PAINEWEBBER MONEY MARKET FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Money Market Fund is a diversified series of PaineWebber
Master Series, Inc., a professionally managed open-end investment company
("Corporation").
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.
Portions of the fund's Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information ("SAI"). The Annual
Report accompanies this SAI. You may obtain an additional copy of the Annual
Report by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction with
the fund's current Prospectus, dated June 30, 1999. A copy of the Prospectus may
be obtained by calling any PaineWebber Financial Advisor or correspondent firm
or by calling toll-free 1-800-647-1568. This SAI is dated June 30, 1999.
TABLE OF CONTENTS
PAGE
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The Fund and Its Investment
Policies.......................................................... 2
The Fund's Investments, Related Risks and Limitations............. 3
Organization of the Corporation; Directors and
Officers and Principal Holders of Securities................... 9
Investment Advisory, Administration and Distribution
Arrangements................................................... 17
Portfolio Transactions............................................ 20
Additional Exchange and Redemption Information;
Reduced Sales Charges; Other Services.......................... 22
Conversion of Class B Shares...................................... 25
Valuation of Shares............................................... 25
Performance Information........................................... 26
Taxes............................................................. 28
Other Information................................................. 29
Financial Statements.............................................. 30
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THE FUND AND ITS INVESTMENT POLICIES
The fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of the fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.
The fund's investment objective is to provide maximum current income
consistent with liquidity and conservation of capital. The fund invests in high
quality money market instruments that have, or are deemed to have, remaining
maturities of 13 months or less. Money market instruments are short-term
debt obligations and similar securities. These instruments include (1) U.S. and
foreign government securities, (2) obligations of U.S. and foreign banks, (3)
commercial paper and other short-term obligations of U.S. and foreign
corporations, partnerships, trusts and similar entities, (4) repurchase
agreements regarding any of the foregoing and (5) investment company securities.
Money market instruments include longer term bonds that have variable interest
rates or other special features that give them the financial characteristics of
short-term debt. The fund maintains a dollar-weighted average portfolio maturity
of 90 days or less.
The fund may invest in obligations (including certificates of deposit,
bankers' acceptances, time deposits and similar obligations) of U.S. and foreign
banks only if the institution has total assets at the time of purchase in excess
of $1.5 billion. The fund may invest in non-negotiable time deposits of U.S.
banks, savings associations and similar depository institutions only if the
institution has total assets at the time of purchase in excess of $1.5 billion
and the time deposit has a maturity of seven days or less.
The fund may purchase only those obligations that Mitchell Hutchins
determines, pursuant to procedures adopted by the board, present minimal credit
risks and are "Eligible Securities" as defined in Rule 2a-7 under the Investment
Company Act of 1940, as amended ("Investment Company Act"). Eligible Securities
include securities rated in one of the two highest short-term ratings categories
by at least two nationally recognized statistical rating organizations ("rating
agencies") or rated in one of the two highest short-term ratings categories by a
single rating agency if only that rating agency has assigned the obligation a
short-term rating. The fund also may rely on the short-term rating and credit
quality of a guarantee of a security (including bond insurance, letters of
credit or an unconditional demand feature) or the issuer of the guarantee to
determine whether the security is an Eligible Security. Eligible Securities also
include unrated securities that Mitchell Hutchins determines to be of comparable
quality to rated securities that so qualify.
"Second Tier Securities" are Eligible Securities that are not rated in the
highest short-term ratings category by the requisite rating agencies or
determined by Mitchell Hutchins to be of comparable quality and do not otherwise
qualify for treatment as "First Tier Securities" under Rule 2a-7. (A definition
of First Tier Securities is set forth below.) The fund may invest no more than
5% of its total assets in Second Tier Securities and 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, it does not purchase commercial paper of foreign companies,
governments and similar entities falling into this category. Further, the fund
generally may invest no more than 5% of its total assets in the securities of a
single issuer (other than U.S. government securities). The fund may purchase
only U.S. dollar-denominated obligations of foreign issuers.
The fund may invest up to 10% of its net assets in illiquid securities. It
may purchase securities on a when-issued or delayed delivery basis. The fund may
lend its portfolio securities to qualified broker-dealers or institutional
investors in an amount up to 33 1/3% of its total assets. The fund may borrow up
to 10% of its total assets for temporary purposes, including reverse repurchase
agreements. It may invest in the securities of other investment companies.
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THE FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the fund's investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or the SAI, the fund has established no
policy limitations on its ability to use the investments or techniques discussed
in these documents.
YIELDS AND CREDIT RATINGS OF MONEY MARKET INSTRUMENTS. The yields on the
money market instruments in which the fund invests are dependent on a variety of
factors, including general money market conditions, conditions in the particular
market for the obligation, the financial condition of the issuer, the size of
the offering, the maturity of the obligation and the ratings of the issue. The
ratings assigned by rating agencies represent their opinions as to the quality
of the obligations they undertake to rate. Ratings, however, are general and are
not absolute standards of quality. Consequently, obligations with the same
rating, maturity and interest rate may have different market prices.
