PAINEWEBBER RETIREMENT MONEY FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Retirement Money Fund is a diversified series of PaineWebber
RMA Money Fund, Inc., a professionally managed open-end investment company
("Corporation").
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 fund's
Annual Report without charge by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction with
the fund's current Prospectus, dated August 31, 2000. A copy of the Prospectus
may be obtained by calling any PaineWebber Financial Advisor or correspondent
firm or by calling toll-free 1-800-647-1568. This SAI is dated August 31, 2000.
TABLE OF CONTENTS
PAGE
The Fund and Its Investment Policies........... 2
The Fund's Investments, Related Risks and
Limitations.................................... 2
Organization of the Fund; Directors and
Officers; Principal Holders and Management
Ownership of Securities..................... 9
Investment Advisory, Administration and
Distribution Arrangements................... 15
Portfolio Transactions......................... 18
Additional Purchase and Redemption Information;
Service Organizations....................... 18
Valuation of Shares............................ 19
Performance Information........................ 20
Taxes.......................................... 21
Other Information.............................. 22
Financial Statements........................... 22
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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 consistent
with liquidity and conservation of capital. 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. They also include longer term bonds that have variable
interest rates or other special features that give them the financial
characteristics of short-term debt. 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 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 maintains a dollar-weighted average portfolio maturity of 90 days or less.
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 calendar 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"). First
Tier Securities include U.S. government securities and securities of other
registered investment companies that are money market funds. Other First Tier
Securities are either (1) rated in the highest short-term rating category by at
least two nationally recognized statistical rating organizations ("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), except
that the fund may invest up to 25% of its total assets in First Tier Securities
of a single issuer for a period of up to three business days. 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.
The fund 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 from banks or through reverse repurchase agreements for temporary
purposes, but not in excess of 10% of its total assets. The costs associated
with borrowing may reduce the fund's net income.
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. New forms of money market instruments continued to be
developed. The fund may invest in these instruments to the extent consistent
with its investment objective.
YIELDS AND CREDIT RATINGS OF MONEY MARKET INSTRUMENTS. 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
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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.
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 (as defined above) 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 by a single rating agency 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. These U.S. government securities may
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 program, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
COMMERCIAL PAPER AND OTHER SHORT-TERM OBLIGATIONS. Commercial paper
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 the Securities and Exchange Commission ("SEC"). 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 that have been securitized through the use of
trusts or special purpose corporations or other entities. 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.
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. 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. 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. The fund's investment in variable and floating rate securities must
comply with conditions established by the SEC under which they may be considered
to have remaining maturities of 13 months or less. The fund will purchase
variable and floating rate securities of non-U.S. government issuers that have
remaining maturities of more than 13 months only if the securities are subject
to a demand feature exercisable within 13 months or less. 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
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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
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 (subject to any applicable advance notice provisions) 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 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 and affect its share price. 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" 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. The fund may not be
able to readily liquidate its investments in illiquid securities and may have to
sell other investments if necessary to raise cash to meet its obligations. The
lack of a liquid secondary market for illiquid securities may make it more
difficult for the fund to assign a value to those securities for purposes of
valuing its portfolio and calculating its net asset value.
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.
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"
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from the registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by the fund, however, could affect adversely the
marketability of such portfolio securities, and the fund might be unable to
dispose of them promptly or at favorable prices.
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.
Mitchell Hutchins also monitors the fund's overall holdings of illiquid
securities. If the fund's holdings of illiquid securities exceed its limitation
on investments in illiquid securities for any reason (such as a particular
security becoming illiquid, changes in the relative market values of liquid and
illiquid portfolio securities or shareholder redemptions), Mitchell Hutchins
will consider what action would be in the best interests of the fund and its
shareholders. Such action may include engaging in an orderly disposition of
securities to reduce the fund's holdings of illiquid securities. However, the
fund is not required to dispose of illiquid securities under these
circumstances.
