<PAGE>
As filed with the Securities and Exchange Commission on March 24, 1995
1933 Act Registration No. 2-91362
1940 Act Registration No. 811-4040
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
-----
Pre-Effective Amendment No. [ ]
----- -----
Post-Effective Amendment No. 35 [ X ]
---- -----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
-----
Amendment No. 30
-----
(Check appropriate box or boxes.)
PAINEWEBBER MANAGED INVESTMENTS TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212)713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
LINDA L. RITTENHOUSE, Esq.
Kirkpatrick & Lockhart
South Lobby - 9th Floor
1800 M Street, N.W.
Washington, D.C. 20036-5891
Telephone: (202)778-9000
It is proposed that this filing will become effective:
____ Immediately upon filing pursuant to Rule 485(b)
__X_ On April 1, 1995 pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)(i)
____ On _____________, 1995 pursuant to Rule 485(a)(i)
____ 75 days after filing pursuant to Rule 485(a)(ii)
____ On _____________, 1995 pursuant to Rule 485(a)(ii)
Registrant has filed a declaration pursuant to Rule 24f-2 under
the Investment Company Act of 1940 and filed the notice required by such
Rule for its most recent fiscal year on January 25, 1995.
<PAGE>
PaineWebber Managed Investments Trust
Contents of Registration Statement
This registration statement consists of the following papers and
documents.
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
Class A, B and D shares of:
U.S. Government Income Fund
Investment Grade Income Fund
High Income Fund
----------------
Part A - Prospectus
Part B - Statement of Additional Information
U.S. Government Income Fund Class C
-----------------------------------
Part A - Prospectus
Part B - Statement of Additional Information
Part C- Other Information
Signature Page
Exhibits
<PAGE>
PaineWebber Managed Investments Trust:
Class A, B and D shares of:
U.S. Government Income Fund
Investment Grade Income Fund
High Income Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
<S> <C>
1. Cover Page.............. Cover Page
2. Synopsis................ Prospectus Summary
3. Condensed Financial Financial Highlights; Performance
Information............. Information
4. General Description of Prospectus Summary; Investment
Registrant.............. Objectives and Policies; General
Information
5. Management of the Fund.. Management; General Information
6. Capital Stock and other Cover Page; Conversion of Class B
Securities.............. Shares; Dividends and Taxes;
General Information
7. Purchase of Securities Being Purchases; Exchanges; Valuation of
Offered........... Shares; Other Services and
Information; Management
8. Redemption or Redemptions; Other Services and
Repurchase.............. Information
9. Legal Proceedings....... Not Applicable
<CAPTION>
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- ------------------------------
<S> <C>
10. Cover Page.............. Cover Page
11. Table of Contents....... Table of Contents.......
12. General Information and Other Information
History.............
13. Investment Objectives and Investment Policies and
Policies..... Restrictions; Hedging and Related
Income Strategies; Portfolio
Transactions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- ------------------------------
<S> <C>
14. Management of the Trustees and Officers
Registrant..............
15. Control Persons and Principal Trustees and Officers
Holders of
Securities..............
16. Investment Advisory and Other Investment Advisory and
Services.......... Distribution Arrangements; Other
Information
17. Brokerage Allocation.... Portfolio Transactions
18. Capital Stock and Other Conversion of Class B Shares;
Securities.............. Other Information
19. Purchase, Redemption and Reduced Sales Charges, Additional
Pricing of Securities Being Exchange and Redemption
Offered...... Information and Other Services;
Valuation of Shares
20. Tax Status.............. Taxes
21. Underwriters............ Investment Advisory and
Distribution Arrangements
22. Calculation of Performance Performance Information
Data....................
23. Financial Statements.... Financial Statements
</TABLE>
<PAGE>
PaineWebber Managed Investments Trust:
Class C shares of:
U.S. Government Income Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
--------------------------- ------------------
<S> <C>
1. Cover Page.............. Cover Page
2. Synopsis................ Fund Expenses
3. Condensed Financial Financial Highlights; Performance
Information............. Information
4. General Description of Investment Objective and Policies;
Registrant.............. General Information
5. Management of the Fund.. Management; General Information
6. Capital Stock and other Cover Page; Dividends and Taxes;
Securities.............. General Information
7. Purchase of Securities Purchases and Redemptions;
Being Offered........... Valuation of Shares; Management
8. Redemption or Purchases and Redemptions
Repurchase..............
9. Legal Proceedings....... Not Applicable
<CAPTION>
Part B Item No. Statement of Additional
and Caption Information Caption
---------------- -----------------------
<S> <C>
10. Cover Page.............. Cover Page
11. Table of Contents....... Table of Contents
12. General Information and Other Information
History.............
13. Investment Objectives and Investment Policies and
Policies............ Restrictions; Hedging and Related
Income Strategies; Portfolio
Transactions
14. Management of the Trustees and Officers
Registrant..............
15. Control Persons and Principal Trustees and Officers
Holders of
Securities..............
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part B Item No. Statement of Additional
and Caption Information Caption
---------------- -----------------------
<S> <C>
16. Investment Advisory and Other Investment Advisory and
Services.......... Distribution Arrangements; Other
Information
17. Brokerage Allocation.... Portfolio Transactions
18. Capital Stock and Other Other Information
Securities..............
19. Purchase, Redemption and Valuation of Shares
Pricing of Securities Being
Offered......
20. Tax Status.............. Taxes
21. Underwriters............ Investment Advisory and
Distribution Arrangements
22. Calculation of Performance Performance Information
Data....................
23. Financial Statements.... Financial Statements
</TABLE>
<PAGE>
------------------------------------------------------------------------
------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund
1285 Avenue of the Americas, New York, New York 10019
Prospectus -- April 1, 1995
-------------------------------------------------------------------------------
. Professional Management
. Portfolio Diversification
. Dividend and Capital Gain Reinvestment
. Flexible Pricing SM
. Low Minimum Investment
. Automatic Investment Plan
. Systematic Withdrawal Plan
. Exchange Privileges
. Suitable for Retirement Plans
These Funds are series of PaineWebber Managed Investments Trust ("Trust").
This Prospectus concisely sets forth information about the Funds a prospective
investor should know before investing. Please retain this Prospectus for fu-
ture reference.
PAINEWEBBER HIGH INCOME FUND INVESTS PREDOMINANTLY IN LOWER RATED BONDS, COM-
MONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH RESPECT TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS FUND.