Subsequent to its purchase by the fund, an issue may cease to be rated or
its rating may be reduced. If a security in the fund's portfolio ceases to be a
First Tier Security (as defined below) or Mitchell Hutchins becomes aware that a
security has received a rating below the second highest rating by any rating
agency, Mitchell Hutchins and, in certain cases, the fund's board, will consider
whether the fund should continue to hold the obligation. A First Tier Security
is either (1) rated in the highest short-term rating category by at least two
rating agencies, (2) rated in the highest short-term rating category by a single
rating agency if only that rating agency has assigned the obligation a
short-term rating, (3) issued by an issuer that has received such a short-term
rating with respect to a security that is comparable in priority and security,
(4) subject to a guarantee rated in the highest short-term rating category or
issued by a guarantor that has received the highest short-term rating for a
comparable debt obligation or (5) unrated, but determined by Mitchell Hutchins
to be of comparable quality. A First Tier Security rated in the highest
short-term category at the time of purchase that subsequently receives a rating
below the highest rating category from a different rating agency may continue to
be considered a First Tier Security.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S. Treasury
(such as Treasury bills, notes or bonds) and obligations issued or guaranteed as
to principal and interest (but not as to market value) by the U.S. government,
its agencies or its instrumentalities. U.S. government securities include
mortgage-backed securities issued or guaranteed by government agencies or
government-sponsored enterprises. Other U.S. government securities may be backed
by the full faith and credit of the U.S. government or supported primarily or
solely by the creditworthiness of the government-related issuer or, in the case
of mortgage-backed securities, by pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS programs, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
COMMERCIAL PAPER AND OTHER SHORT-TERM OBLIGATIONS. The fund may purchase
commercial paper, which includes short-term obligations issued by corporations,
partnerships, trusts or other entities to finance short-term credit needs. The
fund also may purchase other types of non-convertible debt obligations subject
to maturity constraints imposed by Rule 2a-7 under the Investment Company Act.
Descriptions of certain types of short-term obligations are provided below.
ASSET-BACKED SECURITIES. The fund may invest in securities that are
comprised of financial assets. Such assets may include motor vehicle and other
installment sales contracts, home equity loans, leases of various types of real
and personal property and receivables from revolving credit (credit card)
agreements or other types of financial assets. Such assets are securitized
through the use of trusts or special purpose corporations or other entities.
Payments or distributions of principal and interest may be guaranteed up to a
certain amount and for a certain time period by a letter of credit or pool
insurance policy issued by a financial institution unaffiliated with the issuer,
or other credit enhancements may be present. See "The Fund's Investments,
Related Risks and Limitations -- Credit and Liquidity Enhancements."
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VARIABLE AND FLOATING RATE SECURITIES AND DEMAND INSTRUMENTS. The fund may
purchase variable and floating rate securities with remaining maturities in
excess of 13 months issued by U.S. government agencies or instrumentalities or
guaranteed by the U.S. government. In addition, the fund may purchase variable
and floating rate securities of other issuers with remaining maturities in
excess of 13 months if the securities are subject to a demand feature
exercisable within 13 months or less. The yields on these securities are
adjusted in relation to changes in specific rates, such as the prime rate, and
different securities may have different adjustment rates. The fund's investment
in these securities must comply with conditions established by the Securities
and Exchange Commission ("SEC") under which they may be considered to have
remaining maturities of 13 months or less. Certain of these obligations carry a
demand feature that gives the fund the right to tender them back to a specified
party, usually the issuer or a remarketing agent, prior to maturity. See "The
Fund's Investments, Related Risks and Limitations -- Credit and Liquidity
Enhancements."
Generally, the fund may exercise demand features (1) upon a default under
the terms of the underlying security, (2) to maintain its portfolio in
accordance with its investment objective and policies or applicable legal or
regulatory requirements or (3) as needed to provide liquidity to the fund in
order to meet redemption requests. The ability of a bank or other financial
institution to fulfill its obligations under a letter of credit, guarantee or
other liquidity arrangement might be affected by possible financial difficulties
of its borrowers, adverse interest rate or economic conditions, regulatory
limitations or other factors. The interest rate on floating rate or variable
rate securities ordinarily is readjusted on the basis of the prime rate of the
bank that originated the financing or some other index or published rate, such
as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect market
rates of interest. Generally, these interest rate adjustments cause the market
value of floating rate and variable rate securities to fluctuate less than the
market value of fixed rate securities.
VARIABLE AMOUNT MASTER DEMAND NOTES. The fund may invest in variable
amount master demand notes, which are unsecured redeemable obligations that
permit investment of varying amounts at fluctuating interest rates under a
direct agreement between the fund and an issuer. The principal amount of these
notes may be increased from time to time by the parties (subject to specified
maximums) or decreased by the fund or the issuer. These notes are payable on
demand (after requisite notice period specified in related documentation) and
may or may not be rated.
INVESTING IN FOREIGN SECURITIES. The fund's investments in U.S.
dollar-denominated securities of foreign issuers may involve risks that are
different from investments in U.S. issuers. These risks may include future
unfavorable political and economic developments, possible withholding taxes,
seizure of foreign deposits, currency controls, interest limitations or other
governmental restrictions that might affect the payment of principal or interest
on the fund's investments. Additionally, there may be less publicly available
information about foreign issuers because they may not be subject to the same
regulatory requirements as domestic issuers.
CREDIT AND LIQUIDITY ENHANCEMENTS. The fund may invest in securities that
have credit or liquidity enhancements or the fund may purchase these types of
enhancements in the secondary market. Such enhancements may be structured as
demand features that permit the fund to sell the instrument at designated times
and prices. These credit and liquidity enhancements may be backed by letters of
credit or other instruments provided by banks or other financial institutions
whose credit standing affects the credit quality of the underlying obligation.
