<PAGE>
The Fund is a series of PaineWebber PAINEWEBBER
Master Series, Inc. This Prospectus MONEY MARKET FUND
concisely sets forth information about 1285 AVENUE OF THE AMERICAS
the Fund a prospective investor should NEW YORK, NEW YORK 10019
know before investing. Please retain
this Prospectus for future reference.
A Statement of Additional Information
dated July 1, 1998 (which is incorpo-
rated by reference herein) has been
filed with the Securities and Exchange
Commission ("SEC" or "Commission").
The Statement of Additional Infor-
mation can be obtained without charge,
and further inquiries can be made, by
contacting the Fund, your PaineWebber
investment executive or PaineWebber's
correspondent firms or by calling
toll-free 1-800-647-1568. In addition,
the Commission maintains a website
(http://www.sec.gov) that contains the
Statement of Additional Information,
material incorporated by reference,
and other information regarding
registrants that file electronically
with the Commission.
- -------------------------------------- --------------------------------------
A PROFESSIONALLY MANAGED MUTUAL / / MAXIMUM CURRENT INCOME
FUND SEEKING MAXIMUM CURRENT CONSISTENT WITH LIQUIDITY AND
INCOME CONSISTENT WITH LIQUIDITY AND CONSERVATION OF CAPITAL
CONSERVATION OF CAPITAL. THE FUND / / PROFESSIONAL MANAGEMENT
INVESTS IN HIGH QUALITY MONEY / / DAILY DIVIDENDS
MARKET INSTRUMENTS. / / EXCHANGE PRIVILEGES
AN INVESTMENT IN THE FUND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY. ALTHOUGH THE
FUND SEEKS TO PRESERVE THE VALUE OF
YOUR INVESTMENT AT $1.00 PER SHARE, IT
IS POSSIBLE TO LOSE MONEY BY INVESTING
IN THE FUND.
- -------------------------------------- --------------------------------------
July 1, 1998 A PaineWebber Mutual Fund
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR
HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
(This page has been left blank intentionally.)
2
<PAGE>
INVESTORS SHOULD RELY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUND AND ITS DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE
INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO
SELL SHARES OF THE FUND IN ANY JURISDICTION WHERE THE FUND OR ITS DISTRIBUTOR
MAY NOT LAWFULLY SELL THOSE SHARES.
--------------
PAINEWEBBER MONEY MARKET FUND
HIGHLIGHTS
SEE THE BODY OF THE PROSPECTUS FOR MORE INFORMATION ON THE TOPICS DISCUSSED IN
THESE HIGHLIGHTS.
<TABLE>
<S> <C>
The Fund: PaineWebber Money Market Fund ("Fund") is a diversified series of
PaineWebber Master Series, Inc., an open-end management investment
company organized as a Maryland corporation ("Corporation").
Investment Objective Maximum current income consistent with liquidity and conservation of
and Policies: capital; invests in high quality money market instruments.
Assets at May 31, Over $54.7 million.
1998:
Investment Adviser: Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a
wholly owned asset management subsidiary of PaineWebber Incorporated
("PaineWebber"), manages over $52 billion in assets. See
"Management."
Investing in the Fund: Class A, Class B and Class C shares of the Fund may be obtained only
through an exchange of shares of the corresponding class of most
other PaineWebber mutual funds. Exchanges may be made through
PaineWebber or PFPC Inc., the Fund's transfer agent ("Transfer
Agent"). See "Investing in the Fund."
Exchanges: Shares may be exchanged for shares of the corresponding class of
most PaineWebber mutual funds.
Redemptions: Shareholders who are clients of PaineWebber or its correspondent
firms ("PaineWebber clients") may redeem through PaineWebber; other
shareholders must redeem through the Transfer Agent.
Dividends: Declared daily and paid monthly. See "Dividends and Taxes."
Reinvestment: All dividends are paid in Fund shares of the same class at net asset
value unless the shareholder has requested cash.
Net Asset Value: The Fund seeks to maintain its net asset value at $1.00 per share.
</TABLE>
3
<PAGE>
WHO SHOULD INVEST. The Fund invests primarily in various types of high
quality money market instruments. Accordingly, the Fund is designed for
investors in other PaineWebber mutual funds whose investment objectives or needs
have changed so that they presently seek current income and preservation of
capital for all or a portion of their investment.
RISK FACTORS. There can be no assurance that the Fund will achieve its
investment objective. While the types of money market securities in which the
Fund invests generally are considered to have low risk of loss to principal or
interest, these securities are not completely risk free. The Fund may invest in
U.S. dollar-denominated securities of foreign issuers, which may present a
greater degree of risk than investments in securities of domestic issuers.
During periods when interest rates are declining or rising, the Fund's yield
will tend to lag behind prevailing short-term interest rates. See "Investment
Objective and Policies."
EXPENSES OF INVESTING IN THE FUND. The following tables are intended to
assist investors in understanding the expenses associated with investing in
Class A, B and C shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares (as a
% of public offering price)..................... None(1) None(1) None(1)
Sales charge on reinvested dividends.............. None None None
Maximum contingent deferred sales charge (as a %
of public offering price at the time of
investment or net asset value at the time of
redemption, whichever is less).................. None(2) 5%(3) 1%(4)
</TABLE>
ANNUAL FUND OPERATING EXPENSES (5)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management fees................................... 0.50% 0.50% 0.50%
12b-1 fees (6).................................... 0.25 0.75 0.75
Other expenses.................................... 0.66 0.65 0.70
------- ------- -------
Total operating expenses.......................... 1.41% 1.90% 1.95%
------- ------- -------
------- ------- -------
</TABLE>
- ---------
(1) Shares of the Fund may be acquired solely through an exchange of shares
of the corresponding class of another PaineWebber mutual fund. No initial sales
charge is imposed when Class A shares of the Fund are acquired through an
exchange. See "Investing in the Fund."
(2) Class A shares of the Fund may be subject to a contingent deferred
sales charge ("CDSC") of 1% upon redemption if the original shares that were
purchased and subsequently exchanged (directly or through a series of exchanges)
to obtain Class A shares of the Fund were subject to a 1% CDSC upon redemption
and less than one year has elapsed since the original shares were purchased.
(3) Redemptions of Class B shares of the Fund that were acquired through an
exchange of Class B shares of PaineWebber Low Duration U.S. Government Income
Fund will be subject to a maximum CDSC of 3%, provided that the exchanged shares
would have been subject to the lower schedule had they been redeemed rather than
exchanged for Class B shares of the Fund. The maximum 3% CDSC applies to
redemptions during the first year after purchase of the exchanged shares; the
charge declines by 1% following each of the first, third and fourth years after
purchase, reaching zero after four years. Redemptions of Class B shares of the
Fund that were acquired through an exchange of Class B shares of any other
4
<PAGE>
PaineWebber mutual fund will be subject to a maximum CDSC of 5%. The maximum 5%
CDSC applies to redemptions during the first year after purchase of the
exchanged shares; the charge generally declines by 1% annually thereafter,
reaching zero after six years. The holding period of Class B shares acquired
through an exchange with another PaineWebber mutual fund will be calculated from
the date that the Class B shares were initially acquired in the other fund. See
"Redemptions."
(4) Redemptions of Class C shares of the Fund that were acquired through an
exchange of Class C shares of another PaineWebber mutual fund and are held less
than one year from the date of original purchase will be subject to the same
CDSC that would have been imposed on the Class C shares of the other PaineWebber
mutual fund. The maximum CDSC applicable to Class C shares sold within one year
of the purchase date is 1% (0.75% for funds that invest predominantly in debt
securities) of net asset value of the shares at the time of purchase or sale,
whichever is less.
(5) See "Management" for additional information. All expenses are based on
those incurred for the most recent fiscal year.
(6) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------- ----------- -----------
<S> <C> <C> <C>
12b-1 service fees................................ 0.25% 0.25% 0.25%
12b-1 distribution fees........................... 0.00 0.50 0.50
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Class A shares.................................... $ 14 $ 45 $ 77 $ 169
Class B shares:
Assuming a complete redemption at end of period
(1)(2)........................................ $ 69 $ 90 $ 123 $ 198
Assuming no redemption (2)...................... $ 19 $ 60 $ 103 $ 198
Class C shares:
Assuming a complete redemption at end of period
(1)........................................... $ 30 $ 61 $ 105 $ 227
Assuming no redemption.......................... $ 20 $ 61 $ 105 $ 227
</TABLE>
- ---------
(1) Assumes deduction at the time of redemption of the maximum applicable
CDSC.
(2) Ten-year figures assume conversion of Class B shares to Class A shares
at the end of the sixth year.
This Example assumes that all dividends are reinvested and that the
percentage amounts listed under Annual Fund Operating Expenses remain the same
in the years shown. The above tables and the assumption in the Example of a 5%
annual return are required by regulations of the SEC applicable to all mutual
funds; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of any class of Fund shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The actual expenses attributable to each class of Fund shares will depend upon,
among other things, the level of average net assets and the extent to which the
Fund incurs variable expenses, such as transfer agency costs.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share of the Fund for each of the periods shown. This
information is supplemented by the financial statements, accompanying notes and
the report of Price Waterhouse LLP, independent accountants, which appear in the
Fund's Annual Report to Shareholders for the fiscal year ended February 28,
1998, and are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the tables below, relating to the five years in the period ended February 28,
1998, have been audited by Price Waterhouse LLP. The Annual Report to
Shareholders may be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------
FOR THE YEARS ENDED
--------------------------------------------------------------- FOR THE PERIOD
JULY 1, 1991+
FEBRUARY 28 OR 29, TO FEBRUARY 29,
--------------------------------------------------------------- ---------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------
Net investment income......... 0.042 0.040 0.046 0.037 0.016 0.022 0.026
Dividends from net investment
income....................... (0.042) (0.040) (0.046) (0.037) (0.016) (0.022) (0.026)
-------- -------- -------- -------- -------- -------- -------
Net asset value, end of
period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
Total investment return (1)... 4.33% 4.11% 4.69% 3.95% 1.64% 2.25% 2.47%
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
Ratios/Supplemental data:
Net assets, end of period
(000's)...................... $ 12,983 $ 11,808 $ 23,735 $ 21,042 $ 14,204 $ 11,716 $ 3,806
Expenses to average net
assets....................... 1.41% 1.42% 1.31% 1.06% 1.72% 1.74% 1.90%*
Net investment income to
average net assets........... 4.29% 4.09% 4.68% 3.85% 1.70% 2.18% 3.61%*
</TABLE>
- ------------
* Annualized.
+ Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends at net asset value on the payable dates, and a sale at net asset
value on the last day of each period reported. The figures do not include
sales charges; results for each class would be lower if sales charges were
included. Total investment return for periods of less than one year has not
been annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income......... 0.037 0.035 0.041 0.032 0.011 0.016 0.039 0.068 0.076 0.068
Dividends from net investment
income....................... (0.037) (0.035) (0.041) (0.032) (0.011) (0.016) (0.039) (0.068) (0.076) (0.068)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total investment return (1)... 3.81% 3.60% 4.18% 3.41% 1.12% 1.73% 4.16% 6.98% 8.18% 6.75%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's)...................... $ 14,715 $ 18,389 $ 26,592 $ 39,123 $ 9,819 $ 15,280 $ 29,341 $ 50,842 $ 50,392 $ 50,320
Expenses to average net
assets....................... 1.90% 1.90% 1.79% 1.55% 2.25% 2.28% 2.06% 1.40% 1.48% 1.25%
Net investment income to
average net assets........... 3.78% 3.55% 4.17% 3.46% 1.16% 1.69% 4.07% 6.82% 7.77% 6.88%
</TABLE>
7
<PAGE>
FINANCIAL HIGHLIGHTS--(CONCLUDED)
<TABLE>
<CAPTION>
CLASS C**
----------------------------------------------------------------------
FOR THE YEARS ENDED
---------------------------------------------------- FOR THE PERIOD
JULY 14, 1992+
FEBRUARY 28 OR 29, TO FEBRUARY 28,
---------------------------------------------------- ---------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------
Net investment income............................ 0.037 0.034 0.041 0.033 0.012 0.009
Dividends from net investment income............. (0.037) (0.034) (0.041) (0.033) (0.012) (0.009)
-------- -------- -------- -------- -------- -------
Net asset value, end of period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Total investment return (1)...................... 3.78% 3.50% 4.14% 3.44% 1.19% 0.81%
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Ratios/Supplemental data:
Net assets, end of period (000's)................ $ 5,308 $ 5,504 $ 5,754 $ 16,137 $ 9,430 $ 2,220
Expenses to average net assets................... 1.95% 1.99% 1.79% 1.55% 2.14% 2.14%*
Net investment income to average net assets...... 3.76% 3.47% 4.27% 3.35% 1.36% 1.67%*
</TABLE>
- ------------
* Annualized.
** Formerly Class D.
+ Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends at net asset value on the payable dates, and a sale at net asset
value on the last day of each period reported. The figures do not include
sales charges; results for each class would be lower if sales charges were
included. Total investment return for periods of less than one year has not
been annualized.
8
<PAGE>
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective is to provide maximum current income
consistent with liquidity and conservation of capital. The Fund's investments
include (1) U.S. Treasury bills and other obligations issued or guaranteed as to
interest and principal by the U.S. government, its agencies or
instrumentalities; such obligations may or may not be backed by the full faith
and credit of the United States; (2) obligations of U.S. and foreign banks,
including certificates of deposit, bankers' acceptances, time deposits and
similar obligations; issuing banks must have total assets at the time of
purchase in excess of $1.5 billion; (3) time deposits of savings associations
having total assets in excess of $1.5 billion at the time of purchase; (4)
commercial paper of U.S. and foreign companies, governments and similar
entities, including variable amount master demand notes and other short-term
obligations; and (5) repurchase agreements relating to any of the foregoing.
The Fund may invest in non-negotiable time deposits of U.S. banks, savings
associations and similar depository institutions having total assets in excess
of $1.5 billion at the time of purchase only if the time deposits have
maturities of seven days or less. The Fund may also purchase participation
interests in any of the securities in which it is permitted to invest.
Participation interests are pro rata interests in securities held by others. The
Fund invests in securities having, or deemed to have, a remaining maturity of up
to 13 months and maintains a dollar-weighted average portfolio maturity of 90
days or less.
The commercial paper and other short-term obligations purchased by the Fund
consist only of obligations that Mitchell Hutchins determines, pursuant to
procedures adopted by the Corporation's board of directors (sometimes referred
to as the "board"), present minimal credit risks and are either (1) rated in one
of the two highest short-term ratings categories by at least two nationally
recognized statistical rating organizations ("NRSROs"), (2) rated in one of the
two highest short-term ratings categories by a single NRSRO if only that NRSRO
has assigned the obligations a short-term rating or (3) unrated, but determined
by Mitchell Hutchins to be of comparable quality ("Eligible Securities").
Eligible Securities that have not been (1) rated in the highest short-term
ratings category by at least two NRSROs (or by one NRSRO if only one NRSRO has
assigned the obligation a short-term rating) or (2), if the obligations are
unrated, determined by Mitchell Hutchins to be of comparable quality are known
as "Second Tier Securities." The Fund may invest no more than 5% of its total
assets in Second Tier Securities. The Fund generally may invest no more than the
greater of 1% of its total assets or $1 million in Second Tier Securities of a
single issuer. Although the Fund may invest in Second Tier Securities of U.S.
companies, the Fund does not purchase commercial paper of foreign companies,
governments and similar entities falling into this category. Furthermore, the
Fund generally may invest no more than 5% of its total assets in the securities
of a single issuer (other than securities issued by the U.S. government, its
agencies or instrumentalities).
In managing the Fund's portfolio, Mitchell Hutchins may employ a number of
professional money management techniques, including varying the composition and
the weighted average maturity of the portfolio based upon its assessment of the
relative values of various money market instruments and future interest rate
patterns, in order to respond to changing economic and money market conditions
and to shifts in fiscal and monetary policy. Mitchell Hutchins may also seek to
improve the Fund's yield by purchasing or selling securities to take advantage
of yield disparities among similar or dissimilar money market instruments that
regularly occur in the money markets.
9
<PAGE>
While the types of money market instruments in which the Fund invests
generally are considered to have low risk of loss of principal or interest, they
are not completely risk free. An issuer or guarantor may be unable or unwilling
to pay interest or repay principal on its obligations for many reasons,
including adverse changes in its own financial condition or in economic
conditions generally.
In periods of declining interest rates the Fund's yield will tend to be
somewhat higher than prevailing market rates, and in periods of rising interest
rates the opposite generally will be true. Also, when interest rates are
falling, net cash inflows from the continuous sale of Fund shares are likely to
be invested in portfolio instruments producing lower yields than the balance of
the Fund's portfolio, thereby reducing its yield. In periods of rising interest
rates, the opposite can be true. There can be no assurance that the Fund will
achieve its investment objective.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the
Fund may invest include direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and obligations issued or guaranteed by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association certificates ("GNMAs")), securities supported
primarily or solely by the creditworthiness of the issuer (such as securities of
the Resolution Funding Corporation and the Tennessee Valley Authority) and
securities that are supported primarily or solely by specific pools of assets
and the creditworthiness of a U.S. government-related issuer (such as
mortgage-backed securities issued by Fannie Mae, also known as the Federal
National Mortgage Association, and Freddie Mac, also known as the Federal Home
Loan Mortgage Corporation).
The Fund may invest in separately traded principal and interest components
of securities issued or guaranteed by the U.S. Treasury. The principal and
interest components of selected securities 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.
VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate securities with remaining maturities in excess of 13 months issued
by U.S. government agencies or instrumentalities or guaranteed by the U.S.
government. In addition, the Fund may purchase variable and floating rate
securities of other issuers with remaining maturities in excess of 13 months if
the securities are subject to a demand feature exercisable within 13 months or
less. The yield on these securities is adjusted in relation to changes in
specific rates, such as the prime rate, and different securities may have
different adjustment rates. The Fund's investment in these securities must
comply with conditions established by the SEC under which they may be considered
to have remaining maturities of 13 months or less. Certain of these obligations
carry a demand feature that gives the Fund the right to tender them back to the
issuer or a remarketing agent and receive the principal amount of the security
prior to maturity. The demand feature may be backed by letters of credit or
other liquidity support arrangements provided by banks or other financial
institutions, whose credit standing affects the credit quality of the
obligation. Changes in the credit quality of these institutions could cause
losses to the Fund and affect its share price.
VARIABLE AMOUNT MASTER DEMAND NOTES. Securities purchased by the Fund may
include variable amount master demand notes, which are unsecured redeemable
obligations that permit
10
<PAGE>
investment of varying amounts at fluctuating interest rates under a direct
agreement between the Fund and the 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 and may or may not be rated.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases obligations from a bank or recognized securities dealer (or its
affiliate) and simultaneously commits to resell the obligations to that
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.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible decline in the market value of the
underlying obligations. 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 the collateral. The Fund intends to enter into
repurchase agreements only with counterparties in transactions believed by
Mitchell Hutchins to present minimum credit risks in accordance with guidelines
established by the board.
