<PAGE>
PaineWebber
Short-Term U.S. Government
Income Fund for Credit Unions
1285 Avenue of the Americas New York, New York 10019
Prospectus Dated April 1, 1995
The Fund is a series of PaineWebber Managed Investments Trust ("Trust"). This
Prospectus concisely sets forth information about the Fund a prospective
investor should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information dated April 1, 1995 (which is
incorporated by reference herein) has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting the Fund, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
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A professionally managed series of a mutual fund designed primarily for federal
credit unions seeking the highest level of income consistent with the
preservation of capital and low volatility of net asset value.
. Professional Management
. Portfolio Diversification
. Dividend and Capital Gain Reinvestment
. Flexible Pricing(SM)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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A PAINEWEBBER MUTUAL FUND
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBU-
TOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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PAINEWEBBER SHORT-TERM U.S. GOVERNMENT INCOME FUND FOR CREDIT UNIONS
PROSPECTUS SUMMARY
See the body of the Prospectus for more information on the topics discussed
in this summary.
The Fund: This Prospectus describes PaineWebber Short-Term U.S.
Government Income Fund for Credit Unions ("Fund"), a
diversified series of an open-end, management
investment company designed primarily for federal
credit unions.
Investment Objective Highest level of income consistent with the
and Policies: preservation of capital and low volatility of net asset
value; invests primarily in U.S. government securities,
including mortgage-backed securities that are issued or
guaranteed by the U.S. government, its agencies or
certain other government-related entities; all of the
Fund's investments and investment transactions are
intended to be legally permissible for investment by
federal credit unions under the Federal Credit Union
Act and the rules and regulations of the National
Credit Union Administration ("NCUA Regulations").
Total Net Assets: $6.4 million at February 28, 1995.
Investment Adviser Mitchell Hutchins Asset Management Inc. ("Mitchell
and Administrator: Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber" or "PW"),
manages over $41.5 billion in assets. See "Management."
Purchases: Shares of beneficial interest are available exclusively
through PaineWebber and its correspondent firms for
investors who are clients of PaineWebber or those firms
("PaineWebber clients") and, for other investors,
through PFPC Inc., the Fund's transfer agent ("Transfer
Agent").
Flexible Pricing Sys- Investors may select Class A or Class D shares, each
tem: with a public offering price that reflects different
sales charges and expense levels. See "Flexible Pricing
System," "Purchases" and "Redemptions."
Class A Shares Offered at net asset value plus any applicable sales
charge (maximum is 2.5% of public offering price).
Class D Shares Offered at net asset value without an initial or
contingent deferred sales charge. Class D shares pay
higher ongoing expenses than Class A shares.
2
<PAGE>
Exchanges: Shares may be exchanged for shares of the corresponding
Class of most PaineWebber and Mitchell Hutchins/Kidder,
Peabody ("MH/KP") mutual funds. However, such other
funds may not constitute permitted investments for
federal credit unions.
Redemptions: PaineWebber clients may redeem through PaineWebber;
other shareholders must redeem through the Transfer
Agent.
Dividends: Declared daily and paid monthly; net capital gain will
be distributed annually. See "Dividends and Taxes."
Reinvestment: All dividends and capital gain distributions will be
paid in Fund shares of the same Class at net asset
value unless the shareholder has requested cash.
Minimum Purchase: $100,000 for initial investment; $5,000 for subsequent
purchases.
Other Features:
Class A Shares Automatic investment Quantity discounts on initial
plan sales charge
Systematic withdrawal 365-day reinstatement privilege
plan
Rights of accumulation
Class D Shares Automatic investment Systematic withdrawal plan
plan
WHO SHOULD INVEST. The Fund is designed primarily for investment by federal
credit unions, but also is available for investment by other institutional and
individual investors. All of the Fund's investments and investment transactions
are intended to be legally permissible for federal credit unions under the Fed-
eral Credit Union Act and NCUA Regulations. The Fund will invest primarily in
U.S. government securities, including mortgage-backed securities, and may also
invest in privately issued mortgage-backed securities that have been rated AAA
by Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's Investors Service,
Inc. ("Moody's"), have an equivalent rating from another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, have been determined
by Mitchell Hutchins to be of comparable quality. The Fund will have a dollar-
weighted average portfolio maturity of less than three years. Accordingly, the
Fund is designed to provide investors with current income and less fluctuation
in net asset value than in longer-term U.S. government bond funds.
RISK FACTORS. There can be no assurance that the Fund will achieve its in-
vestment objective, and the Fund's net asset value generally will vary in-
versely with movements in interest rates. Although the Fund invests primarily
in U.S. government securities, neither the Fund's yield nor its net asset value
is insured or guaranteed by the U.S. government. Normally, the Fund will con-
centrate at least 25% of its total assets in mortgage-backed securities. In-
vesting in mortgage-backed securities involves special risks, such as those re-
lating to the prepayment of principal on the underlying obligations, in addi-
tion to the risks present in the case of other types of debt securities. During
periods of market uncertainty, the market values of fixed income securities,
including mortgage-backed securities, can become volatile. Additionally, in-
vestments in certain types of mortgage-backed securities may, from time to
time, become less liquid than other types of investments, increasing the vola-
tility of the Fund's net asset value. During 1994, the value and the liquidity
of many mortgage-backed securities declined sharply due primarily to increases
in short-term interest rates. There can be no assurance that such declines will
not recur.
3
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EXPENSES OF INVESTING IN THE FUND. The following tables are intended to as-
sist investors in understanding the expenses associated with investing in the
Fund.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
CLASS A CLASS D
------- -------
<S> <C> <C>
Maximum sales charge on purchases of shares (as a percentage of
public offering price)........................................ 2.50% None
Sales charge on reinvested dividends........................... None None
Exchange fee................................................... $5.00 $5.00
Maximum contingent deferred sales charge (as a percentage of
redemption proceeds).......................................... None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES(2)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
CLASS A CLASS D
------- -------
<S> <C> <C>
Management fees................................................. 0.30% 0.30%
12b-1 fees(3)................................................... 0.25 0.50
Other expenses.................................................. 1.17 1.14
---- ----
Total operating expenses........................................ 1.72% 1.94%
==== ====
</TABLE>
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(1) Sales charge waivers and reduced sales charge purchase plans are avail-
able for Class A shares. See "Purchases".
(2) See "Management" for additional information. "Other expenses" have been
annualized based on those actually incurred for the period December 7, 1993
(commencement of operations) to November 30, 1994. Mitchell Hutchins waived a
portion of its advisory and administration fees for this period. Expenses net
of waivers were 1.35% for Class A shares and 1.55% for Class D shares for this
period.
(3) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS D
------- -------
<S> <C> <C>
12b-1 service fees......................................... 0.25% 0.25%
12b-1 distribution fees.................................... 0.00 0.25
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class D share-
holders may pay more in direct and indirect sales charges (including distribu-
tion fees) than the economic equivalent of the maximum front-end sales charges
permitted by the National Association of Securities Dealers, Inc.
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares(1)(2)............... $42 $78 $116 $223
Class D Shares(2).................. $20 $61 $105 $226
</TABLE>
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(1) Assumes deduction at the time of purchase of the maximum 2.5% initial
sales charge.
(2) During the year ended November 30, 1994, Mitchell Hutchins waived a por-
tion of its advisory and administration fees. This Example is based on expense
ratios which would have occurred had such waivers not been made.
This Example assumes that all dividends and other distributions are rein-
vested and that the percentage amounts listed under Annual Fund Operating Ex-
penses remain the same in the years shown. The above tables and the assumption
in the Example of a 5% annual return are required by regulations of the Securi-
ties and Exchange Commission ("SEC") applicable to all mutual funds; the as-
sumed 5% annual return is not a prediction of, and does not represent, the pro-
jected or actual performance of either Class of the Fund's shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund's actual expenses will depend upon, among other things, the level of
average net assets, the extent to which the Fund incurs variable expenses, such
as transfer agency costs, and whether Mitchell Hutchins reimburses all or a
portion of the Fund's expenses and/or waives all or a portion of its advisory
and other fees.
4
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FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one Class A
share and one Class D share of the Fund for the period shown. This information
is supplemented by the financial statements and accompanying notes appearing in
the Fund's Annual Report to Shareholders, which are incorporated by reference
into the Statement of Additional Information.
The financial statements and notes, as well as the information in the table
appearing below, have been audited by Ernst & Young LLP, independent auditors,
whose report thereon is included in the Annual Report to Shareholders. Further
information about the Fund's performance is also included in the Annual Report
to Shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 7, 1993# TO
NOVEMBER 30, 1994
-----------------------
CLASS A CLASS D
---------- ----------
<S> <C> <C>
Net Asset Value, beginning of period................. $ 10.00 $ 10.00
---------- ----------
Net Decrease from Operations:
Net investment income.............................. 0.40 0.37
Net realized and unrealized losses from investment
transactions...................................... (0.41) (0.41)
---------- ----------
Net decrease in net asset value from operations.... (0.01) (0.04)
---------- ----------
Less Distributions:
Dividends from net investment income............... (0.40) (0.37)
---------- ----------
Net Asset Value, end of period....................... $ 9.59 $ 9.59
========== ==========
Total investment return (1)........................ (0.36)% (0.59)%
========== ==========
Ratios/Supplemental Data:
Net assets, end of period (000's).................. $10,619 $ 1,143
Ratio of expenses to average net assets**.......... 1.35%* 1.55%*
Ratio of net investment income to average net as-
sets**............................................ 4.13%* 3.89%*
Portfolio turnover rate............................ 570.73% 570.73%
</TABLE>
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# Commencement of operations.
* Annualized.
** During the period presented above, PaineWebber/Mitchell Hutchins waived all
or a portion of its investment advisory and administration fees and service
and distribution fees. If such waivers had not been made for the Class A
shares, the annualized ratio of expenses to average net assets and the
annualized ratio of net investment income to average net assets would have
been 1.72% and 3.75%, respectively, for the period ended November 30, 1994.
If such waivers had not been made for the Class D shares, the annualized
ratio of expenses to average net assets and the annualized ratio of net in-
vestment income to average net assets would have been 1.94% and 3.51%, re-
spectively, for the period ended November 30, 1994.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends at net as-
set value on the payable dates, and a sale at net asset value on the last
day of the period reported. The figures do not include sales charges; re-
sults for Class A shares would be lower if sales charges were included. To-
tal investment returns have not been annualized.
5
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FLEXIBLE PRICING SYSTEM
DIFFERENCES BETWEEN THE CLASSES
The primary distinctions between the Classes of the Fund's shares lie in
their sales charge structures and in their ongoing expenses, including asset-
based sales charges in the form of distribution fees. These differences are
summarized in the table below. Each Class has distinct advantages and disadvan-
tages for different investors, and investors may choose the Class that better
suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales Service fee of 0.25% Initial sales charge
charge of 2.5% of the waived or reduced for
public offering price certain purchases
CLASS D None Service fee of 0.25%; --
distribution fee of 0.25%
</TABLE>
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES
In deciding which Class of shares to purchase, investors should consider the
cost of sales charges together with the cost of the on-going annual expenses
described below, as well as any other relevant facts and circumstances.
SALES CHARGES. Class A shares are sold at net asset value plus an initial
sales charge of up to 2.5% of the public offering price. Because of this ini-
tial sales charge, not all of a Class A shareholder's purchase price is in-
vested in the Fund. Class D shareholders pay no initial sales charges. Thus,
the entire amount of a Class D shareholder's purchase price is immediately in-
vested in the Fund.
WAIVERS AND REDUCTIONS OF CLASS A SALES CHARGES. Class A share purchases of
$250,000 or more and Class A share purchases made under the Fund's reduced
sales charge plans may be made at a reduced sales charge. In considering the
combined cost of sales charges and ongoing annual expenses, investors should
take into account any reduced sales charges on Class A shares for which they
may be eligible.
The entire initial sales charge on Class A shares is waived for certain eli-
gible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class D shares, investors eligible for complete waivers should purchase
Class A shares.
ONGOING ANNUAL EXPENSES. Both Classes of Fund shares pay an annual 12b-1
service fee of 0.25% of average daily net assets. In addition, Class D shares
pay an annual 12b-1 distribution fee of 0.25% of average daily net assets. An-
nual 12b-1 distribution fees are a form of asset-based sales charge. An in-
vestor should consider both ongoing annual expenses and initial sales charges
in estimating the costs of investing in the respective Classes of Fund shares
over various time periods.
For example, assuming a constant net asset value, the cumulative distribution
fees on the Fund's Class D shares and the 2.5% maximum initial sales charge on
the Fund's Class A shares would be approximately equal if the shares were held
for approximately ten years. Thus, an investor who would be subject to the max-
imum initial sales charge and who expects to hold Fund shares for less than ten
years generally should expect to pay the lowest cumulative expenses by purchas-
ing Class D shares.
The foregoing example does not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can it reflect fluctuations in the net asset
value of Fund shares, which will affect the actual amount of expenses paid. Ex-
penses
6
<PAGE>
borne by Classes will differ slightly because of the allocation of other
Class-specific expenses. The "Example of Effect of Fund Expenses" under "Pro-
spectus Summary" shows the cumulative expenses an investor would pay over time
on a hypothetical investment in each Class of Fund shares, assuming an annual
return of 5%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of compensa-
tion for selling one Class of Fund shares rather than the other. Investors
should understand that distribution fees and initial sales charges are in-
tended to compensate Mitchell Hutchins for distribution services.
See "Purchases," "Redemptions" and "Management" for a more complete descrip-
tion of the sales charges, service fees and distribution fees applicable to
the two Classes of shares in the Fund. See also "Dividends and Taxes," "Valua-
tion of Shares" and "General Information" for other differences between the
Classes.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve the highest level of income
consistent with the preservation of capital and low volatility of net asset
value. All of the Fund's investments and investment transactions are intended
to be legally permissible for investment by federal credit unions under the
Federal Credit Union Act and NCUA Regulations.
The Fund seeks to maximize income consistent with the preservation of capi-
tal by investing, under normal conditions, at least 65% of its total assets in
U.S. government securities, including mortgage-backed securities ("U.S. gov-
ernment mortgage-backed securities") issued or guaranteed by the U.S. govern-
ment or by government agencies or other government entities permissible for
investment by federal credit unions ("permitted government entities"), other
obligations issued or guaranteed by the U.S. government or permitted govern-
ment entities and repurchase agreements with respect to those securities. Up
to 35% of the Fund's total assets may be invested in mortgage-backed securi-
ties that are issued by private issuers and that at the time of purchase have
been rated AAA by S&P or Aaa by Moody's, have an equivalent rating from an-
other NRSRO or, if unrated, have been determined by Mitchell Hutchins to be of
comparable quality. As a matter of fundamental policy, the Fund normally con-
centrates at least 25% of its total assets in U.S. government and privately
issued mortgage-backed securities.