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 in transactions with counterparties
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 or securities
dealers or their affiliates. 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
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files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may
receive an extension of time to determine whether to enforce the 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 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
assets to cover the amount of the commitment. See "The Fund's Investments,
Related Risks and Limitations--Segregated Accounts." The fund's when-issued and
delayed delivery purchase commitments could cause its net asset value per share
to be more volatile.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The fund may invest in
securities of other money market funds, subject to limitations under the
Investment Company Act. Among other things, these limitations currently restrict
the fund's aggregate investments in other investment companies to no more than
10% of its total assets. The fund's investments in certain private investment
vehicles are not subject to this restriction. 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, including other investment
companies. The fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The fund will
retain authority to terminate any of its loans at any time. The fund may pay
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
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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 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
present at a shareholders' meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from changing values of portfolio
securities or amount of total assets will not be considered a violation of any
of the following limitations. With regard to the borrowings limitation in
fundamental limitation (3), the fund will comply with the applicable
restrictions of Section 18 of the Investment Company Act.
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.
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(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. If a percentage restriction is adhered to at the time of an investment
or transaction, a later increase or decrease in percentage resulting from
changing values of portfolio securities or amount of total assets will not be
considered a violation of any of the following limitations.
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.
(4) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
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ORGANIZATION OF THE FUND; DIRECTORS AND OFFICERS;
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
The Corporation was organized on July 2, 1982 as a Maryland corporation
and has three operating series. The Corporation has authority to issue 60
billion shares of common stock of par value $.001 per share, 20 billion of which
are designated as shares of the fund. The remaining shares are designated as
shares of the two other series of the Corporation. The Corporation is governed
by a board of directors, which oversees the fund's operations. The board also is
authorized to establish additional series.
The directors ("board members") and executive officers of the Corporation,
their ages, business addresses and principal occupations during the past five
years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 53 Director and Mrs. Alexander is Chairman
President (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 30
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Richard Q. Armstrong; 65 Director Mr. Armstrong is chairman and
R.Q.A. Enterprises principal of R.Q.A. Enterprises
One Old Church Road (management consulting firm)
Unit #6 (since April 1991 and principal
Greenwich, CT 06830 occupation since March 1995).
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 29
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------- ----------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**+;73 Director and Chairman of the Mr. Bewkes is a director of
Board of Directors Paine Webber Group Inc. ("PW
Group") (holding company of
PaineWebber and Mitchell
Hutchins). Prior to 1996, he
was a consultant to PW Group.
He serves as a consultant to
PaineWebber (since May 1999).
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 40
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Richard R. Burt; 53 Director Mr. Burt is chairman of IEP
1275 Pennsylvania Ave, N.W. Advisors, LLP (international
Washington, DC 20004 investments and 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 commod-ities),
Hollinger International Co.
(publishing), Homestake Mining
Corp., (gold mining), six
investment companies in the
Deutsche Bank family of funds,
nine investment companies in
the Flag Investors family of
funds, The Central European
Fund, Inc. and The Germany
Fund, Inc., vice chairman of
Anchor Gaming (provides
technology to gaming and
wagering industry) (since July
1999) and chairman of Weirton
Steel Corp. (makes and finishes
steel products) (since April
1996). 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 29
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Mary C. Farrell**+; 50 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
Street 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 28
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------- ----------------------------------------
<S> <C> <C>
Meyer Feldberg; 58 Director Mr. Feldberg is Dean and
Columbia University Professor of Management of the
101 Uris Hall Graduate School of Business,
New York, NY 10027 Columbia University. Prior to
1989, he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of Primedia,
Inc. (publishing), Federated
Department Stores, Inc.
(operator of department stores)
and Revlon, Inc. (cosmetics).
Dean Feldberg is a director or
trustee of 37 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
George W. Gowen; 70 Director Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, NY 10017 Bartholow & Miller. Prior to
May 1994, he was a partner in the
law firm of Fryer, Ross & Gowen.
Mr. Gowen is a director or
trustee of 37 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Frederic V. Malek; 63 Director Mr. Malek is chairman of Thayer
1455 Pennsylvania Ave, Capital Partners (merchant
N.W. bank) and chairman of Thayer
Suite 350 Hotel Investors II and Lodging
Washington, DC 20004 Opportunities Fund (hotel
investment partnerships). From
January 1992 to November 1992,
he was campaign manager of
Bush-Quayle '92. From 1990 to
1992, he was vice chairman and,
from 1989 to 1990, he was
president of Northwest Airlines
Inc. and 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
Aegis Communications, Inc.
(tele-services), American
Management Systems, Inc.
(management consulting and
computer related services),
Automatic Data Processing, Inc.
