banks
charge each other for overnight borrowing, six times in 1994 for a total
increase of 2.5%. These increases were implemented to moderate economic
expansion and forestall inflation, and were followed by another 0.5% increase on
February 1, 1995, bringing the Federal Funds rate to 6.0%.
Productivity gains in the workplace and the increased competitiveness of United
States corporations in the global marketplace contributed to the low inflation
and steady growth which characterized the economy during the year ended March
31, 1995. Unemployment continued to decline, personal income exhibited an upward
trend and measures of consumer confidence continued to register positive
readings. However, side effects of higher interest rates, including a decline in
single family housing starts, crept into economic data during the latter half of
1994. As we move into the second quarter of 1995, the economy remains
healthy -- although it is not yet clear what the full impact of higher interest
rates will be on economic growth.
At a special meeting of shareholders that took place on April 13, 1995,
shareholders approved the appointment of PaineWebber Incorporated
('PaineWebber') as investment adviser and administrator of the
PaineWebber/ Kidder, Peabody Premium Account Fund (the 'Fund') and Mitchell
Hutchins Asset Management Inc. ('Mitchell Hutchins') as the Fund's sub-adviser
and sub-administrator. Mitchell Hutchins, a wholly owned investment management
subsidiary of PaineWebber, provides investment advisory and portfolio management
services to individuals, pension and endowment funds, trusts and institutions.
As of March 31, 1995, Mitchell Hutchins was adviser or sub-adviser to 42
investment companies with 77 separate portfolios and aggregate assets of
approximately $27 billion.
Susan P. Messina and Kris Dorr are jointly responsible for the day-to-day
management of the Fund. Mrs. Messina is a senior vice president of Mitchell
Hutchins responsible for overseeing taxable fixed income money market funds. Ms.
Dorr is a portfolio manager at Mitchell Hutchins.
PORTFOLIO REVIEW
As of March 31, 1995, the Fund offered a seven-day annualized yield of 5.41% and
an effective 7-day annualized yield of 5.55%. The Fund maintained a weighted
average maturity of 34 days as of March 31, 1995. During the year ended March
31, 1995, the Federal Reserve's credit tightening policy caused interest rates
on money market instruments to increase. For example, the Federal Funds rate for
short-term borrowing was approximately 3.50% on March 31, 1994; as of March 31,
1995 it had increased to 6.0%.
During the year ended March 31, 1995, the Fund's performance was enhanced by the
Federal Funds rate increases. Rising interest rates translated into higher
yields for the portfolio. During the
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<PAGE>
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period, the Fund continuously reduced its weighted average maturity. A shorter
weighted average maturity benefits the Fund by enabling it to have more cash
available to invest as rates trend upward. Going forward, the Fund will maintain
a neutral weighted average maturity as short-term rates find stability during
uncretain economic times. Investment decisions in the portfolio will continue to
be dominated by credit quality and liquidity. Although we are interested in
maintaining higher yields, we will not do so by sacrificing the Fund's very
strict emphasis on security, quality and liquidity.
We value you as a shareholder and as a client, and thank you for your continued
support. We welcome any comments or questions you may have.
Sincerely,
<TABLE>
<S> <C>
FRANK P.L. MINARD SUSAN P. MESSINA
FRANK P.L. MINARD SUSAN P. MESSINA
Chairman, Senior Vice President,
Mitchell Hutchins Asset Management Inc. Taxable Money Funds
Mitchell Hutchins Asset Management Inc.