The Fund seeks to limit the volatility of its net asset value per share by
maintaining a dollar-weighted average portfolio maturity not in excess of
three years. For this purpose, the maturity of a mortgage-backed security is
deemed to be its average life (i.e., the average time in which the principal
amount of the security is repaid), as estimated by Mitchell Hutchins based
upon scheduled principal amortization and an anticipated rate of principal
prepayments, which, in turn, is based upon past prepayment patterns, prevail-
ing interest rates and other factors. The average life of a mortgage-backed
security generally is substantially shorter than its stated maturity. The Fund
may invest in securities with variable interest rates. The maturities of vari-
able rate securities maturing in 397 days or less and of those variable rate
securities that are issued or guaranteed by the U.S. government or its agen-
cies or instrumentalities and that have interest rates that are readjusted no
less frequently than every 762 days will be deemed to be equal to the period
remaining until the next readjustment of the interest rate. Unless permitted
under applicable SEC policies, interest rate reset dates will not be used for
purposes of determining the maturity of other variable rate securities.
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property
and include single- and multi-class pass-through securities and collateralized
mortgage obligations. Multi-class pass-through securities and collateralized
mortgage obligations are collectively referred to herein as CMOs. The U.S.
government mortgage-backed securities in which the Fund may invest include
mortgage-backed securities issued or guaranteed as to the payment of principal
and interest (but not as to market value) by the Government National Mortgage
Association ("Ginnie
7
<PAGE>
Mae"), the Federal National Mortgage Association ("Fannie Mae"), or the Fed-
eral Home Loan Mortgage Corporation ("Freddie Mac"). Other mortgage-backed se-
curities, in which the Fund may invest up to 35% of its total assets, will be
issued by private issuers, generally originators of and investors in mortgage
loans, including savings associations, mortgage bankers, commercial banks, in-
vestment bankers and special purpose entities (collectively, "Private Mortgage
Lenders"). Payments of principal and interest (but not the market value) of
such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or in-
directly, by the U.S. government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying mort-
gage assets but with some form of non-government credit enhancement. The Fund
intends to invest in private mortgage-backed securities only if they qualify
as mortgage related securities within the meaning of Section 3(a)(41) of the
Securities Exchange Act of 1934 ("1934 Act"). For more information concerning
the types of mortgage-backed securities in which the Fund may invest, see the
Appendix to this Prospectus.
Non-mortgage-related U.S. government securities in which the Fund may invest
include U.S. Treasury obligations and other obligations backed by the full
faith and credit of the U.S. government and securities that are supported pri-
marily or solely by the creditworthiness of the issuer, such as securities is-
sued by the Resolution Funding Corporation, the Student Loan Marketing Associ-
ation, the Federal Home Loan Banks and the Tennessee Valley Authority.
The Fund may invest in certain zero coupon securities that are U.S. Treasury
notes and bonds that have been stripped of their unmatured interest coupon re-
ceipts or interests in such U.S. Treasury securities or coupons. The SEC staff
currently takes the position that "stripped" U.S. government securities that
are not issued through the U.S. Treasury are not U.S. government securities.
As long as the SEC takes this position, Certificates of Accrual Treasury Secu-
rities ("CATS") and Treasury Income Growth Receipts ("TIGRs") that are not is-
sued through the U.S. Treasury will not be counted as U.S. government securi-
ties for purposes of the 65% investment requirement. The Fund intends to enter
into only those zero coupon transactions that are permitted for investment by
federal credit unions under the Federal Credit Union Act and NCUA Regulations.
There can be no assurance that the Fund will achieve its investment objec-
tive. The Fund's net asset value will fluctuate based on changes in the value
of its portfolio securities. Neither the issuance by, nor the guarantee of, a
U.S. government agency nor even the highest rating by a NRSRO constitutes as-
surance that the security will not fluctuate in value or that the Fund will
receive the originally anticipated yield on the security. See "Investment Pol-
icies and Restrictions--Yield Factors and Ratings" in the Statement of Addi-
tional Information.
RISK FACTORS AND OTHER INVESTMENT POLICIES
INTEREST RATE SENSITIVITY. The investment income of the Fund is based on the
income earned on the securities it holds, less expenses incurred; thus, the
Fund's investment income may be expected to fluctuate in response to changes
in such expenses or income. For example, the investment income of the Fund may
be affected if it experiences a net inflow of new money that is then invested
in securities whose yield is higher or lower than that earned on then-current
investments. Generally, the value of the securities held by the Fund, and thus
the net asset value per share of the Fund, will rise when interest rates de-
cline. Conversely, when interest rates rise, the value of fixed income securi-
ties, and thus the net asset value per share of the Fund, may be expected to
decline. During periods of market uncertainty, the market values of fixed in-
come securities, including mortgage-backed securities, can become volatile.
DETERMINATIONS BY NRSROS. Ratings of debt securities represent the NRSROs'
opinions regarding their quality, are not a guarantee of quality and may be
reduced after the Fund has acquired the security. Mitchell Hutchins will con-
sider such an event in determining whether the Fund should continue to hold
the security,
8
<PAGE>
but is not required to dispose of it. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not reflect an assessment of
the volatility of the security's market value or the liquidity of an investment
in the security. Also, NRSROs may fail to make timely changes in credit ratings
in response to subsequent events, so that an issuer's current financial condi-
tion may be better or worse than the rating indicates.
RISKS OF MORTGAGE-BACKED SECURITIES. The yield characteristics of the mort-
gage-backed securities in which the Fund may invest differ from those of tradi-
tional debt securities. Among the major differences are that interest and prin-
cipal payments are made more frequently on mortgage-backed securities, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a re-
sult, if the Fund purchases these securities at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Conversely, if the Fund purchases these securities at a dis-
count, faster than expected prepayments will increase, while slower than ex-
pected prepayments will reduce, yield to maturity. Amounts available for rein-
vestment by the Fund are likely to be greater during a period of declining in-
terest rates and, as a result, are likely to be reinvested at lower interest
rates than during a period of rising interest rates. Accelerated prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full.
The market for privately issued mortgage-backed securities is smaller and
less liquid than the market for U.S. government mortgage-backed securities. CMO
classes may be specially structured in a manner that provides any of a wide va-
riety of investment characteristics, such as yield, average maturity and inter-
est rate sensitivity. As market conditions change, however, and particularly
during periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. These
changes can result in volatility in the market value, and in some instances re-
duced liquidity, of the CMO class.
The rate of interest payable on CMO classes may be set at levels that are ei-
ther above or below market rates at the time of issuance, so that the securi-
ties will be sold at a substantial premium to, or at a discount from, par val-
ue. In the most extreme case, one class will be entitled to receive all or a
portion of the interest but none of the principal from the underlying mortgage
assets (the interest-only or "IO" class) and one class will be entitled to re-
ceive all or a portion of the principal but none of the interest (the princi-
pal-only or "PO" class). IOs and POs may also be created from mortgage-backed
securities that are not CMOs. The yields on IOs, POs and other mortgage-backed
securities that are purchased at a substantial premium or discount generally
are extremely sensitive to the rate of principal payments (including prepay-
ments) on the underlying mortgage assets. If the mortgage assets underlying an
IO experience greater than anticipated principal prepayments, an investor may
fail to recoup fully his or her initial investment even if the security is gov-
ernment issued or guaranteed or is rated AAA or the equivalent.
Some CMO classes are structured to pay interest at rates that are adjusted in
accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive
in certain interest rate environments but not in others. For example, an in-
verse floating rate CMO class pays interest at a rate that increases as a spec-
ified interest rate index decreases but decreases as that index increases. For
other CMO classes, the yield may move in the same direction as market interest
rates--i.e. the yield may increase as rates increase and decrease as rates de-
crease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obliga-
tion. Such interest rate formulas may be combined with other CMO characteris-
tics. For example, a
9
<PAGE>
CMO class may be an "inverse IO," on which the holders are entitled to receive
no payments of principal and are entitled to receive interest at a rate that
will vary inversely with a specified index or a multiple thereof.
During 1994, the value and liquidity of many mortgage-backed securities de-
clined sharply due primarily to increases in short-term interest rates. There
can be no assurance that such declines will not recur. The market value of cer-
tain mortgage-backed securities in which the Fund may invest, including IO and
PO classes of mortgage-backed securities and inverse floating rate securities,
can be extremely volatile and these securities may become illiquid. Mitchell
Hutchins seeks to manage the Fund so that the volatility of its portfolio,
taken as a whole, is consistent with the Fund's investment objective. If Mitch-
ell Hutchins incorrectly forecasts interest rate changes or other factors that
may affect the volatility of securities held by the Fund, the Fund's ability to
meet its investment objective may be reduced.
The Fund intends to invest in CMOs and other mortgage backed securities only
to the extent permitted for federal credit unions under the Federal Credit
Union Act and NCUA Regulations.
The Fund's policy of investing at least 25% of its total assets in mortgage-
backed securities has the effect of increasing the Fund's exposure to these and
other risks related to such securities and may cause the Fund's net asset value
to fluctuate more than otherwise would be the case.
See Appendix A to this Prospectus for more information concerning the types
of mortgage-backed securities in which the Fund may invest.
RISKS OF ZERO COUPON SECURITIES. The Fund may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero coupon secu-
rities pay no interest to holders prior to maturity. However, a portion of the
original issue discount on the zero cou-pon securities must be included in the
Fund's income. Accordingly, to continue to qualify for tax treatment as a regu-
lated investment company and to avoid a certain excise tax (see "Taxes" in the
Statement of Additional Information), the Fund may be required to distribute as
dividends amounts that are greater than the total amount of cash it actually
receives. These distributions must be made from the Fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income- producing securities with cash used
to make such distributions, and its current income ultimately may be reduced as
a result. Zero coupon securities usually trade at a deep discount from their
face or par value and will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable ma-
turities that make current distributions of interest in cash.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. The Fund may enter into dol-
lar rolls, in which the Fund sells mortgage-backed or other securities for de-
livery in the current month and simultaneously contracts to purchase substan-
tially similar securities on a specified future date. In the case of dollar
rolls involving mortgage-backed securities, the mortgage-backed securities that
are purchased will be of the same type and will have the same interest rate and
maturity as those sold, but will be supported by different pools of mortgages.
The Fund forgoes principal and interest paid during the roll period on the se-
curities sold in a dollar roll, but the Fund is compensated by the difference
between the current sales price and the lower price for the future purchase, as
well as by any interest earned on the proceeds of the securities sold. The Fund
also could be compensated through the receipt of fee income equivalent to a
lower forward price.
The Fund may also enter into reverse repurchase agreements in which the Fund
sells securities to a bank or dealer and agrees to repurchase them at a mutu-
ally agreed date and price. The market value of securities sold under reverse
repurchase agreements typically is greater than the proceeds of the sale, and
ac-
10
<PAGE>
cordingly, the market value of the securities sold is likely to be greater than
the value of the securities in which the Fund invests those proceeds. Thus, re-
verse 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 repur-
chase. In the event the buyer of securities under a reverse repurchase agree-
ment files for bankruptcy or becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to determine whether to enforce the
Fund's obligation to repurchase the securities and the Fund's use of the pro-
ceeds of the reverse repurchase agreement may effectively be restricted pending
such decision.
The dollar rolls and reverse repurchase agreements entered into by the Fund
normally will be arbitrage transactions in which the Fund will maintain an off-
setting position in securities or repurchase agreements that mature on or be-
fore the settlement date of the related dollar roll or reverse repurchase
agreement. Since the Fund will receive interest on the securities or repurchase
agreements in which it invests the transaction proceeds, such transactions may
involve leverage. However, since such securities or repurchase agreements must
satisfy the quality requirements of the Fund, and will mature on or before the
settlement date of the dollar roll or reverse repurchase agreement, Mitchell
Hutchins believes that such arbitrage transactions do not present the risks to
the Fund that are associated with other types of leverage.
Dollar rolls and reverse repurchase agreements will be considered to be
borrowings and, accordingly, will be subject to the Fund's limitations on
borrowings, which will restrict the aggregate of such transactions (plus any
other borrowings) to 33 1/3% of the Fund's total assets. The Fund will not en-
ter into dollar rolls or reverse repurchase agreements, other than in arbitrage
transactions as described above, in an aggregate amount in excess of 5% of the
Fund's total assets. The Fund has no present intention to enter into dollar
rolls other than in such arbitrage transactions, and it has no present inten-
tion to enter into reverse repurchase agreements other than in such arbitrage
transactions or for temporary or emergency purposes. The Fund intends to enter
into only those dollar roll and reverse repurchase transactions that are per-
mitted for investment by federal credit unions under the Federal Credit Union
Act and NCUA Regulations.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase debt secu-
rities, including mortgage-backed securities, on a "when-issued" basis or may
purchase or sell such securities for "delayed delivery," provided that, in ei-
ther case, settlement occurs no more than 120 days after the trade date. In
when-issued or delayed delivery transactions, delivery of the securities occurs
beyond normal settlement periods, but the Fund generally would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund undertakes to purchase a when-issued or delayed delivery obliga-
tion, it immediately assumes the risks of ownership, including the risk of
price fluctuation. Failure of a counterparty to deliver a security purchased 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. Depending on
market conditions, the Fund's when-issued and delayed delivery purchase commit-
ments could cause its net asset value per share to be more volatile, because
such securities may increase the amount by which its total assets, including
the value of when-issued and delayed-delivery securities it holds, exceed its
net assets.
REPURCHASE AGREEMENTS. The Fund may use repurchase agreements. Repurchase
agreements are transactions in which the Fund purchases securities from a bank
or recognized securities dealer and simultaneously commits to resell the secu-
rities to the bank or dealer at an agreed-upon date and price reflecting a mar-
ket rate of interest unrelated to the coupon rate or maturity of the purchased
securities. Repurchase agreements carry certain risks not associated with di-
rect investments in securities, including possible declines in the market value
of the underlying securities and delays and costs to the Fund if the other
party to the repurchase agreement becomes insolvent. The Fund in-
11
<PAGE>
tends to enter into repurchase agreements only with banks and dealers in trans-
actions that are permitted for investment by federal credit unions under the
Federal Credit Union Act and NCUA Regulations and that are believed by Mitchell
Hutchins to present minimum credit risks in accordance with guidelines estab-
lished by the Trust's board of trustees.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in il-
liquid securities, including repurchase agreements with maturities in excess of
seven days and securities whose disposition is restricted under the federal se-
curities laws (other than "Rule 144A" securities Mitchell Hutchins has deter-
mined to be liquid under procedures approved by the Trust's board of trustees).
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act of 1933 ("1933 Act"). Institutional markets for restricted secu-
rities have developed as a result of Rule 144A, providing both readily ascer-
tainable values for restricted securities and the ability to liquidate an in-
vestment to satisfy share redemption orders. An insufficient number of quali-
fied institutional buyers interested in purchasing Rule 144A-eligible re-
stricted securities held by the Fund, however, could affect adversely the mar-
ketability of such portfolio securities, and the Fund might be unable to dis-
pose of such securities promptly or at favorable prices.
PORTFOLIO TURNOVER. The Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. A higher turnover rate (100% or more) will in-
volve correspondingly greater transaction costs, and may increase the potential
for short-term capital gains.