FOREIGN SECURITIES. The Fund may invest in U.S. dollar-denominated
securities of foreign issuers, including debt securities of foreign
corporations, governments and similar entities. Such investments may consist of
obligations of foreign and domestic branches of foreign banks and foreign
branches of domestic banks. Such investments 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 securities held by the Fund. Additionally, there may be less publicly
available information about foreign issuers, as these issuers may not be subject
to the same regulatory requirements as domestic issuers.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend its securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of the Fund's total assets. Lending securities enables the Fund to earn
additional income, but could result in a loss or delay in recovering these
securities.
OTHER INFORMATION. The Fund may borrow money for temporary purposes, but
not in excess of 10% of its total assets, including reverse repurchase
agreements involving up to 5% of its total assets. The Fund may invest no more
than 10% of its net assets in illiquid securities, including repurchase
agreements with maturities in excess of seven days. The Fund's investment
objective may not be changed without the affirmative vote of its shareholders.
Certain investment limitations, as described in the Statement of Additional
Information, also may not be changed without shareholder approval. All other
investment policies may be changed by the board without shareholder approval.
YEAR 2000 RISKS. Like other mutual funds, financial and business
organizations around the world, the Fund could be adversely affected if the
computer systems used by Mitchell Hutchins, other service providers and entities
with computer systems that are linked to the Fund's records do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Issue." Mitchell Hutchins is
taking steps that it
11
<PAGE>
believes are reasonably designed to address the Year 2000 Issue with respect to
the computer systems that it uses and to obtain satisfactory assurances that
comparable steps are being taken by the Fund's other major service providers.
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund.
INVESTING IN THE FUND
Shares of the Fund are available only through an exchange of shares of the
corresponding class of other PaineWebber mutual funds. No initial sales charge
is imposed on the Fund shares being acquired, and no CDSC is imposed on the
shares of the other PaineWebber mutual fund being disposed of through an
exchange. However, CDSCs may apply to redemptions of Fund shares acquired
through an exchange. See "Redemptions." Exchanges may be subject to minimum
investment requirements of the fund into which exchanges are made.
The other PaineWebber mutual funds with which Fund shares may be exchanged
include the following:
PAINEWEBBER BOND FUNDS
- HIGH INCOME FUND
- INVESTMENT GRADE INCOME FUND
- LOW DURATION U.S. GOVERNMENT INCOME FUND
- STRATEGIC INCOME FUND
- U.S. GOVERNMENT INCOME FUND
PAINEWEBBER TAX-FREE BOND FUNDS
- CALIFORNIA TAX-FREE INCOME FUND
- MUNICIPAL HIGH INCOME FUND
- NATIONAL TAX-FREE INCOME FUND
- NEW YORK TAX-FREE INCOME FUND
PAINEWEBBER ASSET ALLOCATION FUNDS
- BALANCED FUND
- TACTICAL ALLOCATION FUND
PAINEWEBBER STOCK FUNDS
- FINANCIAL SERVICES GROWTH FUND
- GROWTH FUND
- GROWTH AND INCOME FUND
- MID CAP FUND
- SMALL CAP FUND
- UTILITY INCOME FUND
PAINEWEBBER GLOBAL FUNDS
- ASIA PACIFIC GROWTH FUND
- EMERGING MARKETS EQUITY FUND
- GLOBAL EQUITY FUND
- GLOBAL INCOME FUND
MITCHELL HUTCHINS PORTFOLIOS
- AGGRESSIVE PORTFOLIO
- MODERATE PORTFOLIO
- CONSERVATIVE PORTFOLIO
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms. Shareholders who are not
PaineWebber clients must place exchange orders in writing with the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. All exchanges will be effected based on the relative net asset
values per share next determined after the exchange order is received at
PaineWebber's New York City offices or by the Transfer Agent. See "Valuation of
Shares." Exchanges may be made on any Business Day. A "Business Day" is each
day, Monday through Friday, on which the New York Stock Exchange ("NYSE") is
open.
This exchange privilege may be modified or terminated at any time, upon at
least 60 days' notice when such notice is required by SEC rules. See the
Statement of Additional Information for further details. This exchange privilege
is available only in those jurisdictions where the sale of the PaineWebber
mutual fund shares to be acquired may be legally made. Before making any
exchange, shareholders should contact their PaineWebber investment executives or
correspondent firms or the Transfer Agent to obtain more
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information and prospectuses of the PaineWebber mutual funds to be acquired
through the exchange.
REDEMPTIONS
Fund shares may be redeemed (sold) at their net asset value (subject to any
applicable CDSC), and redemption proceeds will be paid after receipt of a
redemption request, as described below. PaineWebber clients may redeem shares
through PaineWebber or its correspondent firms; all other shareholders must
redeem through the Transfer Agent. If a redeeming shareholder owns shares of
more than one class, the shares will be redeemed in the following order unless
the shareholder specifically requests otherwise: Class A shares, then Class C
shares, and finally Class B shares.
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES. Class A shares held less
than one year are subject to a CDSC if the Class A shares of the PaineWebber
mutual fund initially purchased and subsequently exchanged for Class A shares of
the Fund were purchased without an initial sales charge due to the sales charge
waiver for purchases of $1 million or more. This CDSC is equal to 1% of the
lower of (a) the public offering price of the Class A shares of the other
PaineWebber mutual fund when initially purchased or (b) the net asset value of
the Fund shares at the time of redemption. For these purposes, the holding
period of Class A shares of the Fund is calculated from the date the Class A
shares of the other PaineWebber mutual fund were initially purchased. Class A
shares will be considered to represent, as applicable, dividend and capital gain
distribution reinvestments in such other funds. Redemption order will be
determined as described for Class B shares (see "Contingent Deferred Sales
Charge--Class B Shares"). Class A shares acquired through reinvestment of
dividends and capital gain distributions are not subject to this CDSC. The CDSC
is waived for exchanges and for most redemptions in connection with the
systematic withdrawal plan. The amount of any CDSC will be paid to Mitchell
Hutchins.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A CDSC is imposed upon
most redemptions of Class B shares. The amount of the CDSC is calculated by
multiplying the percentage indicated below by the lower of (a) the net asset
value of the Class B shares of the other PaineWebber mutual fund when initially
purchased or (b) the net asset value of the Fund shares at the time of
redemption. Class B shares held six years or longer (four years or longer for
Fund shares acquired in certain exchanges for Class B shares of PaineWebber Low
Duration U.S. Government Income Fund) and Class B shares acquired through
reinvestment of dividends or capital gain distributions are not subject to the
CDSC.
REDEMPTIONS OF FUND SHARES ACQUIRED THROUGH AN EXCHANGE FOR SHARES OF
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND.
<TABLE>
<CAPTION>
CDSC AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
- ---------------------------------------- ----------------
<S> <C>
1st Year Since Purchase................. 3%
2nd Year Since Purchase................. 2
3rd Year Since Purchase................. 2
4th Year Since Purchase................. 1
5th Year Since Purchase................. None
</TABLE>
The schedule above will apply only if the exchanged shares would have been
subject to the same lower schedule had they been redeemed rather than exchanged
for Class B shares of the Fund.
REDEMPTIONS OF FUND SHARES ACQUIRED THROUGH AN EXCHANGE FOR SHARES OF ANY
OTHER PAINEWEBBER MUTUAL FUND.
<TABLE>
<CAPTION>
CDSC AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
- ---------------------------------------- ----------------
<S> <C>
1st Year Since Purchase................. 5%
2nd Year Since Purchase................. 4
3rd Year Since Purchase................. 3
4th Year Since Purchase................. 2
5th Year Since Purchase................. 2
6th Year Since Purchase................. 1
7th Year Since Purchase................. None
</TABLE>
In determining the applicability and rate of any CDSC, it will be assumed
that a redemption is
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made first of Class B shares representing the reinvestment of dividends and
capital gain distributions and then of other shares held by the shareholder for
the longest period of time. The holding period of Class B shares acquired
through an exchange with another PaineWebber mutual fund will be calculated from
the date that the Class B shares were initially acquired in one of the other
funds, and Class B shares being redeemed will be considered to represent, as
applicable, dividend and capital gain distribution reinvestments in such other
funds. This will result in any CDSC being imposed at the lowest possible rate.
The amount of any CDSC will be paid to Mitchell Hutchins.
SALES CHARGE WAIVERS--CLASS B SHARES. The CDSC will be waived for exchanges,
as described above, and for most redemptions in connection with the Fund's
systematic withdrawal plan. In addition, the CDSC will be waived for a total or
partial redemption if made within one year of the death of the shareholder. The
CDSC waiver is available where the decedent is either the sole shareholder or
owns the shares with his or her spouse as a joint tenant with right of
survivorship. This waiver applies only to redemption of shares held at the time
of death. The CDSC will also be waived in connection with a lump-sum or other
distribution in the case of an individual retirement account ("IRA"), a
self-employed individual retirement plan (so-called "Keogh Plan") or a custodial
account under Section 403(b) of the Internal Revenue Code following attainment
of age 59 1/2; a total or partial redemption resulting from a distribution
following retirement in the case of a tax-qualified retirement plan; and any
redemption resulting from a tax-free return of an excess contribution to an IRA.
CDSC waivers will be granted subject to confirmation (by PaineWebber in the
case of shareholders who are PaineWebber clients or by the Transfer Agent in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. Class C shares held less
than one year are subject to the same CDSC that would have been imposed on the
Class C shares of the PaineWebber mutual fund initially purchased and
subsequently exchanged for Class C shares of the Fund. This CDSC will be either
1% or 0.75% of the lower of (a) the net asset value of the Class C shares of the
other PaineWebber mutual fund when initially purchased or (b) the net asset
value of the Fund shares at the time of redemption. For these purposes, the
holding period of Class C shares of the Fund is calculated from the date the
Class C shares of the other PaineWebber mutual fund were initially purchased.
