<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
CLASS C SHARES
1285 Avenue of the Americas
New York, New York 10019
PaineWebber U.S. Government Income Fund ("Fund"), a series of PaineWebber
Managed Investments Trust ("Trust"), seeks high current income consistent with
the preservation of capital and liquidity. The Fund invests primarily in U.S.
government securities.
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 Ex-
change Commission. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting the
PaineWebber Incorporated Benefits Department, 10th Floor, 1000 Harbor Boule-
vard, Weehawken, New Jersey 07087 or by calling 1-201-902-4444.
The Class C shares described in this Prospectus are currently offered for sale
only to the trustee of the PaineWebber Savings Investment Plan on behalf of
that Plan.
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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 COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is April 1, 1995.
PaineWebber Incorporated
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION 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 ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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FUND EXPENSES
The following tables are intended to assist investors in understanding the
maximum expenses associated with investing in Class C shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum sales charge on purchases of shares .............................. None
Sales charge on reinvested dividends...................................... None
Redemption fee or deferred sales charge................................... None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees........................................................... 0.50%
12b-1 fees................................................................ 0.00%
Other expenses............................................................ 0.15%
----
Total operating expenses.................................................. 0.65%
====
</TABLE>
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>
$7 $21 $36 $81
</TABLE>
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the
assumption in the Example of a 5% annual return are required by regulations of
the Securities and Exchange Commission ("SEC") applicable to all mutual funds;
the assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of the Class C shares of the Fund.
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 actual expenses attributable to the Fund's Class C shares will depend upon,
among other things, the level of average net assets and the extent to which the
Fund incurs variable expenses, such as transfer agency costs.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one Class C
share of the Fund for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
the Fund's Annual Report to Shareholders for the fiscal year ended November 30,
1994, 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 FOR THE PERIOD
YEARS ENDED SEPTEMBER 11, 1991 #
NOVEMBER 30, TO
----------------------- NOVEMBER 30,
1994 1993 1992 1991
------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $10.02 $ 9.97 $ 9.97 $ 9.88
------ ------ ------ ------
Net increase (decrease) from
investment operations:
Net investment income............ 0.62 0.70 0.77 0.18
Net realized and unrealized gains
(losses) from investment (1.53) 0.05 0.01 0.09
transactions.................... ------ ------ ------ ------
Net increase (decrease) in net
assets resulting from (0.91) 0.75 0.78 0.27
operations...................... ------ ------ ------ ------
Less distributions:
Dividends from net investment (0.62) (0.70) (0.78) (0.18)
income.......................... ------ ------ ------ ------
Net asset value, end of period... $ 8.49 $10.02 $ 9.97 $ 9.97
====== ====== ====== ======
Total investment return (1)...... (9.37)% 7.69% 8.13% 2.37%
====== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period (000's
omitted)........................ $4,955 $6,232 $5,517 $4,514
Ratio of expenses to average net
assets.......................... 0.65% 0.62% 0.63% 0.72%*
Ratio of net investment income to
average net assets.............. 6.76% 6.87% 7.70% 8.36%*
Portfolio turnover rate.......... 358.07% 83.13% 28.33% 71.22%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends and other distributions
at net asset value on the payable date and a sale at net asset value on the
last day of each period reported. Total investment returns for periods of
less than one year have not been annualized.
3
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INVESTMENT OBJECTIVE AND POLICIES
The Fund is an open-end, diversified management investment company that seeks
to provide high current income consistent with the preservation of capital and
liquidity. Under normal conditions, the Fund invests at least 65% of its total
assets in U.S. government securities, including mortgage-backed securities is-
sued or guaranteed by the U.S. government, its agencies or instrumentalities
("U.S. government mortgage-backed securities"), other obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities and repur-
chase agreements with respect to those securities. Up to 35% of the Fund's to-
tal assets may be invested in mortgage- and asset-backed securities that are
issued by private issuers and that at the time of purchase 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. As a matter of fundamental
policy, the Fund normally concentrates at least 25% of its total assets in
mortgage- and asset-backed securities issued or guaranteed by private issuers
or by agencies or instrumentalities of the U.S. government; this fundamental
policy may not be changed without shareholder approval.
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. gov-
ernment mortgage-backed securities in which the Fund may invest include mort-
gage-backed securities issued or guaranteed as to the payment of principal and
interest (but not as to market value) by the Government National Mortgage Asso-
ciation ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Other
mortgage-backed securities, in which the Fund may invest up to 35% of its total
assets, are issued by private issuers, generally originators of and investors
in mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers and special purpose entities (collectively, "Private
Mortgage Lenders"). Payments of principal and interest (but not the market val-
ue) of such private mortgage-backed securities may be supported by pools of
mortgage loans or other mortgage-backed securities that are guaranteed, di-
rectly or indirectly, by the U.S. government or one of its agencies or instru-
mentalities, or they may be issued without any government guarantee of the un-
derlying mortgage assets but with some form of non-government credit enhance-
ment. For more information concerning the types of mortgage-backed securities
in which the Fund may invest, see Appendix A 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 Associa-
tion, 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
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"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 po-
sition, Certificates of Accrual Treasury Securities ("CATS") and Treasury In-
come Growth Receipts ("TIGRs") that are not issued through the U.S. Treasury
will not be counted as U.S. government securities for purposes of the 65% in-
vestment requirement.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle install-
ment sale contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property and receivables from re-
volving credit (credit card) agreements. Such assets are securitized through
the use of trusts or special purpose corporations. Payments or distributions of
principal and interest on asset-backed securities may be guaranteed up to cer-
tain amounts and for a certain time period by a letter of credit or a pool in-
surance policy issued by a financial institution unaffiliated with the issuer
or other credit enhancements may be present.
The Fund also may seek to enhance income or to reduce the risks associated
with ownership of the securities in which it invests through the use of op-
tions, futures contracts, options on futures contracts and interest rate pro-
tection transactions. See "Hedging and Related Income Strategies."
RISK FACTORS. The Fund's net asset value will fluctuate based on changes in
the value of its portfolio securities. Neither the issuance by, nor the guaran-
tee of, a U.S. government agency, nor even the highest rating by a NRSRO con-
stitutes assurance that the security will not fluctuate in value or that the
Fund will receive the originally anticipated yield on the security. An invest-
ment in the Fund also is subject to the risks discussed below.
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 in-
vestments. Generally, the value of the debt securities held by the Fund, and
thus the net asset value per share of the Fund, will rise when interest rates
decline. Conversely, when interest rates rise, the value of fixed income secu-
rities, and thus the net asset value per share of the Fund, may be expected to
decline.