(computing services), CB
Richard Ellis, Inc. (real
estate services), FPL Group,
Inc. (electric services),
Global Vacation Group (packaged
vacations), HCR/Manor Care,
Inc. (health care), SAGA
Systems, Inc. (software
company) and Northwest Airlines
Inc. Mr. Malek is a director or
trustee of 29 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------- ----------------------------------------
<S> <C> <C>
Carl W. Schafer; 64 Director Mr. Schafer is president of the
66 Witherspoon Street, #1100 Atlantic Foundation (charitable
Princeton, NJ 08542 foundation supporting mainly
oceanographic exploration and
research). He is a director of
Labor Ready, Inc. (temporary
employment), Roadway Express,
Inc. (trucking), The Guardian
Group of Mutual Funds, the
Harding, Loevner Funds, E.I.I.
Realty Trust (investment
company), 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 29
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Brian M. Storms*+; 45 Director Mr. Storms is president and
chief operating officer of
Mitchell Hutchins (since March
1999). Mr. Storms 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 29
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Thomas Disbrow***; 34 Vice President and Mr. Disbrow is a first vice
Assistant Treasurer president and a senior manager
of the mutual fund finance
department of Mitchell
Hutchins. Prior to November
1999, he was a vice president
of Zweig/Glaser Advisers. Mr.
Disbrow is a vice president and
assistant treasurer of 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
John J. Lee***; 32 Vice President and Mr. Lee is a vice president and
Assistant Treasurer a 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 30 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------- ----------------------------------------
<S> <C> <C>
Kevin J. Mahoney***; 34 Vice President and Mr. Mahoney is a first vice
Assistant Treasurer president 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 for BlackRock
Financial Management L.P. Mr.
Mahoney is a vice president and
assistant treasurer of 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Dennis McCauley*; 53 Vice President Mr. McCauley is a managing
director and chief investment
officer--fixed income of
Mitchell Hutchins. Mr. McCauley
is a vice president of 20
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Ann E. Moran***; 43 Vice President and Ms. Moran is a vice president
Assistant Treasurer and a manager of the mutual
fund finance department of
Mitchell Hutchins. Ms. Moran is
a vice president and assistant
treasurer of 30 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Dianne E. O'Donnell**; 48 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 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Susan P. Ryan*; 40 Vice President Ms. Ryan is a senior vice
president and a portfolio
manager of Mitchell Hutchins.
Ms. Ryan is a vice president of
six investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Paul H. Schubert***; 37 Vice President and Treasurer Mr. Schubert is a senior vice
president and the director of
the mutual fund finance
department of Mitchell
Hutchins. Mr. Schubert is a
vice president and treasurer of
30 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Barney A. Vice President and Mr. Taglialatela is a vice
Taglialatela***; 39 Assistant Treasurer president and a manager of the
mutual fund finance department
of Mitchell Hutchins. Mr.
Taglialatela is a vice
president and assistant
treasurer of 30 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------- ----------------------------------------
<S> <C> <C>
Keith A. Weller**; 39 Vice President and Mr. Weller is a first vice
Assistant Secretary president and associate general
counsel of Mitchell Hutchins.
Mr. Weller is a vice president
and assistant secretary of 29
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
</TABLE>
-------------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York, New
York 10019-6028.
*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
+ 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 attending each board meeting and each
separate meeting of a board committee. The Corporation has three series and thus
pays each such director $3,000 annually, plus any additional amounts due for
board or committee meetings. Each chairman of the audit and contract review
committees of individual funds within the PaineWebber fund complex receives
additional compensation, aggregating $15,000 annually, from the relevant funds.
All board members are reimbursed for any expenses incurred in attending
meetings. 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.
The table below includes certain information relating to the compensation
of the current board members who held office with the Corporation or with other
PaineWebber funds during the periods indicated.
COMPENSATION TABLE+
AGGREGATE
COMPENSATION TOTAL COMPENSATION FROM
FROM THE THE CORPORATION AND THE
NAME OF PERSON, POSITION CORPORATION* FUND COMPLEX**
------------------------ ----------- -----------------------
Richard Q. Armstrong,
Director.......... $ 5,340 $ 104,650
Richard R. Burt,
Director................... 5,340 102,850
Meyer Feldberg,
Director................... 5,340 143,650
George W. Gowen,
Director................... 6,495 138,400
Frederic V. Malek,
Director................... 5,340 104,650
Carl W. Schafer,
Director................... 5,250 104,650
14
<PAGE>
--------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation from the PaineWebber
funds.