Changes in the credit quality of these financial institutions could cause losses
to the fund. The credit and liquidity enhancements may have conditions that
limit the ability of the fund to use them when the fund wishes to do so.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and SAI means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the fund
has valued the securities and includes, among other things, repurchase
agreements maturing in more than seven days and restricted securities other than
those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the board. To the extent the fund invests in illiquid securities,
it may not be able readily to liquidate such investments and may have to sell
other investments if necessary to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of 1933,
as amended ("Securities Act"), and may be sold only in privately negotiated or
other exempted transactions or after a registration statement under the
Securities Act has become effective. Where registration is required, the fund
may be obligated to pay all or part of the registration expenses and a
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considerable period may elapse between the time of the decision to sell and the
time the fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the fund might obtain a less favorable price than prevailed when it
decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the Securities Act. Institutional investors generally will not
seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
the fund, however, could affect adversely the marketability of such portfolio
securities, and the fund might be unable to dispose of 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 nature of the
security and how trading is effected (E.G., the time needed to sell the
security, how bids are solicited and the mechanics of transfer) and (4) the
existence of demand features or similar liquidity enhancements. Mitchell
Hutchins monitors the liquidity of restricted securities in the fund's portfolio
and reports periodically on such decisions to the board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
The fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations. Repurchase agreements carry certain risks not associated
with direct investments in securities, including a possible decline in the
market value of the underlying obligations. If their value becomes less than the
repurchase price, plus any agreed-upon additional amount, the counterparty must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
obligations and the price that was paid by the fund upon acquisition is accrued
as interest and included in its net investment income. Repurchase agreements
involving obligations other than U.S. government securities (such as commercial
paper and corporate bonds) may be subject to special risks and may not have the
benefit of certain protections in the event of the counterparty's insolvency. If
the seller or guarantor becomes insolvent, the fund may suffer delays, costs and
possible losses in connection with the disposition of collateral. The fund
intends to enter into repurchase agreements only with counterparties in
transactions believed by Mitchell Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by the fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to the fund's
limitation on borrowings and may be entered into only with banks and securities
dealers. While a reverse repurchase agreement is outstanding, the fund will
maintain, in a segregated account with its custodian, cash or liquid securities,
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marked to market daily, in an amount at least equal to its obligations under the
reverse repurchase agreement. See "The Fund's Investments, Related Risks and
Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the fund might be unable to deliver them when the fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or trustee or receiver may
receive an extension of time to determine whether to enforce that fund's
obligation to repurchase the securities, and the fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. The
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when the fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the fund on a when-issued or delayed delivery basis may
result in the fund's incurring a loss or missing an opportunity to make an
alternative investment.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect the fund's net asset value. When the fund commits to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
assets to cover the amount of the commitment. See "The Fund's Investments,
Related Risks and Limitations--Segregated Accounts." The fund may sell the right
to acquire the security prior to delivery if Mitchell Hutchins deems it
advantageous to do so, which may result in a gain or loss to the fund.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The fund may invest in
securities of other money market funds, subject to Investment Company Act
limitations, which at present restrict these investments in the aggregate to no
more than 10% of the fund's total assets. The shares of other money market funds
are subject to the management fees and other expenses of those funds. At the
same time, the fund would continue to pay its own management fees and expenses
with respect to all its investments, including shares of other money market
funds. The fund may invest in the securities of other money market funds when
Mitchell Hutchins believes that (1) the amounts to be invested are too small or
are available too late in the day to be effectively invested in other money
market instruments, (2) shares of other money market funds otherwise would
provide a better return than direct investment in other money market instruments
or (3) such investments would enhance the fund's liquidity.
LENDING OF PORTFOLIO SECURITIES. The fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables the fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of the fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. The fund will retain authority to terminate any of its loans at any
time. The fund may pay reasonable fees in connection with a loan and may pay the
borrower or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. The fund will receive amounts
equivalent to any interest 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
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these services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber acted as lending agent. PaineWebber also has
been approved as a borrower under the fund's securities lending program.
SEGREGATED ACCOUNTS. When the fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for the fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
The fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more of
the fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or to municipal securities or to certificates of
deposit and bankers' acceptances of domestic branches of U.S. banks.
The following interpretations apply to, but are not a part of, this
fundamental restriction: (a) domestic and foreign banking will be considered to
be different industries, and (b) asset-backed securities will be grouped in
industries based upon their underlying assets and not treated as constituting a
single, separate industry.
(2) issue senior securities or borrow money, except as permitted under the
Investment Company Act and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
The following interpretation applies to, but is not part of, this
fundamental restriction: the fund's investments in master notes and similar
instruments will not be considered to be the making of a loan.
(4) 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.
(5) 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.
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(6) 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.
(7) 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.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without shareholder
approval.
The fund will not:
(1) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(2) 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.
(3) 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.
(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger.
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ORGANIZATION OF THE CORPORATION; DIRECTORS
AND OFFICERS AND PRINCIPAL HOLDERS OF SECURITIES
The Corporation was organized on October 29, 1985 as a Maryland
corporation and has two operating series. The Corporation has authority to issue
10 billion shares of common stock, par value $.001 per share. One billion of
those shares are classified as shares of the fund. The Corporation is governed
by a board of directors, which oversees the fund's operations. The board also is
authorized to establish additional series.
The directors and executive officers of the Corporation, their ages,
business addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS*; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Margo N. Alexander**; 52 Director and President Mrs. Alexander is chairman (since March
1999), chief executive officer and a director
of Mitchell Hutchins (since January 1995), and
an executive vice president and a director of
PaineWebber (since March 1984). Mrs. Alexander
is president and a director or trustee of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard Q. Armstrong; 64 Director Mr. Armstrong is chairman and principal of
R.Q.A. Enterprises R.Q.A. Enterprises (management consulting
One Old Church Road firm) (since April 1991 and principal
Unit #6 occupation since March 1995). Mr. Armstrong
Greenwich, CT 06830 was chairman of the board, chief executive
officer and co-owner of Adirondack Beverages
(producer and distributor of soft drinks and
sparkling/still waters) (October 1993-March
1995). He was a partner of The New England
Consulting Group (management consulting firm)
(December 1992-September 1993). He was
managing director of LVMH U.S. Corporation
(U.S. subsidiary of the French luxury goods
conglomerate, Louis Vuitton Moet Hennessey
Corporation) (1987-1991) and chairman of its
wine and spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr. Armstrong is
a director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
9
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------- ----------------------------------------
E. Garrett Bewkes, Jr.**; 72 Director and Chairman of the Mr. Bewkes is a director of Paine Webber Group
Board of Directors Inc. ("PW Group") (holding company of
PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of the
board, president and chief executive officer
of American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation.