OTHER INVESTMENT POLICIES. In order to invest cash reserves or, on a tempo-
rary basis, when Mitchell Hutchins believes unusual circumstances warrant a de-
fensive posture, the Fund temporarily may commit all or any portion of its as-
sets to money market instruments. Such instruments may include securities is-
sued or guaranteed by the U.S. government or permitted government entities, CDs
and bankers' acceptances of banks that are insured by the Federal Deposit In-
surance Corporation and repurchase agreements secured by any of the foregoing.
The Fund's investment objective and certain investment limitations as de-
scribed in the Statement of Additional Information are fundamental policies
that may not be changed without shareholder approval. Additionally, the Fund's
policy of limiting its investments and investment transactions to those in-
tended to be legally permissible for federal credit unions under the Federal
Credit Union Act and NCUA Regulations may not be changed without shareholder
approval. All other investment policies may be changed by the Trust's board of
trustees without shareholder approval.
PURCHASES
GENERAL. Class A shares of the Fund are sold to investors subject to an ini-
tial sales charge. Class D shares are sold without an initial sales charge but
are subject to higher ongoing expenses than Class A shares. See "Flexible Pric-
ing System."
Shares of the Fund are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the Trans-
fer Agent. Investors may contact a local PaineWebber office to open a
PaineWebber account. The minimum initial investment is $100,000; the minimum
for additional purchases is $5,000. The Fund reserves the right to change these
minimums. Purchase orders will be priced at the net asset value per share next
determined (see "Valuation of Shares") after the order is received by
PaineWebber's New York City offices or by the Transfer Agent, plus any applica-
ble sales charge for the Class A shares. The Fund and Mitchell Hutchins reserve
the right to reject any purchase order and to suspend the offering of the
Fund's shares for a period of time.
When placing purchase orders, investors should specify whether the order is
for Class A or Class D shares. All share purchase orders that fail to specify a
Class will automatically be invested in Class A shares.
12
<PAGE>
PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million. Invest-
ment executives and correspondent firms are responsible for transmitting pur-
chase orders to PaineWebber's New York City offices promptly. Investors may pay
for a purchase with checks drawn on U.S. banks or with funds held in brokerage
accounts at PaineWebber or its correspondent firms. Payment is due on the fifth
Business Day after the order is received at PaineWebber's New York City of-
fices. A "Business Day" is any day, Monday through Friday, on which the New
York Stock Exchange, Inc. ("NYSE") is open for business.
PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber cli-
ents may purchase shares of the Fund through the Transfer Agent. Shares of the
Fund may be purchased, and an account with the Fund established, by completing
and signing the purchase application at the end of this Prospectus and mailing
it, together with a check to cover the purchase, to the Transfer Agent: PFPC
Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. Subsequent investments need not be accompanied by an application.
INITIAL SALES CHARGE--CLASS A SHARES. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the following
table:
INITIAL SALES CHARGE SCHEDULE--CLASS A SHARES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF DISCOUNT TO SELECTED
--------------------------------------- DEALERS AS A PERCENTAGE
OFFERING NET AMOUNT INVESTED OF
AMOUNT OF PURCHASE PRICE (NET ASSET VALUE) OFFERING PRICE
- -------------------- ------------------ -------------------- -----------------------
<S> <C> <C> <C>
Less than $250,000 2.50 2.56 2.25
$250,000 to $499,999 2.00 2.04 1.75
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over(1) None None 0.50
</TABLE>
- --------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own re-
sources.
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for the Fund's shares, than those shown above.
To the extent PaineWebber or any dealer receives 90% or more of the sales
charge, it may be deemed an "underwriter" under the 1933 Act.
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares of the Fund are avail-
able with- out a sales charge through exchanges for Class
A shares of most other PaineWebber and MH/KP mutual funds. See "Exchanges." In
addition, Class A shares may be purchased without a sales charge, and exchanges
of any Class of shares may be made without the $5.00 exchange fee, by employ-
ees, directors and officers of PaineWebber or its affiliates, directors or
trustees and officers of any PaineWebber or MH/KP fund, their spouses, parents
and children and advisory clients of Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the purchase
is made through a PaineWebber investment executive who formerly was employed as
a broker with another firm registered as a broker-dealer with the SEC, provided
(1) the purchaser was the investment executive's client at the competing bro-
kerage firm, (2) within 90 days of the purchase of Class A shares the purchaser
redeemed shares of one or more mutual funds for which that competing firm or
its affiliates was principal underwriter, provided the purchaser either paid a
sales charge to invest in those funds, paid a contingent deferred sales charge
upon redemption or held shares of those funds for the period required not to
pay the otherwise applicable contingent deferred sales charge and (3) the total
amount of shares of all PaineWebber and MH/KP funds purchased under this sales
charge waiver does not exceed the amount of the purchaser's redemption proceeds
from the competing firm's funds. To take
13
<PAGE>
advantage of this waiver, an investor must provide satisfactory evidence that
all the above-noted conditions are met. Qualifying investors should contact
their PaineWebber investment executives for more information.
Certificate holders of unit investment trusts ("UITs") sponsored by
PaineWebber may acquire Class A shares of the Fund without regard to minimum
investment requirements and without sales charges by electing to have dividends
and other distributions from their UIT investment automatically invested in
Class A shares.
REDUCED SALES CHARGE PLANS--CLASS A SHARES. If an investor or eligible group
of related Fund investors purchases Class A shares of the Fund concurrently
with Class A shares of other PaineWebber or MH/KP mutual funds, the purchases
may be combined to take advantage of the reduced sales charge applicable to
larger purchases. In addition, the right of accumulation permits a Fund in-
vestor or eligible group of related Fund investors to pay the lower sales
charge applicable to larger purchases by basing the sales charge on the dollar
amount of Class A shares currently being purchased, plus the net asset value of
the investor's or group's total existing Class A shareholdings in other
PaineWebber or MH/KP mutual funds.
An "eligible group of related Fund investors" includes an individual, the in-
dividual's spouse, parents and children, the individual's individual retirement
account ("IRA"), certain companies controlled by the individual and employee
benefit plans of those companies, and trusts or Uniform Gifts to Minors
Act/Uniform Transfers to Minors Act accounts created by the individual or eli-
gible group of individuals for the benefit of the individual and/or the indi-
vidual's spouse, parents or children. The term also includes a group of related
employers and one or more qualified retirement plans of such employers. For
more information, an investor should consult the Statement of Additional Infor-
mation or contact a PaineWebber investment executive or correspondent firm or
the Transfer Agent.
PURCHASE OF CLASS D SHARES. The public offering price of the Class D shares
of the Fund is the next determined net asset value. No initial or contingent
deferred sales charge is imposed.
EXCHANGES
Shares of the Fund may be exchanged for shares of the corresponding Class of
other PaineWebber and MH/KP mutual funds, or may be acquired through an ex-
change of shares of the corresponding Class of those funds. Federal credit
union investors should be aware, however, that the investment policies of other
PaineWebber mutual funds have not been designed for, and such other funds gen-
erally would not constitute permissible investments for, federal credit unions.
No initial sales charge is imposed on the shares being acquired through an
exchange. Class B shares of MH/KP mutual funds are equivalent to Class D shares
of PaineWebber mutual funds. A $5.00 exchange fee is charged for each exchange,
and exchanges may be subject to minimum investment requirements of the fund
into which exchanges are made.
Exchanges are permitted with other PaineWebber and MH/KP mutual funds, in-
cluding:
Income Funds
. MH/KP ADJUSTABLE RATE GOVERNMENT FUND
. MH/KP GLOBAL FIXED INCOME FUND
. MH/KP GOVERNMENT INCOME FUND
. MH/KP INTERMEDIATE FIXED INCOME FUND
. PW GLOBAL INCOME FUND
. PW HIGH INCOME FUND
. PW INVESTMENT GRADE INCOME FUND
. PW SHORT-TERM U.S. GOVERNMENT INCOME FUND
. PW STRATEGIC INCOME FUND
. PW U.S. GOVERNMENT INCOME FUND
Tax-Free Income Funds
. MH/KP MUNICIPAL BOND FUND
. PW CALIFORNIA TAX-FREE INCOME FUND
. PW MUNICIPAL HIGH INCOME FUND
. PW NATIONAL TAX-FREE INCOME FUND
. PW NEW YORK TAX-FREE INCOME FUND
Growth Funds
. MH/KP EMERGING MARKETS EQUITY FUND
. MH/KP GLOBAL EQUITY FUND
. MH/KP SMALL CAP GROWTH FUND
14
<PAGE>
. PW ATLAS GLOBAL GROWTH FUND
. PW BLUE CHIP GROWTH FUND
. PW CAPITAL APPRECIATION FUND
. PW COMMUNICATIONS & TECHNOLOGY GROWTH FUND
. PW EUROPE GROWTH FUND
. PW GROWTH FUND
. REGIONAL FINANCIAL GROWTH FUND
. SMALL CAP VALUE FUND
Growth and Income Funds
. MH/KP ASSET ALLOCATION FUND
. MH/KP EQUITY INCOME FUND
. PW ASSET ALLOCATION FUND
. PW GLOBAL ENERGY FUND
. PW GLOBAL GROWTH AND INCOME FUND
. PW GROWTH AND INCOME FUND
. PW UTILITY INCOME FUND
PW Money Market Fund
PaineWebber clients must place exchange orders through their PaineWebber in-
vestment executives or correspondent firms. Shareholders who are not
PaineWebber clients must place exchange orders in writing with the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
Delaware 19899. All exchanges will be effected based on the relative net asset
values per share next determined after the exchange order is received at
PaineWebber's New York City offices or by the Transfer Agent. See "Valuation of
Shares." Shares of the Fund purchased through PaineWebber or its correspondent
firms may be exchanged only after the settlement date has passed and payment
for such shares has been made.
OTHER EXCHANGE INFORMATION. This exchange privilege may be modified or termi-
nated at any time, upon at least 60 days' notice when such notice is required
by SEC rules. This exchange privilege is available only in those jurisdictions
where the sale of the PaineWebber and MH/KP fund shares to be acquired may be
legally made. Before making any exchange, shareholders should contact their
PaineWebber investment executives or correspondent firms or the Transfer Agent
to obtain more information and prospectuses of the PaineWebber and MH/KP funds
to be acquired through the exchange.
REDEMPTIONS
As described below, Fund shares may be redeemed at their net asset value and
redemption proceeds will be paid within seven days of the receipt of a redemp-
tion request. PaineWebber clients may redeem shares through PaineWebber or its
correspondent firms; all other shareholders must redeem through the Transfer
Agent. If a redeeming shareholder owns shares of more than one Class, the
shares will be redeemed in the following order unless the shareholder specifi-
cally requests otherwise: Class D shares and then Class A shares.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. Within seven days, repurchase
proceeds will be paid by check or credited to the shareholder's brokerage ac-
count at the election of the shareholder. PaineWebber investment executives and
correspondent firms are responsible for promptly forwarding redemption requests
to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor a redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients must redeem their shares through the Transfer Agent by
mail; other shareholders also may redeem Fund shares through the Transfer
Agent. Shareholders
15
<PAGE>
should mail redemption requests directly to the Transfer Agent: PFPC Inc.,
Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899. A
redemption request will be executed at the net asset value next computed after
it is received in "good order." "Good order" means that the request must be ac-
companied by the following: (1) a letter of instruction or a stock assignment
specifying the number of shares or amount of investment to be redeemed (or that
all shares credited to a Fund account be redeemed), signed by all registered
owners of the shares in the exact names in which they are registered, (2) a
guarantee of the signature of each registered owner by an eligible guarantor
institution acceptable to the Transfer Agent and in accordance with SEC rules,
such as a commercial bank, trust company or member of a recognized stock ex-
change, and (3) other supporting legal documents for estates, trusts, guardian-
ships, custodianships, partnerships and corporations. Shareholders are respon-
sible for ensuring that a request for redemption is received in "good order."
ADDITIONAL INFORMATION ON REDEMPTIONS. Redemption proceeds of $1 million or
more may be wired to the shareholder's PaineWebber brokerage account or a com-
mercial bank account designated by the shareholder. Questions about this op-
tion, or redemption requirements generally, should be referred to the share-
holder's PaineWebber investment executive or correspondent firm, or to the
Transfer Agent if the shares are not held in a PaineWebber brokerage account.
If a shareholder requests redemption of shares which were purchased recently,
the Fund may delay payment until it is assured that good payment has been re-
ceived. In the case of purchases by check, this can take up to 15 days.
Because the Fund incurs certain fixed costs in maintaining shareholder ac-
counts, the Fund reserves the right to redeem all Fund shares in any share-
holder account having a net asset value below the lesser of $500 or the current
minimum for initial purchases. If the Fund elects to do so, it will notify the
shareholder and provide the shareholder the opportunity to increase the amount
invested to the minimum required level or more within 60 days of the notice.
The Fund will not redeem accounts that fall below the minimum required level
solely as a result of a reduction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund ac-
count without a sales charge up to the dollar amount redeemed by purchasing
Class A shares of the Fund within 365 days after the redemption. To take advan-
tage of this reinstatement privilege, shareholders must notify their
PaineWebber investment executive or correspondent firm at the time the privi-
lege is exercised.
OTHER SERVICES AND INFORMATION
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll free at 1-800-647-1568.
AUTOMATIC INVESTMENT PLAN. Shareholders may purchase shares of the Fund
through an automatic investment plan, under which an amount specified by the
shareholder of $5,000 or more each month will be sent to the Transfer Agent
from the shareholder's bank for investment in the Fund.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own Class A or Class D Fund
shares with a value of $5,000 or more may have PaineWebber redeem a portion of
their Fund shares monthly, quarterly or semi-annually under the Fund's system-
atic withdrawal plan. The minimum amount for all withdrawals of Class A or
Class D shares is $100. Shareholders who receive dividends or other distribu-
tions in cash may not participate in the systematic withdrawal plan. Purchases
of additional shares of the Fund concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, sales charges.
TRANSFER OF ACCOUNTS. If a shareholder holding Fund shares in a PaineWebber
brokerage account transfers his brokerage account to another firm, the Fund
shares normally will be transferred to an account with the Transfer
16
<PAGE>
Agent. However, if the other firm has entered into a selected dealer agreement
with Mitchell Hutchins relating to the Fund, the shareholders may be able to
hold Fund shares in an account with the other firm.
DIVIDENDS AND TAXES
DIVIDENDS. Dividends from the Fund's net investment income are declared daily
and paid monthly on or about the 15th day of each month. Net investment income
includes accrued interest and discount, less amortization of premium and ac-
crued expenses. The Fund distributes annually substantially all of its net cap-
ital gain (the excess of net long-term capital gain over net short-term capital
loss) and net short-term capital gain, if any. The Fund may make additional
distributions if necessary to avoid a 4% excise tax on certain undistributed
income and capital gain. Dividends and other distributions paid on each Class
of Fund shares are calculated at the same time and in the same manner. Divi-
dends on Class D shares are expected to be lower than those for Class A shares
because of the higher expenses resulting from distribution fees borne by the
Class D shares. Dividends on each Class also might be affected differently by
the allocation of other Class-specific expenses. See "Valuation of Shares."