--RISKS OF MORTGAGE AND ASSET-BACKED SECURITIES. The yield characteristics of
the mortgage- and asset-backed securities in which the Fund may invest differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage- and as-
set-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 result, 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 pur-
chases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturi-
ty. Amounts available for reinvestment by the Fund are likely to be greater
during a period of declining interest rates and, as a result, are likely to be
reinvested at lower interest rates than during a period of rising interest
rates. Accelerated
5
<PAGE>
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- and asset-backed securities is smaller and less liquid than the mar-
ket for U.S. government mortgage-backed securities. CMO classes may be spe-
cially structured in a manner that provides any of a wide variety of investment
characteristics, such as yield, effective maturity and interest rate sensitivi-
ty. 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 in-
vestment characteristics may be significantly reduced. These changes can result
in volatility in the market value and, in some instances, reduced 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 CMO class may be an "inverse IO," on which the holders are
entitled to receive no payments of principal and are entitled to receive inter-
est 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 interest rates. There can be no
assurance that such declines will not recur. The market value of certain mort-
gage-backed securities in which the Fund may invest, including IO and PO clas-
ses 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 the Fund's portfolio, taken
as a whole, is consistent with the Fund's investment objective. If Mitchell
Hutchins incorrectly forecasts interest rate changes or other factors that may
affect the volatility of securi-
6
<PAGE>
ties held by the Fund, the Fund's ability to meet its investment objective may
be reduced.
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 coupon 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.
HEDGING AND RELATED INCOME STRATEGIES. The Fund may use options (both ex-
change-traded and over-the-counter ("OTC')), futures contracts and interest
rate protection transactions to attempt to enhance income and to reduce the
overall risk of its investments (hedge). Hedging strategies may be used in an
attempt to manage the Fund's average duration and other risks of its invest-
ments, which can affect fluctuations in the Fund's net asset value. The Fund's
ability to use these strategies may be limited by market conditions, regulatory
limits and tax considerations. Appendix B to this Prospectus describes the
hedging instruments that the Fund may use, and the Statement of Additional In-
formation contains further information on these strategies.
The Fund may write (sell) covered call and put options, buy call and put op-
tions, buy and sell interest rate futures contracts and buy call or put options
or write covered call options on such futures contracts. The Fund may enter
into options and futures contracts under which up to 100% of its portfolio is
at risk.
The Fund may enter into interest rate protection transactions, including in-
terest rate swaps, caps, collars and floors, to preserve a return or spread on
a particular investment or portion of a portfolio or to protect against any in-
crease in the price of securities it anticipates purchasing at a later date.
The Fund will enter into interest rate protection transactions only with banks
and recognized securities dealers believed by Mitchell Hutchins to present min-
imal credit risks in accordance with guidelines established by the Trust's
board of trustees. The Fund would use these transactions as a hedge and not as
a speculative investment.
The Fund might not employ any of the strategies described above, and no as-
surance can be given that any strategy used will succeed. If Mitchell Hutchins
incorrectly forecasts interest rates, market values or other economic factors
in utilizing a strategy for the Fund, the Fund would be in a better position if
it had not entered into the transaction at all. The use of these strategies in-
volves certain special risks, including (1) the fact that skills needed to use
hedging instruments are different from those
7
<PAGE>
needed to select the Fund's securities, (2) possible imperfect correlation, or
even no correlation, between price movements of hedging instruments and price
movements of the investments being hedged, (3) the fact that, while hedging
strategies can reduce the risk of loss, they can also reduce the opportunity
for gain, or even result in losses, by offsetting favorable price movements in
hedged investments and (4) the possible inability of the Fund to purchase or
sell a portfolio security at a time that otherwise would be favorable for it to
do so, or the possible need for the Fund to sell a portfolio security at a dis-
advantageous time, due to the need for the Fund to maintain "cover" or to seg-
regate securities in connection with hedging transactions and the possible in-
ability of the Fund to close out or to liquidate its hedged position.
New financial products and risk management techniques continue to be devel-
oped. The Fund may use these instruments and techniques to the extent consis-
tent with its investment objective and regulatory and federal tax considera-
tions.
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 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 securities
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. At the time the Fund enters into a dollar roll, an approved cus-
todian will segregate cash or liquid, high-grade debt securities having a value
not less than the 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-upon date and price. The market value of securities sold under re-
verse repurchase agreements typically is greater than the proceeds of the sale,
and accordingly, the market value of the securities sold is likely to be
greater than the value of the securities in which the Fund invests those pro-
ceeds. Thus, reverse repurchase agreements involve the risk that the buyer of
the securities sold by the Fund might be unable to deliver them when the Fund
seeks to repurchase. In the event the buyer of securities under a reverse re-
purchase agreement 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 proceeds of the reverse repurchase agreement may effectively be re-
stricted 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 on 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,
8
<PAGE>
and will mature on or before the settlement date on the related 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 may borrow money
for temporary or emergency purposes, but not in excess of an additional 5% of
its total assets.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and si-
multaneously commits 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. Repurchase agreements
carry certain risks not associated with direct investments in securities, in-
cluding possible decline in the market value of the underlying securities and
delays and costs to the Fund if the other party to the repurchase agreement be-
comes insolvent. The Fund intends to enter into repurchase agree- ments only
with banks and dealers in transac- tions believed by Mitchell Hutchins to pres-
ent minimum credit risks in accordance with guidelines established by the
Trust's board of trustees.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities
on a "when-issued" basis or may purchase or sell securities for "delayed deliv-
ery". In when-issued or delayed delivery transactions, delivery of the securi-
ties occurs beyond normal settlement period, but the Fund generally would not
pay for such securities or start earning interest on them until they are deliv-
ered. However, when the Fund purchases securities on a when-issued or delayed
delivery basis, it immediately assumes the risks of ownership, including the
risk of price fluctuation. Failure by a counter party to deliver a security
purchased on a when-issued or delayed delivery basis may result in a loss or
missed opportunity to make an alternative investment. Depending on market con-
ditions, the Fund's when-issued and delayed delivery purchase commitments could
cause its net asset value per share to be more volatile, because such securi-
ties may increase the amount by which the Fund's total assets, including the
value of when-issued and delayed delivery securities held by the Fund, exceed
its net assets.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in il-
liquid securities, including certain cover for OTC options and securities whose
disposition is restricted under the federal securities laws (other than "Rule
144A" securities Mitchell Hutchins has determined to be liquid under procedures
approved by the Trust's trustees). Rule 144A establishes a "safe harbor" from
the registration requirements of the Securities Act of 1933 ("1933 Act"). In-
stitutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable values for restricted securi-
ties and the ability to liquidate an investment to satisfy share redemption or-
ders. An insufficient number of qualified insti-
9
<PAGE>
tutional buyers interested in purchasing Rule 144A-eligible restricted securi-
ties held by the Fund, however, could affect adversely the marketability of
such portfolio securities and the Fund might be unable to dispose of such secu-
rities 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 for the Fund (100% or
more) will involve correspondingly greater transaction costs, which will be
borne directly by the Fund, and may increase the potential for short-term capi-
tal gains.