A Statement of Additional Information dated April 1, 1995 (which is incorpo-
rated by reference herein) has been filed with the Securities and Exchange
Commission. The Statement of Additional Information can be obtained without
charge, and further inquiries can be made, by contacting the Funds, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
------------------------------------------------------------------------
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 REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
Prospectus Page 1
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Table of Contents
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Financial Highlights....................................................... 9
Flexible Pricing System.................................................... 16
Investment Objectives and Policies......................................... 17
Purchases.................................................................. 26
Exchanges.................................................................. 29
Redemptions................................................................ 30
Conversion of Class B Shares............................................... 31
Other Services and Information............................................. 32
Dividends and Taxes........................................................ 33
Valuation of Shares........................................................ 34
Management................................................................. 34
Performance Information.................................................... 36
General Information........................................................ 37
Appendix A................................................................. A-1
Appendix B................................................................. B-1
Appendix C................................................................. C-1
</TABLE>
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Prospectus Page 2
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Prospectus Summary
--------------------------------------------------------------------------------
See the body of the Prospectus for more information on the topics discussed
in this summary.
The Funds: This Prospectus describes three separate, diversified
series (each a "Fund") of an open-end management in-
vestment company. Each Fund has its own investment ob-
jective and policies.
Investment Objectives
and Policies:
PaineWebber U.S. High current income consistent with the preservation
Government Income of capital and liquidity; invests primarily in U.S.
Fund ("U.S. government securities.
Government Income
Fund")
PaineWebber
Investment Grade High current income consistent with the preservation
Income Fund of capital and liquidity; invests primarily in invest-
("Investment Grade ment grade corporate bonds and other fixed income se-
Income Fund") curities.
PaineWebber High
Income Fund ("High Highest level of current income available without un-
Income Fund") due risk; invests primarily in high risk, high yield-
ing medium and lower quality corporate bonds.
Total Net Assets at
February 28, 1995:
U.S. Government Investment Grade High Income
Income Fund Income Fund Fund
$564.1 million $383.0 million $611.3 million
Investment Adviser:
Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber" or "PW"), man-
ages over $41.5 billion in assets. See "Management."
Purchases: Shares of beneficial interest are available exclu-
sively through PaineWebber and its correspondent firms
for investors who are clients of PaineWebber or those
firms ("PaineWebber clients") and, for other invest-
ors, through PFPC Inc., the Funds' transfer agent
("Transfer Agent").
Flexible Pricing Investors may select Class A, Class B or Class D
System: shares, each with a public offering price that re-
flects different sales charges and expense levels. See
"Flexible Pricing System," "Purchases," "Redemptions"
and "Conversion of Class B Shares."
Class A Shares Offered at net asset value plus any applicable sales
charge (maximum is 4% of public offering price).
Class B Shares Offered at net asset value (a maximum contingent de-
ferred sales charge of 5% of redemption proceeds is
imposed on certain redemptions made within six years
of date of purchase). Class B shares automatically
convert into Class A shares (which pay lower ongoing
expenses) approximately six years after purchase.
-------------
Prospectus Page 3
<PAGE>
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----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Prospectus Summary
(Continued)
--------------------------------------------------------------------------------
Class D Shares Offered at net asset value without an initial or con-
tingent deferred sales charge. Class D shares pay
higher ongoing expenses than Class A shares and do not
convert into another Class.
Exchanges:
Shares may be exchanged for shares of the correspond-
ing Class of most PaineWebber and Mitchell
Hutchins/Kidder, Peabody ("MH/KP") mutual funds.
Redemptions: PaineWebber clients may redeem through PaineWebber;
other shareholders must redeem through the Transfer
Agent.
Dividends: Declared daily and paid monthly; net capital gain is
distributed annually. See "Dividends and Taxes."
Reinvestment: All dividends and capital gain distributions are paid
in Fund shares of the same Class at net asset value
unless the shareholder has requested cash.
Minimum Purchase: $1,000 for first purchase; $100 for subsequent pur-
chases.
Other Features:
Class A Shares Automatic investment plan Quantity discounts on initial
sales charge
Systematic withdrawal plan 365-day reinstatement privilege
Rights of accumulation
Class B Shares Automatic investment plan Systematic withdrawal plan
Class D Shares Automatic investment plan Systematic withdrawal plan
WHO SHOULD INVEST. Each Fund has its own suitability considerations and risk
factors, as summarized below and described in detail under "Investment
Objectives and Policies." While no single Fund is intended to provide a
complete or balanced investment program, each can serve as one component of an
investor's long-term program to accumulate assets for retirement, college
tuition or other major goals.
U.S. GOVERNMENT INCOME FUND. Investing primarily in U.S. government
securities, including U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies or instrumentalities and related
repurchase agreements, U.S. Government Income Fund is designed for investors
seeking high current income consistent with the preservation of capital and
liquidity.
INVESTMENT GRADE INCOME FUND. Investing in a diversified range of investment
grade bonds and other fixed income securities, Investment Grade Income Fund
is designed for investors seeking high current income consistent with the
preservation of capital and liquidity.
HIGH INCOME FUND. Investing in a diversified range of high risk, high yield
medium to lower quality bonds, High Income Fund is designed for investors
seeking the highest level of current income available without undue risk.
RISK FACTORS. There can be no assurance that any Fund will achieve its
investment objective, and each Fund's net asset value per share will vary
inversely with movements in interest rates. Mitchell Hutchins attempts to
reduce the risks associated with investments in debt securities through
diversification, credit analysis and attention to current trends in interest
rates and other factors. U.S. Government Income Fund normally concentrates at
least 25% of its total assets in mortgage- and asset-backed securities.