KRIS DORR
KRIS DORR
Portfolio Manager,
PaineWebber/Kidder, Peabody Premium Account Fund
</TABLE>
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2
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Statement of Net Assets
March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BANK NOTES -- 3.10%
- ------------------------------------------------------------------------------------------------------------------------
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
Domestic -- 3.10%
$ 5,000 Banc One (Milwaukee), N.A............................. 02/09/96 7.25% $ 5,007,696
15,000 Fifth Third Bank (Cincinnati) N.A..................... 04/27/95 6.02 15,000,216
------------
TOTAL BANK NOTES (cost -- $20,007,912)............................ 20,007,912
------------
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 93.17%
- ------------------------------------------------------------------------------------------------------------------------
Aerospace/Defense -- 1.55%
10,000 Raytheon Co........................................... 04/04/95 6.00 9,995,000
------------
Agriculture -- 2.32%
15,000 Cargill Inc........................................... 04/10/95 to 04/11/95 5.94 to 5.96 14,976,872
------------
Asset-Backed -- 9.53%
30,800 Asset Securitization Cooperative Corp. ............... 04/05/95 to 05/08/95 6.02 to 6.05 30,693,210
7,969 Delaware Funding Corp................................. 04/07/95 6.03 7,960,991
10,000 New Center Asset Trust................................ 04/19/95 6.00 9,970,000
13,000 Preferred Receivables Funding Corp.................... 05/09/95 6.00 12,917,666
------------
61,541,867
------------
Auto/Truck -- 4.11%
17,000 Ford Motor Credit Co. ................................ 04/10/95 to 05/04/95 6.00 to 6.04 16,934,430
10,000 Toyota Motor Credit Corp.............................. 12/08/95 6.19 9,568,419
------------
26,502,849
------------
Banking -- 5.39%
20,000 ABN Amro North American Finance, Inc.................. 04/21/95 6.00 19,933,333
15,000 Nomura Holding America, Inc........................... 05/24/95 6.06 14,866,175
------------
34,799,508
------------
Broker/Dealer -- 8.48%
10,000 Bear Stearns Cos., Inc................................ 06/05/95 6.13 9,889,320
20,000 Merrill Lynch & Co., Inc. ............................ 04/03/95 to 04/18/95 5.98 to 6.05 19,968,400
25,000 Morgan Stanley Group, Inc. ........................... 04/06/95 to 05/22/95 6.00 to 6.03 24,902,075
------------
54,759,795
------------
Chemicals -- 1.54%
10,000 E.I. duPont de Nemours & Co., Inc. ................... 04/26/95 5.96 9,958,611
------------
Conglomerate -- 2.76%
17,900 Minnesota Mining & Manufacturing Co................... 04/20/95 5.93 17,843,978
------------
Drugs & Healthcare -- 6.22%
25,000 Lilly (Eli) & Co. .................................... 04/17/95 5.95 24,933,889
5,300 Miles Inc............................................. 04/25/95 5.98 5,278,871
10,000 Warner Lambert Co. ................................... 05/12/95 6.00 9,931,667
------------
40,144,427
------------
Electronics -- 9.02%
10,000 Emerson Electric Co................................... 04/26/95 5.97 9,958,541
10,000 Hewlett Packard Co. .................................. 04/27/95 5.97 9,956,883
15,000 Siemens Corp. ........................................ 06/01/95 6.09 14,845,213
23,522 Vermont American Corp................................. 04/10/95 to 04/28/95 5.96 to 5.97 23,457,077
------------
58,217,714
------------
</TABLE>
3
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Statement of Net Assets -- (concluded)
March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMERCIAL PAPER -- (CONCLUDED)
- ------------------------------------------------------------------------------------------------------------------------
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
Energy -- 3.87%
$25,000 Koch Industries, Inc. ................................ 04/03/95 6.32% $ 24,991,222
------------
Finance-Conduit -- 7.71%
25,000 Metlife Funding Inc................................... 05/15/95 to 05/30/95 6.00 to 6.02 24,785,548
25,000 UBS Finance (Delaware) Inc............................ 04/03/95 6.40 24,991,111
------------
49,776,659
------------
Finance-Diversified -- 2.31%
15,000 Sanwa Business Credit Corp............................ 05/02/95 to 05/15/95 6.03 to 6.04 14,900,215
------------
Finance-Subsidiary -- 1.53%
10,000 Pitney Bowes Credit Corp. ............................ 06/09/95 6.08 9,883,466
------------
Food & Beverage -- 8.82%
20,000 Campbell Soup Co. .................................... 04/25/95 to 05/23/95 5.98 to 6.02 19,873,178
10,000 Coca Cola Co.......................................... 04/25/95 5.95 9,960,334
17,812 Heinz (H.J.) Co. ..................................... 04/04/95 to 05/04/95 5.97 to 6.02 17,123,672
10,000 Kellogg Co............................................ 04/11/95 5.95 9,983,472
------------
56,940,656
------------
General Trade -- 0.92%
6,000 Mitsubishi International Corp......................... 06/06/95 to 06/08/95 6.18 5,930,990
------------
Insurance -- 2.32%
15,000 USAA Capital Corp..................................... 04/10/95 5.95 14,977,688