Class C shares will be considered to represent, as applicable, dividend and
capital gain distribution reinvestments in such other funds. Redemption order
will be determined as described for Class B shares (see "Contingent Deferred
Sales Charge--Class B Shares"). Class C shares acquired through reinvestment of
dividends and capital gain distributions are not subject to this CDSC. The CDSC
is waived for exchanges and for most redemptions in connection with the
systematic withdrawal plan. The amount of any CDSC will be paid to Mitchell
Hutchins.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder based upon the shares' net asset value next determined after receipt
of the request by PaineWebber's New York City offices. Within three Business
Days after receipt of the request, repurchase proceeds (less any applicable
CDSC) will be paid by check or credited to the shareholder's brokerage account
at the election of the shareholder. PaineWebber investment executives and
correspondent firms are responsible for promptly forwarding redemption requests
to PaineWebber's New York City offices.
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PaineWebber reserves the right not to honor any redemption request, in which
case it promptly will forward the request to the Transfer Agent for treatment as
described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients must redeem their shares through the Transfer Agent by mail;
other shareholders also may redeem Fund shares through the Transfer Agent.
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. A redemption request will be executed at the net asset value next
determined after it is received in "good order," and redemption proceeds will be
paid within seven days of receipt of the request. "Good order" means that the
request must be accompanied by the following: (1) a letter of instruction or a
stock assignment specifying the number of shares or amount of investment to be
redeemed (or that all shares credited to a Fund account be redeemed), signed by
all registered owners of the shares in the exact names in which they are
registered, (2) a guarantee of each registered owner's signature, and (3) other
supporting legal documents for estates, trusts, guardianships, custodianships,
partnerships and corporations. Shareholders are responsible for ensuring that a
request for redemption is received in "good order."
A signature guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency or savings association which is a participant in
a medallion program recognized by the Securities Transfer Association. The three
recognized medallion programs are Securities Transfer Agents Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and the New York Stock
Exchange Medallion Signature Program (MSP). Signature guarantees which are not a
part of these programs will not be accepted.
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder may have redemption
proceeds of $1 million or more wired to the shareholder's PaineWebber brokerage
account or a commercial bank account designated by the shareholder. Questions
about this option, or redemption requirements generally, should be referred to
the shareholder's PaineWebber investment executive or correspondent firm, or to
the Transfer Agent if the shares are not held in a PaineWebber brokerage
account.
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, the Fund reserves the right to redeem all Fund shares in any
shareholder account of less than $500 net asset value. If the Fund elects to do
so, it will notify the shareholder and provide the shareholder the opportunity
to increase the amount invested to $500 or more within 60 days of the notice.
The Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
TRANSFER OF ACCOUNTS. If a shareholder holding Fund shares in a PaineWebber
brokerage account transfers his brokerage account to another firm, the Fund
shares normally will be transferred to an account with the Transfer Agent.
However, if the other firm has entered into a selected dealer agreement with
Mitchell Hutchins relating to the Fund, the shareholder may be able to hold Fund
shares in an account with the other firm.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A shares
approximately six years after the date of issuance, together with a pro rata
portion of all Class B shares representing dividends and other distributions
paid in additional Class B shares. The Class B shares so converted will no
longer be subject to the higher expenses borne by Class B shares. The conversion
will be effected at the relative net asset values per share of the two classes
(normally $1.00) on the first Business Day of the month in which the sixth
anniversary of issuance occurs. See "Valuation of Shares."
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If a shareholder effects one or more exchanges among Class B shares of the
PaineWebber mutual funds during the six-year period, the holding periods for the
shares so exchanged will be counted toward the six-year period.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund declares dividends daily from its net investment income
and pays them monthly. Shares begin earning dividends on the day after the
exchange is effected and continue to receive dividends declared through the date
of redemption. The Fund distributes its net short-term capital gain annually but
may make more frequent distributions of such gain if necessary to maintain its
net asset value per share at $1.00 or to avoid income or excise taxes. The Fund
does not expect to realize net long-term capital gain and thus does not
anticipate payment of any long-term capital gain distributions. Dividends paid
on all classes of shares are calculated at the same time and in the same manner.
Dividends on Class B and Class C shares are expected to be lower than those on
Class A shares because of the higher expenses resulting from the distribution
fees borne by the Class B and Class C shares. Dividends on each class also might
be affected differently by the allocation of other class-specific expenses.
Dividends are paid in additional Fund shares of the same class unless the
shareholder requests cash payments. Shareholders who wish to receive dividends
in cash, either mailed to the shareholder by check or credited to the
shareholder's PaineWebber account, should contact their PaineWebber investment
executives or correspondent firms.
TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of net investment income and net short-term capital gain,
if any) that it distributes to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or in additional Fund shares) are taxable to its shareholders as ordinary
income to the extent of its earnings and profits. Shareholders not subject to
tax on their income will not be required to pay tax on amounts distributed to
them.
The Fund notifies its shareholders following the end of each calendar year
of the amount of dividends paid that year.
The Fund is required to withhold 31% of all dividends payable to any
individuals and certain other noncorporate shareholders who do not provide the
Fund with a correct taxpayer identification number or who otherwise are subject
to backup withholding.
No gain or loss will be recognized to a shareholder as a result of a
conversion of Class B shares to Class A shares.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be other
federal, state or local tax considerations applicable to a particular investor.
Prospective shareholders are urged to consult their tax advisers.
VALUATION OF SHARES
The Fund uses its best efforts to maintain its net asset value at $1.00 per
share. Net asset value per share is determined by dividing the Fund's net assets
by the total number of Fund shares outstanding. The Fund's net assets are equal
to the value of the Fund's investments and its other assets less its
liabilities. Net asset value is determined separately for each class as of the
close of regular trading on the NYSE (currently 4:00 p.m., Eastern time) each
Business Day.
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The Fund values its portfolio securities using the amortized cost method of
valuation, under which market value is approximated by amortizing the difference
between the acquisition cost and value at maturity of an instrument on a
straight-line basis over its remaining life. All cash, receivables and current
payables are carried at their face value. Other assets, if any, are valued at
fair value as determined in good faith by or under the direction of the board.
MANAGEMENT
The board, as part of its overall management responsibility, oversees
various organizations responsible for the Fund's day-to-day management. Mitchell
Hutchins, the Fund's investment adviser and administrator, makes and implements
all investment decisions and supervises all aspects of the Fund's operations.
Mitchell Hutchins receives a monthly fee for these services at the annual rate
of 0.50% of the Fund's average daily net assets.
In accordance with procedures adopted by the Fund's board, the Fund may pay
fees to PaineWebber for its services as lending agent in its portfolio
securities lending program. Mitchell Hutchins investment personnel may engage in
securities transactions for their own accounts pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New
York 10019, and is an asset management subsidiary of PaineWebber, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. As of May 31, 1998, Mitchell Hutchins was adviser or subadviser
of 31 investment companies with 69 separate portfolios and aggregate assets of
over $39.7 billion.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins is the distributor of Fund
shares and has appointed PaineWebber as the exclusive dealer for the sale of
Fund shares. Under separate plans of distribution pertaining to the Class A
shares, the Class B shares and the Class C shares ("Class A Plan," "Class B
Plan" and "Class C Plan," collectively, "Plans"), the Fund pays Mitchell
Hutchins:
- Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
- Monthly distribution fees at the annual rate of 0.50% of the average daily
net assets of Class B and Class C shares.
Under the Plans, Mitchell Hutchins uses the service fees primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in the Fund by PaineWebber clients.
PaineWebber passes on a portion of these fees to its investment executives to
compensate them for shareholder servicing that they perform and retains the
remainder to offset its own expenses in servicing and maintaining shareholder
accounts. These expenses may include costs of the PaineWebber branch office in
which the investment executive is based, such as rent, communications equipment,
employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to offset the Fund's marketing costs attributable to those classes, such
as preparation of sales literature, advertising and printing and distributing
prospectuses and other shareholder materials to prospective investors. Mitchell
Hutchins also may use the distribution fees to pay additional compensation to
PaineWebber and other costs allocated to Mitchell Hutchins' and PaineWebber's
distribution activities, including employee salaries, bonuses and other overhead
expenses. These expenses may include the branch office costs noted above.
Because shares of the Fund may be acquired only
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through an exchange of shares of other PaineWebber mutual funds, Mitchell
Hutchins does not pay commissions to PaineWebber for selling Fund shares.
Mitchell Hutchins receives the proceeds of the CDSCs paid upon certain
redemptions and may use these proceeds for any of the expenses described above.
See "Redemptions."
During the period they are in effect, the Plans and related distribution
contracts pertaining to each class of shares ("Distribution Contracts") obligate
the Fund to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed its service or distribution fees, the Fund will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. The Fund will
pay the service and distribution fees to Mitchell Hutchins until either the
applicable Plan or Distribution Contract is terminated or not renewed. In that
event, Mitchell Hutchins' expenses in excess of service and distribution fees
received or accrued through the termination date will be Mitchell Hutchins' sole
responsibility and not obligations of the Fund. In their annual consideration of
the continuation of each Plan, the directors will review the Plan and Mitchell
Hutchins' corresponding expenses for each class separately from the Plans and
expenses for the other two classes.
PERFORMANCE INFORMATION
From time to time the Fund may advertise its "yield" and "effective yield."
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The "yield" of the Fund is the income on an
investment in the Fund over a specified seven-day period. This income is then
"annualized" (that is, assumed to be earned each week over a 52-week period) and
shown as a percentage of the investment. The "effective yield" is calculated
similarly, but when annualized the income earned is assumed to be reinvested.
The "effective yield" will be higher than the "yield" because of the compounding
effect of this assumed reinvestment.
GENERAL INFORMATION
ORGANIZATION. PaineWebber Master Series, Inc. is registered with the SEC as
a diversified, open-end management investment company and was incorporated in
Maryland on October 29, 1985. The Fund commenced operations on September 26,
1986. The Corporation has authority to issue 10 billion shares of common stock
of separate series, par value $.001 per share; one billion of these shares are
classified as shares of the Fund.