Investing in mortgage- and asset-backed securities involves special risks, such
as those relating to the prepayment of principal on the underlying obligations,
in addition to the risks
-------------
Prospectus Page 4
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Prospectus Summary
(Continued)
--------------------------------------------------------------------------------
present in the case of other types of debt securities. During 1994, the value
and liquidity of many mortgage-backed securities declined sharply due primarily
to increases in interest rates. There can be no assurance that such declines
will not recur. The market value of certain mortgage-backed securities in which
U.S. Government Income Fund and Investment Grade Income Fund may invest,
including interest-only and principal-only classes of mortgage-backed
securities and inverse floating rate securities, can be extremely volatile and
these securities may become illiquid. Certain investment grade debt securities
in which Investment Grade Income Fund and High Income Fund may invest have
speculative characteristics. Investment Grade Income Fund and High Income Fund
are permitted to purchase high risk, high yield debt securities rated lower
than investment grade by Moody's Investors Service, Inc. ("Moody's"), Standard
& Poor's Ratings Group ("S&P") or comparably rated by another nationally
recognized statistical rating organization ("NRSRO"), which may be subject to
greater risks of default and price fluctuation than investment grade securities
and are considered predominantly speculative. High risk, high yield securities
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. Investment Grade Income Fund and High Income Fund may invest in
U.S. dollar-denominated securities of foreign issuers the value of which is
linked to the value of foreign currencies. High Income Fund is permitted to
invest in securities of foreign issuers that are denominated and traded in
currencies other than the U.S. dollar. Foreign securities involve certain
considerations not typically associated with investing in securities of U.S.
issuers. These include risks relating to political, social and economic
developments abroad and to the differences between the regulations to which
U.S. and foreign issuers and markets are subject. The value of these
investments also can be adversely affected by fluctuations in foreign currency
values. Some foreign currencies can be volatile and may be subject to
governmental controls or intervention. The use of options, futures contracts
and interest rate protection transactions and (for U.S. Government Income Fund)
dollar rolls and reverse repurchase agreements also entails special risks.
-------------
Prospectus Page 5
<PAGE>
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Prospectus Summary
(Continued)
--------------------------------------------------------------------------------
EXPENSES OF INVESTING IN THE FUNDS. The following tables are intended to assist
investors in understanding the expenses associated with investing in each Fund.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares (as a per-
centage of public offering price)..................... 4% None None
Sales charge on reinvested dividends................... None None None
Exchange fee........................................... $5.00 $5.00 $5.00
Maximum contingent deferred sales charge (as a
percentage of redemption proceeds).................... None 5% None
</TABLE>
ANNUAL FUND OPERATING EXPENSES(2)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
U.S. GOVERNMENT INVESTMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
----------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees......... 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
12b-1 fees(3)........... 0.25 1.00 0.75 0.25 1.00 0.75 0.25 1.00 0.75
Other expenses.......... 0.20 0.22 0.20 0.22 0.22 0.20 0.16 0.14 0.13
---- ---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses............... 0.95% 1.72% 1.45% 0.97% 1.72% 1.45% 0.91% 1.64% 1.38%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
-------
(1) Sales charge waivers are available for Class A and Class B shares, reduced
sales charge purchase plans are available for Class A shares and exchange
fee waivers are available for all three Classes. The maximum 5% contingent
deferred sales charge on Class B shares applies to redemptions during the
first year after purchase; the charge generally declines by 1% annually
thereafter, reaching zero after six years. See "Purchases."
(2) See "Management" for additional information. All expenses are those
actually incurred for the fiscal year ended November 30, 1994.
(3) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT INVESTMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
----------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12b-1 service fees...... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
12b-1 distribution fees. 0.00 0.75 0.50 0.00 0.75 0.50 0.00 0.75 0.50
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class D shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
-------------
Prospectus Page 6
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Prospectus Summary
(Continued)
--------------------------------------------------------------------------------
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses on a $1,000
investment in each Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
U.S. GOVERNMENT INCOME FUND
Class A Shares (1).................................... $49 $69 $ 90 $152
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $67 $84 $113 $164
Assuming no redemption (3)........................... $17 $54 $ 93 $164
Class D Shares........................................ $15 $46 $ 79 $174
INVESTMENT GRADE INCOME FUND
Class A Shares (1).................................... $50 $70 $ 91 $154
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $67 $84 $113 $165
Assuming no redemption (3)........................... $17 $54 $ 93 $165
Class D Shares........................................ $15 $46 $ 79 $174
HIGH INCOME FUND
Class A Shares (1).................................... $49 $68 $ 88 $147
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $67 $82 $109 $157
Assuming no redemption (3)........................... $17 $52 $ 89 $157
Class D Shares........................................ $14 $44 $ 76 $166
</TABLE>
-------
(1) Assumes deduction at the time of purchase of the maximum 4% initial sales
charge.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(3) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.
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 any Class of the Funds' shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND A FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The actual expenses attributable to each Class of a Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which a Fund incurs variable expenses, such as transfer agency costs.
-------------
Prospectus Page 7
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
-------------
Prospectus Page 8
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
----------------------------------------------------------------------------
The tables on the following pages provide selected per share data and ratios
for one Class A share, one Class B share and one Class D share of each Fund for
each of the periods shown. This information is supplemented by the financial
statements and accompanying notes appearing in the Funds' 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 tables
appearing on the following pages insofar as it relates to each of the five
years in the period ended November 30, 1994, have been audited by Ernst & Young
LLP, independent auditors, whose report thereon is included in the Annual
Report to Shareholders. Further information about the performance of each Fund
is also included in the Annual Report to Shareholders, which may be obtained
without charge. The information appearing below for the periods prior to the
year ended November 30, 1989 also has been audited by Ernst & Young LLP, whose
reports thereon were unqualified.
-------------
Prospectus Page 9
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
-----------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-----------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31 $ 10.27
-------- -------- -------- -------- -------- -------- ---------- ----------
NET INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS:
Net investment income...... 0.60 0.67 0.75 0.77 0.76 0.80 0.80 0.81
Net realized and unrealized
gains (losses) from
investment transactions... (1.53) 0.05 0.01 0.49 (0.05) 0.23 -- (0.85)
-------- -------- -------- -------- -------- -------- ---------- ----------
Net increase (decrease) in
net asset value resulting
from operations........... (0.93) 0.72 0.76 1.26 0.71 1.03 0.80 (0.04)
-------- -------- -------- -------- -------- -------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net
investment income......... (0.60) (0.67) (0.75) (0.76) (0.75) (0.80) (0.80) (0.85)
Distributions from net
realized gains from
investment transactions... -- -- -- -- -- -- -- (0.07)
Return of capital.......... -- -- -- -- -- -- (0.03) --
-------- -------- -------- -------- -------- -------- ---------- ----------
Total dividends and
distributions to
shareholders.............. (0.60) (0.67) (0.75) (0.76) (0.75) (0.80) (0.83) (0.92)
-------- -------- -------- -------- -------- -------- ---------- ----------
Net asset value, end of
period.................... $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31
======== ======== ======== ======== ======== ======== ========== ==========
Total investment
return (1)................ (9.62)% 7.38% 7.92% 13.80% 8.36% 11.66% 8.93% (0.21)%
======== ======== ======== ======== ======== ======== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted)........... $428,722 $648,923 $703,198 $737,189 $795,240 $963,226 $1,279,535 $2,018,208
Ratio of expenses to
average net assets........ 0.95% 0.91% 0.93% 0.87% 0.66% 0.72% 0.67% 0.68%
Ratio of net investment
income to average net
assets.................... 6.48% 6.60% 7.42% 7.94% 8.57% 8.82% 8.83% 8.44%
Portfolio turnover rate.... 358.07% 83.13% 28.33% 71.22% 34.48% 124.54% 302.09% 98.00%
</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 dates, and a sale at net asset value on the
last day of each period reported. The figures do not include sales charges;
results for Class A and Class B shares would be lower if sales charges were
included. Total investment returns for periods of less than one year have not
been annualized.