------------
Insurance-Property/Casualty -- 3.85%
25,000 A.I.G. Funding Inc.................................... 05/02/95 to 05/15/95 5.99 to 6.00 24,838,420
------------
Miscellaneous -- 1.69%
11,000 Beta Finance Inc...................................... 06/07/95 6.10 10,875,119
------------
Printing, Publishing -- 1.53%
10,000 Reed Elsevier (USA) Inc............................... 05/30/95 6.08 9,900,355
------------
Retail Merchandise -- 0.77%
5,000 Toys 'R' Us, Inc. .................................... 05/10/95 6.01 4,967,446
------------
Telecommunications -- 3.86%
15,000 Ameritech Corp........................................ 05/02/95 6.16 14,920,434
10,000 BellSouth Telecommunications.......................... 04/13/95 5.93 9,980,234
------------
24,900,668
------------
Utility-Telephone -- 3.07%
10,000 American Telephone & Telegraph Co. ................... 06/02/95 6.07 9,895,461
10,000 Southwestern Bell Capital Corp........................ 05/15/95 6.03 9,926,300
------------
19,821,761
------------
TOTAL COMMERCIAL PAPER (cost -- $601,445,286)..................... 601,445,286
------------
</TABLE>
4
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT -- 3.91%
- ------------------------------------------------------------------------------------------------------------------------
Principal
Amount Maturity Interest
(000) Date Rate Value
- --------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
$25,212 Repurchase Agreement dated 03/31/95, with Daiwa
Securities (America) Inc., collateralized by
$21,770,000 U.S. Treasury Bonds, 9.25% due 02/15/16;
proceeds: $25,225,089
(cost -- $25,212,000)................................. 04/03/95 6.23 % $ 25,212,000
------------
TOTAL INVESTMENTS (cost -- $646,665,198, which approximates
cost for federal income tax purposes) -- 100.18%................ 646,665,198
Liabilities in excess of other assets -- (0.18)%.................. (1,141,877)
------------
NET ASSETS (applicable to 645,523,321 shares of beneficial
interest at $1.00 per share) -- 100.00%......................... $645,523,321
------------
------------
</TABLE>
Weighted average maturity (unaudited) -- 34 days
See accompanying notes to financial statements
5
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest....................................................................................... $38,424,753
-----------
EXPENSES:
Investment advisory and administration fees.................................................... 3,949,481
Distribution fees.............................................................................. 947,875
Transfer agency and service fees............................................................... 207,041
State registration............................................................................. 129,319
Custody and accounting......................................................................... 109,200
Legal and audit................................................................................ 70,509
Reports and notices to shareholders............................................................ 42,711
Trustees' fees and expenses.................................................................... 32,969
Other expenses................................................................................. 39,070
-----------
5,528,175
-----------
NET INVESTMENT INCOME.............................................................................. 32,896,578
NET REALIZED LOSSES FROM INVESTMENT TRANSACTIONS................................................... (1,663,026)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................... $31,233,552
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................................................... $ 32,896,578 $ 21,034,650
Net realized losses from investment transactions........................ (1,663,026 ) --
-------------- --------------
Net increase in net assets resulting from operations.................... 31,233,552 21,034,650
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................... (32,896,578 ) (21,034,650)
Net realized capital gains.............................................. (1,160 ) --
-------------- --------------
(32,897,738 ) (21,034,650)
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
BENEFICIAL INTEREST TRANSACTIONS.......................................... (230,482,667 ) 35,652,202
CONTRIBUTION TO CAPITAL FROM PREDECESSOR ADVISER............................ 1,664,186 --
-------------- --------------
Net increase (decrease) in net assets................................... (230,482,667 ) 35,652,202
NET ASSETS:
Beginning of period..................................................... 876,005,988 840,353,786
-------------- --------------
End of period........................................................... $645,523,321 $876,005,988
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber/Kidder, Peabody Premium Account Fund (the 'Fund') was organized as a
Massachusetts business trust on January 13, 1982, and is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended ('1940 Act'), as an open-end, diversified management investment company.