OTHER INFORMATION. When Mitchell Hutchins believes unusual circumstances war-
rant a defensive position, the Fund temporarily may commit all or any portion
of its assets to cash or money market instruments. Such instruments will be
limited to obligations of the U.S. government, its agencies or instrumentali-
ties and repurchase agreements secured by such obligations. The Fund may also
engage in short sales of securities "against the box" to defer realization of
gains or losses for tax purposes.
There can be no assurance that the Fund will achieve its investment objec-
tive. The Fund's net asset value will fluctuate based upon changes in the value
of its portfolio securities. The Fund's investment objective and certain other
investment limitations as described in the Statement of Additional Information
are fundamental policies and 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 AND REDEMPTIONS
The Class C shares of the Fund described in this Prospectus currently are of-
fered for sale only to the trustee of the PaineWebber Savings Investment Plan
("PW SIP"), a defined contribution plan sponsored by Paine Webber Group Inc.
("PW Group"). Such shares may be purchased or redeemed only by such trustee on
behalf of the PW SIP at net asset value without any sales or redemption charge.
The trustee of the PW SIP purchases and redeems Fund shares to implement the
investment choices of individual plan participants with respect to their PW SIP
contributions. INDIVIDUAL PLAN PARTICIPANTS SHOULD CONSULT THE PLAN INFORMATION
STATEMENT AND SUMMARY PLAN DESCRIPTION OF THE PW SIP (COLLECTIVELY, THE "PLAN
DOCUMENTS") FOR A DESCRIPTION OF THE PROCEDURES AND LIMITATIONS APPLICABLE TO
MAKING AND CHANGING INVESTMENT CHOICES. Copies of the Plan Documents are avail-
able from the PaineWebber Incorporated Benefits Department, 10th Floor, 1000
Harbor Boulevard, Weehawken, New Jersey 07087 (telephone 1-201-902-4444).
As described in the Plan Documents, the average net asset value per share at
which Class C shares of the Fund are purchased or redeemed by the trustee of
the PW SIP for the accounts of individual participants might be more or less
than the net asset value per share prevailing at the time that such partici-
pants made their investment choices or made their contributions to the PW SIP.
Purchase and redemption orders by the trustee of the PW SIP for Class C
shares of the Fund will be effected at the net asset value per share next com-
puted (see "Valuation of Shares") after the order is received by the Fund's
transfer agent, PFPC Inc. ("Transfer Agent"). The Fund and Mitchell Hutchins
reserve the right to reject any purchase order and to suspend the offering of
Class C shares for a period of time.
DIVIDENDS AND TAXES
DIVIDENDS. Dividends from the Fund's net investment income are declared daily
and
10
<PAGE>
paid monthly on or about the 15th day of each month. Net investment income in-
cludes accrued interest and discount, less amortization of premium and accrued
expenses. Substantially all of the Fund's net capital gain (the excess of net
long-term capital gain over net short-term capital loss) and net short-term
capital gain, if any, are distributed annually with the Fund's next regular
dividend. The Fund may make additional distributions if necessary to avoid a 4%
excise tax on undistributed income and capital gain.
The Fund's dividends and capital gain distributions are paid in additional
Fund shares at net asset value unless the Transfer Agent is instructed other-
wise.
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.
The Class C shares of the Fund described in this Prospectus currently are of-
fered for sale only to the trustee of the PW SIP acting on behalf of such plan.
As a qualified profit-sharing plan, the PW SIP pays no federal income tax. In-
dividual participants in the PW SIP should consult the Plan Documents and their
own tax advisers for information on the tax consequences associated with par-
ticipating in the PW SIP.
VALUATION OF SHARES
The net asset value of the Fund's shares fluctuates and is determined as of
the close of regular trading on the New York Stock Ex- change, Inc. ("NYSE")
(currently 4:00 p.m., eastern time) each Business Day. A "Business Day" is any
day, Monday through Friday, on which the NYSE is open for business. Net asset
value per share is computed 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 outstanding.
The Fund values its assets based on their current market value when 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 to matu-
rity, 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 these services
at the annual rate of 0.50% of the Fund's average daily net assets.
The Fund incurs various other expenses in its operations and, for the fiscal
year ended November 30, 1994, the Fund's total expenses for its Class C shares,
stated as a percentage of average net assets, was 0.65%.
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
wholly owned
11
<PAGE>
by PW Group, the sponsor of the PW SIP and a publicly owned financial services
holding company. At February 28, 1995, Mitchell Hutchins was adviser or sub-ad-
viser to 42 investment companies with 77 separate portfolios and aggregate as-
sets of over $26.8 billion.
Nirmal Singh and Craig M. Varrelman have been responsible for the day-to-day
management of U.S. Government Income 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 portfolio management team responsible for managing several diver-
sified funds, including mortgage-backed securities funds with assets totaling
approximately $8 billion. From 1990 to 1993, Mr. Singh was a senior portfolio
manager at Nomura Mortgage Fund Management Corporation, where he was responsi-
ble 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 portfolio manager since 1988 and manages fixed in-
come portfolios with assets totaling approximately $1.5 billion, with an empha-
sis on U.S. government securities.
Other members of Mitchell Hutchins domestic fixed income group provide input
on market outlook, interest rate factors and other considerations pertaining to
fixed income investment.
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.
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 a Fund investment as a steady compound an-
nual rate of return. Actual year-by-year returns fluctuate and may be higher or
lower than standardized return. 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 than those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.
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 net asset value per share at the end of the pe-
riod. Yield computations differ from other accounting methods and therefore may
differ from dividends actually paid or reported net income.
The Fund also may use yield and standardized return and, in conjunction
therewith, non-standardized return, of its Class A shares, Class B shares and
Class D shares in performance advertisements. Advertised returns for one Class
of the Fund's shares may include periods during which that Class was outstand-
ing but others were not. Yields and standardized returns of the other Classes
of Fund shares will reflect the higher ongoing expenses attributable to those
Classes, as well as deduction of the initial or contingent deferred sales
charge.
12
<PAGE>
Non-standardized return of Class A or Class B shares does not reflect initial
or contingent deferred sales charges and would be lower if such charges were
included.
Yield and total return information reflects past performance and does not
necessarily indicate future results. Investment return and principal values
will fluctuate, and proceeds upon redemption may be more or less than a share-
holder'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. Shares of six series, including the Fund, have been autho-
rized.