Mr. Bewkes is a director or trustee of 35
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard R. Burt; 52 Director Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave, N.W. (international investments and consulting
Washington, DC 20004 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp.,
Powerhouse Technologies Inc. and 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 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Mary C. Farrell**; 49 Director Ms. Farrell is a managing director, senior
investment strategist and member of the
Investment Policy Committee of PaineWebber.
Ms. Farrell joined PaineWebber in 1982. She is
a member of the Financial Women's Association
and Women's Economic Roundtable and appears as
a regular panelist on Wall $treet Week with
Louis Rukeyser. She also serves on the Board
of Overseers of New York University's Stern
School of Business. Ms. Farrell is a director
or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
10
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------- ----------------------------------------
Meyer Feldberg; 57 Director Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of Business,
101 Uris Hall Columbia University. Prior to 1989, he was
New York, NY 10027 president of the Illinois Institute of
Technology. Dean Feldberg is also a director
of Primedia, Inc., Federated Department
Stores, Inc. and Revlon, Inc. Dean Feldberg is
a director or trustee of 34 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
George W. Gowen; 69 Director Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, NY 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director
or trustee of 34 investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
Frederic V. Malek; 62 Director Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank). From January 1992 to
Suite 350 November 1992, he was campaign manager of
Washington, DC 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, Inc. (electric
services), Manor Care, Inc. (health care) and
Northwest Airlines Inc. Mr. Malek is a
director or trustee of 31 investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
11
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------- ----------------------------------------
Carl W. Schafer; 63 Director Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and
research). He is a director of Base Ten
Systems, Inc. (software), Roadway Express,
Inc. (trucking), The Guardian Group of Mutual
Funds, the Harding, Loevner Funds, Evans
Systems, Inc. (motor fuels, convenience store
and diversified company), Electronic Clearing
House, Inc. (financial transactions
processing), Frontier Oil Corporation and
Nutraceutix, Inc. (biotechnology company).
Prior to January 1993, he was chairman of the
Investment Advisory Committee of the Howard
Hughes Medical Institute. Mr. Schafer is a
director or trustee of 31 investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
Brian M. Storms;** 44 Director Mr. Storms is president and chief operating
officer of Mitchell Hutchins (since March
1999). Prior to March 1999, he was president
of Prudential Investments (1996-1999). Prior
to joining Prudential, he was a managing
director at Fidelity Investments. Mr. Storms
is a director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
T. Kirkham Barneby; 53 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. Mr. Barneby is a vice president of
seven investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an
audit manager in the financial services
practice of Ernst & Young LLP. Mr. Lee is a
vice president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as an investment adviser.
12
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------- ----------------------------------------
Kevin J. Mahoney; 33 Vice President and Mr. Mahoney is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
department of Mitchell Hutchins. From August
1996 through March 1999, he was the manager of
the mutual fund internal control group of
Salomon Smith Barney. Prior to August 1996, he
was an associate and assistant treasurer of
BlackRock Financial Management L.P. Mr.
Mahoney is a vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was
director of fixed income investments of IBM
Corporation. Mr. McCauley is a vice president
of 22 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
Dianne E. O'Donnell; 47 Vice President and Secretary Ms. O'Donnell is a senior vice president and
deputy general counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice president and
secretary of 31 investment companies and a
vice president and assistant secretary of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president and
director of operations and control for
Mitchell Hutchins. Mr. Polito is a vice
president of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Susan Ryan; 39 Vice President Ms. Ryan is a senior vice president and
portfolio manager of Mitchell Hutchins and has
been with Mitchell Hutchins since 1982. Ms.
Ryan is a vice president of five investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
13
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------- ----------------------------------------
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins (since
May 1994) and a senior vice president of
PaineWebber (since July 1995). Prior to May
1994, she was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is a vice
president of 31 investment companies and a
vice president and secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
Paul H. Schubert; 36 Vice President and Treasurer Mr. Schubert is a senior vice president and
director of the mutual fund finance department
of Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president at
BlackRock Financial Management L.P. Mr.
Schubert is a vice president and treasurer of
32 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Nirmal Singh; 43 Vice President Mr. Singh is a senior vice president and a
portfolio manager of Mitchell Hutchins. Mr.
Singh is a vice president of four investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance department
of Mitchell Hutchins. Prior to February 1995,
he was a manager of the mutual fund finance
division of Kidder Peabody Asset Management,
Inc. Mr. Taglialatela is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.
Mark A. Tincher; 43 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 is a vice
president of 13 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
14
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH CORPORATION BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------- ----------------------------------------
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr. Weller is a
vice president and assistant secretary of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
</TABLE>
- -----------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of the fund and the Corporation as defined in the Investment
Company Act by virtue of their positions with Mitchell Hutchins,
PaineWebber, and/or PW Group.
The Corporation pays each board member who is not an "interested person"
of the Corporation $1,000 annually for the fund and $1,500 annually for the
Corporation's second series and an additional amount up to $150 per series for
each board meeting and each separate meeting of a board committee. Therefore,
the Corporation pays each such trustee $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 fund
complex receives additional compensation, aggregating $15,000 annually, from the
relevant funds. All board members are reimbursed for any expenses incurred in
attending meetings. Board members and officers own in the aggregate less than 1%
of the outstanding shares of any class of the fund. Because PaineWebber and
Mitchell Hutchins perform substantially all the services necessary for the
operation of the Corporation and the fund, the Corporation requires no
employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
presently receives any compensation from the Corporation for acting as a board
member or officer.
15
<PAGE>
The table below includes certain information relating to the compensation
of the current board members who held office with the Corporation or with other
PaineWebber funds during the fund's fiscal year ended February 28, 1999.