The outstanding shares of common stock of the Fund are divided into three
Classes, designated Class A shares, Class B shares and Class C shares. Each
class represents interests in the same assets of the Fund. The classes differ as
follows: (1) each class of shares has exclusive voting rights on matters
pertaining to its plan of distribution; (2) Class A shares may be subject to a
CDSC upon certain redemptions within one year of purchase; (3) Class B shares
bear ongoing distribution fees, are subject to a CDSC upon most redemptions and
will automatically convert to Class A shares approximately six years after
issuance; (4) Class C shares may be subject to a CDSC if redeemed within one
year of purchase, bear ongoing distribution expenses and do not convert into
another class; and (5) each class may bear differing amounts of certain
class-specific expenses. The different sales charges and other expenses
applicable to the different classes of Fund shares may affect the performance of
those classes.
The Corporation does not hold annual shareholder meetings. There normally
will be no meetings of shareholders to elect directors unless fewer than a
majority of the directors holding office have
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been elected by shareholders. Shareholders of record holding at least two-thirds
of the outstanding shares of the Corporation may remove a director by votes cast
in person or by proxy at a meeting called for that purpose. The directors are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any director when so requested in writing by the
shareholders of record holding at least 10% of the Corporation's outstanding
shares.
Each share of the Fund is entitled to participate equally in dividends and
other distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the three classes, dividends are likely to be lower
for the Class B and Class C shares than for the Class A shares.
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 the shares of the
Corporation may elect all of its directors. The shares of the Fund will be voted
together, except that only the shareholders of a particular class of the Fund
may vote on matters affecting only that class, such as the terms of a Plan as it
relates to a class. The shares of each series of the Corporation will be voted
separately, except when an aggregate vote of all the securities is required by
law.
CERTIFICATES. To avoid additional operating costs and for investor
convenience, the Fund does not issue share certificates. Ownership of Fund
shares is recorded on a stock register by the Transfer Agent and shareholders
have the same rights of ownership with respect to such shares as if certificates
had been issued.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, One
Heritage Drive, North Quincy, Massachusetts 02171, is custodian of the Fund's
assets. PFPC Inc., a subsidiary of PNC Bank, N.A., 400 Bellevue Parkway,
Wilmington, Delaware 19809, is the Fund's transfer and dividend disbursing
agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of
purchases and redemptions of Fund shares. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semiannual financial
statements of the Fund.
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Shares of the Fund can be exchanged for shares of the following PaineWebber
Mutual Funds:
PAINEWEBBER BOND FUNDS
- - High Income Fund
- - Investment Grade Income Fund
- - Low Duration U.S. Government Income Fund
- - Strategic Income Fund
- - U.S. Government Income Fund
PAINEWEBBER TAX-FREE BOND FUNDS
- - California Tax-Free Income Fund
- - Municipal High Income Fund
- - National Tax-Free Income Fund
- - New York Tax-Free Income Fund
PAINEWEBBER ASSET ALLOCATION FUNDS
- - Balanced Fund
- - Tactical Allocation Fund
PAINEWEBBER STOCK FUNDS
- - Financial Services Growth Fund
- - Growth Fund
- - Growth and Income Fund
- - Mid Cap Fund
- - Small Cap Fund
- - Utility Income Fund
PAINEWEBBER GLOBAL FUNDS
- - Asia Pacific Growth Fund
- - Emerging Markets Equity Fund
- - Global Equity Fund
- - Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
- - Aggressive Portfolio
- - Moderate Portfolio
- - Conservative Portfolio
--------------
A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read the prospectus carefully before investing.
- -C-1998 PaineWebber Incorporated
PAINEWEBBER
MONEY
MARKET
/ / FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Highlights................................................................ 3
Financial Highlights...................................................... 6
Investment Objective and Policies......................................... 9
Investing in the Fund..................................................... 12
Redemptions............................................................... 13
Conversion of Class B Shares.............................................. 15
Dividends and Taxes....................................................... 16
Valuation of Shares....................................................... 16
Management................................................................ 17
Performance Information................................................... 18
General Information....................................................... 18
</TABLE>
PROSPECTUS
July 1, 1998
<PAGE>
PAINEWEBBER MONEY MARKET FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Money Market Fund ("Fund") is a diversified series of
PaineWebber Master Series, Inc. ("Corporation"), a professionally managed mutual
fund. The Fund's investment adviser, administrator and distributor is Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the Fund, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of Fund shares. This Statement of
Additional Information is not a prospectus and should be read only in
conjunction with the Fund's current Prospectus, dated July 1, 1998. A copy of
the Prospectus may be obtained by calling any PaineWebber investment executive
or correspondent firm or by calling toll-free 1-800-647-1568. This Statement of
Additional Information is dated July 1, 1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
YIELDS AND RATINGS OF MONEY MARKET INSTRUMENTS. The yields on the money
market instruments in which the Fund invests (such as U.S. government
securities, commercial paper and bank obligations) are dependent on a variety of
factors, including general money market conditions, conditions in the particular
market for the obligation, the financial condition of the issuer, the size of
the offering, the maturity of the obligation and the ratings of the issue. The
ratings of nationally recognized statistical rating organizations ("NRSROs")
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. In the event that a security
in the Fund's portfolio ceases to be a "First Tier" security, as defined below,
or Mitchell Hutchins becomes aware that a security has received a rating below
the second highest rating by any NRSRO, Mitchell Hutchins, and in certain cases
the Corporation's board of directors ("board"), will consider whether the Fund
should continue to hold the obligation. A "First Tier" security is a security
that is either (1) rated in the highest short-term rating category by at least
two NRSROs, (2) rated in the highest short-term rating category by a single
NRSRO if only that NRSRO has assigned the obligation a short-term rating, (3)
was issued by an issuer that has received such a short-term rating with respect
to a security that is comparable in priority and security, or (4) unrated, but
determined by Mitchell Hutchins to be of comparable quality. A First Tier
security rated in the highest short-term rating category by a single NRSRO at
the time of purchase that subsequently receives a rating below the highest
rating category from a different NRSRO will continue to be considered a First
Tier security.
VARIABLE AND FLOATING RATE DEMAND INSTRUMENTS. The Fund may invest in
variable and floating rate securities with demand features. A demand feature
gives the Fund the right to sell the securities back to a specified party,
usually a remarketing agent, on a specified date, at a price equal to their
amortized cost value plus accrued interest. A demand feature is often backed by
a letter of credit, guarantee or other liquidity support arrangement from a bank
or other financial institution, that may be drawn upon demand,
<PAGE>
after specified notice, for all or any part of the exercise price of the demand
feature. Generally, the Fund intends to exercise demand features (1) upon a
default under the terms of the underlying security, (2) to maintain the Fund's
portfolio in accordance with its investment objective and policies or applicable
legal or regulatory requirements or (3) as needed to provide liquidity to the
Fund in order to meet redemption requests. The ability of a bank or other
financial institution to fulfill its obligations under a letter of credit,
guarantee or other liquidity arrangement might be affected by possible financial
difficulties of its borrowers, adverse interest rate or economic conditions,
regulatory limitations or other factors. The interest rate on floating rate or
variable rate securities ordinarily is readjusted on the basis of the prime rate
of the bank that originated the financing or some other index or published rate,
such as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect
market rates of interest. Generally, these interest rate adjustments cause the
market value of floating rate and variable rate securities to fluctuate less
than the market value of fixed rate obligations.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to any security in which it is authorized to invest, except that
securities subject to repurchase agreements may have maturities in excess of 13
months. The Fund maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or securities dealer to pay the
repurchase price on the date agreed to or upon demand is, in effect, secured by
such securities. If the value of these securities is less than the repurchase
price, plus any agreed-upon additional amount, the other party to the agreement
must provide additional collateral so that at all times the collateral is at
least equal to the repurchase price plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price that was paid by the Fund upon acquisition is accrued
as interest and included in the Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities. The Fund intends to enter into repurchase agreements
only with banks and dealers in transactions believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
board. Mitchell Hutchins will review and monitor the creditworthiness of those
institutions under the board's general supervision.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of its total assets. Such agreements involve the sale of securities
held by the Fund subject to the Fund's agreement to repurchase the securities at
an agreed-upon date or upon demand and at a price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes. While a reverse repurchase
agreement is outstanding, the Fund's custodian segregates assets to cover the
Fund's obligations under the reverse repurchase agreement. See "Investment
Policies and Restrictions--Segregated Accounts."
ILLIQUID SECURITIES. The Fund will not invest more than 10% of its net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which 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 to be liquid pursuant to guidelines established by the
board. To the extent the Fund invests in illiquid securities, it may not be able
to readily liquidate such investments and may have to sell other investments if
necessary to raise cash to meet its obligations.
2
<PAGE>
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the 1993 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, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment in order to satisfy share
redemption orders. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
the Fund, however, could affect adversely the marketability of such portfolio
securities, and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
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, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities held by the Fund and reports periodically on such
decisions to the board.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities on a "when-issued" or "delayed delivery" basis. 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 "Investment Policies and Restrictions--Segregated Accounts."
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, the Fund 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.