-------------
Prospectus Page 10
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
--------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS D
---------------------- -------------------------------------------- -----------------------------------
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
FOR THE YEARS ENDED YEARS ENDED JULY 1, 1991# YEARS ENDED JULY 2, 1992#
NOVEMBER 30, NOVEMBER 30, TO NOVEMBER 30, TO
---------------------- ---------------------------- NOVEMBER 30, ------------------- NOVEMBER 30,
1986 1985 1994 1993 1992 1991 1994 1993 1992
---------- ---------- ------- -------- -------- -------------- ------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.18 $ 9.78 $ 10.03 $ 9.98 $ 9.98 $ 9.59 $ 10.02 $ 9.98 $ 10.13
---------- ---------- ------- -------- -------- -------- ------- --------- ---------
0.96 1.03 0.53 0.60 0.67 0.29 0.55 0.62 0.25
0.32 0.63 (1.53) 0.05 0.01 0.39 (1.53) 0.04 (0.15)
---------- ---------- ------- -------- -------- -------- ------- --------- ---------
1.28 1.66 (1.00) 0.65 0.68 0.68 (0.98) 0.66 0.10
---------- ---------- ------- -------- -------- -------- ------- --------- ---------
(0.96) (1.03) (0.53) (0.60) (0.68) (0.29) (0.55) (0.62) (0.25)
(0.23) (0.23) -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
---------- ---------- ------- -------- -------- -------- ------- --------- ---------
(1.19) (1.26) (0.53) (0.60) (0.68) (0.29) (0.55) (0.62) (0.25)
---------- ---------- ------- -------- -------- -------- ------- --------- ---------
$ 10.27 $ 10.18 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 8.49 $ 10.02 $ 9.98
========== ========== ======= ======== ======== ======== ======= ========= =========
13.51% 18.23% (10.31)% 6.57% 6.98% 6.78% (10.08)% 6.75% 0.62%
========== ========== ======= ======== ======== ======== ======= ========= =========
$3,139,662 $1,646,231 $99,581 $161,158 $132,357 $ 23,532 $68,400 $ 143,473 $ 127,026
0.66% 0.68% 1.72% 1.66% 1.67% 1.68%* 1.45% 1.40% 1.44%*
9.35% 10.04% 5.71% 5.79% 6.38% 6.40%* 5.99% 6.06% 6.13%*
224.38% 255.67% 358.07% 83.13% 28.33% 71.22% 358.07% 83.13% 28.33%
</TABLE>
-------------
Prospectus Page 11
<PAGE>
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42 $ 10.74
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
FROM
INVESTMENT OPERATIONS:
Net investment income... 0.77 0.79 0.81 0.82 0.84 0.86 0.83 0.88
Net realized and
unrealized gains (loss-
es) from investment
transactions........... (1.41) 0.70 0.22 0.66 (0.33) 0.27 0.10 (1.15)
-------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease)
in net asset value re-
sulting from opera-
tions.................. (0.64) 1.49 1.03 1.48 0.51 1.13 0.93 (0.27)
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net in-
vestment income........ (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.81) (0.92)
Distributions from net
realized gains from in-
vestment transactions.. -- -- -- -- -- -- -- (0.08)
Return of capital....... -- -- -- -- -- -- (0.01) (0.05)
-------- -------- -------- -------- -------- -------- -------- --------
Total dividends and dis-
tributions to
shareholders........... (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.82) (1.05)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42
======== ======== ======== ======== ======== ======== ======== ========
Total investment re-
turn (1)............... (5.99)% 14.77% 10.39% 16.17% 5.55% 12.28% 10.24% (2.69)%
======== ======== ======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod
(000's omitted)........ $271,553 $204,418 $197,795 $220,216 $225,424 $269,381 $334,106 $543,919
Ratio of expenses to av-
erage net assets....... 0.97% 0.96% 1.01% 0.91% 0.66% 0.65% 0.70% 0.72%
Ratio of net investment
income to
average net assets..... 7.50% 7.24% 7.81% 8.32% 8.76% 8.96% 8.83% 8.67%
Portfolio turnover rate. 142.15% 27.25% 43.88% 45.68% 31.42% 46.99% 34.61% 87.53%
</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 dates, and a sale at net asset value on
the last day of each period reported. The figures do not include sales
charges; results for Class A and Class B shares would be lower if sales
charges were included. Total investment returns for periods of less than
one year have not been annualized.