COMPENSATION TABLE+
AGGREGATE
----------
COMPENSATION TOTAL COMPENSATION FROM
------------ -----------------------
FROM THE CORPORATION AND THE
---- -----------------------
NAME OF PERSON, POSITION CORPORATION* FUND COMPLEX**
------------------------ ------------ --------------
Richard Q. Armstrong, $ 4,120 $101,372
Director
Richard R. Burt, 4,060 101,372
Director
Meyer Feldberg, 4,120 116,222
Director
George W. Gowen, 4,609 108,272
Director
Frederic V. Malek, 4,120 101,372
Director
Carl W. Schafer, 4,120 101,372
Director
- --------------------
+ Only independent board members are compensated by the Corporation and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation.
* Represents fees paid to each board member from the Corporation indicated for
the fiscal year ended February 28, 1999.
** Represents total compensation paid during the calendar year ended December
31, 1998, to each board member by 31 investment companies (33 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS OF SECURITIES
As of May 31, 1999, the following shareholders are shown in Money Market
Fund's records as owning 5% or more of a class of its shares.
NUMBER AND PERCENTAGE OF SHARES
NAME AND ADDRESS* BENEFICIALLY OWNED AS OF MAY 31, 1999
----------------- -------------------------------------
Trident Arbitrage Partners, L.P. 12,745,209 15%
Class A Shares
Independent Trust Corp. Custodian 7,873,788 9%
Trust Funds Class A Shares
Independent Trust Corp. Fund 5,509,090 6%
Class A Shares
- -------------------------
*The shareholders listed may be contacted c/o Mitchell Hutchins Asset Management
Inc., 1285 Avenue of the Americas, New York, NY 10019.
16
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator to the fund pursuant to a
contract dated August 4, 1988 ( "Advisory Contract") with the Corporation. Under
the Advisory Contract, the fund pays Mitchell Hutchins a fee, computed daily and
paid monthly, at the annual rate of 0.50% of its average daily net assets.
During the fiscal years ended February 28, 1999, February 28, 1998 and
February 28, 1997, the fund paid (or accrued) investment advisory and
administrative fees of $314,378, $202,449 and $215,423, respectively.
Prior to August 1, 1997, PaineWebber provided certain services to the fund
not otherwise provided by its transfer agent, PFPC Inc. Pursuant to a separate
agreement between PaineWebber and the Corporation relating to those services,
PaineWebber earned (or accrued) $5,548 for the period March 1, 1997 to July 31,
1997 and $13,300 for the fiscal year ended February 28, 1997. Subsequent to July
31, 1997, PFPC (not the fund) 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
fair and equitable. Expenses borne by the fund include the following: (1) the
cost (including 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 under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members and officers who are not interested persons (as defined
in the Investment Company Act) of the Corporation or Mitchell Hutchins; (6) all
expenses incurred in connection with the board members' 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 fund for violation of any law; (10) legal, accounting and
auditing expenses, including legal fees of special counsel for the independent
board members; (11) charges of custodians, transfer agents and other agents;
(12) expenses of setting in type and printing prospectuses, statements of
additional information and supplements thereto, reports and proxy materials for
existing shareholders, and costs of mailing such materials to shareholders; (13)
any extraordinary expenses (including fees and disbursements of counsel)
incurred by the fund; (14) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations; (15)
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 board members 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 Corporation
or the fund in connection with the performance of the Advisory 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 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 Corporation.
During the fiscal years ended February 28, 1999 and February 28, 1998, the
fund paid (or accrued) no fees to PaineWebber for its services as securities
lending agent.
17
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of May
31, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
Domestic (excluding Money Market).................. $ 8,208.7
Global............................................. 4,332.3
Equity/Balanced.................................... 7,535.0
Fixed Income (excluding Money Market).............. 5,006.0
Taxable Fixed Income......................... 3,448.4
Tax-Free Fixed Income........................ 1,557.6
Money Market Funds................................. 35,176.9
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber funds and other Mitchell
Hutchins advisory accounts by all Mitchell Hutchins' directors, officers and
employees, establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of 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 each class of 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 Investment Company Act (each,
respectively, the "Class A Plan," "Class B Plan" and "Class C Plan," and
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 Plan, the fund pays Mitchell
Hutchins a distribution fee, accrued daily and payable monthly, at the annual
rate of 0.50% of the average daily net assets of the Class B shares. Under the
Class C Plan, the fund pays Mitchell Hutchins a distribution fee, accrued daily
and payable monthly, at the annual rate of 0.50% of the average daily net assets
of the Class C shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B and
C shares 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 then compensates its Financial Advisors
for shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts. These expenses may include the
costs of the PaineWebber branch office in which the Financial Advisor is based,
such as rent, communications equipment, employee salaries and other overhead
costs.
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 the preparation, printing and distribution of sales literature and
advertising and printing and distributing prospectuses and other shareholder
materials to prospective investors. PaineWebber also may use distribution fees
to pay additional compensation to PaineWebber and other costs allocated to
Mitchell Hutchins' and PaineWebber's distribution activities, including employee
salaries and bonuses and other overhead expenses. These expenses may include the
branch office costs noted above. Because fund shares may be acquired only
through an exchange of shares of other PaineWebber funds, Mitchell Hutchins does
not pay commissions to PaineWebber for selling fund shares.
18
<PAGE>
Mitchell Hutchins receives the proceeds of the contingent deferred sales
charge paid upon sales of shares. These proceeds may be used to cover
distribution expenses.
The Plans and the related Distribution Contracts for Class A, Class B and
Class C shares specify that the fund must pay service and distribution fees to
Mitchell Hutchins for its activities, not as reimbursement for specific expenses
incurred. Therefore, even if Mitchell Hutchins' expenses exceed the service or
distribution fees it receives, 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. Expenses in excess of
service and distribution fees received or accrued through the termination date
of any Plan will be Mitchell Hutchins' sole responsibility and not that of the
fund. Annually, the board reviews the Plans and Mitchell Hutchins' corresponding
expenses for each class of fund shares separately from the Plans and expenses of
the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the board at least quarterly, and the board members 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 board members 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 board
members who are not "interested persons" of the Corporation shall be committed
to the discretion of the board members who are not "interested persons" of that
Corporation.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of
the fund's 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
the fund's shares will not be used to subsidize the sale of any other class of
fund shares.