Valuation and Accounting for Investments -- Investments are valued at amortized
cost which approximates market value. Securities not subject to amortization are
valued at current market value, or, when appropriate, at cost, which
approximates current market value.
Investment transactions are recorded on trade date. Interest income, adjusted
for amortization of premiums and discounts on investments, is earned from
settlement date and recorded on an accrual basis. Premiums paid on purchases of
portfolio securities are amortized and discounts are accreted as adjustments to
interest income and the identified cost of securities. Realized gains and losses
from security transactions and principal paydowns on asset-backed securities are
calculated using the identified cost method.
The ability of the issuers of the debt securities held by the Fund to meet their
obligations may be affected by economic developments, including those particular
to a specific industry or region.
Repurchase Agreements -- The Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to ensure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, the Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be subject
to legal proceedings.
Federal Tax Status -- The Fund intends to distribute all of its taxable income
and to comply with the other requirements of the Internal Revenue Code
applicable to regulated investment companies. Accordingly, no provision for
federal income taxes is required. In addition, by distributing during each
calendar year substantially all of its net investment income, capital gains and
certain other amounts, if any, the Fund intends not to be subject to a federal
excise tax.
Dividends -- The Fund declares dividends on a daily basis from net investment
income. Such dividends are normally paid monthly. Net capital gains, if any,
will be declared and paid at least annually. To the extent that the Fund earns
net realized capital gains which can be offset by capital loss carryforwards, if
any, it is the policy of the Fund not to distribute such gains.
7
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements -- (concluded)
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's investment adviser and administrator receives compensation from the
Fund for its services. Fees paid by the Fund for investment advisory and
administration services are accrued daily and paid monthly at the annual rate of
0.50% of the Fund's average daily net assets.
At a special meeting of shareholders that took place on April 13, 1995,
shareholders approved the appointment of PaineWebber Incorporated
('PaineWebber') as investment adviser and administrator of the Fund and Mitchell
Hutchins Asset Management Inc. ('Mitchell Hutchins') as the Fund's sub-adviser
and sub-administrator. The Fund pays the same fee for investment advisory and
administration services to PaineWebber as previously paid to Kidder Peabody
Asset Management, Inc. ('KPAM'), as described in the Fund's Prospectus.
PaineWebber (not the Fund) pays Mitchell Hutchins a fee for sub-advisory and
sub-administration services at the annual rate of 20% of the fee received by
PaineWebber from the Fund. PaineWebber and Mitchell Hutchins continue to manage
the Fund in accordance with the Fund's investment objective, policies and
restrictions as stated in the Prospectus. At March 31, 1995, the Fund owed
PaineWebber $280,355 in investment advisory and administration fees.
Investment advisory functions for the Fund were previously transfered from KPAM
to Mitchell Hutchins on an interim basis as a result of an asset purchase
transaction by and among Kidder, Peabody Group Inc., its parent, General
Electric Company, and Paine Webber Group Inc. That period commenced on January
30, 1995 and ended April 13, 1995.
In compliance with applicable state securities laws, PaineWebber, the Fund's
investment adviser, will reimburse the Fund, if and to the extent that the
aggregate operating expenses in any fiscal year, exclusive of taxes, interest,
brokerage fees, distribution fees and extraordinary expenses, exceed limitations
imposed by various state regulations. Currently, the most restrictive limitation
is 2.5% on the first $30 million of average daily net assets, 2.0% of the next
$70 million and 1.5% of average daily net assets in excess of $100 million. For
the year ended March 31, 1995, no reimbursements were required pursuant to the
above limitation.