Shares purchased through PaineWebber investment executives and correspondent
firms begin earning dividends on the Business Day following the date payment
for such shares is due; shares purchased through the Transfer Agent begin earn-
ing dividends on the Business Day following the Transfer Agent's receipt of
payment for such shares. Shares acquired through an exchange begin earning div-
idends on the Business Day following the day on which the exchange is effected.
Dividends and other distributions are paid in additional Fund shares of the
same Class at net asset value unless the shareholder has requested cash pay-
ments. Shareholders who wish to receive dividends and/or capital gain distribu-
tions in cash, either mailed to the shareholder by check or credited to the
shareholder's PaineWebber account, should contact their PaineWebber investment
executives or correspondent firms or complete the appropriate section of the
application form.
TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will be relieved
of federal income tax on that part of its investment company taxable income
(consisting generally of net investment income and net short-term capital gain)
and net capital gain that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or in additional shares) generally are taxable to its shareholders as or-
dinary income. Distributions of the Fund's net capital gain (whether paid in
cash or in additional shares) are taxable to shareholders as long-term capital
gain, regardless of how long they have held their Fund shares. Shareholders not
subject to tax on their income will not be required to pay tax on amounts dis-
tributed to them.
The Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year.
The Fund is required to withhold 31% of all dividends, capital gain distribu-
tions and redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and capital gain distributions payable to those shareholders who otherwise are
subject to backup withholding.
The Fund is required to include in its gross income each year a portion of
the original issue discount on zero coupon or other deeply discounted securi-
ties it acquires, even though the Fund receives no interest payment on the se-
curities during the year.
A redemption of Fund shares may result in taxable gain or loss to the redeem-
ing shareholder, depending upon whether the redemp-
17
<PAGE>
tion proceeds are more or less than the shareholder's adjusted basis for the
redeemed shares (which normally includes any initial sales charge paid on Class
A shares). An exchange of Fund shares for shares of another PaineWebber or
MH/KP fund generally will have similar tax consequences. However, special tax
rules apply when a shareholder (1) disposes of Class A shares through an ex-
change or redemption within 90 days of purchase and (2) subsequently acquires
Class A shares of a PaineWebber or MH/KP fund without paying a sales charge due
to the exchange privilege or 365-day reinstatement privilege. In these cases,
any gain on the disposition of the original Class A shares will be increased,
or loss decreased, by the amount of the sales charge paid when the shares were
acquired, and that amount will increase the basis of the PaineWebber or MH/KP
fund shares subsequently acquired. In addition, if Fund shares are purchased
within 30 days before or after redeeming Fund shares (regardless of Class) at a
loss, that loss will not be deductible to the extent that the redemption pro-
ceeds are reinvested and instead will increase the basis of the newly purchased
shares.
The foregoing is only a summary of some of the important federal tax consid-
erations generally affecting the Fund and its shareholders; see the Statement
of Additional Information for a further discussion. There may be other federal,
state or local tax considerations applicable to a particular investor. Prospec-
tive shareholders are therefore urged to consult their tax advisers.
VALUATION OF SHARES
The net asset value of the Fund's shares fluctuates and is determined sepa-
rately for each Class as of the close of regular trading on the NYSE (currently
4:00 p.m., eastern time) each Business Day. Net asset value per share is deter-
mined by dividing the value of the securities held by the Fund plus any cash or
other assets minus all liabilities by the total number of Fund shares outstand-
ing.
The Fund values its assets based on their current market value where market
quotations are readily available. If such value cannot be established, assets
are valued at fair value as determined in good faith by or under the direction
of the Trust's board of trustees. The amortized cost method of valuation gener-
ally is used to value debt obligations with 60 days or less remaining until ma-
turity, unless the board of trustees determines that this does not represent
fair value.
MANAGEMENT
The Trust's board of trustees, as part of its overall management responsibil-
ity, oversees various organizations responsible for the Fund's day-to-day man-
agement. Mitchell Hutchins, the Fund's investment adviser and administrator,
makes and implements all investment decisions and supervises all aspects of the
Fund's operations. Mitchell Hutchins receives a monthly fee for its services,
computed daily and payable monthly, at an annual rate of 0.30% of the Fund's
average daily net assets.
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. The Fund incurs various other expenses in its operations, such as cus-
tody and transfer agency fees, brokerage commissions, professional fees, ex-
penses of board and shareholder meetings, fees and expenses relating to regis-
tration of its shares, taxes and governmental fees, fees and expenses of the
trustees, costs of obtaining insurance, expenses of printing and distributing
shareholder materials, organizational expenses and extraordinary expenses, in-
cluding costs or losses in any litigation. For the fiscal year ended November
30, 1994, the Fund's total expenses for its Class A and Class D shares, stated
as a percentage of average net assets (annualized and net of fee waivers) were
1.35% and 1.55%, respectively.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New
York 10019. It is a wholly owned subsidiary of PaineWebber, which is in turn a
wholly owned subsidiary of Paine Webber Group Inc., a publicly owned financial
services holding company. At February 28, 1995, Mitchell Hutchins was adviser
or sub-adviser of 42 investment compa-
18
<PAGE>
nies with 77 separate portfolios and aggregate assets of approximately $26.8
billion.
Nirmal Singh and Craig M. Varrelman have been responsible for the day-to-day
management of the Fund's portfolio since December 1994. Mr. Singh is a vice
president of Mitchell Hutchins, and Mr. Varrelman is a first vice president of
Mitchell Hutchins. Prior to joining Mitchell Hutchins in 1993, Mr. Singh was
with Merrill Lynch Asset Management, Inc., where he was a member of the portfo-
lio management team responsible for managing several diversified funds, includ-
ing mortgage-backed securities funds with assets totaling $8 billion. From 1990
to 1993, Mr. Singh was a senior portfolio manager at Nomura Mortgage Fund Man-
agement Corporation, where he was responsible for managing approximately $3
billion in mortgage assets. From 1987 to 1990, Mr. Singh was a vice president
of Lehman Brothers. Mr. Varrelman has been with Mitchell Hutchins as a portfo-
lio manager since 1988 and manages fixed income portfolios with assets totaling
approximately $1.5 billion, with an emphasis on U.S. government securities. Mr.
Varrelman is a Certified Financial Analyst.
Other members of Mitchell Hutchins' domestic fixed income group provide input
on market outlook, interest rate forecasts and other considerations pertaining
to domestic fixed income investments.
Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics which establishes proce-
dures for personal investing and restricts certain transactions.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins is the distributor of the Fund's
shares and has appointed PaineWebber as the exclusive dealer for the sale of
those shares. Under separate plans of distribution pertaining to the Class A
shares and Class D shares ("Class A Plan," and "Class D Plan," collectively,
"Plans"), the Fund pays Mitchell Hutchins a monthly service fee at the annual
rate of 0.25% of the average daily net assets of each Class of Fund shares and
a monthly distribution fee at the annual rate of 0.25% of the average daily net
assets of the Class D shares.
Under both Plans, Mitchell Hutchins uses the service fee primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in the Fund by PaineWebber clients.
PaineWebber passes on a portion of these fees to its investment executives to
compensate them for shareholder servicing that they perform, and it retains the
remainder to offset its own expenses in servicing and maintaining shareholder
accounts. These expenses may include costs of the PaineWebber branch office in
which the investment executive is based, such as rent, communications equip-
ment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fee under the Class D Plan to offset
the commissions it pays to PaineWebber for selling the Fund's Class D shares.
PaineWebber passes on to its investment executives a portion of these commis-
sions and retains the remainder to offset its expenses in selling Class D
shares. These expenses may include the branch office costs noted above. In ad-
dition, Mitchell Hutchins may use the distribution fees under the Class D Plan
to offset the Fund's marketing costs attributable to such Class, such as prepa-
ration of sales literature, advertising and printing and distributing prospec-
tuses and other shareholder materials to prospective investors. Mitchell
Hutchins also may use the distribution fees to pay other costs allocated to
Mitchell Hutchins' and PaineWebber's distribution activities, including em-
ployee salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives
at the time of sale of Class D shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class D shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class D shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and may use these proceeds
19
<PAGE>
for any of the distribution expenses described above. See "Purchases."
During the period they are in effect, the Plans and related distribution con-
tracts pertaining to each Class of Fund shares ("Distribution Contracts") obli-
gate the Fund to pay service and distribution fees to Mitchell Hutchins as com-
pensation for its service and distribution activities, not as reimbursement for
specific expenses incurred. Thus, even if Mitchell Hutchins' expenses exceed
its service or distribution fees, the Fund will not be obligated to pay more
than those fees and, if Mitchell Hutchins' expenses are less than such fees, it
will retain its full fees and realize a profit. The Fund will pay the service
and distribution fees to Mitchell Hutchins until either the applicable Plan or
Distribution Contract is terminated or not renewed. In that event, Mitchell
Hutchins' distribution expenses in excess of service and distribution fees re-
ceived or accrued through the termination date will be Mitchell Hutchins' sole
responsibility and not obligations of the Fund. In their annual consideration
of the continuation of each Plan, the trustees will review the Plan and Mitch-
ell Hutchins' corresponding expenses for each Class separately from the Plan
and corresponding expenses for the other Class.
PERFORMANCE INFORMATION
The Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady com-
pound annual rate of return. Actual year-by-year returns fluctuate and may be
higher or lower than standardized return. Standardized return for the Class A
shares of the Fund reflects deduction of the Fund's maximum initial sales
charge at the time of purchase. One-, five- and ten-year periods will be shown,
unless the Class has been in existence for a shorter period. Total return cal-
culations assume reinvestment of dividends and other distributions.
The Fund may use other total return presentations in conjunction with stan-
dardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were included.
The Fund also may advertise its yield. Yield reflects investment income net
of expenses over a 30-day (or one-month) period on a Fund share, expressed as
an annualized percentage of the maximum offering price per share for Class A
shares and net asset value per share for Class D shares at the end of the peri-
od. Yield computations differ from other accounting methods and therefore may
differ from dividends actually paid or reported net income.
The Fund will include performance data for both Classes of Fund shares in any
advertisements or promotional materials including Fund performance data. Total
return and yield information reflect past performance and do not necessarily
indicate future results. Investment return and principal values will fluctuate,
and proceeds upon redemption may be more or less than a shareholder's cost.
GENERAL INFORMATION
ORGANIZATION. PaineWebber Managed Investments Trust is registered with the
SEC as an open-end management investment company and was organized as a busi-
ness trust under the laws of the Commonwealth of Massachusetts by Declaration
of Trust dated November 21, 1986. The trustees have authority to issue an un-
limited number of shares of beneficial interest of separate series, par value
$.001 per share. In addition to the Fund, shares of five other series have been
authorized.
The shares of beneficial interest of the Fund are divided into two Classes,
designated Class A shares and Class D shares. Each Class represents interests
in the same assets of the Fund. The Classes differ as follows: (1) each Class
of shares has exclusive voting rights on matters pertaining to its plan of dis-
tribution, (2) Class A shares are subject to an initial sales
20
<PAGE>
charge, (3) Class D shares are not subject to an initial sales charge and bear
ongoing distribution fees and (4) each Class may bear differing amounts of cer-
tain Class-specific expenses. The board of trustees of the Trust does not an-
ticipate that there will be any conflicts among the interests of the holders of
the different Classes of shares of the Fund. On an ongoing basis, the board of
trustees will consider whether any such conflict exists and, if so, take appro-
priate action.
The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders to elect trustees unless fewer than a majority of
the trustees holding office have been elected by shareholders. Shareholders of
record holding at least two-thirds of the outstanding shares of the Trust may
remove a trustee by votes cast in person or by proxy at a meeting called for
that purpose. The trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee when so re-
quested in writing by shareholders of record holding at least 10% of the
Trust's outstanding shares. Each share of the Fund has equal voting rights, ex-
cept as noted above. Each share of the Fund is entitled to participate equally
in dividends and other distributions and the proceeds of any liquidation, ex-
cept that, due to the differing expenses borne by the two Classes, these divi-
dends and proceeds for the Class D shares are likely to be lower than for the
Class A shares. The shares of the Fund and the other series of the Trust will
be voted separately except when an aggregate vote of all series is required by
the Investment Company Act of 1940.
To avoid additional operating costs and for investor convenience, the Fund
does not issue share certificates. Ownership of the Fund's shares is recorded
on a stock register by the Transfer Agent and shareholders have the same rights
of ownership with respect to such shares as if certificates had been issued.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, 1776 Heri-
tage Drive, North Quincy, Massachusetts 02171, is the custodian of the Fund's
assets. PFPC Inc., a subsidiary of PNC Bank, National Association, whose prin-
cipal business address is 400 Bellevue Parkway, Wilmington, Delaware 19809, is
the Fund's transfer and dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of Fund shares. PaineWebber clients receive statements at least
quarterly that report their Fund activity and consolidated year-end statements
that show all Fund transactions for that year. Shareholders who are not
PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Fund.
21
<PAGE>
APPENDIX
TYPES OF MORTGAGE-BACKED SECURITIES
GINNIE MAE CERTIFICATES
Ginnie Mae guarantees certain mortgage pass-through certificates ("Ginnie Mae
certificates") that are issued by Private Mortgage Lenders and that represent
ownership interests in individual pools of residential mortgage loans. These
securities are designed to provide monthly payments of interest and principal
to the investor. Timely payment of interest and principal is backed by the full
faith and credit of the U.S. government. Each mortgagor's monthly payments to
his lending institution on his residential mortgage are "passed through" to
certificateholders such as the Fund. Mortgage pools consist of whole mortgage
loans or participations in loans. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. Lend-
ing institutions that originate mortgages for the pools are subject to certain
standards, including credit and other underwriting criteria for individual
mortgages included in the pools.
FANNIE MAE CERTIFICATES
Fannie Mae facilitates a national secondary market in residential mortgage
loans insured or guaranteed by U.S. government agencies and in privately in-
sured or uninsured residential mortgage loans (sometimes referred to as "con-
ventional mortgage loans" or "conventional loans") through its mortgage pur-
chase and mortgage-backed securities sales activities. Fannie Mae issues guar-
anteed mortgage pass-through certificates ("Fannie Mae certificates"), which
represent pro rata shares of all interest and principal payments made and owed
on the underlying pools. Fannie Mae guarantees timely payment of interest and
principal on Fannie Mae certificates. The Fannie Mae guarantee is not backed by
the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES
Freddie Mac also facilitates a national secondary market for conventional
residential and U.S. government-insured mortgage loans through its mortgage
purchase and mortgage-backed securities sales activities. Freddie Mac issues
two types of mortgage pass-through securities: mortgage participation certifi-
cates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC represents
a pro rata share of all interest and principal payments made and owed on the
underlying pool. Freddie Mac generally guarantees timely monthly payment of in-
terest on PCs and the ultimate payment of principal, but it also has a PC pro-
gram under which it guarantees timely payment of both principal and interest.
GMCs also represent a pro rata interest in a pool of mortgages. These instru-
ments, however, pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The Freddie Mac guarantee is not backed by the
full faith and credit of the U.S. government.
PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES
Mortgage-backed securities issued by Private Mortgage Lenders are structured
similarly to the pass-through certificates and collateralized mortgage obliga-
tions ("CMOs") issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac.
Such mortgage-backed securities may be supported by pools of U.S. government or
agency insured or guaranteed mortgage loans or by other mortgage-backed securi-
ties issued by a government agency or instrumentality, but they generally are
supported by pools of conventional (i.e., non-government guaranteed or insured)
mortgage loans. Since such mortgage-backed securities normally are not guaran-
teed by an entity having the credit standing of Ginnie Mae, Fannie Mae or Fred-
die Mac, they normally are structured with one or more types of credit enhance-
ment. See "--Types of Credit Enhancement." These credit enhancements do not
protect investors from changes in market value.
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, holds assets of
failed savings associations as
22
<PAGE>
either a conservator or receiver for such associations, or it acquires such as-
sets in its corporate capacity. These assets include, among other things, sin-
gle family and multifamily mortgage loans. In order to dispose of such assets
in an orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed securi-
ties represent pro rata interests in pools of mortgage loans that RTC holds or
has acquired, as described above, and are supported by one or more of the types
of private credit enhancements used by Private Mortgage Lenders.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS
CMOs are debt obligations that are collateralized either by mortgage loans or
mortgage pass-through securities (such collateral collectively being called
"Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by gov-
ernment entities such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-
through securities are interests in trusts that are comprised of Mortgage As-
sets and that have multiple classes similar to those in CMOs. Multi-class mort-
gage pass-through securities generally are treated as grantor trusts or as real
estate mortgage investment conduits ("REMICs") for federal tax purposes. Unless
the context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal and interest on the
Mortgage Assets (and, in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled distri-
butions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any principal-
only ("PO") class) on a monthly, quarterly or semi-annual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO un-
til all other classes having an earlier stated maturity or final distribution
date have been paid in full. In some CMO structures, all or a portion of the
interest attributable to one or more of the CMO classes may be added to the
principal amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
To the extent required for investment by federal credit unions, the Fund in-
tends to invest in only those CMO or REMIC tranches that have average lives at
the time of purchase and at subsequent review dates that are not greater than
ten years and that would not be extended by more than four years or be short-
ened by more than six years under modeling scenarios assuming an immediate and
sustained parallel shift in the yield curve of plus or minus 300 basis points,
assuming market interest rates and prepayment spreads at the time the standard
is applied. Such a 300 basis point change in interest rates also may not result
in an estimated change of more than 17% in the price of a CMO or REMIC tranche
in which the Fund may invest. Alternatively, the Fund may invest in floating
and adjustable rate CMO or REMIC tranches if (i) the interest rate is reset at
least annually, (ii) at the time of purchase and at subsequent review dates,
interest rates on the instrument are below any interest rate cap that applies
to the security, (iii) the index upon
23
<PAGE>
which the interest rate on the security is based is a conventional, widely-
used market interest rate such as LIBOR and (iv) interest rates on the instru-
ment vary directly (not inversely) with a conventional, widely used index and
not as a multiple thereof. The Fund will not invest in CMO or REMIC residual
interests.
ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES
ARM mortgage-backed securities are mortgage-backed securities that represent
a right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of mortgage loans bearing variable or adjustable
rates of interest (such mortgage loans are referred to as "ARMs"). Floating
rate mortgage-backed securities are classes of mortgage-backed securities that
have been structured to represent the right to receive interest payments at
rates that fluctuate in accordance with an index but that generally are sup-
ported by pools comprised of fixed-rate mortgage loans. Because the interest
rates on ARM and floating rate mortgage-backed securities are reset in re-
sponse to changes in a specified market index, the values of such securities
tend to be less sensitive to interest rate fluctuations than the values of
fixed-rate securities.
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on Mortgage Assets to make pay-
ments, mortgage-backed securities may contain elements of credit enhancement.
Such credit enhancement falls into two categories: (1) liquidity protection;
and (2) protection against losses resulting after default by an obligor on the
underlying assets and collection of all amounts recoverable directly from the
obligor and through liquidation of the collateral. Liquidity protection refers
to the provisions of advances, generally by the entity administering the pool
of assets (usually the bank, savings association or mortgage banker that
transferred the underlying loans to the issuer of the security), to ensure
that the receipt of payments on the underlying pool occurs in a timely fash-
ion. Protection against losses resulting after default and liquidation ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. The Fund will not pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the
price of a security. Credit enhancements do not provide protection against
changes in the market value of the security.
Examples of credit enhancement arising out of the structure of the transac-
tion include "senior-subordinated securities" (multiple class securities with
one or more classes subordinate to other classes as to the payment of princi-
pal thereof and interest thereon, with the result that defaults on the under-
lying assets are borne first by the holders of the subordinated class), crea-
tion of "spread accounts" or "reserve funds" (where cash or investments, some-
times funded from a portion of the payments on the underlying assets, are held
in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets ex-
ceeds that required to make payment of the securities and pay any servicing or
other fees). The degree of credit enhancement provided for each issue gener-
ally is based on historical information regarding the level of credit risk as-
sociated with the underlying assets. Delinquency or loss in excess of that an-
ticipated could adversely affect the return on an investment in such a securi-
ty.
New types of mortgage-backed securities are developed and marketed from time
to time and, consistent with its investment limitations, the Fund expects to
invest in those new types of mortgage-backed securities that Mitchell Hutchins
believes may assist the Fund in achieving its investment objective and that
are permitted for federal credit union investment under the Federal Credit
Union Act and NCUA Regulations. Consistent with such limitations, the Fund may
invest in mortgage-backed securities issued by new or existing governmental or
private issuers other than those identified above.
24
<PAGE>
Application Form
THE PAINEWEBBER [_][_]-[_][_][_][_][_]-[_][_]
MUTUAL FUNDS PaineWebber Account No.
- --------------------------------------------------------------------------------
INSTRUCTIONS DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED
THROUGH PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT
EXECUTIVE (OR YOUR LOCAL PAINEWEBBER OFFICE TO OPEN AN ACCOUNT).
FOR ASSISTANCE IN COMPLETING THIS Return this completed form
FORM CONTACT PFPC INC. AT 1-800- to: PFPC Inc. P.O. Box
647-1568. 8950 Wilmington, Delaware
19899 ATTN: PaineWebber
PLEASE PRINT Mutual Funds
- --------------------------------------------------------------------------------
------------------------------------------------------------
[1] INITIAL INVESTMENT ($100,000 MINIMUM)
------------------------------------------------------------
ENCLOSED IS A CHECK FOR $_____(payable to PaineWebber
Short-Term U.S. Government Income Fund for Credit
Unions) to purchase Class A [_] or Class D [_] shares
(Check one; if no Class is specified Class A shares will be
purchased)
------------------------------------------------------------
[2A] ACCOUNT REGISTRATION FOR CREDIT UNIONS OR OTHER INSTITU-
TIONS
------------------------------------------------------------
Not valid 1. Name of Institution
without --------------------------------------
signature and
Federal Tax
ID # on 2. Federal Taxpayer I.D. Number
accompanying -----------------------------
Form W-9
------------------------------------------------------------
[2B] ACCOUNT REGISTRATION FOR NON-INSTITUTIONAL PURCHASERS
------------------------------------------------------------
Not valid 1. Individual / /
without -------------- -------------- ---------------
signature and First Name Last Name MI Soc. Sec. No.
Soc. Sec. or
Tax ID # on 2. Joint Tenancy / /
accompanying ----------- -------------- ---------------
Form W-9 First Name Last Name MI Soc. Sec. No.
- --As joint ("Joint Tenants with Rights of Survivorship"
tenants, use unless otherwise specified)
Lines 1 and 2
- --As custodian 3. Gifts to Minors / /
for a minor, use ------------------------- ---------------
Lines 1 and 3 Minor's Name Soc. Sec. No.
- --in the name
of a Under the
corporation, ------------------------------ Uniform Uniform
trust or other State of Residence of Minor Gifts Transfers
organization or to Mi- / to Mi-
any fiduciary nors Act nors Act
capacity, use
Line 4
4. Other Registrations
--------------------- ---------------
Name Tax Ident. No.
5. If Trust, Date of Trust Instruments:
---------------------
------------------------------------------------------------
[3] ADDRESS
------------------------------------------------------------
------------------------- Federal Credit Union
Street [_] YES [_] NO*
-------------------------
City State Zip Code ---------------------------------
*Type and State of Organization
If an Individual : U.S. Citizen [_] YES [_] NO* *COUNTRY
OF CITIZENSHIP
----------------------------------------------
------------------------------------------------------------
[4] DISTRIBUTION OPTIONS See Prospectus
------------------------------------------------------------
Please select one of the following:
[_]Reinvest both dividends and capital gain distributions in
additional shares
[_]Pay dividends to my address above; reinvest capital gain
distributions
[_]Pay both dividends and capital gain distributions in cash
to my address above
[_]Reinvest dividends and pay capital gain distributions in
cash to my address above
NOTE: If a selection is not made, both dividends and cap-
ital gain distributions will be paid in additional Fund
shares of the same Class.
<PAGE>
-----------------------------------------------------------------
[5] SPECIAL OPTIONS (For More Information--Check Appropriate Box)
-----------------------------------------------------------------
[_] [Automatic Investment Plan] [_] [Systematic Withdrawal Plan]
-----------------------------------------------------------------
[6] RIGHTS OF ACCUMULATION--CLASS A SHARES See Prospectus
-----------------------------------------------------------------
Indicate here any other account(s) in the group of funds that
qualify for the cumulative quantity discount as outlined in
the Prospectus.
--------------------- ----------- --------------------
Fund Name Account No. Registered Owner
--------------------- ----------- --------------------
Fund Name Account No. Registered Owner
--------------------- ----------- --------------------
Fund Name Account No. Registered Owner
-----------------------------------------------------------------
[7] PLEASE INDICATE BELOW IF YOU OR ANY OF YOUR OFFICERS OR DIREC-
TORS ARE AFFILIATED WITH PAINEWEBBER
-----------------------------------------------------------------
"Affiliated" persons are defined as officers, directors/trustees
and employees of the PaineWebber funds, PaineWebber or its
affiliates, and their parents, spouses and children.
----------------------------------------------------------
Nature of Relationship
-----------------------------------------------------------------
[8] SIGNATURE (S) AND TAX CERTIFICATION
-----------------------------------------------------------------
I warrant that I have full corporate and other authority or, if
I am an individual, I warrant that I have full authority and am
of legal age, to purchase shares of the Fund specified on behalf
of the entity in whose name such shares are to be registered, or
myself if I am purchasing for my own account, ("Purchaser") and
that Purchaser is authorized to purchase Fund Shares under all
applicable laws and regulations and has received and read a
current Prospectus of the Fund and agree to its terms. The Fund
and its Transfer Agent will not be liable for acting upon
instructions or inquiries believed genuine. Under penalties of
perjury, I certify that (1) the taxpayer identification number
provided in this application is correct and (2) Purchaser is not
subject to backup withholding because (i) it has not been
notified that it is subject to backup withholding as a result of
failure to report interest or dividends or (ii) the IRS has
notified it that it is no longer subject to backup withholding
(STRIKE OUT CLAUSE (2) IF INCORRECT).
--------------------------------- ---------------- --------------
Corporate Officer, Partner, Title Date
Trustee, etc.
--------------------------------- ---------------- --------------
Individual (or Custodian) Joint Registrant (Date)
(if any)
-----------------------------------------------------------------
[9] INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed By In-
vestment Executive Only)
-----------------------------------------------------------------
--------------------------------- -------------------------------
Broker No./Name Branch Wire Code
( )
--------------------------------- -------------------------------
Branch Address Telephone
-----------------------------------------------------------------
[10] CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Corre-
spondent Firm Only)
-----------------------------------------------------------------
--------------------------------- -------------------------------
Name Address
---------------------------------
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE OR
CORRESPONDENT FIRM OR TO: PFPC INC., P.O. BOX 8950, WILMINGTON,
DELAWARE 19899.
<PAGE>
PAINEWEBBER SHORT-TERM U.S. GOVERNMENT
INCOME FUND FOR CREDIT UNIONS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................. 2
Financial Highlights................................................ 5
Flexible Pricing System............................................. 6
Investment Objective and Policies................................... 7
Purchases........................................................... 12
Exchanges........................................................... 14
Redemptions......................................................... 15
Other Services and Information...................................... 16
Dividends and Taxes................................................. 17
Valuation of Shares................................................. 18
Management.......................................................... 18
Performance Information............................................. 20
General Information................................................. 20
Appendix............................................................ 22
</TABLE>
PROSPECTUS
April 1, 1995
(C) 1995 PaineWebber Incorporated
[LOGO OF RECYCLED PAPER APPEARS HERE]
<PAGE>
PAINEWEBBER SHORT-TERM U.S. GOVERNMENT
INCOME FUND FOR CREDIT UNIONS
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Short-Term U.S. Government Income Fund for Credit Unions ("Fund")
is a diversified series of PaineWebber Managed Investments Trust ("Trust"), a
professionally managed, open-end management investment company organized as a
Massachusetts business trust. The Fund is designed primarily for federal credit
unions and seeks high current income consistent with the preservation of
capital and low volatility of net asset value; it invests primarily in
mortgage-backed securities that are issued or guaranteed by the U.S. government
or by government agencies or other government entities permissible for
investment by federal credit unions ("permitted government entities"), other
U.S. government securities and repurchase agreements with respect to those
securities. The Fund's investment adviser, administrator and distributor is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"). As distributor for the
Fund, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive
dealer for the sale of Fund shares. This Statement of Additional Information is
not a prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated April 1, 1995. A copy of the Prospectus may be obtained by
calling any PaineWebber investment executive or correspondent firm or by
calling toll-free 1-800-647-1568. This Statement of Additional Information is
dated April 1, 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
YIELD FACTORS AND RATINGS. Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's") and other nationally recognized statistical
rating organizations are private services that provide ratings of the credit
quality of mortgage-backed securities and other debt obligations. The Fund may
use these ratings in determining whether to purchase, sell or hold a security.
S&P's highest rating category is AAA. Moody's highest rating category is Aaa.
Publications of S&P indicate that it assigns such ratings to securities for
which the obligor's "capacity to pay interest and repay principal is extremely
strong." Publications of Moody's indicate that it assigns such ratings to
securities that "are judged to be of the best quality" and "carry the smallest
degree of investment risk," that interest payments on such securities "are
protected by a large or by an exceptionally stable margin and principal is
secure" and that while "the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues." The process by which S&P and Moody's determine
ratings for mortgage-backed securities includes consideration of the likelihood
of the receipt by security holders of all distributions, the nature of the
underlying securities, the credit quality of the guarantor, if any, and the
structural, legal and tax aspects associated with such securities. Neither of
such ratings represents an assessment of the likelihood that principal
prepayments will be made by mortgagors or the degree to which such prepayments
may differ from that originally anticipated, nor do such ratings address the
possibility that investors may suffer a lower than anticipated yield or that
investors in such securities may fail to recoup fully their initial investment
due to prepayments.