3
<PAGE>
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with the Fund's custodian, 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 cash collateral in money
market instruments or other short-term liquid investments. In determining
whether to lend securities to a particular broker-dealer or institutional
investor, Mitchell Hutchins will consider, and during the period of the loan
will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any of its loans at any time. The Fund may pay reasonable fees in connection
with a loan and may pay the borrower or placing broker a negotiated portion of
the interest earned on the reinvestment of cash held as collateral. The Fund
will receive amounts equivalent to any dividends, interest or other
distributions on the securities loaned. The Fund will regain record ownership of
loaned securities to exercise beneficial rights, such as voting and subscription
rights, when regaining such rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the board governing the Fund's securities
lending program, PaineWebber has been retained to serve as lending agent for the
Fund. The board also has authorized the payment of fees (including fees
calculated as a percentage of invested cash collateral) to PaineWebber for these
services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber acted as lending agent.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed without the affirmative vote of the lesser of (1) more than
50% of the outstanding shares of the Fund or (2) 67% or more of the Fund's
shares present at a shareholders' meeting if more than 50% of the outstanding
Fund shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
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
4
<PAGE>
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) with respect to this limitation, domestic and
foreign banking will be considered to be different industries; and (b) with
respect to this limitation, 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 of 1940 ("1940 Act") and then not in excess of
33 1/3% of the Fund's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the Fund
may borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a
loan.
(5) engage in the business of underwriting securities of other issuers, except
to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(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 not
fundamental and may be changed by the vote of the board without shareholder
approval.
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.
5
<PAGE>
(3) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange,
or as a result of reorganization, consolidation, or merger.
(4) purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding.
DIRECTORS AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The directors and executive officers of the Corporation, their ages,
business addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
- ------------------------------------ -------------------- ---------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Director and Mrs. Alexander is president, chief executive
President officer and a director of Mitchell Hutchins
(since January 1995) and an executive vice
president and director of PaineWebber (since
March 1984). Mrs. Alexander is president and a
director or trustee of 31 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Richard Q. Armstrong; 63 Director Mr. Armstrong is chairman and principal of RQA
78 West Brother Drive Enterprises (management consulting firm) (since
Greenwich, CT 06830 April 1991 and principal 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 con-
glomerate, 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 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
- ------------------------------------ -------------------- ---------------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 71 Director and Mr. Bewkes is a director of Paine Webber Group Inc.
Chairman of the ("PW Group") (holding company of PaineWebber and
Board Mitchell Hutchins). Prior to December 1995, he
was a consultant to PW Group. Prior to 1988, he
was chairman of the board, president and chief
executive officer of American Bakeries Company.
Mr. Bewkes is a director of Interstate Bakeries
Corporation and NaPro BioTherapeutics, Inc. Mr.
Bewkes is a director or trustee of 31 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Richard R. Burt; 51 Director Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave. N.W. (international investments and consulting firm)
Washington, D.C. 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp., Powerhouse
Technologies Inc. and Wierton Steel Corp. He was
the chief negotiator in the Strategic Arms
Reduction Talks with the former Soviet Union
(1989-1991) and the U.S. Ambassador to the
Federal Republic of Germany (1985-1989). Mr. Burt
is a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Mary C. Farrell**; 48 Director Ms. Farrell is a managing director, senior
investment strategist and member of
the Investment Policy Committee of PaineWebber.
Ms. Farrell joined PaineWebber in 1982. She is a
member of the Financial Women's Association and
Women's Economic Roundtable, and appears as a
regular panelist on Wall $treet Week with Louis
Rukeyser. She also serves on the Board of
Overseers of New York University's Stern School
of Business. Ms. Farrell is a director or trustee
of 30 investment companies for which Mitchell
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
- ------------------------------------ -------------------- ---------------------------------------------------
<S> <C> <C>
Hutchins or PaineWebber serves as investment
adviser.
Meyer Feldberg; 56 Director Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of
New York, New York 10027 the Illinois Institute of Technology. Dean
Feldberg is a director of Primedia Inc.,
Federated Department Stores, Inc. and Revlon,
Inc.. Dean Feldberg is a director or trustee of
30 investment companies for which Mitchell
Hutchins or PaineWebber serves as an investment
adviser.
George W. Gowen; 68 Director Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, New York 10017 1994, he was a partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a director of Columbia
Real Estate Investments, Inc. Mr. Gowen is a
director or trustee of 30 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Frederic V. Malek; 61 Director Mr. Malek is chairman of Thayer Merchant Capital
1455 Pennsylvania Ave. N.W. Partners (merchant bank). From January 1992 to
Suite 350 November 1992, he was campaign manager of
Washington, D.C. 20004 Bush-Quayle '92. From 1990 to 1992, he was vice
chairman and, from 1989 to 1990, he was president
of Northwest Airlines Inc., NWA Inc. (holding
company of Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of NWA Inc.).
Prior to 1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline
catering and contract feeding), where he most
recently was an executive vice president and
president of Marriott Hotels and Resorts. Mr.
Malek is also a director of American Management
Systems, Inc. (management consulting and
computer-related services), Automatic Data
Processing, Inc., CB Commercial Group, Inc. (real
estate services), Choice Hotels International
(hotel and hotel franchising), FPL Group,
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
- ------------------------------------ -------------------- ---------------------------------------------------
<S> <C> <C>
Inc. (electric services), Manor Care, Inc.
(healthcare) and Northwest Airlines Inc. Mr.
Malek is a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Carl W. Schafer; 62 Director Mr. Schafer is president of the Atlantic Foun-
66 Witherspoon Street #1100 dation (charitable foundation supporting mainly
Princeton, New Jersey 08542 oceanographic exploration and research). He is a
director of Base Ten Systems, Inc. (software),
Roadway Express, Inc. (trucking), The Guardian
Group of Mutual Funds, Loevner Funds, Evans
Systems, Inc. (motor fuels, convenience store and
diversified company), Electronic Clearing House,
Inc. (financial transactions processing),
Frontier Oil Corporation and Nutraceutix Inc.
(biotechnology company). Prior to January 1993,
Mr. Schafer was chairman of the Investment
Advisory Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or trustee
of 30 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing director and chief
investment officer--quantitative investments of
Mitchell Hutchins. Prior to September 1994, he
was a senior vice president at Vantage Global
Management. Prior to June 1993, he was a senior
vice president at Mitchell Hutchins. Mr. Barneby
is a vice president of six investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
John J. Lee; 29 Vice President and Mr. Lee is a vice president and manager of the
Assistant Treasurer 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
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
- ------------------------------------ -------------------- ---------------------------------------------------
<S> <C> <C>
Hutchins or PaineWebber serves as investment
adviser.
Dennis McCauley; 51 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was director
of fixed income investments of IBM Corporation.
Mr. McCauley is a vice president of 21 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Ann E. Moran; 40 Vice President and Ms. Moran is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 31 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president and deputy
Secretary general counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and secretary of 30
investment companies, and vice president and
assistant secretary of one investment company for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior vice president and director
of operations and control for Mitchell Hutchins.
From March 1991 to September 1993 he was director
of the mutual funds sales support and service
center for Mitchell Hutchins and PaineWebber. Mr.
Polito is vice president of 31 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Susan Ryan; 38 Vice President Ms. Ryan is a senior vice president and portfolio
manager of Mitchell Hutchins and has been with
Mitchell Hutchins since 1982. Ms. Ryan is a vice
president of five investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
- ------------------------------------ -------------------- ---------------------------------------------------
<S> <C> <C>
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. Prior to May 1994,
she was a partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice president of 30
investment companies and a vice president and
secretary of one investment company for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice president and the
Treasurer director of the mutual fund finance department of
Mitchell Hutchins. From August 1992 to August
1994, he was a vice president of BlackRock
Financial Management L.P. Mr. Schubert is a vice
president and treasurer of 31 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Nirmal Singh; 42 Vice President Mr. Singh is a senior vice president and a port-
folio manager of Mitchell Hutchins. Prior to
1993, he was a member of the portfolio man-
agement team at Merrill Lynch Asset Management,
Inc. Mr. Singh is a vice president of four
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Barney A. Taglialatela; 37 Vice President and Mr. Taglialatela is a vice president and a manger
Assistant Treasurer of the mutual fund finance department of Mitchell
Hutchins. Prior to February 1995, he was a
manager of the mutual fund finance division of
Kidder Peabody Asset Management, Inc. Mr.
Taglialatela is a vice president and assistant
treasurer of 31 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Mark A. Tincher; 42 Vice President Mr. Tincher is a managing director and
chief investment officer--equities of Mitchell
Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds management
and equity research areas of Chase Manhattan
Private Bank. Mr. Tincher
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE CORPORATION OTHER DIRECTORSHIPS
- ------------------------------------ -------------------- ---------------------------------------------------
<S> <C> <C>
is a vice president of 13 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Craig M. Varrelman; 39 Vice President Mr. Varrelman is a senior vice president and a
portfolio manager of Mitchell Hutchins. Mr.
Varrelman is a vice president of four investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Keith A. Weller; 36 Vice President and Mr. Weller is a first vice president and associate
Assistant Secretary general counsel of Mitchell Hutchins. Prior to
May 1995, he was an attorney in private practice.
Mr. Weller is a vice president and assistant
secretary of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Ian W. Williams; 41 Vice President and Mr. Williams is a vice president and a manger of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Mr. Williams is a vice president and
assistant treasurer of 31 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
- ---------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, N.Y. 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Corporation as defined in the 1940 Act by virtue of their positions with
Mitchell Hutchins, PaineWebber and/or PW Group.
The Corporation pays directors who are not interested persons of the
Corporation $1,000 annually for the Fund and $1,500 annually for the
Corporation's other series and $150 per series for each meeting of a board
committee (other than committee meetings held on the same day as a board
meeting). The Corporation thus pays each such director $2,500 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
complex receives additional compensation aggregating $15,000 annually from the
relevant funds. All directors are reimbursed for any expenses incurred in
attending meetings. Directors and officers of the Corporation own in the
aggregate less than 1% of the shares of the Fund. Because PaineWebber and
Mitchell Hutchins perform substantially all of the services necessary for the
operation of the Corporation and the Fund, the Corporation requires no
employees. No officer, director or employee of PaineWebber or Mitchell Hutchins
presently receives any compensation from the Corporation for acting as director
or officer.