* Represents fees paid to each board member during the fiscal year ended June
30, 2000.
** Represents total compensation paid during the calendar year ended December
31, 1999, to each board member by 31 investment companies (34 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 AND MANAGEMENT OWNERSHIP OF SECURITIES. As of July 31,
2000, the Corporation's records showed no shareholders as owning 5% or more of
the fund's shares, and the Corporation is not aware of any beneficial owner of
5% or more of the fund's shares.
As of July 31, 2000, board members and officers owned in the aggregate
less than 1% of the outstanding shares of the fund.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. PaineWebber acts as
the fund's investment adviser and administrator pursuant to a contract with the
Corporation ("Advisory Contract"). Under the Advisory 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 $1 billion.................................. 0.50%
In excess of $1.0 billion up to $1.5 billion...... 0.44%
Over $1.5 billion ................................ 0.36%
Services provided by PaineWebber under the Advisory 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 Advisory Contract,
during the fiscal years ended June 30, 2000, 1999 and 1998, the fund paid (or
accrued) to PaineWebber investment advisory and administrative fees in the
amount of $20,256,815, $19,032,089 and $16,593,019, respectively.
Under a contract with PaineWebber ("Mitchell Hutchins Contract"), Mitchell
Hutchins serves as the fund's sub-adviser and sub-administrator. Under the
Mitchell Hutchins Contract, PaineWebber (not the fund) pays Mitchell Hutchins a
fee, computed daily and paid monthly, at an annual rate of 20% of the fees paid
by the fund to PaineWebber. Under the Mitchell Hutchins Contract, for the fiscal
years ended June 30, 2000, 1999 and 1998, PaineWebber paid (or accrued) to
Mitchell Hutchins fees in the amount of $4,051,363, $3,806,418 and $3,318,604,
respectively.
Under the terms of the Advisory Contract, the fund bears all expenses
incurred in its operation that are not specifically assumed by PaineWebber.
General expenses of the Corporation not readily identifiable as belonging to the
fund or to the Corporation's other series are allocated among series by or under
the direction of the board of directors in such manner as the board deems fair
and equitable. Expenses borne by the fund include the following (or the fund's
share of the following): (1) the cost (including brokerage commissions and other
transaction costs, if any) of securities purchased or sold by the fund and any
losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the fund by PaineWebber; (3) organizational expenses; (4)
filing fees and expenses relating to the registration and qualification of fund
shares under federal and state securities laws and maintaining such
registrations and qualifications; (5) fees and salaries payable to the directors
and officers who are not interested persons of the Corporation or PaineWebber;
(6) all expenses incurred in connection with the directors' services, including
travel expenses; (7) taxes (including any income or franchise taxes) and
governmental fees; (8) costs of any liability, uncollectible items of deposit
and other insurance or fidelity bonds; (9) any costs, expenses or losses arising
out of a liability of or claim for damages or other relief asserted against the
Corporation or the fund for violation of any law; (10) legal, accounting and
auditing expenses, including legal fees of special counsel for those directors
who are not interested persons of the Corporation; (11) charges of custodians,
transfer agents and other agents; (12) expenses of setting in type and printing
prospectuses and statements of additional information and supplements thereto,
15
<PAGE>
reports and statements to shareholders and proxy material for existing
shareholders and costs of mailing such materials to existing shareholders; (13)
any extraordinary expenses (including fees and disbursements of counsel)
incurred by the fund; (14) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations; (15)
50% of the cost of printing and mailing PaineWebber monthly statements; (16)
costs of mailing and tabulating proxies and costs of meetings of shareholders,
the board and any committees thereof; (17) the cost of investment company
literature and other publications provided to the directors and officers; and
(18) costs of mailing, stationery and communications equipment.
The Advisory and Mitchell Hutchins Contracts (collectively, "Contracts")
noted above provide 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 Contracts, 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 Contracts are 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. The Advisory Contract is also terminable without penalty by
PaineWebber on 60 days' written notice to the Corporation, and the Mitchell
Hutchins Contract is terminable without penalty by PaineWebber or Mitchell
Hutchins on 60 days' written notice to the other party. The Contracts terminate
automatically upon their assignment, and the Mitchell Hutchins Contract also
automatically terminates upon the assignment of the Advisory Contract.