<PAGE>
It should be emphasized that ratings are general and are not absolute
standards of quality. Consequently, debt obligations with the same maturity,
interest rate and rating may have different market prices. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events so that an issuer's current financial condition may be better
or worse than the rating would indicate. The rating assigned to a security by
Moody's or S&P does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.
Subsequent to its purchase by the Fund, an issue of debt obligations may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. Mitchell Hutchins will consider such an event in
determining whether the Fund should continue to hold the obligation, but is not
required to dispose of it. In addition to ratings assigned to individual
securities, Mitchell Hutchins will analyze interest rate trends and
developments that may affect individual issuers, including factors such as
liquidity, profitability and asset quality.
The yields on debt securities, including mortgage-backed securities in which
the Fund invests, are dependent on a variety of factors, including general
money market conditions, general conditions in the bond market, the financial
condition of the issuer, the size of the offering, the maturity of the
obligation and its credit rating. There is a wide variation in the quality of
debt securities, both within a particular classification and between
classifications. The obligations of an issuer of debt securities are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of bond holders or other creditors of an issuer; litigation or
other conditions may also adversely affect the power or ability of issuers to
meet their obligations for the payment of interest and principal.
ADJUSTABLE RATE AND FLOATING RATE MORTGAGE-BACKED SECURITIES. The Fund may
invest in adjustable rate mortgage ("ARM") and floating rate mortgage-backed
securities. Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining interest
rates, ARMs generally do not increase in value as much as fixed rate
securities. ARM mortgage-backed securities represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on
a pool of ARMs. ARMs generally provide that the borrower's mortgage interest
rate may not be adjusted above a specified lifetime maximum rate or, in some
cases, below a minimum lifetime rate. In addition, certain ARMs provide for
limitations on the maximum amount by which the mortgage interest rate may
adjust for any single adjustment period. ARMs also may provide for limitations
on changes in the maximum amount by which the borrower's monthly payment may
adjust for any single adjustment period. In the event that a monthly payment is
not sufficient to pay the interest accruing on the ARM, any such excess
interest is added to the mortgage loan ("negative amortization"), which is
repaid through future monthly payments. If the monthly payment exceeds the sum
of the interest accrued at the applicable mortgage interest rate and the
principal payment that would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess reduces the
principal balance of the ARM. Borrowers under ARMs experiencing negative
amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate ("CMT"), that reflect changes in market interest rates.
Others are based on indices, such as the 11th District Federal Home Loan Bank
Cost of Funds index ("COFI"), that tend to lag behind changes in market
interest rates. The values of ARM mortgage-backed securities supported by ARMs
that adjust based on lagging indices tend to be somewhat more sensitive to
interest rate fluctuations than those
2
<PAGE>
reflecting current interest rate levels, although the values of such ARM
mortgage-backed securities still tend to be less sensitive to interest rate
fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The yield
characteristics of mortgage-backed securities differ from those of traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other obligations
generally may be prepaid at any time. As a result, if the securities are
purchased at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Conversely, if
the securities are purchased at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity. Amounts available for reinvestment are likely to be greater during a
period of decreasing interest rates and are likely to be reinvested at lower
interest rates than during a period of rising interest rates. Accelerated
prepayments on securities purchased at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is repaid in full. Investments in derivative securities such as
stripped mortgage-backed securities are more sensitive to changes in prepayment
and interest rates than traditional debt securities and mortgage-backed
securities.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to "lock-
in" at a lower interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments with respect
to ARMs has fluctuated in recent years.
The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool due to the annual
fees paid to the servicer of the mortgage pool for passing through monthly
payments to certificateholders and to any guarantor, such as the Government
National Mortgage Association ("Ginnie Mae"), and due to any yield retained by
the issuer. Actual yield to the holder may vary from the coupon rate, even if
adjustable, if the mortgage-backed securities are purchased or traded in the
secondary market at a premium or discount. In addition, there is normally some
delay between the time the issuer receives mortgage payments from the servicer
and the time the issuer makes the payments on the mortgage-backed securities
and this delay reduces the effective yield to the holder of such securities.
3
<PAGE>
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict precisely the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of
a pool of mortgage-related securities. Conversely, in periods of rising
interest rates, the rate of prepayment tends to decrease, thereby lengthening
the actual average life of the pool. However, these effects may not be present,
or may differ in degree, if the mortgage loans in the pools have adjustable
interest rates or other special payment terms, such as a prepayment charge.
Actual prepayment experience may cause the yield of mortgage-backed securities
to differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of the Fund.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and restricted securities other than those Mitchell
Hutchins has determined are liquid pursuant to guidelines established by the
Trust's board of trustees. Illiquid restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which
a registration statement is in effect under the Securities Act of 1933 ("1933
Act"). Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. 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.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
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.
4
<PAGE>
The Trust's board of trustees 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 but not limited to (1) the frequency
of trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in
the security, (4) the number of other potential purchasers and (5) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of restricted securities in the Fund's
portfolio and reports periodically on such decisions to the board of trustees.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund would purchase securities from a bank or recognized securities dealer and
simultaneously commit to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund would
maintain custody of the underlying securities prior to their repurchase; thus,
the obligation of the bank or dealer to pay the repurchase price on the date
agreed to would be in effect, secured by such securities. If the value of these
securities is less than the repurchase price, plus any agreed-upon additional
amount, the other party to the agreement would be required to provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price, plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the securities and
the price that would have been paid by the Fund upon acquisition would be
accrued as interest and included in the Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party
to a repurchase agreement becomes insolvent. The Fund will enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Trust's board of trustees. Mitchell Hutchins will review and
monitor the creditworthiness of those institutions under the board's general
supervision.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. 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, fluctuations in the value of the security from
the time of the commitment date will affect the Fund's net asset value. When
the Fund commits to purchase securities on a when-issued or delayed delivery
basis, its custodian segregates assets to cover the amount of the commitment.
See "Investment Policies and Restrictions--Segregated Accounts." The Fund
purchases when-issued securities only with the intention of taking delivery,
but may sell the right to acquire the security prior to delivery if Mitchell
Hutchins deems it advantageous to do so, which may result in capital gain or
loss to the Fund.
LENDING OF PORTFOLIO SECURITIES. Although the Fund has no present intention
of doing so, the Fund is authorized to lend up to 10% of the total value of its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified, but only to the extent permitted for federal credit
union investment, and only when the borrower maintains with the Fund's
custodian collateral either in cash or money market instruments, marked to
market daily, in an amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends, determined on a daily basis and
adjusted accordingly. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins would consider, and
during the period of the loan would monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The Fund will
retain authority to terminate any loans at any time. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
5
<PAGE>
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when regaining such
rights is considered to be in the Fund's interest.
SEGREGATED ACCOUNTS. When the Fund enters into certain transactions that
involve obligations to make future payments to third parties, including dollar
rolls, reverse repurchase agreements or the purchase of securities on a when-
issued or delayed delivery basis, the Fund will maintain with an approved
custodian in a segregated account cash, U.S. government securities or other
liquid high-grade debt securities, marked to market daily, in an amount at
least equal to the Fund's obligation or commitment under such transactions.
INVESTMENT LIMITATIONS. The Fund may not (1) purchase the securities of any
issuer if as a result more than 5% of the total assets of the Fund would be
invested in the securities of that issuer; provided that securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities are not
subject to this limitation and further provided that up to 25% of the value of
the Fund's assets may be invested without regard to this limitation; (2) issue
senior securities or borrow money, except from banks or through reverse
repurchase agreements and dollar rolls, and then in an aggregate amount not in
excess of 33 1/3% of the Fund's total assets (including the amount of the
borrowings and senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of such borrowings, except that the
Fund may borrow up to an additional 5% of total assets (not including the
amount borrowed) for temporary or emergency purposes; (3) purchase securities
if, as a result of the purchase, the Fund would have more than 25% of the value
of its total assets invested in securities of issuers in any one industry,
except that this limitation does not apply to (a) obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities and (b)
investments in mortgage-backed securities, which (whether or not issued or
guaranteed by an agency or instrumentality of the U.S. government) shall be
considered a single industry for purposes of this limitation; (4) underwrite
securities of other issuers, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed an underwriter
under federal securities laws; (5) purchase or sell real estate (including real
estate limited partnerships), except that investments in mortgage-backed
securities and other debt securities secured by real estate or interests
therein are not subject to this limitation, and provided further that the Fund
may exercise rights under agreements relating to such securities, including the
right to enforce security interests and to liquidate real estate acquired as a
result of such enforcement; (6) purchase securities on margin, make short sales
of securities or maintain a short position in any security, except that the
Fund may (a) make margin deposits, make short sales and maintain short
positions in connection with its use of options, futures contracts and options
on futures contracts and (b) sell short "against the box"; (7) purchase or sell
commodities or commodity contracts, except that the Fund may purchase or sell
financial futures contracts, such as interest rate and bond index futures
contracts and options thereon; (8) invest in oil, gas or mineral exploration or
development programs or leases, except that the Fund may invest in issuers
which invest in such programs; (9) purchase securities of other open-end
investment companies, except in connection with a merger, consolidation or
acquisition; or (10) make loans, except through repurchase agreements and
except in connection with the loan of securities as described herein or in the
Prospectus; provided that for purposes of this restriction the acquisition of
bonds or other debt instruments, or interests therein, shall not be deemed to
be the making of a loan.
The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or (b) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
6
<PAGE>
time of an investment or transaction, a later increase or decrease 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 foregoing
limitations. For purposes of fundamental investment limitation (1), mortgage-
backed securities will not be considered to have been issued by the same issuer
by reason of such securities having the same sponsor, and mortgage-backed
securities issued by a finance subsidiary or other single purpose subsidiary of
a corporation that are not guaranteed by the parent corporation will be
considered to be issued by a separate issuer from its parent corporation.
The following investment restrictions are non-fundamental and may be changed
by the vote of the Trust's board of trustees without shareholder approval: the
Fund may not (1) purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, the officers and trustees of the Trust and
the officers and directors of Mitchell Hutchins (each owning beneficially as
principal for its own account more than 0.5% of the outstanding securities of
the issuer) beneficially so own in the aggregate more than 5% of the securities
of the issuer; (2) purchase any security, other than mortgage-backed
securities, if as a result more than 5% of the Fund's total assets would be
invested in securities of companies that together with any predecessors have
been in continuous operation for less than three years; (3) invest more than
15% of its net assets in illiquid securities, a term that 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; (4) invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of its net assets, which amount may include warrants that
are not listed on the New York Stock Exchange Inc. ("NYSE") or the American
Stock Exchange, Inc., provided that such unlisted warrants, valued at the lower
of cost or market, do not exceed 2% of the Fund's net assets, and further
provided that this restriction does not apply to warrants attached to, or sold
as a unit with, other securities; (5) make short sales or maintain short
positions in connection with any use of options, futures contracts and options
on futures contracts; (6) sell short "against the box"; and (7) purchase or
sell financial futures contracts or options thereon. In addition, in connection
with the qualification of its shares for sale in a state, the Fund has
undertaken not to invest more than 15% of its total assets in restricted
securities (including Rule 144A securities).
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust (except as indicated), their
ages, business addresses and principal occupations during the past five years
are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Trustee and Chairman Mr. Bewkes is a director of Paine Web-
68** of the Board of ber Group Inc. ("PW Group") (holding
Trustees company of PaineWebber and Mitchell
Hutchins) and a consultant to PW
Group. Prior to 1988, he was chairman
of the board, president and chief ex-
ecutive officer of American Bakeries
Company. Mr. Bewkes is also a direc-
tor of Interstate Bakeries Corpora-
tion and NaPro BioTherapeutics, Inc.
and a director or trustee of 26 other
investment companies for which Mitch-
ell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
Meyer Feldberg; 52 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior
New York, New York 10027 to 1989, he was president of the Il-
linois Institute of Technology. Dean
Feldberg is also a director of AMSCO
International Inc., Federated Depart-
ment Stores Inc., Inco Homes Corpora-
tion and New World Communications
Group Incorporated and a director or
trustee of 18 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
George W. Gowen; 65 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, New York 10017 Prior to May 1994, he was a partner
in the law firm of Fryer, Ross & Gow-
en. Mr. Gowen is also a director of
Columbia Real Estate Investments,
Inc. and a director or trustee of 16
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 58 Trustee Mr. Malek is chairman of Thayer Capi-
901 15th Street, N.W. tal Partners (investment bank) and
Suite 300 co-chairman and director of CB Com-
Washington, DC 20005 mercial Group Inc. (real estate).
From January 1992 to November 1992,
he was campaign manager of Bush-
Quayle '92. From 1990 to 1992, he was
vice chairman and, from 1989 to 1990,
he was president of Northwest Air-
lines 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 re-
cently was an executive vice presi-
dent and president of Marriott Hotels
and Resorts. Mr. Malek is also a di-
rector of American Management Sys-
tems, Inc., Automatic Data Process-
ing, Inc., Avis, Inc., FPL Group,
Inc., ICF International, Manor Care,
Inc. and National Education Corpora-
tion and a director or trustee of 16
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- --------------------- ---------- --------------------
<S> <C> <C>
Frank P. L. Minard; 49** Trustee Mr. Minard is chairman of the board
and a director of Mitchell Hutchins,
chairman of the board of Mitchell
Hutchins Institutional Investors Inc.
and a director of PaineWebber. Prior
to 1993, Mr. Minard was managing di-
rector of Oppenheimer Capital in New
York and director of Oppenheimer Cap-
ital Ltd. in London. Mr. Minard is
also president of 13, and a director
or trustee of 16, other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Judith Davidson Moyers; Trustee Mrs. Moyers is president of Public Af-
59 fairs Television, Inc., an educa-
Public Affairs tional consultant and a home econo-
Television mist. Mrs. Moyers is also a director
356 W. 58th Street of Ogden Corporation and a director
New York, New York 10019 or trustee of 16 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Thomas F. Murray; 84 Trustee Mr. Murray is a real estate and finan-
400 Park Avenue cial consultant. Mr. Murray is also a
New York, New York 10022 di-
rector and chairman of American Con-
tinental Properties, Inc., a trustee
of Prudential Realty Trust and a di-
rector or trustee of 16 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president
and manager--advisory administration
of Mitchell Hutchins. Prior to Novem-
ber 1993, she was compliance manager
of Hyperion Capital Management, Inc.,
an investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice
president and manager--legal adminis-
tration of Mitchell Hutchins. Ms.
Boyle is also a vice president of 39
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
Joan L. Cohen; 30 Vice President and Ms. Cohen is a vice president and at-
Assistant Secretary torney of Mitchell Hutchins. Prior to
December 1993, she was an associate
at the law firm of Seward & Kissel.
Ms. Cohen is also a vice president
and assistant secretary of 26 other
investment companies for which Mitch-
ell Hutchins or PaineWebber serves as
investment adviser.