The outstanding shares of beneficial interest of the Fund are divided into
four classes, designated Class A, Class B, Class C and Class D shares. Each
Class represents interests in the same assets of the Fund. The Classes differ
as follows: (1) Class A, Class B and Class D shares, unlike Class C shares,
bear certain fees under plans of distribution and have exclusive voting rights
on matters pertaining to those plans; (2) Class A shares are subject to an ini-
tial sales charge; (3) Class B shares bear ongoing distribution fees, are sub-
ject to a contingent deferred sales charge upon certain redemptions and will
automatically convert to Class A shares approximately six years after issuance;
(4) Class D shares are subject to neither an initial nor a contingent deferred
sales charge, bear ongoing distribution fees and do not convert into another
Class; (5) Class C shares are subject to neither an initial or contingent de-
ferred sales charge nor ongoing service or distribution fees; and (6) each
Class may bear differing amounts of certain Class-specific expenses. The board
of trustees of the Trust does not anticipate that there will be any conflicts
among the interests of the holders of the different Classes of Fund shares. On
an ongoing basis, the board will consider whether any such conflict exists and,
if so, take appropriate 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 of the Trust 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 share-
holders for the purpose of voting upon the question of removal of any trustee
when so requested in writing by the shareholders of record holding at least 10%
of the Trust's outstanding shares. Each share of the Fund has equal voting
rights, except as noted above. Each share of the Fund is entitled to partici-
pate equally in dividends and other distributions and the proceeds of any liq-
uidation except that, due to the differing expenses borne by the four Classes,
these dividends and proceeds are likely to be lower for the other Classes than
for the Class C shares.
To avoid additional operating costs and for investor convenience, share cer-
tificates are not issued. Ownership of shares of the Fund is recorded on a
stock register by the Transfer Agent and shareholders have the same rights of
ownership with respect to such shares as if certificates had been issued.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, One Heri-
tage Drive, North Quincy, Massachusetts 02171 is custodian of the Fund's as-
sets. PFPC Inc., a
13
<PAGE>
subsidiary of PNC Bank, National Association, whose principal business address
is 103 Bellevue Parkway, Wilmington, Delaware 19809, is the Fund's transfer and
dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. The PW SIP receives confirmations of purchases
and redemptions of shares of the Fund and quarterly statements from the Trans-
fer Agent. The PW SIP also receives audited annual and unaudited semi-annual
financial statements of the Fund. PW SIP participants receive periodic informa-
tion, including quarterly statements, about their plan participation from the
PW SIP plan administrator.
14
<PAGE>
APPENDIX A
MORTGAGE-BACKED SECURITIES
The U.S. government securities in which the Fund may invest include mortgage-
backed securities issued or guaranteed by Ginnie Mae, the Fannie Mae or the
Freddie Mac. Other mortgage-backed securities in which the Fund may invest will
be issued by Private Mortgage Lenders. Such private mortgage-backed securities
may be supported by pools of mortgage loans or other mortgage-backed securities
that are guaranteed, directly or indirectly, by the U.S. government or one of
its agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-govern-
ment credit enhancement. 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. Similarly, the Fund may invest in mortgage-backed securities issued
by new or existing governmental or private issuers other than those identified
herein.
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 residen-
tial mortgage loans. These securities are designed to provide monthly payments
of interest and principal to the investor. Timely payment of interest and prin-
cipal is backed by the full faith and credit of the U.S. government. Each mort-
gagor'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 char-
acteristics of the mortgage instruments are generally uniform within a pool but
may vary among pools. Lending 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 insured or uninsured residential mortgage loans (sometimes re-
ferred to as "conventional mortgage loans" or "conventional loans") through its
mortgage purchase and mortgage-backed securities sales activities. Fannie Mae
issues guaranteed mortgage pass-through certificates ("Fannie Mae certifi-
cates"), 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 par-
ticipation certificates ("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 interest on PCs and the ultimate payment of principal, but
it also has a PC program under which it guarantees timely pay-
A-1
<PAGE>
ment of both principal and interest. GMCs also represent a pro rata interest in
a pool of mortgages. These instruments, 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 obligations ("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 securities
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
guaranteed by an entity having the credit standing of Ginnie Mae, Fannie Mae and
Freddie Mac, they normally are structured with one or more types of credit
enhancement. 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 either a conservator or receiver for such asso-
ciations, or it acquires such assets in its corporate capacity. These assets
include, among other things, single family and multifamily mortgage loans, as
well as commercial mortgage loans. In order to dispose of such assets in an or-
derly manner, RTC has established a vehicle registered with the SEC through
which it sells mortgage-backed securities. RTC mortgage-backed securities rep-
resent pro rata interests in pools of mortgage loans that RTC holds or has ac-
quired, 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 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 government enti-
ties such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-through secu-
rities are interests in trusts that are comprised of Mortgage Assets and that
have multiple classes similar to those in CMOs. Unless the context indicates
otherwise, references herein to CMOs include multi-class mortgage pass-through
securities. Payments of principal of 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 distributions 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
A-2
<PAGE>
are applied to the classes of a CMO in the order of their respective stated ma-
turities or final distribution dates so that no payment of principal will be
made on any class of the CMO until all other classes having an earlier stated
maturity or final distribution date have been paid in full. In some CMO struc-
tures, 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.
ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES. ARM mortgage-backed securi-
ties 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 supported by pools comprised of fixed-rate
mortgage loans. 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 fluc-
tuations than the values of fixed-rate securities.
TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors on
Mortgage Assets to make payments, mortgage-backed securities may contain ele-
ments of credit enhancement. Such credit enhancement falls into two categories;
(1) liquidity protection and (2) protection against losses resulting after de-
fault by an obligor on the underlying assets and collection of all amounts re-
coverable directly from the obligor and through liquidation of the collateral.
Liquidity protection refers to the provision of advances, generally by the en-
tity administering the pool of assets (usually the bank, savings association or
mortgage banker that transferred the underlying loans to the issuer of the se-
curity), to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting after default and liq-
uidation ensures ultimate payment of the obligations on at least a portion of
the assets in the pool. Such protection may be provided through guarantees, in-
surance 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 in-
crease 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 principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held in re-
serve against future losses) and "over-collateralization"
A-3
<PAGE>
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed that required to make payment of the securities and pay any ser-
vicing or other fees). The degree of credit enhancement provided for each issue
generally is based on historical information regarding the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated could adversely affect the return on an investment in such a secu-
rity.
A-4
<PAGE>
APPENDIX B
THE FUND MAY USE THE FOLLOWING INSTRUMENTS:
Options on Debt Securities. A call option is a short-term contract pursuant
to which the purchaser of the option, in return for a premium, has the right to
buy the security underlying the option at a specified price at any time during
the term of the option. The writer of the call option, who receives the premi-
um, has the obligation, upon exercise of the option during the option term, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premi-
um, the right to sell the underlying security at a specified price during the
option term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the un-
derlying security at the exercise price.
Options on Indices of Debt Securities. An index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more tradi-
tional options except that exercises of index options are effected with cash
payment and do not involve delivery of securities. Thus, upon exercise of an
index option, the purchaser will realize, and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
index.
Interest Rate Futures Contracts. An interest rate futures contract is a bi-
lateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of debt security called
for in the contract at a specified future time and at a specified price. Al-
though interest rate futures contracts by their terms call for actual delivery
or acceptance of debt securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery.