During the fiscal year ended February 28, 1999, the fund paid (or accrued)
service and/or distribution fees to Mitchell Hutchins under the Plans as
follows: Class A -- $88,231, Class B -- $134,452 and Class C -- $72,413.
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 during the fiscal year
ended February 28, 1999:
CLASS A CLASS B CLASS C
------- ------- -------
Marketing and advertising....... $ 54,686 $ 28,165 $ 15,184
Amortization of commissions..... 0 58,915 18,345
Printing of prospectuses and
statements of additional
information..................... 632 197 136
Branch network costs
allocated and interest expense.. 78,785 46,930 22,170
Service fees paid to
PaineWebber Financial Advisors.. 33,528 17,030 9,173
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the fund's 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
19
<PAGE>
shares of other PaineWebber funds such that Class A fund shares could be
exchanged with Class A shares of other PaineWebber 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 of the fund 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 funds such that Class B fund shares could be exchanged with shares
of the corresponding class of other PaineWebber 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 funds, (2) the advantage to
investors in paying for distribution on an ongoing basis, (3) Mitchell Hutchins'
belief that the ability of PaineWebber Financial Advisors 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 if the shares are held for more than one year,
would prove attractive to the Financial Advisors 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 board members also recognized that Mitchell Hutchins'
willingness to compensate PaineWebber and its Financial Advisors, without the
concomitant receipt by Mitchell Hutchins of initial sales charges or contingent
deferred sales charges upon redemption after one year following purchase, 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 that 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.
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
February 28, 1999:
Class A...................... $ 47,915
Class B...................... 163,976
Class C...................... 19,441
PORTFOLIO TRANSACTIONS
The fund purchases portfolio securities from dealers and underwriters as
well as from issuers. Securities are usually traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. Prices
paid to dealers in principal transactions generally include a "spread," which is
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the difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. When securities are purchased directly
from an issuer, no commissions or discounts are paid. When securities are
purchased in underwritten offerings, they include a fixed amount of compensation
to the underwriter.
The 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. The Advisory Contract 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. Although Mitchell Hutchins may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins will not
purchase securities at a higher price or sell securities at a lower price than
would otherwise be paid had no services been provided by the executing dealer.
Agency transactions in over-the-counter securities are entered into only in
compliance with procedures ensuring that the transaction (including commissions)
is at least as favorable as it would have been if effected directly with a
market-maker that did not provide research or execution services. These
procedures include a requirement that Mitchell Hutchins obtain multiple quotes
from dealers before executing the transactions on an agency basis. Moreover,
Mitchell Hutchins will not enter into any explicit soft dollar arrangements
relating to principal transactions and will not receive in principal
transactions the types of services that could be purchased for hard dollars.
Research services furnished by the dealers through which or with which the fund
effects securities transactions may be used by Mitchell Hutchins in advising
other funds or accounts it advises and, conversely, research services furnished
to Mitchell Hutchins in connection with other funds or accounts that Mitchell
Hutchins advises may be used in advising the fund. Information and research
received from dealers will be in addition to, and not in lieu of, the services
required to be performed by Mitchell Hutchins under the Advisory Contract.
During the last three fiscal years, the fund paid no brokerage
commissions. Therefore, the fund has not allocated any brokerage transactions
for research, analysis, advice and similar services.
Investment decisions for the fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for the fund and one or more of such accounts.
In such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the fund and such other
account(s) as to amount according to a formula deemed equitable to the fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the fund.
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As of February 28, 1999, the fund owned securities issued by the following
companies which are regular broker-dealers for the fund:
ISSUER TYPE OF SECURITY VALUE
------ ---------------- -----
Bankers Trust Company certificate of deposit $ 1,799,773
Bear Stears Companies Inc. short-term corporate obligation 500,000
Credit Suisse First Boston short-term corporate obligation 1,300,000
Dresdner Kleinwort Benson NA LLC repurchase agreement 3,000,000
J. P. Morgan & Company Inc. commercial paper 996,967
Morgan Stanley Dean Witter short-term corporate obligation 2,000,000
& Company
State Street Bank and Trust Company repurchase agreement 35,000
ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION; REDUCED SALES CHARGES; OTHER SERVICES
WAIVERS OF CONTINGENT DEFERRED 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 redemption of shares held at the time of death.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, shares of the fund may be exchanged for shares of the corresponding
class of most other PaineWebber funds.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange privilege, except no notice need be given
if, under extraordinary circumstances, either redemptions are 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 its investment objective, policies and restrictions.
If conditions exist that 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 it 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 fund has elected,
however, to be governed by Rule 18f-1 under the Investment Company Act, under
which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the 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, that makes it not reasonably
practicable for the fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time.
SERVICE ORGANIZATIONS. The fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." The fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
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SYSTEMATIC WITHDRAWAL PLAN. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $20,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $200,
$400, $600 and $800, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to a
contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the plan). Shareholders who elect to receive dividends in cash may not
participate in the plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate), less
aggregate redemptions made other than pursuant to the plan, is less than the
minimum values specified above. Purchases of additional shares of a fund
concurrent with withdrawals are ordinarily disadvantageous to shareholders
because of tax liabilities and, for Class A shares, initial sales charges. On or
about the 20th of a month for monthly, quarterly, semi-annual and annual plans,
PaineWebber will arrange for redemption by the fund of sufficient fund shares to
provide the withdrawal payments specified by participants in the systematic
withdrawal plan. The payments generally are mailed approximately five Business
Days (defined under "Valuation of Shares") after the redemption date. Withdrawal
payments should not be considered dividends, but redemption proceeds. If
periodic withdrawals continually exceed reinvested dividends, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or the funds' transfer agent, PFPC
Inc. Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by PFPC.