-------------
Prospectus Page 12
<PAGE>
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME FUND
----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS D
------------------ ----------------------------------------- --------------------------------
FOR THE FOR THE
FOR THE YEARS FOR THE PERIOD FOR THE PERIOD
ENDED NOVEMBER YEARS ENDED JULY 1, 1991# YEARS ENDED JULY 2, 1992#
30, NOVEMBER 30, TO NOVEMBER 30, TO
------------------ -------------------------- NOVEMBER 30, ----------------- NOVEMBER 30,
1986 1985 1994 1993 1992 1991 1994 1993 1992
-------- -------- ------- ------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.27 $ 9.81 $ 11.07 $ 10.38 $ 10.17 $ 9.79 $ 11.08 $ 10.38 $ 10.48
-------- -------- ------- ------- ------- ------ ------- ------- -------
1.00 1.06 0.69 0.71 0.73 0.31 0.72 0.74 0.28
0.69 0.71 (1.40) 0.69 0.22 0.38 (1.41) 0.70 (0.10)
-------- -------- ------- ------- ------- ------ ------- ------- -------
1.69 1.77 (0.71) 1.40 0.95 0.69 (0.69) 1.44 0.18
-------- -------- ------- ------- ------- ------ ------- ------- -------
(1.00) (1.06) (0.69) (0.71) (0.74) (0.31) (0.72) (0.74) (0.28)
(0.22) (0.25) -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------ ------- ------- -------
(1.22) (1.31) (0.69) (0.71) (0.74) (0.31) (0.72) (0.74) (0.28)
-------- -------- ------- ------- ------- ------ ------- ------- -------
$ 10.74 $ 10.27 $ 9.67 $ 11.07 $ 10.38 $10.17 $ 9.67 $ 11.08 $ 10.38
======== ======== ======= ======= ======= ====== ======= ======= =======
17.36% 19.44% (6.60)% 13.81% 9.56% 6.76% (6.40)% 14.21% 1.32%
======== ======== ======= ======= ======= ====== ======= ======= =======
$474,632 $213,789 $69,359 $52,301 $20,862 $5,368 $45,473 $47,527 $16,067
0.68% 0.78% 1.72% 1.70% 1.74% 1.67%* 1.45% 1.44% 1.49%*
9.27% 10.55% 6.73% 6.40% 6.88% 6.87%* 6.99% 6.61% 6.83%*
80.72% 166.30% 142.15% 27.25% 43.88% 45.68% 142.15% 27.25% 43.88%
</TABLE>
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Prospectus Page 13
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME FUND
---------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94 $ 10.46
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
FROM INVESTMENT
OPERATIONS:
Net investment income... 0.86 0.89 0.98 0.98 0.99 1.10 1.18 1.23
Net realized and
unrealized gains
(losses) from
investment
transactions........... (1.59) 0.83 0.61 1.69 (1.88) (1.15) (0.33) (1.39)
-------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease)
in net asset value
resulting from
operations............. (0.73) 1.72 1.59 2.67 (0.89) (0.05) 0.85 (0.16)
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.86) (0.91) (0.97) (0.98) (0.97) (1.08) (1.19) (1.28)
Distributions from net
realized gains from
investment
transactions........... -- -- -- -- -- -- -- (0.08)
-------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders........... (0.86) (0.91) (0.97) (0.98) (0.97) (1.08) (1.19) (1.36)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94
======== ======== ======== ======== ======== ======== ======== ========
Total investment return
(1).................... (9.20)% 22.89% 22.99% 51.11% (12.95)% (0.76)% 9.81% (2.28)%
======== ======== ======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000 omitted)... $268,397 $360,281 $279,685 $243,210 $184,990 $322,426 $532,450 $683,692
Ratio of expenses to
average net assets..... 0.91% 0.93% 0.98% 1.05% 0.85% 0.71% 0.70% 0.67%
Ratio of net investment
income to average net
assets................. 10.43% 10.61% 12.68% 15.12% 15.20% 13.50% 13.55% 12.05%
Portfolio turnover rate. 155.77% 182.26% 185.43% 116.97% 109.68% 131.88% 111.31% 145.39%
</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 dates, and a sale at net asset value on the
last day of each period reported. The figures do not include sales charges;
results for Class A and Class B shares would be lower if sales charges were
included. Total investment returns for periods of less than one year have not
been annualized.
-------------
Prospectus Page 14
<PAGE>
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----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME FUND
------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS D
------------------ ------------------------------------------ -------------------------------------
FOR THE
FOR THE YEARS PERIOD FOR THE YEARS FOR THE
ENDED FOR THE YEARS ENDED JULY 1, ENDED PERIOD JULY
NOVEMBER 30, NOVEMBER 30, 1991# TO NOVEMBER 30, 2, 1992# TO
------------------ ---------------------------- NOVEMBER 30, ------------------- NOVEMBER 30,
1986 1985 1994 1993 1992 1991 1994 1993 1992
-------- -------- -------- -------- ------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 9.86 $ 8.72 $ 7.91 $ 7.29 $ 6.85 $ 8.74 $ 7.92 $ 7.80
-------- -------- -------- -------- ------- ------- -------- -------- -------
1.30 1.25 0.80 0.83 0.92 0.41 0.82 0.85 0.33
0.39 0.50 (1.58) 0.82 0.61 0.44 (1.59) 0.82 0.11
-------- -------- -------- -------- ------- ------- -------- -------- -------
1.69 1.75 (0.78) 1.65 1.53 0.85 (0.77) 1.67 0.44
-------- -------- -------- -------- ------- ------- -------- -------- -------
(1.30) (1.25) (0.80) (0.84) (0.91) (0.41) (0.82) (0.85) (0.32)
(0.14) (0.15) -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- -------- -------- -------
(1.44) (1.40) (0.80) (0.84) (0.91) (0.41) (0.82) (0.85) (0.32)
-------- -------- -------- -------- ------- ------- -------- -------- -------
$ 10.46 $ 10.21 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 7.15 $ 8.74 $ 7.92
======== ======== ======== ======== ======= ======= ======== ======== =======
17.31% 18.91% (9.77)% 21.89% 22.07% 11.93% (9.62)% 22.19% 5.21%
======== ======== ======== ======== ======= ======= ======== ======== =======
$770,137 $128,810 $235,480 $286,525 $99,645 $18,274 $115,196 $176,161 $35,992
0.69% 0.78% 1.64% 1.66% 1.70% 1.73%* 1.38% 1.39% 1.45%*
12.07% 12.15% 9.66% 9.69% 11.42% 12.43%* 9.91% 9.81% 10.67%*
169.38% 117.72% 155.77% 182.26% 185.43% 116.97% 155.77% 182.26% 185.43%
</TABLE>
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Prospectus Page 15
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Flexible Pricing System
----------------------------------------------------------------------------
DIFFERENCES AMONG THE CLASSES
The primary distinctions among the Classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of distribution fees.