Options on Futures Contracts. Options on futures contracts are similar to op-
tions on securities, except that an option on a futures contract gives the pur-
chaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a spec-
ified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be accom-
panied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Fund Expenses............................................................... 2
Financial Highlights........................................................ 3
Investment Objective and Policies........................................... 4
Purchases and Redemptions................................................... 10
Dividends and Taxes......................................................... 10
Valuation of Shares......................................................... 11
Management.................................................................. 11
Performance Information..................................................... 12
General Information......................................................... 13
Appendix A.................................................................. A-1
Appendix B.................................................................. B-1
</TABLE>
[Logo of Recycled Paper]
(C)1995 PaineWebber Incorporated
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
Class C Shares
PROSPECTUS
April 1, 1995
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
CLASS C SHARES
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber U.S. Government Income Fund ("Fund") is a diversified series of
PaineWebber Managed Investments Trust ("Trust"), a professionally managed
mutual fund. The Fund seeks to provide high current income consistent with the
preservation of capital and liquidity and invests primarily in U.S. government
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 exclusive dealer
for the sale of Fund shares. The Class C shares described in this Statement of
Additional Information are currently offered for sale only to the trustee of
the PaineWebber Savings Investment Plan acting on behalf of that Plan. 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 contacting the PaineWebber Incorporated
Benefits Department, 1000 Harbor Boulevard, 10th Floor, Weehawken, New Jersey
07087 or by calling 1-201-902-4444. 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 investment policies and limitations of the Fund.
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 ("NRSROs") are private services that provide ratings of
the credit quality of mortgage- and asset- 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 -and asset-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
<PAGE>
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.
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 indicates. The rating assigned to a security by a
NRSRO 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.
In addition to ratings assigned to individual bond issues, 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- and asset-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 bonds, both within a particular classification and between classifications.
An issuer's obligations under its 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 on their bonds.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The yield characteristics of mortgage- and asset-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. 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. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are less likely to
experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage- and asset-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.
2
<PAGE>
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, 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.
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 accurately the average life of a particular pool. In the
past, a common industry practice has been 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.
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 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 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
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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, 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 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.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased over-the-counter ("OTC")
options, 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. The assets
used as cover for OTC options written by the Fund will be considered illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC option it writes at a maximum price to be calculated by
a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. 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
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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
institutional buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities, and the Fund might be unable to dispose of such
securities promptly or at reasonable prices.
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 offers 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 purchases securities from a bank or recognized securities dealer and
simultaneously commits 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 maintains
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 is, in effect, secured by such securities. If the value of these securities
is less than the repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral so that at all
times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the securities and the price that was paid by the
Fund upon their acquisition is accrued as interest and included in the Fund's
net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, 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 intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimum credit risks in accordance with guidelines
established by the Trust's board of trustees. Mitchell Hutchins reviews and
monitors the creditworthiness of those institutions under the board's general
supervision.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus, the
Fund may purchase securities on a "when-issued" or delayed delivery basis. A
security purchased on a when-issued or delayed delivery basis is recorded as an
asset on the commitment date and is subject to changes in market value
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When the Fund agrees to purchase securities on a
when-issued 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 it has no intention of doing so
during the coming year, 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 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. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and 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, As
described below under "Hedging and Related Income Strategies," segregated
accounts may also be required in connection with certain transactions involving
options or futures contracts or interest rate protection 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%
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of its 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 and
asset-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, except that investments in
Government National Mortgage Association certificates and other debt securities
secured by real estate or real estate interests are not subject to this
limitation; (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 interest rate futures
contracts and options thereon; (8) invest in oil, gas or mineral exploration or
development programs, 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;
(10) make loans, except through repurchase agreements and except in connection
with the loan of securities as described herein; provided that for purposes of
this restriction the acquisition of bonds or other debt obligations shall not
be deemed to be the making of a loan; or (11) hold more than 10% of the
outstanding voting securities of any issuer.
The foregoing fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares of the Fund present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
The following investment restrictions may be changed by the vote of the
Trust's board of trustees without shareholder approval. The Fund may not (1)
purchase any security if as a result more than 5% of the value 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;
(2) invest more than 10% 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; (3) make investments in warrants, if such investments,
valued at the lower of cost or market, exceed 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; or (4) invest more than 35% of its total assets in debt securities
rated Ba or lower by Moody's, BB or lower by S&P, comparably rated by another
NRSRO or determined by Mitchell Hutchins to be of comparable quality. This non-
fundamental policy (4) can be changed only upon 30 days' advance notice to
shareholders.
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If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the Fund's investment limitations, restrictions or
investment policies.
The Fund will continue to interpret fundamental investment limitation (5) to
prohibit investment in real estate limited partnerships.
HEDGING AND RELATED INCOME STRATEGIES
GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins may use a variety of financial instruments ("Hedging
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures") and options on futures contracts, to attempt to hedge the
Fund's portfolio and to enhance income. Mitchell Hutchins also may attempt to
hedge the Fund's portfolio through the use of interest rate protection
transactions. The particular Hedging Instruments are described in Appendix B to
the Prospectus.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example,
the Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in
the value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on
a security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
The Fund may purchase and write (sell) covered straddles on securities or
indices of debt securities. A long straddle is a combination of a call and a
put option purchased on the same security or on the same futures contract,
where the exercise price of the put is less than or equal to the exercise price
of the call. The Fund might enter into a long straddle when Mitchell Hutchins
believes it likely that interest rates will be more volatile during the term of
the option than the
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option pricing implies. A short straddle is a combination of a call and a put
written on the same security where the exercise price of the put is less than
or equal to the exercise price of the call. The Fund might enter into a short
straddle when Mitchell Hutchins believes it unlikely that interest rates will
be as volatile during the term of the option as the option pricing implies.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
Securities and Exchange Commission ("SEC"), the several options and futures
exchanges upon which they are traded, the Commodity Futures Trading Commission
("CFTC") and various state regulatory authorities. In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Fund's investment objective and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities markets, which
requires different skills than predicting changes in the prices of individual
securities. While Mitchell Hutchins is experienced in the use of Hedging
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However,
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hedging strategies can also reduce opportunity for gain by offsetting the
positive effect of favorable price movements in the hedged investments. For
example, if the Fund entered into a short hedge because Mitchell Hutchins
projected a decline in the price of a security in the Fund's portfolio, and the
price of that security increased instead, the gain from that increase might be
wholly or partially offset by a decline in the price of the Hedging Instrument.
Moreover, if the price of the Hedging Instrument declined by more than the
increase in the price of the security, the Fund could suffer a loss. In either
such case, the Fund would have been in a better position had it not hedged at
all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of a contra party to enter into a transaction closing
out the position. Therefore, there is no assurance that any hedging position
can be closed out at a time and price that is favorable to the Fund.
COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose the Fund to an obligation to another party. The
Fund will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts or (2) cash, receivables and short-term liquid debt securities, with
a value sufficient at all times to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for hedging transactions and will, if the guidelines
so require, set aside cash, U.S. government securities or other liquid, high-
grade debt securities in a segregated account with its custodian in the
prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Fund may purchase put and call options, and write (sell) covered
put and call options, on debt securities in which it is authorized to invest.
The purchase of call options serves as a long hedge, and the purchase of put
options serves as a short hedge. Writing covered put or call options can enable
the Fund to enhance income by reason of the premiums paid by the purchasers of
such options. In addition, writing covered put options serves as a limited long
hedge because increases in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options serves as a limited
short hedge,
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because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it
can be expected that the option will be exercised and the Fund will be
obligated to sell the security at less than its market value. The securities or
other assets used as cover for OTC options written by a Fund would be
considered illiquid to the extent described under "Investment Policies and
Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Generally, OTC options on debt securities are European-style options.
This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option. Options
that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, the
Fund may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options. Exchange
markets for options on debt securities exist but are relatively new, and these
instruments are primarily traded on the OTC market. Exchange-traded options in
the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed which, in effect, guarantees completion
of every exchange-traded option transaction. In contrast, OTC options are
contracts between the Fund and its contra party (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when the Fund purchases
or writes an OTC option, it relies on the contra party to make or take delivery
of the underlying investment upon exercise of the option. Failure by the contra
party to do so would result in the loss of any premium paid by the Fund as well
as the loss of any expected benefit of the transaction. The Fund will enter
into OTC option transactions only with contra parties that have a net worth of
at least $20 million.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.
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If the Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
The Fund may purchase and write put and call options on indices of debt
securities in much the same manner as the more traditional options discussed
above, except the index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
GUIDELINES FOR OPTIONS. The Fund's use of options is governed by the
following guidelines which can be changed by the Trust's board of trustees
without shareholder vote:
1. The Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the
premiums on all other options purchased by the Fund, does not exceed 5% of
the Fund's total assets.
2. The aggregate value of securities underlying put options written by
the Fund, determined as of the date the put options are written, will not
exceed 50% of the Fund's net assets.
3. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by the Fund that are held at any time will not exceed 20% of the
Fund's net assets.
FUTURES. The Fund may purchase and sell interest rate futures contracts. The
Fund may also purchase put and call options, and write covered put and call
options, on futures in which it is allowed to invest. The purchase of futures
or call options thereon can serve as a long hedge, and the sale of futures or
the purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered call options
on securities or indices.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of the Fund, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If Mitchell Hutchins wishes to
lengthen the average duration of the Fund, the Fund may buy a futures contract
or a call option thereon or sell a put option thereon.
The Fund may also write put options on interest rate futures contracts while
at the same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. The Fund will engage in this
strategy only when it is more advantageous to the Fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of
12
<PAGE>
the futures broker through whom the transaction was effected, "initial margin"
consisting of cash, U.S. government securities or other liquid, high-grade debt
securities, in an amount generally equal to 10% or less of the contract value.
Margin must also be deposited when writing a call option on a futures contract,
in accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the future position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If the Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there
can be no assurance that such a market will exist for a particular contract at
a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or options position due to the
absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to market
risk with respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to
13
<PAGE>
further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets, there might be increased participation by speculators
in the futures markets. This participation also might cause temporary price
distortions. In addition, activities of large traders in both the futures and
securities markets involving arbitrage, "program trading" and other investment
strategies might result in temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS. The Fund's use of futures and
related options is governed by the following guidelines which can be changed by
the Trust's board of trustees without shareholder vote:
1. To the extent the Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed
5% of the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by a Fund that are held at any time will not exceed 20% of the
Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's total
assets.
INTEREST RATE PROTECTION TRANSACTIONS
The Fund may enter into interest rate protection transactions, including
interest rate swaps and interest rate caps, collars and floors. Interest rate
swap transactions involve an agreement between two parties to exchange payments
that are based, respectively, on variable and fixed rates of interest and that
are calculated on the basis of a specified amount of principal (the "notional
principal amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an agreement between two parties in
which payments are made when a designated market interest rate either goes
above a designated ceiling level or goes below a designated floor on
predetermined dates or during a specified time period. The Fund intends to use
these transactions as a hedge and not as a speculative investment. Interest
rate protection transactions are subject to risks comparable to those described
above with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these interest rate protection transactions are
entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, Mitchell
14
<PAGE>
Hutchins and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and appropriate Fund assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account as described above in "Investment Policies and
Restrictions--Segregated Accounts." The Fund also will establish and maintain
such segregated accounts with respect to its total obligations under any
interest rate swaps that are not entered into on a net basis and with respect
to any interest rate caps, collars and floors that are written by the Fund.
The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly they are less liquid than swaps.
15
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their business addresses
and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Trustee and Chairman of Mr. Bewkes is a director of Paine
68** the Board of Trustees Webber Group Inc. ("PW Group")
(holding company of PaineWebber and
Mitchell Hutchins) and a consultant
to PW Group. Prior to 1988, he was
chairman of the board, president
and chief executive officer of
American Bakeries Company. Mr.
Bewkes is also a director of Inter-
state Bakeries Corporation and
NaPro BioTherapeutics, Inc. and a
director or trustee of 26 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
Meyer Feldberg; 52 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc., Federated Department
Stores, Inc., Inco Homes Corpora-
tion and New World Communications
Group Incorporated and is a direc-
tor or trustee of 18 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
an investment adviser.
George W. Gowen Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is also a
director of Columbia Real Estate
Investments, Inc. and a director or
trustee of 16 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Paul B. Guenther; 54** Trustee and President Mr. Guenther is president and a di-
rector of PW Group and a director
of PaineWebber and Mitchell
Hutchins. Mr. Guenther is also
president of 26, and director or
trustee of 17, other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Frederic V. Malek; 58 Trustee Mr. Malek is chairman of Thayer Cap-
901 15th Street, N.W. ital Partners (investment bank) and
Suite 300 a co-chairman and director of CB
Washington, D.C. 20005 Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 1992, he was campaign manager
of Bush-Quayle '92. From 1990 to
1992, he was vice chairman and,
from 1989 to 1990, he was president
of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.)