Shareholders may request the forms needed to establish a systematic withdrawal
plan from their PaineWebber Financial Advisors, correspondent firms or PFPC at
1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs in which purchases of
PaineWebber mutual funds and other investments may be made are available through
PaineWebber. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.
TRANSFER OF ACCOUNTS. If investors holding shares of the fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. 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.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICEMARK);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
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order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity and
Gold MasterCard(REGISTERED) transactions during the period, and
provide unrealized and realized gain and loss estimates for most
securities held in the account;
o comprehensive year-end summary statements that provide information
on account activity for use in tax planning and tax return
preparation;
o automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds--RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New Jersey Municipal Money Fund
and RMA New York Municipal Money Fund. AN INVESTMENT IN A MONEY
MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH A
MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN A
MONEY MARKET FUND.
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures.
o Gold MasterCard, with or without a line of credit, which provides
RMA accountholders with direct access to their accounts and can be
used with automatic teller machines worldwide. Purchases on the Gold
MasterCard are debited to the RMA account once monthly, permitting
accountholders to remain invested for a longer period of time;
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o free and unlimited electronic funds transfers and bill payment
service for $6 a month -- unlimited fixed and variable payments.
o 24-hour access to account information through toll-free numbers, and
more detailed personal assistance during business hours from the RMA
Service Center;
o account protection up to the net equity securities balance in the
event of the liquidation of PaineWebber. This protection does not
apply to shares of PW Funds that are held directly at PFPC and not
through PaineWebber; and
o automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
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 under "Valuation of Shares") of
the month in which the sixth anniversary of the initial issuance of such Class B
shares occurs. For the purpose of calculating the holding period required for
conversion of Class B shares, the date of initial issuance shall mean the date
of issuance of the original Class B shares of the PaineWebber mutual fund 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 of 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 will also convert to
Class A shares. The portion will be 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 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 that 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 will
not continue to be met.
VALUATION OF SHARES
The fund determines its net asset value separately for each class of
shares, normally as of the close of regular trading (usually 4:00 p.m., Eastern
time) on the New York Stock Exchange ("NYSE") on each Business Day, which is
defined as each Monday through Friday when the NYSE is open. Net asset value
will be calculated earlier when the NYSE closes early because trading has been
halted for the day. 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 Investment Company
Act. To use amortized cost to value its portfolio securities, the fund must
adhere to certain conditions under the Rule relating to its investments, some of
which are discussed in this SAI. Amortized cost is an approximation of market
value of an instrument, whereby the difference between its acquisition cost and
value at maturity is amortized on a straight-line basis over the remaining life
of the instrument. The effect of changes in the market value of a security as a
result of fluctuating interest rates is not taken into account, and thus the
amortized cost method of valuation may result in the value of a security being
higher or lower than its actual market value. If a large number of redemptions
take place at a time when interest rates have increased, the fund might have to
sell portfolio securities prior to maturity and at a price that might not be
desirable.
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The board has established procedures ("Procedures") for the purpose of
maintaining a constant net asset value of $1.00 per share, which include a
review of the extent of any deviation of net asset value per share, based on
available market quotations, from the $1.00 amortized cost per share. If that
deviation exceeds 1/2 of 1% for the fund, the board will promptly consider
whether any action should be initiated to eliminate or reduce material dilution
or other unfair results to shareholders. Such action may include redeeming
shares in kind, selling portfolio securities prior to maturity, reducing or
withholding dividends and utilizing a net asset value per share as determined by
using available market quotations. The fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will not purchase any
instrument having, or deemed to have, a remaining maturity of more than 397
days, will limit portfolio investments, including repurchase agreements, to
those U.S. dollar-denominated instruments that are of high quality under the
Rule and that Mitchell Hutchins, acting pursuant to the Procedures, determines
present minimal credit risks, and will comply with certain reporting and
recordkeeping procedures. There is no assurance that constant net asset value
per share will be maintained. If amortized cost ceases to represent fair value
per share, the board will take appropriate action.
In determining the approximate market value of portfolio investments, the
fund may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula method not been used. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board.
PERFORMANCE INFORMATION
The fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return will fluctuate.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in the fund's Performance Advertisements are
calculated according to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class B and Class C
shares, the applicable contingent deferred sales charge imposed on a redemption
of Class B or Class C shares held for the period is deducted. All dividends are
assumed to have been reinvested at net asset value.
The fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends. The rate of return is determined
by subtracting the initial value of the investment from the ending value and by
dividing the remainder by the initial value. Contingent deferred sales charges
are not taken into account in calculating Non-Standardized Return; the inclusion
of those charges would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following tables show performance information for each class of the
fund's shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average annual return.
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CLASS A CLASS B CLASS C
------- ------- -------
Year ended February 28, 1999:
Standardized Return*................. 4.32% (1.01)% 3.02%
Non-Standardized Return.............. 4.32% 3.99% 4.02%
Five Years ended February 28, 1999:
Standardized Return*................. 4.81% 3.40% 3.73%
Non-Standardized Return.............. 4.81% 3.75% 3.73%
Ten Years ended February 28, 1999:
Standardized Return.................. N/A 4.06% N/A
Non-Standardized Return.............. N/A 4.06% N/A
Inception** to February 28, 1999:
Standardized Return*................. 3.96% 4.20% 3.11%
Non-Standardized Return............. 3.96% 4.20% 3.11%
- --------------------
* All Standardized Return figures for Class B and Class C shares reflect
deduction of the applicable contingent deferred sales charges imposed on a
redemption of shares held for the period.