DISTRIBUTION PLAN
Since January 30, 1995, PaineWebber has been serving as the exclusive
distributor of the Fund's shares. For its services, which include payment of
sales commissions to registered representatives and various other promotional
and sales related expenses, PaineWebber receives from the Fund a distribution
fee accrued daily and paid monthly at the annual rate of 0.12% of the Fund's
average daily net assets. At March 31, 1995, $67,285 was payable to PaineWebber
for these services.
OTHER LIABILITIES
At March 31, 1995, the amount payable for dividends was $867,747.
8
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES OF BENEFICIAL INTEREST
There is an unlimited number of shares of beneficial interest authorized.
Transactions in shares of beneficial interest, at $1.00 per share were as
follows:
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
Shares sold...................................................... 3,997,365,909 4,339,354,867
Shares repurchased............................................... (4,258,741,761) (4,324,016,906)
Dividends reinvested in additional Fund shares................... 30,893,185 20,314,241
-------------- --------------
Net increase (decrease) in shares outstanding.................... (230,482,667) 35,652,202
-------------- --------------
-------------- --------------
</TABLE>
CAPITAL CONTRIBUTION AND AFFILIATED TRANSACTIONS
KPAM purchased certain of the Fund's variable rate securities on July 6, 1994
for an aggregate purchase price of $32,244,799. The purchases were made at
prices equal to the securities' amortized cost plus accrued and unpaid interest.
Since the purchases by KPAM were made at prices above the securities' then
current fair values, the Fund recorded a capital contribution from KPAM in the
amount of $1,664,186 or $0.002 per share.
9
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Net investment income.................................... 0.04 0.03 0.03 0.05 0.07
Dividends from net investment income..................... (0.04) (0.03) (0.03) (0.05) (0.07)
------ ------ ------ ------ ------
Net asset value:
End of period........................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total investment return (1).............................. 4.31% 2.60% 2.94% 4.90% 7.48%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratios/Supplemental Data:
Net assets, end of period (000's).................... $645,523 $876,006 $840,354 $948,674 $1,198,164
Ratio of expenses to average net assets.............. 0.70% 0.69% 0.70% 0.69% 0.68%
Ratio of net investment income to average net
assets............................................. 4.16% 2.57% 2.86% 4.82% 7.24%
</TABLE>
- ------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable date, and a sale at net asset value on the last
day of each period reported.
10
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Report of Independent Auditors
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders,
PaineWebber/Kidder, Peaboby Premium Account Fund:
We have audited the accompanying statement of net assets of PaineWebber/Kidder,
Peabody Premium Account Fund, as of March 31, 1995, and the related statement of
operations for the year then ended, and of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the five-year period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of PaineWebber/Kidder,
Peabody Premium Account Fund at March 31, 1995, the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
May 18, 1995
11
<PAGE>
PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
- --------------------------------------------------------------------------------
Tax Information
- --------------------------------------------------------------------------------
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (March 31,
1995) as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that all distributions
paid during the fiscal year were derived from net investment income and
short-term capital gains and are taxable as ordinary income. No portion of these
distributions qualifies for the dividends received deduction available to
corporate shareholders.
Distributions received by tax-exempt recipients (e.g., IRAs and Keoghs) need not
be reported as taxable income. Some retirement trusts (e.g., corporate, Keogh
and 403(b)(7) plans) may need this information for their annual information
reporting.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1995. The second notification, which
will reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1996. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
12
<PAGE>
---------------------------------------
TRUSTEES
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Frank P.L. Minard
Carl W. Schafer
---------------------------------------
OFFICERS
Frank P.L. Minard
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
Dennis L. McCauley
Vice President
Susan P. Messina
Vice President
---------------------------------------
INVESTMENT ADVISER,
ADMINISTRATOR AND
DISTRIBUTOR
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
---------------------------------------
SUB-ADVISER AND
SUB-ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
---------------------------------------
This report is not to be used in
connection with the offering of shares
of the Fund unless accompanied or
preceded by an effective prospectus.
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