TRANSFER-AGENCY RELATED SERVICES. Prior to August 1, 1997, PaineWebber
provided certain services to the fund not otherwise provided by the fund's
transfer agent. Pursuant to an agreement relating to those services, PaineWebber
earned (or accrued) $251,757 for the period July 1, 1997 to July 31, 1997.
Effective August 1, 1997, PFPC Inc. ("PFPC"), the fund's transfer agent, (not
the fund) pays PaineWebber for certain transfer agency related services that
PFPC has delegated to PaineWebber.
SECURITIES LENDING. During the fiscal years ended June 30, 2000, 1999 and
1998, the fund did not pay fees to PaineWebber for its services as lending agent
because the fund did not engage in any securities lending activities.
NET ASSETS. The following table shows the approximate net assets as of
July 31, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
Domestic (excluding Money Market)........... $ 9,156.5
Global...................................... 4,703.4
Equity/Balanced............................. 9,585.7
Fixed Income (excluding Money Market)....... 4,274.2
Taxable Fixed Income 2,859.4
Tax-Free Fixed........................ 1,414.8
Money Market Funds.......................... 39,450.0
DISTRIBUTION ARRANGEMENTS. PaineWebber acts as the distributor of fund
shares under a distribution contract with the Corporation ("Distribution
Contract"), which requires PaineWebber to use its best efforts, consistent with
its other business, to sell shares of the fund. Shares of the fund are offered
continuously. PaineWebber is located at 1285 Avenue of the Americas, New York,
New York 10019-6028.
16
<PAGE>
Under a plan of distribution adopted by the Corporation in the manner
prescribed by Rule 12b-1 under the Investment Company Act ("Plan"), the fund
pays PaineWebber a service fee, computed daily and paid monthly, for providing
certain shareholder and account maintenance services. The Plan authorizes the
fund to pay PaineWebber the service fee at an annual rate of up to 0.15% of its
average daily net assets. The fund currently pays service fees to PaineWebber at
the annual rate of 0.125% of average net assets. Any increase from the 0.125%
annual rate would require prior approval of the board.
PaineWebber uses the 12b-1 service fee to pay PaineWebber Financial
Advisors and correspondent firms for shareholder servicing. The fee is also used
to offset PaineWebber's other expenses in servicing and maintaining shareholder
accounts. These expenses may include the costs of the PaineWebber branch office
in which the Financial Advisor is based, such as rent, communications equipment,
employee salaries and other overhead costs.
During the period they are in effect, the Plan and the Distribution
Contract obligate the fund to pay the 12b-1 service fee to PaineWebber as
compensation for its service activities and not as reimbursement for specific
expenses incurred. Thus, even if PaineWebber's expenses exceed its 12b-1 service
fee, the fund will not be obligated to pay more than the fee and, if
PaineWebber's expenses are less than the fee, it will retain its full fee and
realize a profit. The fund will pay the 12b-1 service fee to PaineWebber until
either the Plan or the Distribution Contract is terminated or not renewed. In
that event, PaineWebber's 12b-1 service expenses in excess of 12b-1 service fees
received or accrued through the termination date will be PaineWebber's sole
responsibility and not obligations of the fund.
Among other things, the Plan provides that (1) PaineWebber will submit to
the board at least quarterly, and the directors will review, reports regarding
all amounts expended under the Plan and the purposes for which such expenditures
were made, (2) the Plan will continue in effect only so long as it is approved
at least annually, and any material amendment thereto is approved, by the board,
including those directors who are not "interested persons" of the Corporation
and who have no direct or indirect financial interest in the operation of the
Plan or any agreement related to the Plan, acting in person at a meeting called
for that purpose, (3) payments by the fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the fund's outstanding shares and (4) while the Plan remains in effect, the
selection and nomination of directors who are not "interested persons" of the
Corporation shall be committed to the discretion of the directors who are not
"interested persons" of the Corporation.
During the fiscal year ended June 30, 2000, the fund paid or accrued to
PaineWebber service fees of $6,408,618. For the same period, PaineWebber
estimates that it incurred expenses of $1,848,836 in servicing fund
shareholders. PaineWebber estimates that these expenses were incurred as
follows: (a) allocated costs related to shareholder servicing--$822,750; and (b)
service fees to Financial Advisors--$1,026,086.