12
<PAGE>
The table below includes certain information relating to the compensation of
the Corporation's current directors who held office with the Corporation or
other PaineWebber funds during the Fund's fiscal year ended February 28, 1998.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM THE
COMPENSATION CORPORATION
FROM THE AND THE
NAME OF PERSON, POSITION CORPORATION* COMPLEX**
- -------------------------------------------------- -------------- --------------
<S> <C> <C>
Richard Q. Armstrong, Director.................... $ 4,600 $ 94,885
Richard R. Burt, Director......................... 4,300 87,085
Meyer Feldberg, Director.......................... 4,600 117,853
George W. Gowen, Director......................... 5,192 101,567
Frederic V. Malek, Director....................... 4,600 95,845
Carl W. Schafer, Director......................... 4,600 94,885
</TABLE>
- ---------
+ Only independent board members are compensated by the Corporation and
identified above; directors who are "interested persons," as defined by the
1940 Act, do not receive compensation.
* Represents fees paid to each director during the fiscal year ended February
28, 1998.
** Represents total compensation paid to each director during the calendar year
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholders are shown in the Fund's records as owning more
than 5% of its shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE OF
SHARES BENEFICIALLY OWNED
NAME AND ADDRESS* AS OF MAY 31, 1998
- ------------------------------------------------ -------------------------
<S> <C> <C>
Decten Fund L.P. 4,254,130 6.96%
Independent Trust Corp.
Custodian Ian Trust Funds 11,243,241 18.41%
Independent Trust Corp.
Trust Fund 5,938,324 9.72%
</TABLE>
- ---------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management, Inc., 1285 Avenue of the Americas, New York, NY 10019.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins acts
as the investment adviser and administrator of the Fund pursuant to a contract
with the Corporation dated August 4, 1988 ("Advisory Contract"). Under the
Advisory Contract, the Fund pays Mitchell Hutchins a fee, computed daily and
paid monthly, at the annual rate of 0.50% of the Fund's average daily net
assets.
During the fiscal years ended February 28, 1998, February 28, 1997 and
February 29, 1996, the Fund paid (or accrued) to Mitchell Hutchins investment
advisory and administrative fees of $202,449, $215,423, and $312,991,
respectively.
13
<PAGE>
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) $5,548 for the
period March 1, 1997 to July 31, 1997; $13,300 for the fiscal year ended
February 28, 1997; and $17,432 for the fiscal year ended February 29, 1996.
Effective August 1, 1997, PFPC (not the Funds) pays PaineWebber for certain
transfer agency related services that PFPC has delegated to PaineWebber.
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. 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 in such manner as the board deems
to be fair and equitable. Expenses borne by the Fund include the following (or
the Fund's share of the following): (1) the cost (including any brokerage
commissions) of securities purchased or sold by the Fund and any losses incurred
in connection therewith; (2) fees payable to and expenses incurred on behalf of
the Fund by Mitchell Hutchins; (3) organizational expenses; (4) filing fees and
expenses relating to the registration and qualification of the Fund's shares and
the Corporation under federal and state securities laws and maintenance of such
registrations and qualifications; (5) fees and salaries payable to directors who
are not interested persons of the Corporation or Mitchell Hutchins; (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 the independent
directors; (11) charges of custodians, transfer agents and other agents; (12)
expenses of setting in type and printing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials 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 Corporation or the Fund; (14) fees,
voluntary assessments and other expenses incurred in connection with membership
in investment company organizations; (15) costs of mailing and tabulating
proxies and costs of meetings of shareholders, the board and any committees
thereof; (16) the cost of investment company literature and other publications
provided to directors and officers; and (17) costs of mailing, stationery and
communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Advisory Contract terminates
automatically upon assignment and is terminable with respect to the Fund at any
time without penalty by the board or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.
14
<PAGE>
The following table shows the approximate net assets as of May 31, 1998,
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.
<TABLE>
<CAPTION>
INVESTMENT CATEGORY NET ASSETS ($ MIL)
- -------------------------------------------------- ------------------
<S> <C>
Domestic (excluding Money Market)................. $ 7,322.7
Global............................................ 3,788.7
Equity/Balanced................................... 6,260.8
Fixed Income (excluding Money Market)............. 4,850.6
Taxable Fixed Income.......................... 3,267.9
Tax-Free Fixed Income......................... 1,582.7
Money Market Funds................................ 28,628.3
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of the PaineWebber funds and other
Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber funds and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class C shares of the Fund under separate distribution
contracts with the Corporation (collectively, "Distribution Contracts"). Each
Distribution Contract requires Mitchell Hutchins to use its best efforts,
consistent with its other businesses, to sell shares of the Fund. Shares of the
Fund are offered continuously. Under separate exclusive dealer agreements
between Mitchell Hutchins and PaineWebber relating to the Class A, Class B and
Class C shares of the Fund (collectively, "Exclusive Dealer Agreements"),
PaineWebber and its correspondent firms sell the Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of the Fund adopted by the Corporation in the manner prescribed
under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class C
Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of shares. Under the Class B and Class C Plans,
the Fund pays Mitchell Hutchins distribution fees, accrued daily and payable
monthly, at the annual rate of 0.50% of the average daily net assets of the
Class B shares and the Class C shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the board at least quarterly, and the board 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 outstanding shares of the relevant Class 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.
15
<PAGE>
In reporting amounts expended under the Plans to the directors, Mitchell
Hutchins will allocate expenses attributable to the sale of each class of Fund
shares to such class based on the ratio of sales of shares of such class to the
sales of all three classes of shares. The fees paid by one class of Fund shares
will not be used to subsidize the sale of any other class of Fund shares.
For the fiscal year ended February 28, 1998, the Fund paid (or accrued) fees
to Mitchell Hutchins under the Plans as follows: Class A--$38,643, Class
B--$141,332 and Class C--$46,409.
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Fund for the fiscal year ended February 28, 1998:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------- --------- ---------
<S> <C> <C> <C>
Marketing and advertising......................... $ 29,871 $ 36,221 $ 12,162
Amortization of commissions....................... N/A 54,170 11,757
Printing of prospectuses and statements of
additional information for other than current
shareholders.................................... 285 346 116
Branch network costs allocated and interest
expense......................................... 68,706 88,555 28,180
Service fees paid to PaineWebber investment
executives...................................... 14,685 17,903 5,878
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins in its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. "Branch network costs
allocated and interest expense" consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of the Fund's
shares, including the PaineWebber retail branch system.
In approving the Class A Plan, the board considered all the features of the
distribution system, including (1) the benefit to the Fund and its shareholders
of the Fund being available as an exchange vehicle for the Class A shares of
other PaineWebber mutual funds such that Class A Fund shares could be exchanged
with Class A shares of other PaineWebber mutual funds without an initial sales
charge being incurred, (2) the advantages to the shareholders of economies of
scale resulting from growth in the Fund's assets and potential continued growth,
(3) the services provided to the Fund and its shareholders by Mitchell Hutchins,
(4) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (5) Mitchell Hutchins' shareholder
service-related expenses and costs.
In approving the Class B Plan, the board considered all the features of the
distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
benefit to the Fund and its shareholders of the Fund being available as an
exchange vehicle for shares of the corresponding class of other PaineWebber
mutual funds such that Class B Fund shares could be exchanged with shares of the
corresponding class of other PaineWebber mutual funds without a contingent
deferred sales charge being incurred; (3) the advantages to the shareholders of
economies of scale resulting from growth in the Fund's assets and potential
continued growth, (4) the services provided to the Fund and its shareholders by
Mitchell Hutchins, (5) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (6) Mitchell Hutchins'
shareholder service and distribution-related expenses and costs.
In approving the Class C Plan, the board considered all the features of the
distribution system, including (1) the benefit to the Fund and its shareholders
of the Fund being available as an exchange vehicle for shares of the
corresponding class of other PaineWebber mutual funds, (2) the advantage to
16
<PAGE>
investors in paying for distribution on an ongoing basis, (3) Mitchell Hutchins'
belief that the ability of PaineWebber investment executives and correspondent
firms to receive sales compensation for their sales of Class C shares on an
ongoing basis, along with continuing service fees, while their customers invest
their entire purchase payments immediately in Class C shares and do not face
contingent deferred sales charges for shares held more than one year, would
prove attractive to the investment executives and correspondent firms, resulting
in greater growth to the Fund than might otherwise be the case, (4) the
advantages to the shareholders of economies of scale resulting from growth in
the Fund's assets and potential continued growth, (5) the services provided to
the Fund and its shareholders by Mitchell Hutchins, (6) the services provided by
PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (7) Mitchell Hutchins' shareholder service and distribution-related expenses
and costs. The directors also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges or contingent deferred
sales charges upon redemption of shares held more than one year, was conditioned
upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the board considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, distribution fees and contingent
deferred sales charges. The board also considered the benefits that would accrue
to Mitchell Hutchins under each Plan in that Mitchell Hutchins would receive
service, distribution and advisory fees which are calculated based upon a
percentage of the average net assets of the Fund, which fees would increase if
the Plan were successful and the Fund attained and maintained significant asset
levels.