** The inception date for each class of shares is as follows:
CLASS A CLASS B CLASS C
------- ------- -------
07/01/91 09/26/86 07/14/92
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) its
current yield based on a recently ended seven-day period, computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from that
shareholder account, dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent, and (2) its effective
yield based on the same seven-day period by compounding the base period return
by adding 1, raising the sum to a power equal to (365/7), and subtracting 1 from
the result, according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1
For the seven days ended February 28, 1999, the yield and effective yield
of the fund's shares was as follows:
YIELD EFFECTIVE YIELD
----- ---------------
Class A Shares.................. 3.91% 3.99%
Class B Shares.................. 3.39% 3.45%
Class C Shares.................. 3.41% 3.47%
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 that may reduce the yield.
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<PAGE>
OTHER INFORMATION. The fund's performance data quoted in advertising and
other promotional materials ("Performance Advertisements") represent past
performance and are not intended to predict or indicate future results. The
return on an investment in the fund will fluctuate. In Performance
Advertisements, the fund may compare its yield with data published by Lipper
Analytical Services, Inc. for money funds ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), IBC Financial Data, Inc. ("IBC"), Wiesenberger
Investment Companies Service ("Wiesenberger") or Investment Company Data Inc.
("ICD"), or Morningstar Mutual Funds ("Morningstar") or with the performance of
recognized stock and other indexes, including the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Morgan
Stanley Capital International World Index, the Lehman Brothers Treasury Bond
Index, the Lehman Brothers Government/Corporate Bond Index, the Salomon Brothers
Government Bond Index and changes in the Consumer Price Index as published by
the U.S. Department of Commerce. The fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, IBC, Wiesenberger or ICD.
Performance Advertisements also may refer to discussions of the fund and
comparative mutual fund data and ratings reported in independent periodicals,
including THE WALL STREET JOURNAL, MONEY MAGAZINE, FORBES, BUSINESS WEEK,
FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE
WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in Performance
Advertisements may be in graphic form.
The fund may also compare its performance with the performance of bank
certificates of deposit ("CDs") as measured by the CDA Certificate of Deposit
Index and the Bank Rate Monitor National Index and the average of yields of CDs
of major banks published by Banxquotes(R) Money Markets. In comparing the fund's
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Bank accounts are insured in whole or in part by an agency of
the U.S. government and may offer a fixed rate of return. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon will fluctuate.
While the fund seeks to maintain a stable net asset value of $1.00 per share,
there can be no assurance that it will be able to do so.
The fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends on the fund investment are reinvested by being paid in
additional fund shares, any future income of the fund would increase the value,
not only of the original fund investment, but also of the additional fund shares
received through reinvestment. As a result, the value of the fund investment
would increase more quickly than if dividends had been paid in cash. The fund
may also make available to shareholders a daily accrual factor or "mil rate"
representing dividends accrued to shareholder accounts on a given day or days.
Certain shareholders may find that this information facilitates accounting or
recordkeeping.
TAXES
BACKUP WITHHOLDING. The fund is required to withhold 31% of all dividends
payable to individuals and certain other non-corporate shareholders who do not
provide the fund or PaineWebber with a correct taxpayer identification number or
who otherwise are subject to backup withholding.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or loss
as a result of a conversion from Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To qualify for treatment
as a regulated investment company ("RIC") under the Internal Revenue Code, the
fund must distribute to its shareholders for each taxable year at least 90% of
its investment company taxable income (consisting generally of net investment
income and net short-term capital gains, if any) and must meet several
additional requirements. Among these requirements are the following: (1) the
fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities and certain other income; (2) at the
close of each quarter of the fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
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the fund's total assets; and (3) at the close of each quarter of the fund's
taxable year, not more than 25% of the value of its total assets may be invested
in securities (other than U.S. government securities or the securities of other
RICs) of any one issuer. If the fund failed to qualify for treatment as a RIC
for any taxable year, (a) it would be taxed as an ordinary corporation on the
full amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (b) the shareholders would treat
all those distributions as dividends (that is, ordinary income) to the extent of
the fund's earnings and profits. In addition, the fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before requalifying for RIC treatment.
OTHER INFORMATION
CLASSES OF SHARES. A share of each class of the fund represents an
interest in the fund's investment portfolio and has similar rights, privileges
and preferences. Each class may differ with respect to distribution and/or
service fees, other expenses allocable exclusively to each class, voting rights
on matters exclusively affecting that class, and its exchange privilege, if any.
The different sales charges and other expenses applicable to the different
classes of shares of the fund will affect the performance of those classes. Each
share of the fund is entitled to participate equally in dividends and the
proceeds of any liquidation of the fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B and C shares
will differ.
VOTING RIGHTS. Shareholders of the fund are entitled to one vote for each
full share held and fractional votes for fractional shares held. Voting rights
are not cumulative and, as a result, the holders of more than 50% of all the
shares of the Corporation may elect all its board members. The shares of 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 Rule 12b-1 Plan as it relates to the class. The shares of each series
of the Corporation will be voted separately, except when an aggregate vote of
all the series is required by law.
The fund does not hold annual meetings. There normally will be no meetings
of shareholders to elect directors unless fewer than a majority of the directors
holding office have been elected by shareholders. The directors are required to
call a meeting of shareholders when requested in writing to do so by the
shareholders of record holding at least 25% of the fund's outstanding shares.
CLASS-SPECIFIC EXPENSES. The fund may determine to allocate certain of its
expenses (in addition to service and 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.
PRIOR NAMES. Prior to November 10, 1995, the Class C shares of the fund
were called "Class D" shares.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for the fund.
PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the fund.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New
York, New York 10036, serves as independent accountants for the fund.
29
<PAGE>
FINANCIAL STATEMENTS
The fund's Annual Report to Shareholders for its last fiscal year ended
February 28, 1999 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent accountants
appearing therein are incorporated herein by this reference.
30
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YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL
INFORMATION. THE FUND AND ITS DISTRIBUTOR
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT. THE
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION 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
------------------------------------------
Statement of Additional Information
June 30, 1999
------------------------------------------
PAINEWEBBER
(COPYRIGHT)1999 PaineWebber Incorporated