These differences are summarized in the table below. Each Class has distinct
advantages and disadvantages for different investors, and investors may choose
the Class that best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES (AS A %
OF AVERAGE DAILY NET
SALES CHARGE ASSETS) OTHER INFORMATION
------------ ------------------------- -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales Service fee of 0.25% Initial sales charge
charge of 4% of the waived or reduced for
public offering price certain purchases
CLASS B Maximum contingent Service fee of 0.25%; Shares convert to Class
deferred sales charge of distribution fee of A shares approximately
5% of redemption 0.75% six years after issuance
proceeds; declines to
zero after six years
CLASS D None Service fee of 0.25%; --
distribution fee of
0.50%
</TABLE>
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES
In deciding which Class of shares to purchase, investors should consider the
cost of sales charges together with the cost of the ongoing annual expenses
described below, as well as any other relevant facts and circumstances.
SALES CHARGES. Class A shares are sold at net asset value plus an initial sales
charge of up to 4% of the public offering price. Because of this initial sales
charge, not all of a Class A shareholder's purchase price is invested in the
Fund. Class B shares are sold with no initial sales charge, but a contingent
deferred sales charge of up to 5% of the redemption proceeds applies to
redemptions made within six years of purchase. Class D shareholders pay no
initial or contingent deferred sales charges. Thus, the entire amount of a
Class B or Class D shareholder's purchase price is immediately invested in the
Fund.
WAIVERS AND REDUCTIONS OF CLASS A SALES CHARGES. Class A share purchases over
$100,000 and Class A share purchases made under a Fund's reduced sales charge
plan may be made at a reduced sales charge. In considering the combined cost of
sales charges and ongoing annual expenses, investors should take into account
any reduced sales charges on Class A shares for which they may be eligible.
The entire initial sales charge on Class A shares is waived for certain
eligible purchasers. Because Class A shares bear lower ongoing annual expenses
than Class B shares or Class D shares, investors eligible for complete waivers
should purchase Class A shares.
ONGOING ANNUAL EXPENSES. All three Classes of Fund shares pay an annual 12b-1
service fee of 0.25% of average daily net assets. Class B shares pay an annual
12b-1 distribution fee of 0.75%, and Class D shares pay an annual 12b-1
distribution fee of 0.50%, of average daily net assets. Annual 12b-1
distribution fees are a form of asset-based sales charge. An investor should
consider both ongoing annual expenses and initial or contingent sales charges
in estimating the costs of investing in the respective Classes of Fund shares
over various time periods.
For example, assuming a constant net asset value, the cumulative distribution
fees on a Fund's
-------------
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
--------------------------------------------------------------------------------
Investment Objectives and Policies
--------------------------------------------------------------------------------
Class B and Class D shares would approximate the expenses of the 4% maximum
initial sales charge on the Class A shares if the shares were held for
approximately 5 1/2 years in the case of the Class B shares and approximately 8
years in the case of the Class D shares. Class B shares convert to Class A
shares (which do not bear the expense of ongoing distribution fees)
approximately six years after purchase. The cumulative distribution fees on a
Fund's Class D shares would approximate the cumulative distribution fees on the
Class B shares if the shares were held for 9 years. Thus, an investor who would
be subject to the maximum initial sales charge on Class A shares and who
expects to hold shares of a Fund for less than 9 years generally should expect
to pay the lowest cumulative expenses by purchasing Class D shares.
The foregoing examples do not reflect, among other variables, the cost or
benefit of bearing sales charges or distribution fees at the time of purchase,
upon redemption or over time, nor can they reflect fluctuations in the net
asset value of Fund shares, which will affect the actual amount of expenses
paid. Expenses borne by Classes may differ slightly because of the allocation
of other Class-specific expenses. The "Example of Effect of Fund Expenses"
under "Prospectus Summary" shows for each Fund the cumulative expenses an
investor would pay over time on a hypothetical investment in each Class of Fund
shares, assuming an annual return of 5%.
OTHER INFORMATION
PaineWebber investment executives may receive different levels of compensation
for selling one particular Class of Fund shares rather than another. Investors
should understand that distribution fees and initial and contingent deferred
sales charges all are intended to compensate Mitchell Hutchins for distribution
services.
See "Purchases," "Redemptions" and "Management" for a more complete description
of the initial and contingent deferred sales charges, service fees and distri-
bution fees for the three Classes of shares of each Fund. See also "Conversion
of Class B Shares," "Dividends and Taxes" and "General Information" for other
differences among the three Classes.
INVESTMENT OBJECTIVES AND PRIMARY INVESTMENTS
The investment objective of U.S. GOVERNMENT INCOME FUND is to provide high
current income consistent with the preservation of capital and liquidity. The
Fund invests primarily in U.S. government securities.
The investment objective of INVESTMENT GRADE INCOME FUND is to provide high
current income consistent with the preservation of capital and liquidity. The
Fund invests in a diversified range of investment grade bonds and other fixed
income securities.
The investment objective of HIGH INCOME FUND is to provide the highest level of
current income available without undue risk. The Fund invests in a diversified
range of high risk, high yield medium to lower quality bonds.
There can be no assurance that any Fund will achieve its investment objective.
Each Fund's net asset value will fluctuate based upon changes in the value of
its portfolio securities. Each Fund's investment objective and certain
investment limitations as described in the Statement of Additional Information
are fundamental policies and may not be changed without shareholder approval.
In addition, U.S. Government Income Fund's policy of normally concentrating at
least 25% of its total assets in mortgage- and asset-backed securities is
fundamental 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.
U.S. GOVERNMENT INCOME FUND
Under normal conditions, U.S. Government Income Fund invests at least 65% of
its total assets in U.S. government securities, including mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities ("U.S. government mortgage-backed securities"), other
obligations issued or
-------------
Prospectus Page 17
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements with respect to those securities. Up to 35% of the Fund's
total 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 S&P or Aaa by Moody's, have an equivalent rating from another 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.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Multi-class pass-through securities and collateralized
mortgage obligations are collectively referred to herein as CMOs. The U.S.
government mortgage-backed securities in which U.S. Government Income Fund may
invest include mortgage-backed securities issued or guaranteed as to the
payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ("Ginnie 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 value) of such private mortgage-
backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or 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-government credit enhancement. For more information
concerning the types of mortgage-backed securities in which the Fund may
invest, see Appendix A to this Prospectus.
U.S. Government Income Fund's policy of investing at least 25% of its total
assets in mortgage- and asset-backed securities has the effect of increasing
the Fund's exposure to the risks related to such securities and might cause the
Fund's net asset value per share to fluctuate more than otherwise would be the
case. See "Risks of Mortgage and Asset-Backed Securities."