For the fiscal year ended February 28, 1998, Mitchell Hutchins earned and
retained the following contingent deferred sales charges paid upon certain
redemptions of Class A, Class B and Class C shares:
<TABLE>
<S> <C>
Class A............. $ 1,121
Class B............. $ 82,318
Class C............. $ 6,118
</TABLE>
PORTFOLIO TRANSACTIONS
The Advisory Contract authorizes Mitchell Hutchins (with the approval of the
board) to select brokers and dealers to execute purchases and sales of the
Fund's portfolio securities. It directs Mitchell Hutchins to use its best
efforts to obtain the best available price and most favorable execution with
respect to all transactions for the Fund. To the extent that the execution and
price offered by more than one dealer are comparable, Mitchell Hutchins may, in
its discretion, effect transactions in portfolio securities with dealers who
provide the Fund with research, analysis, advice and similar services. The Fund
will not purchase portfolio securities at a higher price or sell such securities
at a lower price in connection with transactions effected with a dealer, acting
as principal, who furnishes research services to Mitchell Hutchins than would be
the case if no weight were given by Mitchell Hutchins to the dealer's furnishing
of such services. 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 those
transactions, Mitchell Hutchins will not purchase securities at a higher price
or sell securities at a lower price than would otherwise be paid if no weight
was attributed to the services provided by the executing dealer. Moreover,
Mitchell Hutchins will not enter into any explicit soft dollar arrangements
relating to principal transactions and will not receive in principal
transactions the types of services that could be purchased for hard dollars.
Mitchell Hutchins may engage in agency transactions in over-the-counter
17
<PAGE>
("OTC") equity and debt securities in return for research and execution
services. These transactions are entered into only in compliance with procedures
ensuring that the transaction (including commissions) is at least as favorable
as it would have been if effected directly with a market-maker that did not
provide research or execution services. These procedures include Mitchell
Hutchins receiving multiple quotes from dealers before executing the
transactions on an agency basis. Research services furnished by the 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 dealers in connection with
other funds or accounts that Mitchell Hutchins advises may be used by Mitchell
Hutchins in advising the Fund. Since its inception, the Fund has not paid any
brokerage commissions, nor has it allocated any transactions to dealers for
research, analysis, advice and similar services. Information and research
received from such dealers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contract.
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.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s) as
to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned or upon
its ability to complete its entire order, in other cases it is believed that
coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
HOLDINGS OF REGULAR BROKER-DEALERS. As of February 28, 1998, the Fund held
the following securities issued by entities which are regular broker-dealers for
the Fund:
<TABLE>
<CAPTION>
ISSUER TYPE OF SECURITY VALUE
- --------------------------------------------------- -------------------------------------- ----------
<S> <C> <C>
Goldman Sachs & Company Commercial Paper $ 994,378
Merrill Lynch & Company, Incorporated Commercial Paper 997,560
Bear Stearns Companies, Incorporated Short-Term Corporate Obligations 500,000
Lehman Brothers Holdings, Incorporated Short-Term Corporate Obligations 200,837
</TABLE>
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION;
REDUCED SALES CHARGES
As discussed in the Prospectus, shares of the Fund may be exchanged for
shares of the corresponding Class of most other PaineWebber mutual funds.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce an exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are
18
<PAGE>
suspended under the circumstances described below or the Fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the Fund's investment objective, policies and
restrictions.
If conditions exist which make cash payments undesirable, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The Corporation has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
one shareholder. This election is irrevocable unless the Securities and Exchange
Commission ("SEC") permits its withdrawal. The Fund may suspend redemption
privileges or postpone the date of payment during any period (1) when the New
York Stock Exchange ("NYSE") is closed or trading on the NYSE is restricted as
determined by the SEC, (2) when an emergency exists, as defined by the SEC,
which makes it not reasonably practicable for the Fund to dispose of securities
owned by it or to determine fairly 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.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemptions of shares held at the time of death.
CONVERSION OF CLASS B SHARES
Class B shares will automatically convert to Class A shares, based on the
relative net asset values per share of the two classes, as of the close of
business on the first Business Day (as defined below) of the month in which the
sixth anniversary of the initial issuance of such Class B shares occurs. For
these purposes, the date of initial issuance shall mean the date of issuance of
the original Class B shares of other PaineWebber mutual funds that were
exchanged (directly or through a series of exchanges) for the Fund's Class B
shares. For purposes of conversion to Class A shares, Class B shares purchased
through the reinvestment of dividends and other distributions paid in respect of
Class B shares of the Fund or those other PaineWebber mutual funds are held in a
separate sub-account. Each time any Class B shares in the shareholder's regular
account (other than those in the sub-account) convert to Class A shares, a pro
rata portion of the Class B shares in the sub-account also converts to Class A
shares. The portion is determined by the ratio that the shareholder's Class B
shares converting to Class A shares bears to the shareholder's total Class B
shares not acquired through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares would not be converted and would continue to be
subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not continue to be
met.
19
<PAGE>
VALUATION OF SHARES
The Fund determines its net asset value per share separately for each Class
as of the close of regular trading (currently 4:00 p.m., Eastern time) on the
NYSE on each Monday through Friday when the NYSE is open. Currently, the NYSE is
closed on the observance of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor 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 1940 Act. To use
amortized cost to value its portfolio securities, the Fund must adhere to
certain conditions under that Rule relating to the Fund's investments, some of
which are discussed in the Prospectus. 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. In the event that a
large number of redemptions take place at a time when interest rates have
increased, the Fund may have to sell portfolio securities prior to maturity and
at a price that might not be desirable.
The board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share, which include a review of the
extent of any deviation of net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. Should that deviation
exceed 1/2 of 1%, the directors 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 greater than 13 months, will limit portfolio
investments, including repurchase agreements, to those U.S. dollar-denominated
instruments that are of high quality and that the directors determine present
minimal credit risks as advised by Mitchell Hutchins, and will comply with
certain reporting and recordkeeping procedures. There is no assurance that
constant net asset value will be maintained. In the event amortized cost ceases
to represent fair value per share, the board will take appropriate action.
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried at their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board.
CALCULATION OF YIELD
The Fund computes its yield and effective yield quotations for each class of
shares using standardized methods required by the SEC. The Fund from time to
time advertises for each class of shares (1) the 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 of such class 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
20
<PAGE>
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) the effective yield based on the
same seven-day period by compounding the base period return and by adding 1,
raising the sum to a power equal to (365/7) and subtracting 1 from the result,
according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1
For the seven days ended February 28, 1998, the yield of the Fund's Class A
shares was 4.13%, of the Class B shares was 3.63% and of the Class C shares was
3.67%. The effective yield of the Fund's Class A shares was 4.21%, of the Class
B shares was 3.69% and of the Class C shares was 3.74%.
The Fund may also advertise other performance data, which may consist of the
annual or cumulative return (including realized net short-term capital gain, if
any) earned on a hypothetical investment in the Fund since it began operations
or for shorter periods. This return data may or may not assume reinvestment of
dividends (compounding).
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of each class of shares of the Fund fluctuates,
it cannot be compared with yields on savings accounts or other investment
alternatives that provide an agreed-to or guaranteed fixed yield for a stated
period of time. However, yield information may be useful to an investor
considering temporary investments in money market instruments. In comparing the
yield of one money market fund to another, consideration should be given to each
fund's investment policies, including the types of investments made, the average
maturity of the portfolio securities and whether there are any special account
charges which may reduce the yield.
OTHER 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 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/Donoghue's Money Market Fund Report ("Donoghue"), Wiesenberger Investment
Companies Service ("Wiesenberger"), Investment Company Data Inc. ("ICD") or
Morningstar Mutual Funds ("Morningstar"), or with the performance of recognized
stock and other indexes, including (but not limited to) the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, the Morgan
Stanley Capital World Index, the Lehman Brothers 20+ Year Treasury Bond Index,
the Lehman Brothers Government/Corporate Bond Index, the Salomon Brothers
Non-U.S. World Government Bond Index and 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, Donoghue, Wiesenberger, ICD or
Morningstar. 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 include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested by
being paid in additional Fund shares, any future income or capital appreciation
of the Fund would increase the value, not only of the original Fund investment,
but also of the
21
<PAGE>
additional Fund shares received through reinvestment. As a result, the value of
the Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
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, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote-C- 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. Fund shares are not insured or guaranteed by the U.S.
government, its returns will fluctuate, and while the Fund attempts to maintain
a stable net asset value of $1.00 per share, there is no assurance that it will
be able to do so.
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, 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 securities of other RICs) of any one issuer. If the Fund failed to
qualify for treatment as a RIC for any taxable year, it would be taxed as an
ordinary corporation on its taxable income for that year (even if that income
was distributed to its shareholders) and all distributions out of its earnings
and profits would be taxable to its shareholders, as dividends (that is,
ordinary income).
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
OTHER INFORMATION
CLASS-SPECIFIC EXPENSES. The Fund might determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of its
shares to which those expenses are attributable. For example, Class B and Class
C shares bear higher transfer agency fees per shareholder account than those
borne by Class A shares. The higher fee is imposed due to the higher costs
incurred by the transfer agent in tracking shares subject to a contingent
deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the applicable
charge. Although the transfer agency fee will differ on a per account basis as
stated above, the specific extent to which the transfer agency fees will differ
between the classes as a percentage of net assets is not certain, because the
fee as a percentage of net assets will be affected by the number of shareholder
accounts in each class and the relative amounts of net assets in each class.
22
<PAGE>
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Corporation.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, N.Y. 10036, serves as the Corporation's independent accountants.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the most recent fiscal year is
a separate document supplied with this Statement of Additional Information, and
the financial statements, accompanying notes and report of independent
accountants appearing therein are incorporated by reference in this Statement of
Additional Information.
23
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions............. 1
Directors and Officers; Principal Holders of
Securities..................................... 6
Investment Advisory, Administration and
Distribution Arrangements...................... 13
Portfolio Transactions........................... 17
Additional Exchange and Redemption Information;
Reduced Sales Charges.......................... 18
Conversion of Class B Shares..................... 19
Valuation of Shares.............................. 20
Calculation of Yield............................. 20
Taxes............................................ 22
Other Information................................ 22
Financial Statements............................. 23
</TABLE>
- -C- 1998 PaineWebber Incorporated
PAINEWEBBER
MONEY MARKET FUND
-------------------------
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1998
- -----------------------------------
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