Prior to 1989, he was employed by
the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is
also a director of American Manage-
ment Systems, Inc., Automatic Data
Processing, Inc., Avis, Inc., FPL
Group, Inc., ICF International,
Manor Care, Inc., National Educa-
tion Corporation and Northwest Air-
lines Inc. and a director or
trustee of 16 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Frank P. L. Minard; 49** Trustee Mr. Minard is chairman of the board
of Mitchell Hutchins, chairman of
the board of Mitchell Hutchins In-
stitutional 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 Oppen-
heimer Capital 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
59 Affairs Television, Inc., an educa-
Public Affairs Televi- tional consultant and a home econo-
sion mist. Mrs. Moyers is also a direc-
356 W. 58th Street tor of Ogden Corporation and a di-
New York, New York 10019 rector or trustee of 16 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
Thomas F. Murray; 84 Trustee Mr. Murray is a real estate and fi-
400 Park Avenue nancial consultant. Mr. Murray is
New York, New York 10022 also a director and chairman of
American Continental Properties,
Inc., a trustee of Prudential Re-
alty Trust and a director or
trustee of 16 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS*; BUSINESS EXPERIENCE;
AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ------------------ ------------------- --------------------
<S> <C> <C>
Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president
and manager--advisory administra-
tion of Mitchell Hutchins. Prior to
November 1993, she was compliance
manager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993, Ms.
Boyle was vice president and manag-
er--legal administration of Mitchell
Hutchins. Ms. Boyle is also vice
president of 39 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Joan L. Cohen; 30 Vice President and Ms. Cohen is a vice president and
Assistant Secretary attorney 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 Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ellen R. Harris; 48 Vice President Ms. Harris is a managing director of
Mitchell Hutchins. Ms. Harris is
also a vice president of 19 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment 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.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Thomas J. Libassi; 36 Vice President Mr. Libassi is a senior vice presi-
dent of Mitchell Hutchins. Prior
to May 1994, he was a vice
president of Keystone Custodian
Funds Inc. with portfolio
management responsibility. Mr.
Libassi is also a vice president
of two other investment companies
for which Mitchell Hutchins 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 treasurer of 39 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 42 Vice President and Ms. O'Donnell is a senior vice
Secretary president 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.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing
44 director 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, Hoffman &
Goodman. Ms. Schonfeld is also a
vice president of 39 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
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 pres-
ident at BlackRock Financial Man-
agement, 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
adviser.
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
fundraising director for a U.S.
Senate campaign. Prior to September
1991, she was a tax manager with
Arthur Andersen & Co. Ms. Slezak is
also a vice president and assistant
treasurer of 39 other investment
companies 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>
21
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- ----------------- ------------------- --------------------
<S> <C> <C>
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president
Assistant Secretary and 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 assistant 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, Guenther 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, Mitchell Hutchins and/or PaineWebber.
22
<PAGE>
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
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 PaineWebber and Mitchell Hutchins perform substantially all of
the services necessary for the operation of the Trust and the Fund, 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>
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
AGGREGATE BENEFITS ANNUAL FROM THE
COMPENSATION ACCRUED AS PART BENEFITS TRUST AND THE
FROM THE OF THE TRUST'S UPON TRUST
NAME OF PERSON, POSITION TRUST(degrees) EXPENSES RETIREMENT COMPLEX+
- ------------------------ -------------- --------------- ---------- -------------
<S> <C> <C> <C> <C>
E. Garret 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
Paul B. Guenther,
Trustee and President.. -- -- -- --
Frederick 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>
- --------
(degrees) Represents fees paid to each trustee during the fiscal year ended
November 30, 1994.
+ Represents total compensation paid to each trustee during the year ended
December 31, 1994.
23
<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 21, 1988 ("Advisory Contract"). Under the Advisory Contract, the
Trust pays Mitchell Hutchins an annual fee, computed daily and paid monthly, at
the rate of 0.50% of the Fund's average daily net assets. During the fiscal
years ended November 30, 1994, November 30, 1993 and November 30, 1992,
respectively, the Trust paid (or accrued) to Mitchell Hutchins investment
advisory and administrative fees of $3,958,127, $4,999,240 and $4,192,907 with
respect to the Fund.
Under a service agreement pursuant to which PaineWebber provides certain
services to the Fund not otherwise provided by the Fund's transfer agent, which
agreement is reviewed by the Trust's board of trustees annually, during the
fiscal years ended November 30, 1994, November 30, 1993 and November 30, 1992,
PaineWebber earned fees under the service agreement in the approximate amounts
of $196,490, $217,612 and $196,379, respectively, for the Fund.
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging
to a particular series of the Trust are allocated among the series of the Trust
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.
24
<PAGE>
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 $100 million. Certain expenses, such as brokerage
commissions, taxes, interest, distribution fees and extraordinary items, are
excluded from this limitation. For the fiscal years ended November 30, 1994,
November 30, 1993 and November 30, 1992, no reimbursements were required
pursuant to such limitations.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or
the Fund in connection with the performance of the Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically with respect to the Fund upon assignment and is
terminable at any time without penalty by the Trust's board of trustees or by
vote of the holders of a majority of the Fund's outstanding voting securities
on 60 days' written notice to Mitchell Hutchins or by Mitchell Hutchins on 60
days' written notice to the Trust.
The following table shows the approximate net assets as of February 28, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ 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 mutual funds and other Mitchell Hutchins
advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
shares of the Fund under a distribution contract with the Trust dated July 1,
1991 ("Distribution Contract") that
25
<PAGE>
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the Fund. Shares of the Fund are offered
continuously. Under an exclusive dealer contract between Mitchell Hutchins and
PaineWebber dated July 1, 1991 ("Exclusive Dealer Contract"), PaineWebber sells
the Fund's Class C shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of trustees, 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. Generally, bonds are traded on the
OTC market on a "net" basis without a stated commission through dealers acting
for their own account and not as brokers. Prices paid to dealers in principal
transactions generally include a "spread," which is the difference between the
prices at which the dealer is willing to purchase and sell a specific security
at that time. During the fiscal years ended November 30, 1994, November 30,
1993 and November 30, 1992, the Fund paid approximately $0, $0 and $3,906,
respectively, in 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 to retain compensation
in connection with such transactions. Any such transactions will be effected
and related compensation paid in accordance with applicable SEC regulations.
During the fiscal years ended November 30, 1994, November 30, 1993 and November
30, 1992, the Fund did not pay any brokerage commissions to PaineWebber or any
other affiliates of Mitchell Hutchins.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Fund's transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
Consistent with the interests of the Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase and
sell portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services. 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 that 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
26
<PAGE>
reasonable in relation to the benefits to the Fund over the long term. During
the fiscal year ended November 30, 1994, the Fund directed no portfolio
transactions to brokers chosen because they provided research services. 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 equity and debt securities in return for
research and execution services. These transactions are entered into only in
compliance with procedures ensuring that the transaction (including
commissions) is at least as favorable as it would have been if effected
directly with a market-maker that did not provide research or execution
services. These procedures include Mitchell Hutchins receiving multiple quotes
from dealers before executing the transaction on an agency basis.
Research services furnished by dealers or brokers with or through which the
Fund effects securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts and, conversely, research services furnished
to Mitchell Hutchins by dealers or brokers in connection with other funds or
accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in advising
the Fund. Information and research received from such brokers or dealers will
be in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Advisory Contract.