Ellen R. Harris; 48 Vice President Ms. Harris is chief domestic equity
strategist, a managing director and
chief investment officer--domestic of
Mitchell Hutchins. Ms. Harris is also
a vice president of 19 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Mary B. King; 31 Vice President Mrs. King is a first vice president
and a portfolio manager of Mitchell
Hutchins. Mrs. King is also a vice
president of one other investment
company for which Mitchell Hutchins
serves as investment adviser.
Thomas J. Libassi; 36 Vice President Mr. Libassi is a senior vice president
of Mitchell Hutchins. Prior to May
1994, he was a vice president of Key-
stone Custodian Funds Inc. with port-
folio management responsibility. Mr.
Libassi is also a vice president of 2
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 37 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is also
a vice president and assistant trea-
surer of 39 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Dianne E. O'Donnell; 42 Vice President and Ms. O'Donnell is a senior vice presi-
Secretary dent and senior associate general
counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice president
and secretary of 39 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ---------- --------------------
<S> <C> <C>
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
44 and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Prior to
April 1990, she was a partner in the
law firm of Shereff, Friedman, Hoff-
man & Goodman. Ms. Schonfeld is also
a vice president of 39 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Paul H. Schubert; 32 Vice President and Mr. Schubert is a vice president of
Assistant Treasurer Mitchell Hutchins. From August 1992
to August 1994, he was a vice presi-
dent at BlackRock Financial Manage-
ment, L.P. Prior to August 1992, he
was an audit manager with Ernst &
Young LLP. Mr. Schubert is also a
vice president and assistant trea-
surer of 39 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Martha J. Slezak; 32 Vice President and Ms. Slezak is a vice president of
Assistant Treasurer Mitchell Hutchins. From September
1991 to April 1992, she was a fund-
raising director for a U.S. Senate
campaign. Prior to September 1991,
she was a tax manager with Arthur An-
dersen & Co. LLP. Ms. Slezak is also
a vice president and assistant trea-
surer of 39 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Julian F. Sluyters; 34 Vice President and Mr. Sluyters is a senior vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a
vice president and treasurer of 39
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BUSINESS EXPERIENCE;
ADDRESS* WITH TRUST OTHER DIRECTORSHIPS
- ------------- ---------- --------------------
<S> <C> <C>
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to 1993, he was a
partner in the law firm of Shereff,
Friedman, Hoffman & Goodman. Mr. Todd
is also a vice president and assis-
tant secretary of 39 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes and Minard are "interested persons" of the Trust as defined
in the Investment Company Act of 1940 ("1940 Act") by virtue of their positions
with PW Group, PaineWebber and/or Mitchell Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust $5,000
annually and $250 per meeting of the board or any committee thereof. Trustees
also are reimbursed for any expenses incurred in attending meetings. Trustees
and officers of the Trust own in the aggregate less than 1% of the shares of
the Fund. Because Mitchell Hutchins and PaineWebber perform substantially all
of the services necessary for the operation of the Trust, the Trust requires no
employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
presently receives any compensation from the Trust for acting as a trustee or
officer. The table below includes certain information relating to the
compensation of the Trust's trustees for the fiscal year ended November 30,
1994.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PREFERRED
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM THE
ACCRUED AS TRUST AND
AGGREGATE PART OF ESTIMATED THE
COMPENSATION THE ANNUAL FUND COMPLEX
FROM TRUST'S BENEFITS UPON PAID TO
NAME OF PERSON, POSITION THE TRUST* EXPENSES RETIREMENT TRUSTEES+
------------------------ ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.
Trustee and chairman of the
board of trustees......... -- -- -- --
Meyer Feldberg,
Trustee.................... $10,250 -- -- $86,050
George W. Gowen,
Trustee.................... $ 9,250 -- -- $71,425
Frederic V. Malek,
Trustee.................... $ 9,750 -- -- $77,875
Frank P.L. Minard,
Trustee.................... -- -- -- --
Judith Davidson Moyers,
Trustee.................... $9,750 -- -- $71,125
Thomas F. Murray,
Trustee.................... $9,750 -- -- $71,925
</TABLE>
- --------
* Represents fees paid to each trustee during the fiscal year ended November
30, 1994.
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1994.
12
<PAGE>
The following table sets forth the names, addresses and percentages of
ownership of each person who owned beneficially and of record 5% or more of the
Fund's Class A or Class D shares as of March 20, 1995:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF PERSON CLASS PERCENTAGE OF CLASS OWNED
- -------------------------- ----- -------------------------
<S> <C> <C>
Southgate Federal Credit Union A 74.44%
13050 Fort Street
Southgate, MI 48195-1101
I.C.E. Federal Credit Union A 16.86%
One Manchester Boulevard
Inglewood, CA 90301-1750
Mrs. Diana Riklis A 8.58%
1020 Park Avenue
New York, NY 10028-0913
Postal Employees Regional D 37.99%
Federal Credit Union
40 Montgomery Street
P.O. Box 126
Pawtucket, RI 02862-0126
David Agency, Inc. D 30.21%
800 International Center
900 2nd Avenue South
Minneapolis, MN 55402-3314
United Grocers Federal D 19.15%
Credit Union
P.O. Box 22187
Milwaukie, OR 97222-0187
Eldon A. Glessing D 6.57%
8711 Knox Avenue S.W.
Howard Lake, MN 55349-5310
Direct Response Insurance D 5.92%
Administrative Services Inc.
7815 Telegraph Road
Bloomington, MN 55438-1133
</TABLE>
13
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of the Fund pursuant to a contract with the Trust
dated April 28, 1988, as supplemented by a separate fee agreement dated
September 29, 1993 ("Advisory Contract"). Under the Advisory Contract, the
Fund pays Mitchell Hutchins an annual fee of 0.30% of the Fund's average net
assets, computed daily and paid monthly. During the period December 7, 1993
(commencement of operations) to November 30, 1994, Mitchell Hutchins earned
investment advisory and administrative fees of $55,736 (of which $42,838 was
voluntarily waived).
Under a service agreement with the Trust, PaineWebber provides certain
services to the Fund not otherwise provided by its transfer agent. The
agreement is reviewed by the Trust's board of trustees annually. During the
period December 7, 1993 (commencement of operations) to November 30, 1994,
PaineWebber earned fees under the service agreement in the approximate amount
of $125.
Under the terms of the Advisory Contract, the Fund will bear all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging
to a particular series of the Trust are allocated among the series (including
the Fund) by or under the direction of the Trust's board of trustees in such
manner as the board deems fair and equitable. Expenses borne by the Fund
include the following (or the Fund's share of the following): (1) the cost
(including brokerage commissions) 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 trustees who are not interested persons of the
Trust or Mitchell Hutchins; (6) all expenses incurred in connection with the
trustees' 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 any 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 Trust or the Fund for violation
of any law; (10) legal, accounting and auditing expenses, including legal fees
of special counsel for the independent trustees; (11) charges of custodians,
transfer agents and other agents; (12) costs of preparing share certificates;
(13) expenses of setting in type and printing prospectuses and supplements
thereto, statements of additional information and supplements thereto, reports
and proxy materials for existing shareholders and costs of mailing such
materials to existing shareholders; (14) any extraordinary expenses (including
fees and disbursements of counsel) incurred by the Trust or the Fund; (15)
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to trustees and officers; and (18) costs of mailing,
stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse the Fund
if and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily
net assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees and extraordinary items, are excluded from this limitation. No
reimbursement pursuant to such limitation was required for the period December
7, 1993 (commencement of operations) to November 30, 1994.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or
the Fund in connection with the performance
14
<PAGE>
of the Advisory Contract, except to the extent that such loss results from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
obligations and duties thereunder. The Advisory Contract terminates
automatically upon assignment and is terminable at any time without penalty by
the board of trustees or by vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins,
or by Mitchell Hutchins on 60 days' written notice to the Fund.
The following table shows the approximate net assets as of February 28, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market).............................. $ 5,772.8
Global......................................................... 3,662.6
Equity/Balanced................................................ 2,804.0
Fixed Income (excluding Money Market).......................... 6,631.4
Taxable Fixed Income......................................... 4,836.4
Tax-Free Fixed Income........................................ 1,795.0
Money Market Funds............................................. 17,772.5
</TABLE>
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber and Mitchell Hutchins/Kidder, Peabody ("MH/KP")
mutual 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 and MH/KP funds and other Mitchell Hutchins advisory
clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A and Class D shares of the Fund under separate distribution contracts
dated July 7, 1993 (collectively, "Distribution Contracts") that require
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 dated July 7, 1993
relating to the Class A and Class D 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 and Class D
shares of the Fund adopted by the Trust in the manner prescribed under Rule
12b-1 under the 1940 Act ("Class A Plan" and "Class D Plan," collectively,
"Plans"), the Fund pays Mitchell Hutchins a service fee, accrued daily and
payable monthly, at the annual rate of 0.25% of the average daily net assets of
each Class of Fund shares. Under the Class D Plan, the Fund pays Mitchell
Hutchins a monthly distribution fee at the annual rate of 0.25% of the average
daily net assets of the Class D shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the Trust's board of trustees at least quarterly, and the trustees 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 Trust's board of trustees, including those trustees
who are not
15
<PAGE>
"interested persons" of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan,
acting in person at a meeting called for that purpose, (3) payments by the
Fund under the Plan shall not be materially increased without the affirmative
vote of the holders of a majority of the Fund's outstanding voting securities
and (4) while the Plan remains in effect, the selection and nomination of
trustees who are not "interested persons" of the Trust shall be committed to
the discretion of the trustees who are not interested persons of the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
shares to such Class based on the ratio of sales of shares of such Class to
the sales of both Classes of shares. The fees paid by one Class of Fund shares
will not be used to subsidize the sale of the other Class of Fund shares.
For the period December 7, 1993 (commencement of operations) to November 30,
1994, Mitchell Hutchins received the following fees under the Plans:
<TABLE>
<S> <C>
Class A........................................................... $16,866*
Class D........................................................... $10,231*
</TABLE>
*During the fiscal period shown above, Mitchell Hutchins voluntarily waived
all or a portion of its distribution fees. If such waivers had not been made,
for the Class A and Class D shares, the actual fees which would have been paid
by the Fund would have been $38,305 and $16,281, respectively.
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 period December 7, 1993
(commencement of operations) to November 30, 1994:
<TABLE>
<CAPTION>
CLASS A CLASS D
------- -------
<S> <C> <C>
Marketing and advertising...................................... $36,816 $6,624
Amortization of commissions ................................... N/A $5,943
Printing of prospectuses and statements of additional informa-
tion.......................................................... $ 4,594 $ 811
Branch network costs allocated and interest expense............ $29,688 $7,317
Service fees paid to PaineWebber investment executives......... $17,237 $3,663
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. "Branch network
costs allocated and interest expense" consist of an allocated portion of the
expenses of various PaineWebber departments involved in the distribution of
the Fund's shares, including the PaineWebber retail branch system.
In approving the Fund's overall Flexible Pricing SM system of distribution,
the Trust's board of trustees considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging existing shareholders to make additional investments in the Fund
and attracting new investors and assets to the Fund to the benefit of the Fund
and its shareholders, (2) facilitate distribution of the Fund's shares and (3)
improve the competitive position of the Fund in relation to other funds that
have implemented or are seeking to implement similar distribution
arrangements.
In approving the Class A Plan for the Fund, the trustees considered all the
features of the distribution system, including (1) the conditions under which
initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales load combined
16
<PAGE>
with a service fee would be attractive to PaineWebber investment executives and
correspondent firms, resulting in greater growth of the Fund than might
otherwise be the case, (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 to be provided to the Fund and its shareholders by
Mitchell Hutchins, (5) the services to be provided by PaineWebber pursuant to
its Exclusive Dealer Agreement with Mitchell Hutchins and (6) Mitchell
Hutchins' shareholder service-related expenses and costs.
In approving the Class D Plan for the Fund, the trustees considered all the
features of the distribution system, including (1) the advantage to investors
in having no initial sales charges deducted from the Fund's purchase payments
and instead having the entire amount of their purchase payments immediately
invested in Fund shares, (2) the advantage to investors from paying for
distribution on an ongoing basis rather than at the time of investment, (3)
Mitchell Hutchins' belief that the ability of PaineWebber investment executives
and correspondent firms to receive sales compensation for their sales of Class
D shares on an ongoing basis, along with continuing service fees, while their
customers invest their entire purchase payments immediately in Class D shares,
would prove attractive to the investment executives and correspondent firms,
resulting in greater growth to the Fund than might otherwise be the case, (4)
the advantages to the shareholders of economies of scale resulting from growth
in the Fund's assets and potential continued growth, (5) the services provided
to the Fund and its shareholders by Mitchell Hutchins, (6) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with
Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service and
distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives without the concomitant receipt by Mitchell Hutchins of initial
sales charges was conditioned upon its expectation of being compensated under
the Class D Plan.
With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges and
distribution fees. The trustees also considered the benefits that would accrue
to Mitchell Hutchins under each Plan in that Mitchell Hutchins would receive
service, distribution and advisory fees which are calculated based upon a
percentage of the average net assets of the Fund, which fees would increase if
the Plan were successful and the Fund attained and maintained significant asset
levels.
Under the Distribution Contract between the Trust and Mitchell Hutchins for
the Class A shares, for the period December 7, 1993 (commencement of
operations) to November 30, 1994, Mitchell Hutchins received approximately
$54,211 in sales charges and retained approximately $1,139, net of concessions
to PaineWebber as exclusive dealer.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of trustees of the Trust,
Mitchell Hutchins is responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins seeks to obtain the best net results
for the Fund, taking into account such factors as the price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved. Prices paid to
dealers in principal transactions, through which most debt securities and some
equity securities are traded, generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. While Mitchell Hutchins generally seeks
reasonable competitive commission rates and dealer spreads, payment of the
lowest commission or spread is not necessarily consistent with
17
<PAGE>
obtaining the best net results. During the period December 7, 1993
(commencement of operations) to November 30, 1994, the Fund paid no brokerage
commissions.
The Fund has no obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may
be conducted through Mitchell Hutchins or its affiliates, including
PaineWebber. The Trust's board of trustees has adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions
paid to Mitchell Hutchins or its affiliates are reasonable and fair. Specific
provisions in the Advisory Contract authorize Mitchell Hutchins and any of its
affiliates that are members of a national securities exchange to effect
portfolio transactions for the Fund on such exchange and authorize Mitchell
Hutchins and any of its affiliates to retain compensation in connection with
such transactions. Any such transactions will be effected and related
compensation paid only in accordance with applicable regulations of the
Securities and Exchange Commission ("SEC"). During the period December 7, 1993
(commencement of operations) to November 30, 1994, the Fund paid no brokerage
commissions to PaineWebber or any other affiliate of Mitchell Hutchins.
Consistent with the interests of the Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may, in its discretion, use
brokers who provide the Fund with research, analysis, advice and similar
services to execute portfolio transactions on behalf of the Fund. In return for
such services, the Fund may pay to those brokers a higher commission than may
be charged by other brokers, provided that Mitchell Hutchins determines in good
faith that such commission is reasonable in terms either of the particular
transaction or of the overall responsibility of Mitchell Hutchins to the Fund
and its other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term. For
purchases or sales with broker-dealer firms which act as principal, Mitchell
Hutchins seeks best execution. 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 if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins will not
enter into any explicit soft dollar arrangements relating to principal
transactions and will not receive in principal transactions the types of
services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins receiving multiple quotes from dealers before executing the
transaction on an agency basis.