Non-mortgage-related U.S. government securities in which U.S. Government Income
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 primarily or solely by the creditworthiness of the issuer, such as
securities issued by the Resolution Funding Corporation, the Student Loan
Marketing Association, the Federal Home Loan Banks and the Tennessee Valley
Authority.
U.S. Government Income 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 receipts or interests in such U.S. Treasury securities or
coupons, including Certificates of Accrual Treasury Securities ("CATS") and
Treasury Income Growth Receipts ("TIGRs"). The SEC staff currently takes the
position that "stripped" U.S. government securities that are not issued through
the U.S. Treasury are not U.S. government securities. As long as the SEC takes
this position, CATS and TIGRs will not be counted as U.S. government securities
for purposes of the 65% investment 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
installment sale contracts, other installment loan contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving 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 certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution
unaffiliated with the issuer or other credit enhancements may be present.
U.S. Government Income 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 options, futures contracts, options on futures contracts, interest
rate
-------------
Prospectus Page 18
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
protection transactions, dollar rolls and reverse repurchase agreements. See
"Hedging and Related Income Strategies" and "Dollar Rolls and Reverse
Repurchase Agreements."
INVESTMENT GRADE INCOME FUND
Investment Grade Income Fund invests in a diversified range of investment grade
bonds and other fixed income securities. Investment grade bonds are those bonds
that, at the time of purchase, are assigned one of the four highest grades by
S&P or Moody's, are comparably rated by another NRSRO or, if unrated, are
determined by Mitchell Hutchins to be of comparable quality to such rated
securities. Under normal circumstances, the Fund invests at least 65% of its
total assets in investment grade corporate bonds and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Up to 35%
of the Fund's total assets may be invested in corporate bonds that are below
investment grade, preferred stocks, convertible securities, certain mortgage-
and asset-backed securities described below, commercial paper or variable
amount master notes issued by companies having at the time of purchase an issue
of outstanding debt securities rated investment grade by S&P or Moody's or
commercial paper rated A-1 by S&P or P-1 by Moody's, and other money market
instruments, including repurchase agreements. Up to 10% of the Fund's total
assets may be invested in U.S. dollar-denominated securities of foreign issuers
the value of which is linked to the value of foreign currencies. The Fund may
also seek to enhance income or to reduce the risks associated with ownership of
the securities in which it invests through the use of options, futures
contracts, options on futures contracts and interest rate protection
transactions. See "Hedging and Related Income Strategies."
Investment Grade Income Fund may invest in mortgage-backed securities that are
issued or guaranteed as to the payment of principal and interest (but not as to
market value) by the U.S. government, its agencies or instrumentalities or
issued by private issuers and rated in the four highest ratings of S&P or
Moody's. The Fund also may invest in asset-backed securities that are rated in
the two highest ratings assigned by S&P or Moody's. See "Risk Factors." The
Fund may invest up to 10% of its total assets in classes of mortgage-backed
securities that receive different proportions of the interest and principal
distributions from the underlying mortgage assets. See "Other Investment
Policies and Risk Factors--Risks of Mortgage- and Asset-Backed Securities."
It should be noted that new types of mortgage- and asset-backed securities,
derivative securities and hedging instruments are developed and marketed from
time to time and that, consistent with its investment limitations, Investment
Grade Income Fund expects to invest in those new types of securities and
instruments that Mitchell Hutchins believes may assist the Fund in achieving
its investment objective.
During its 1994 fiscal year, Investment Grade Income Fund had 100% of its
average annual net assets in debt securities that received a rating from S&P or
Moody's or another NRSRO and 0% of its average annual net assets in debt
securities that were not so rated. The Fund had the following percentages of
its average annual net assets invested in rated securities: AAA/Aaa (including
cash items)--16.5, AA/Aa--5.4%, A/A--29.9%, BBB/Baa--29.9%, BB/Ba--10.0%, B/B--
8.1% and Caa/CCC--0.2%. It should be noted that this information reflects the
average composition of the Fund's assets during the fiscal year ended November
30, 1994 and is not necessarily representative of the Fund's assets as of the
end of that fiscal year, the current fiscal year or at any time in the future.
HIGH INCOME FUND
High Income Fund invests in a diversified range of high risk, high yield medium
to lower quality bonds. Generally, higher yielding bonds carry ratings assigned
by S&P, Moody's or another NRSRO that are lower than those assigned to
investment grade bonds, or are unrated, and thus carry higher investment risk
than investment grade bonds. See "Risk Factors." Under normal circumstances, at
least 65% of the Fund's assets are invested in high risk, high yielding, income
producing corporate debt securities that at the time of purchase are rated B or
better by S&P or Moody's, comparably rated by another NRSRO or are unrated but
determined to be of comparable quality by Mitchell Hutchins. Up to 35% of the
Fund's total assets may be invested in debt securities rated below B by S&P or
Moody's or comparably rated by another NRSRO, preferred stocks, securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
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INCOME FUND
equity securities (including common stocks, warrants and rights) when attached
to fixed income securities or as a part of a unit including fixed income
securities, or in connection with a conversion or exchange of fixed income
securities and money market instruments, including repurchase agreements. The
Fund will not invest more than 5% of its total assets in the securities of a
single issuer. The Fund may invest in securities selling at a substantial
discount from par; such securities carry with them the potential for capital
gain, but will not normally be purchased unless they also provide a high level
of current income. The Fund may invest up to 25% of its net assets in
securities of foreign issuers, with no more than 10% of its net assets in
securities of foreign issuers that are denominated and traded in currencies
other than the U.S. dollar. The Fund may also seek to enhance income or to
reduce the risks associated with ownership of the debt securities in which it
invests through the use of options, futures contracts, options on futures
contracts, forward currency contracts and interest rate protection
transactions. See "Hedging and Related Income Strategies."
During its 1994 fiscal year, High Income Fund had 70.82% of its average annual
net assets in debt securities that received a rating from S&P or Moody's or
another NRSRO and 22.7% of its average annual net assets in debt securities
that were not so rated. The Fund had the following percentages of its average
annual net assets invested in rated securities: AAA (including cash items)--
3.94%, AA--0%, A--0%, BBB--0%, BB--4.53%, B--47.85%, CCC--13.36%, CC--0.68%,
C--0.26% and D--0.20%. It should be noted that this information reflects the
average composition of the Fund's assets during the fiscal year ended November
30, 1994 and is not necessarily representative of the Fund's assets as of the
end of that fiscal year, the current fiscal year or at any time in the future.