"Allocated costs" include various internal costs allocated by PaineWebber
to its efforts at providing certain shareholder and account maintenance
services. These internal costs encompass office rent, salaries and other
overhead expenses of various PaineWebber departments and areas of operations.
In approving the continuance of the Plan, the board considered all
features of the distribution system for the fund, including (1) PaineWebber's
view that the payment of service fees at the annual rate of 0.02% of the average
daily net assets of the fund held in shareholder accounts serviced by Financial
Advisors and correspondent firms was attractive to such Financial Advisors and
correspondent firms and would result in greater growth of the fund than might
otherwise be the case, (2) the extent to which fund shareholders might benefit
from economies of scale resulting from growth in the fund's assets and
shareholder account size and the potential for continued growth, (3) the
services provided to the fund and its shareholders by PaineWebber pursuant to
the Distribution Contract, (4) PaineWebber's expenses and costs under the Plan
as described above and (5) the fact that the expense to the fund of the Plan
could be offset if the Plan is successful by the lower advisory fee rates that
are triggered as assets reach higher levels.
The board also considered the benefits that would accrue to PaineWebber
under the Plan in that PaineWebber would receive service and advisory fees that
are calculated based upon a percentage of the average net assets of the fund,
which fees would increase if the Plan is successful and the fund attains and
maintains increased asset levels.
17
<PAGE>
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.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions, it
will not purchase securities at a higher price or sell securities at a lower
price than would otherwise be paid if no weight was attributed to the services
provided by the executing dealer. Mitchell Hutchins may engage in agency
transactions in over-the-counter securities in return for research and execution
services. These transactions are entered into only pursuant to procedures that
are designed to ensure 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.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or 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 by brokers or dealers in
connection with other funds or accounts that it advises may be used in advising
the fund.
During the fiscal years ended June 30, 2000, 1999 and 1998, 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 in a manner 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 June 30, 2000, 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>
J.P. Morgan & Company Incorporated Commercial paper $29,869,400
Bear Stearns Companies Incorporated Commercial paper 79,869,125
Goldman Sachs Group Incorporated Commercial paper 39,722,600
Merrill Lynch & Company Incorporated Commercial paper 39,250,867
Morgan Stanley, Dean Witter & Company Commercial paper 55,000,000
J.P. Morgan & Company Incorporated Short Term Corporate Obligation 20,000,000
Merrill Lynch & Company Incorporated Short Term Corporate Obligation 29,997,984
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION;
SERVICE ORGANIZATIONS
ADDITIONAL PURCHASE INFORMATION. The fund may, subject to approval by the
board, accept securities in which the fund is authorized to invest as
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consideration for the issuance of its shares, provided that the value of the
securities is at least equal to the net asset value of the fund's shares at the
time the transaction occurs. The fund may accept or reject any such securities
in its discretion.
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.
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 noon, 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
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 ("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
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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. The 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:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
T = average annual total return of 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
period. All dividends are assumed to have been reinvested at net asset value.
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).
The following tables show 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 June 30, 2000:
Standardized Return..................... 5.14%
Five Years ended June 30, 2000:
Standardized Return..................... 4.97%
Ten Years ended June 30, 2000:
Standardized Return..................... 4.67%
CALCULATION OF YIELD. The fund computes its 7-day current yield and its
7-day 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:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7] - 1
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
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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 may also advertise non-standardized yields calculated in a
manner similar to that described above, but for different time periods (E.G.,
one-day yield, 30-day yield).
The fund's yield and effective yield for the seven-day period ended June
30, 2000 were 5.90% and 6.08%, 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 indices,
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 Smith Barney 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 gain, 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, (1) it would be
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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 (2) 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.
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 Corporation may elect all its board members. The shares of each
series of the Corporation will be voted separately, except when an aggregate
vote of all the series is required by law.
The Corporation 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 Corporation's outstanding
shares.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at 1776 Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for the fund.
PFPC, 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
June 30, 2000 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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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 ARE
NOT AN OFFER TO SELL SHARES
OF THE FUND IN ANY PAINEWEBBER
JURISDICTION WHERE THE FUND RETIREMENT MONEY FUND
OR ITS DISTRIBUTOR MAY NOT
LAWFULLY SELL THOSE SHARES.
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STATEMENT OF ADDITIONAL INFORMATION
AUGUST 31, 2000
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PAINEWEBBER
(C)2000 PaineWebber Incorporated. All rights reserved.