Investment decisions for the Fund and other investment accounts managed by
Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s)
as to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
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 commission or spread paid in
connection with such a purchase be reasonable and fair, that 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 Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales and purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the
27
<PAGE>
time of acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. During the fiscal years ended
November 30, 1994 and November 30, 1993, respectively, the Fund's portfolio
turnover rates were 358.07% and 83.13%. The increase in the Fund's portfolio
turnover rate during the fiscal year ended November 30, 1994 from the portfolio
turnover rate of the prior fiscal year is due largely to the Fund's use of
dollar rolls.
VALUATION OF SHARES
The Fund determines the 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 NYSE 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
based upon appraisals received from a pricing service using a computerized
matrix system or based upon appraisals 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 to maturity unless
the Trust's board of trustees determines that this does not represent fair
value. All other securities or assets will be valued at fair value as
determined in good faith by or under the direction of the Trust's board of
trustees.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is 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 made
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
28
<PAGE>
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 4% sales charge is deducted
from the initial payment and for Class B shares, the applicable contingent
deferred sales charge imposed on a redemption of shares held for the period is
deducted. No deductions are required in calculating the ending redeemable value
for Class C shares because Class C shares are subject to no sales charges. 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. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of these charges
would reduce the return for the Class A and Class B shares.
Both Standardized and Non-Standardized Return for Class B shares for periods
of over six years will reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B,
Class C and Class D shares of the Fund for the periods indicated. All returns
for periods of more than one year are expressed as an annualized average
return:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal Year Ended November 30, 1994:
Standardized Return*................... (13.25)% (15.31)% (9.37)% (10.08)%
Non-Standardized Return................ (9.62)% (10.31)% (9.37)% (10.08)%
Five Years Ended November 30, 1994:
Standardized Return*................... 4.38 % NA NA NA
Non-Standardized Return................ 5.25 % NA NA NA
Ten Years Ended November 30, 1994:
Standardized Return*................... 7.28 % NA NA NA
Non-Standardized Return................ 7.72 % NA NA NA
Inception** to November 30, 1994:
Standardized Return*................... 7.59 % 2.05 % 2.43 % (1.43)%
Non-Standardized Return................ 8.02 % 2.60 % 2.43 % (1.43)%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for
Class B shares reflect deduction of the applicable contingent deferred sales
charge imposed on a redemption of shares held for the period. Class C and
Class D shares do not impose an initial or a contingent deferred sales
charge; therefore, Non-Standardized Return is identical to Standardized
Return. Until January 28, 1991, the maximum sales charge imposed on
purchases of Fund shares was 4.25%. This higher sales charge is not
reflected in the Standardized Return set forth above.
** The inception date for each Class of the Fund's shares is as follows: Class
A--August 31, 1984, Class B--July 1, 1991, Class C--September 11, 1991 and
Class D--July 2, 1992.
29
<PAGE>
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 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 semi-
annual 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 B, Class
C and Class D shares) at the end of the Period. Yield quotations are calculated
according to the following formula:
YIELD = 2[(a-b + 1) to the 6th power -1]
---
cd
<TABLE>
<C> <S>
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 dividends
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 B,
Class C and Class D shares) on the last day of the Period.
</TABLE>
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 4% initial sales charge on Class A
shares is included. The yields of the Fund's Class A, Class B, Class C and
Class D shares for the 30-day period ended November 30, 1994 were 6.22%, 5.70%,
6.80% and 5.97%, respectively.
OTHER INFORMATION. In Performance Advertisements the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper") for U.S. government funds, 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, Shearson Lehman
Bond Index, Shearson Lehman Government/Corporate Bond Index, the Standard &
Poor's 500 Composite Stock Price Index, the
30
<PAGE>
Dow Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. Such companies 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 market for mortgage-backed securities, such
as those published by the Federal Reserve Bank, the Office of Thrift
Supervision, Ginnie Mae, Fannie Mae and Freddie Mac and the Lehman 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, BARRONS, FORTUNE, THE NEW YORK TIMES, THE
CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in
Performance Advertisements may be in graphic form.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and 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's performance to CD performance, investors
should keep in mind that bank CDs are insured in whole or in part by an agency
of the U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon and net asset
value will fluctuate. The securities held by the Fund generally have longer
maturities than most CDs and may reflect interest rate fluctuations for longer
term securities. 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 (including gains from
31
<PAGE>
options or futures) derived with respect to its business of investing in
securities ("Income Requirement"); (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities, options or futures 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 that are limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets; and (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 October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January.
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 that year and capital gain net income for the
one-year period ending on November 30 of that year, plus certain other amounts.
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains
and losses the Fund realizes in connection therewith by the Fund. Income from
transactions in options and futures derived by the Fund with respect to its
business of investing in securities will qualify as permissible income under
the Income Requirement. However, income from the disposition of options and
futures will be subject to the Short-Short Limitation if they are held for less
than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
The Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As the holder of such securities, the Fund would have
to include in its gross income the OID that accrues on the securities during
the taxable year, even if the Fund receives no corresponding payment on the
securities during the year. The Fund has elected similar treatment with respect
to securities purchased at a discount from their face value ("market
discount"). Because the Fund annually must distribute substantially all of its
investment company taxable income, including any accrued OID and market
discount to satisfy the Distribution Requirement, the Fund may be required in a
particular year to distribute as a dividend an amount that is greater than the
32
<PAGE>
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, or certain options or futures, 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 April 1, 1991, the name of
the Fund was U.S. Government Portfolio (GNMA Portfolio prior to July 1, 1990).
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Prior to February 26, 1992, the Trust's name was PaineWebber Fixed
Income Portfolios. 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 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.
COUNSEL. The law firm of Kirkpatrick & Lockhart, 1800 M Street, NW,
Washington, DC 20036-5891, counsel to the Fund, has passed upon the legality of
the shares offered by the Prospectus. Kirkpatrick & Lockhart also acts as
counsel to Mitchell Hutchins and PaineWebber in connection with other matters.
INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, serves as independent auditors for the Trust.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended 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 relating to the Fund are incorporated by
reference in this Statement of Additional Information.
33
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 1
Hedging and Related Income Strategies...................................... 8
Trustees and Officers...................................................... 16
Investment Advisory and Distribution Arrangements.......................... 24
Portfolio Transactions..................................................... 26
Valuation of Shares........................................................ 28
Performance Information.................................................... 28
Taxes...................................................................... 31
Other Information.......................................................... 33
Financial Statements....................................................... 33
</TABLE>
[LOGO RECYCLED PAPER]
(C)1995 PAINEWEBBER INCORPORATED
PaineWebber
U.S. Government
Income Fund
Class C Shares
- --------------------------------------------------------------------------------
Statement of Additional Information
April 1, 1995
- --------------------------------------------------------------------------------