Research services furnished by brokers or dealers with or through which the
Fund effects securities transactions may be used by Mitchell Hutchins for other
funds or accounts it manages and, conversely, research services furnished to
Mitchell Hutchins in connection with other funds or accounts it manages may be
used by Mitchell Hutchins for the Fund. Information and research received from
brokers 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 period
December 7, 1993 (commencement of operations) to November 30, 1994, Mitchell
Hutchins directed no portfolio transactions to brokers chosen because they
provided research services. The Fund may purchase and sell securities to and
from dealers who provide the Fund with research services. Portfolio
transactions will not be directed by the Fund to dealers solely on the basis of
research services provided. 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.
18
<PAGE>
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 the amount of the security to be purchased or sold by the Fund, in other
cases it is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the
underwriting or selling group, except pursuant to procedures adopted by the
Trust's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among
other things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, the purchase be at not
more than the public offering price prior to the end of the first business day
after the date of the public offering and that Mitchell Hutchins or any
affiliate thereof not participate in or benefit from the sale to the Fund.
PORTFOLIO TURNOVER. The portfolio turnover rate is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of such
securities in the portfolio during the year. During the period December 7, 1993
(commencement of operations) to November 30, 1994, the portfolio turnover rate
for the Fund was 570.73%. The Fund's high portfolio turnover rate was
attributable to repositioning caused by an unusually high number of
redemptions.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Fund with
concurrent purchases of Class A shares of any other PaineWebber or MH/KP mutual
fund and thus take advantage of the reduced sales charges indicated in the
table of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Fund and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
19
<PAGE>
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individuals or the individual's spouse;
or
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed
related to that other employer).
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors are permitted to
purchase Class A shares of the Fund among related accounts at the offering
price applicable to the total of (1) the dollar amount then being purchased
plus (2) an amount equal to the then-current net asset value of the purchaser's
combined holdings of Class A Fund shares and Class A shares of any other
PaineWebber or MH/KP mutual fund. The purchaser must provide sufficient
information to permit confirmation of his or her holdings, and the acceptance
of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Fund may be exchanged for shares of the
corresponding Class of most other PaineWebber or MH/KP mutual funds. However,
such other funds generally would not be permissible investments for federal
credit unions.
Shareholders will receive at least 60 days notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee, and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended 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 the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemptions 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 Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
one shareholder. This election is irrevocable unless the SEC permits its
withdrawal. The Fund may suspend redemption privileges or postpone the date of
payment during any period (1) when the 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 the Fund's portfolio at
the time.
AUTOMATIC INVESTMENT PLAN. Shareholders may purchase shares of the Fund
through an automatic investment plan, under which an amount specified by the
shareholder of $5,000 or more each month will be sent to the Transfer Agent
from the shareholder's bank for investment in the Fund. In addition to
providing a convenient and disciplined manner of investing, participation in
the automatic investment plan enables the investor to use the technique of
"dollar cost averaging." When under the plan a shareholder invests the same
dollar amount each month, the shareholder will purchase more shares when the
Fund's net asset value per share is low and fewer shares when the net asset
value per share is high. Using this technique, a shareholder's average purchase
price per share over any given period will be lower than if the shareholder
purchased a fixed number of
20
<PAGE>
shares on a monthly basis during the period. Of course, investing through the
automatic investment plan does not assure a profit or protect against loss in
declining markets. Additionally, since the automatic investment plan involves
continuous investing regardless of price levels, an investor should consider
his or her financial ability to continue purchases through periods of low price
levels.
SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or semi-
annual plans, PaineWebber will arrange for redemption by the Fund of sufficient
Fund shares to provide the withdrawal payment specified by participants in the
Fund's systematic withdrawal plan. The payment generally is mailed
approximately five business days after the redemption date. Withdrawal payments
should not be considered dividends, but redemption proceeds, with the tax
consequences described under "Dividends and Taxes" in the Prospectus. 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 PFPC Inc. ("Transfer Agent").
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 the Transfer
Agent. Shareholders who receive dividends or other distributions in cash may
not participate in the Fund's systematic withdrawal plan. Purchases of
additional shares concurrent with withdrawals are ordinarily disadvantageous to
shareholders because of tax liabilities and, for Class A shares, sales charges.
Shareholders may request the forms needed to establish a systematic withdrawal
plan from their PaineWebber investment executives, correspondent firms or the
Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in the Fund without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption.
The reinstatement will be made at the net asset value per share next computed
after the notice of reinstatement and check are received. The amount of a
purchase under this reinstatement privilege cannot exceed the amount of the
redemption proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described in "Dividends and Taxes" in the Prospectus.
VALUATION OF SHARES
The Fund determines its net asset value per share separately for each Class
of shares as of the close of regular trading (currently 4:00 p.m., eastern
time) on the 0NYSE on each Business Day, which is defined as each Monday
through Friday when the NYSE is open. Currently the NYSE is closed on the
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Where market quotations are readily available, portfolio securities are
valued based upon market quotations, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the security.
Where such market quotations are not readily available, securities are valued
at fair value as determined in good faith by or under the direction of the
Trust's board of trustees, generally based upon appraisals received from a
pricing service using a
21
<PAGE>
computerized matrix system or derived from information concerning the security
or similar securities received from recognized dealers in those securities. The
amortized cost method of valuation generally is used with respect to debt
obligations with 60 days or less remaining until maturity unless the Trust's
board of trustees determines that this does not represent fair value.
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 and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in the Fund's Performance Advertisements are calculated according
to the following formula:
P(1 + T)n= ERV
where:P = a hypothetical initial payment of $1,000 to purchase shares 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 A shares, the
maximum 2.5% sales charge is deducted from the initial $1,000 payment. All
dividends and other distributions 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 and other distributions.
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. Initial sales charges are not taken into account in calculating Non-
Standardized Return; the inclusion of those charges would reduce the return.
The following table shows performance information for the Class A and Class D
shares of the Fund for the period indicated:
<TABLE>
<CAPTION>
CLASS A CLASS D
------- -------
<S> <C> <C>
From December 7, 1993 (commencement of operations) to
November 30, 1994:
Standardized Return*...................................... (2.88)% (0.59)%
Non-Standardized Return................................... (0.36)% (0.59)%
</TABLE>
- --------
* Standardized Return for Class A shares reflects deduction of the current
maximum sales charge of 2.5%. Class D shares do not impose an initial or a
contingent deferred sales charge; therefore, Non-Standardized Return is
identical to Standardized Return.
YIELD. Yields used in the Fund's Performance Advertisements are calculated by
dividing the Fund's interest income attributable to a Class of shares for a 30-
day period ("Period"), net of
22
<PAGE>
expenses attributable to such Class, by the average number of shares of such
Class entitled to receive dividends during the Period and expressing the result
as an annualized percentage (assuming semiannual compounding) of the maximum
offering price per share (in the case of Class A shares) or the net asset value
per share (in the case of Class D shares) at the end of the Period. Yield
quotations are calculated according to the following formula:
a-b
YIELD = 2[(--- + 1)/6/ - 1]
cd
where: a = interest earned during the Period attributable to a Class of
shares
b = expenses accrued for the Period attributable to a Class of shares
(net of reimbursements)
c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive a dividend
d = the maximum offering price per share (in the case of Class A
shares) or the net asset value per share (in the case of Class D
shares) on the last day of the Period.
Except as noted below, in determining net investment income earned during the
Period (variable "a" in the above formula), the Fund calculates interest earned
on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totalling the interest
earned on all debt obligations. For purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next date on which the obligation reasonably can be expected to be called or,
if none, the maturity date. With respect to Class A shares, in calculating the
maximum offering price per share at the end of the period (variable "d" in the
above formula), the Fund's current maximum 2.5% initial sales charge on Class A
shares is included.
The following table shows the yield for the Class A and Class D shares of the
Fund for the 30-day period ended November 30, 1994:
<TABLE>
<CAPTION>
YIELD
-----
<S> <C>
Class A............................................................. 4.69%
Class D............................................................. 4.61%
</TABLE>
OTHER INFORMATION. In Performance Advertisements the Fund may compare its
Standardized Return and/or its Non-Standardized Return with, or otherwise
discuss data (including average 30-day money market fund yields), published by
Lipper Analytical Services, Inc. ("Lipper"); IBC/Donaghue's Money Market Fund
Report; CDA Investment Technologies, Inc. ("CDA"); Wiesenberger Investment
Companies Service ("Wiesenberger"); Investment Company Data Inc. ("ICD"); or
Morningstar Mutual Funds ("Morningstar"); or with the performance of U.S.
Treasury securities of various maturities, recognized stock, bond and other
indices, including (but not limited to) the Salomon Brothers Bond Index,
Salomon Brothers Non-U.S. World Government Bond Index, Lehman Bond Index,
Lehman Brothers Government/Corporate Bond Index, Lehman Brothers 20+ Year
Treasury Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, Morgan Stanley Capital International World Index
and changes in the Consumer Price Index as published by the U.S. Department of
Commerce. Such comparisons also may include economic data and statistics
published by the United States Bureau of Labor Statistics, such as the cost of
living index, information and statistics on the residential mortgage market or
the
23
<PAGE>
market for mortgage-backed securities, such as those published by the Federal
Reserve Bank, the Office of Thrift Supervision, Ginnie Mae, Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation, and the Lehman
Brothers Mortgage-Backed Securities Index. 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,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals, including (but not limited to) THE WALL STREET
JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE
KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic
form.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on an investment in the Fund are
reinvested in additional Fund shares, any future income or capital appreciation
of the Fund would increase the value, not only of the original Fund investment,
but also of the additional Fund shares received through reinvestment. As a
result, the value of the Fund investment would increase more quickly than if
dividends or other distributions had been paid in cash.
The Fund may also compare its performance with, or may otherwise discuss, the
performance of bank certificates of deposit (CDs) as measured by the CDA
Investment Technologies, Inc. Certificate of Deposit Index, the Bank Rate
Monitor National Index and the averages of yields of CDs of major banks
published by Banxquote (R) Money Markets. In comparing the Fund or its
performance to CDs, 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. Shares of the Fund are not insured or guaranteed by the U.S. government
and returns and net asset value will fluctuate. In comparing the Fund or its
performance to money market funds, investors should keep in mind that money
market funds seek to maintain a constant net asset value per share of $1.00,
while the net asset value of the Fund's shares will fluctuate and the Fund may
not be able to return money invested on a dollar-for-dollar basis. The
securities held by the Fund generally will have longer maturities than those
held by money market funds or than most CDs and may reflect interest rate
fluctuations for longer term securities. Additionally, the Fund's portfolio
securities present greater risks than those of money market funds. An
investment in the Fund involves greater risks than an investment in either a
money market fund or a CD.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-
term capital gain) ("Distribution Requirement") and must meet several
additional requirements. These requirements include 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, or other income derived with respect to its
business of investing in securities; (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities that were held for less than three months ("Short-Short
Limitation"); (3) 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, with these other securities
24
<PAGE>
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets; and (4) 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.
Dividends and other distributions declared by the Fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by shareholders on the last
day of that month if the distributions are paid by the Fund during the
following January. Accordingly, those distributions will be taxed to
shareholders for the year in which that December 31 falls. The Fund invests
exclusively in debt securities and receives no dividend income; accordingly, no
portion of the dividends or other distributions paid by the Fund will be
eligible for the dividends-received deduction allowed to corporations.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for the year and capital gain net income for the
one-year period ending on November 30 of that year, plus certain other amounts.
The Fund may acquire certain zero coupon or other securities issued with
original issue discount. As a holder of such securities, the Fund annually must
include in its gross income the portion of the original issue discount that
accrues on the securities for the taxable year, even if the Fund receives no
corresponding payment on the securities during the year. Because the Fund
annually must distribute substantially all of its investment company taxable
income, including any accrued original issue discount, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, the Fund may
be required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or
losses from those sales, which would increase or decrease the Fund's investment
company taxable income or net capital gain (the excess of net long-term capital
gain over net short-term capital loss). In addition, any such gains may be
realized on the disposition of securities held for less than three months.
Because of the Short-Short Limitation, any such gains would reduce the Fund's
ability to sell other securities held for less than three months that it might
wish to sell in the ordinary course of its portfolio management.
OTHER INFORMATION
PAINEWEBBER MANAGED INVESTMENTS TRUST. Prior to February 26, 1992, the
Trust's name was "PaineWebber Fixed Income Portfolios." The Trust is an entity
of the type commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders could, under certain circumstances, be held
personally liable for the obligations of the Trust or the Fund. However, the
Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust or the Fund and requires that notice of such
disclaimer be given in each note, bond, contract, instrument, certificate or
undertaking made or issued by the trustees or by any officers or officer by or
on behalf of the Trust, the Fund, the trustees or any of them in connection
with the Trust. The Declaration of Trust provides for indemnification from the
Fund's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
25
<PAGE>
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations,
a possibility that Mitchell Hutchins believes is remote and not material. Upon
payment of any liability incurred by a shareholder solely by reason of being or
having been a shareholder, the shareholder paying such liability will be
entitled to reimbursement from the general assets of the Fund. The trustees
intend to conduct the operations of the Fund in such a way as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Fund.
The Fund is authorized to issue Class B and Class C shares in addition to
Class A and Class D shares, but the Trust's board of trustees has no current
intention of doing so. Class B shares, if issued, would be subject to a
contingent deferred sales charge upon redemption and would bear service and
distribution fees, but would be sold with no initial sales charge. Class C
shares, if issued, would bear no service or distribution fees, would be sold
with no initial sales charge and would be redeemable at net asset value without
the imposition of a contingent deferred sales charge. Class C shares would be
offered only to a limited class of institutional purchasers.
CLASS-SPECIFIC EXPENSES. The Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C., 20036-5891, counsel to the Fund, has passed upon the legality
of the shares offered by the Prospectus. Kirkpatrick & Lockhart LLP also acts
as counsel to PaineWebber and Mitchell Hutchins in connection with other
matters.
INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, N.Y.
10019, serves as independent auditors for the Trust.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the period December 7, 1993
(commencement of operations) to November 30, 1994 is a separate document
supplied with this Statement of Additional Information, and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference in this Statement of Additional
Information.
26
<PAGE>
PAINEWEBBER SHORT-TERM U.S. GOVERNMENT
INCOME FUND FOR CREDIT UNIONS
Statement of Additional Information
April 1, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions...................................... 1
Trustees and Officers..................................................... 7
Investment Advisory and Distribution Arrangements......................... 14
Portfolio Transactions.................................................... 17
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 19
Valuation of Shares....................................................... 21
Performance Information................................................... 22
Taxes..................................................................... 24
Other Information......................................................... 25
Financial Statements...................................................... 26
</TABLE>
---------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL IN-
FORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND THIS STATE-
MENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
(C) 1995 PaineWebber Incorporated
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