OTHER INVESTMENT POLICIES AND RISK FACTORS
RISK FACTORS. Each 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 consti-
tutes assurance that the security will not fluctuate in value or that a Fund
will receive the originally anticipated yield on the security. An investment in
a Fund also is subject to the risks discussed below. The investment income of
each Fund is based on the income earned on the securities it holds, less ex-
penses incurred; thus, each Fund's investment income may be expected to fluctu-
ate in response to changes in such expenses or income. For example, the invest-
ment income of a Fund may be affected if it experiences a net inflow of new
money that is then invested in securities whose yield is higher or lower than
that earned on then-current investments. Generally, the value of the debt secu-
rities held by the Funds, and thus the net asset value per share of each Fund,
will rise when interest rates decline. Conversely, when interest rates rise,
the value of fixed income securities, and thus the net asset value per share of
each 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 U.S. Government Income Fund
and Investment Grade Income 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 asset-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 a 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 a Fund purchases these securities
at a discount, faster than expected prepayments will increase, while slower
than expected prepayments will reduce, yield to maturity. Amounts available for
reinvestment by a 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 prepayments on
securities purchased by a 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 market for U.S.
government mortgage-backed securities. CMO classes may be specially structured
in a manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate
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INCOME FUND
sensitivity. As market conditions change, however, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. These
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
The rate of interest payable on CMO classes may be set at levels that are
either above or below market rates at the time of issuance, so that the
securities will be sold at a substantial premium to, or at a discount from, par
value. 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
receive all or a portion of the principal but none of the interest (the
principal-only or "PO" class). IOs and POs may also be created form 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
prepayments) 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 government 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
inverse floating rate CMO class pays interest at a rate that increases as a
specified 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 decrease--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
obligation. Such interest rate formulas may be combined with other CMO
characteristics. 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 interest at a rate that will vary inversely with a specified index or a
multiple thereof.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which U.S. Government Income Fund and Investment
Grade Income Fund may invest, including interest-only and principal-only
classes of mortgage-backed securities and inverse floating rate securities, can
be extremely volatile and these securities may become illiquid.
While the market values of particular securities in which U.S. Government
Income Fund and Investment Grade Income Fund invest may be volatile, or may
become volatile under certain conditions, Mitchell Hutchins seeks to manage
each 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 securities 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 U.S. Government Income Fund and Investment
Grade Income Fund may invest.
--RISKS OF LOWER RATED SECURITIES. High Income Fund may invest all of its
assets in corporate bonds rated below investment grade and Investment Grade
Income Fund may invest up to 35% of its assets in such bonds. Investment Grade
Income Fund must normally invest at least 65% of its assets in debt securities
rated BBB by S&P, Baa by Moody's or comparably rated by another NRSRO. These
securities are investment grade, but Moody's considers securities rated Baa to
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for such
securities to make principal and interest payments than is the case for higher
grade debt securities. Debt securities rated below investment grade are deemed
by these agencies to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal and may involve major risk
exposure to adverse conditions. Such securities are commonly referred to as
"junk bonds." Investment Grade
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INCOME FUND
Income Fund and High Income Fund each may invest up to 35% of its assets in
debt securities rated lower than B, which include securities that are in
default or face the risk of default with respect to the payment of principal or
interest. Such securities are generally unsecured and are often subordinated to
other creditors of the issuer. To the extent a Fund is required to seek
recovery upon a default in the payment of principal or interest on its
portfolio holdings, the Fund may incur additional expenses and may have limited
legal recourse in the event of a default. Investment Grade Income Fund and High
Income Fund are also permitted to purchase debt securities that are not rated
by a NRSRO but that Mitchell Hutchins determines to be of comparable quality to
that of rated securities in which those Funds may invest. Such securities are
included in the computation of any percentage limitations applicable to the
comparable rated securities. In the event that, due to a downgrade of one or
more debt securities, an amount in excess of 35% of Investment Grade Income
Fund's total assets is held in securities rated below investment grade and
comparable unrated securities, Mitchell Hutchins will engage in an orderly
disposition of such securities to the extent necessary to reduce the Fund's
holdings of these securities to 35% of total assets or less.
Ratings of debt securities represent the NRSROs opinions regarding their
quality, are not a guarantee of quality and may be reduced after a Fund has
acquired the security. Mitchell Hutchins would consider such an event in
determining whether the Fund should continue to hold the security but is not
required to dispose of it. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security. Also, NRSROs may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's financial condition may be
better or worse than the rating indicates. See Appendix B to this Prospectus
for further information regarding S&P's and Moody's ratings.
Lower rated debt securities generally offer a higher current yield than that
available from higher grade issues, but they involve higher risks, in that they
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress, which could adversely
affect their ability to make payments of principal and interest and increase
the possibility of default. In addition, such issuers may not have more
traditional methods of financing available to them, and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for lower rated securities has expanded rapidly in recent years, and
its growth paralleled a long economic expansion. In the past, the prices of
many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can be no
assurance that such declines will not recur. The market for lower rated debt
securities generally is thinner and less active than that for higher quality
securities, which may limit a Fund's ability to sell such securities at fair
value in response to changes in the economy or the financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
Although Mitchell Hutchins will attempt to minimize the speculative risks
associated with investments in such securities through diversification, credit
analysis and attention to current trends in interest rates and other factors,
investors should carefully review the objectives and policies of Investment
Grade Income Fund and High Income Fund and consider their ability to assume the
investment risks involved before making an investment in these Funds.
--RISKS OF ZERO COUPON SECURITIES. Each Fund may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds.
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INCOME FUND
High Income Fund may also invest in zero coupon securities of corporate issuers
and other securities that are issued with original issue discount ("OID") and
payment-in-kind ("PIK") securities. Federal tax law requires that a holder of a
security with OID accrue a portion of the OID on the security as income each
year, even though the holder may receive no interest payment on the security
during the year. Accordingly, although the investing Fund will receive no
payments on its zero coupon securities prior to their maturity or disposition,
it will have income attributable to such securities. Similarly, while PIK
securities may pay interest in the form of additional securities rather than
cash, that interest must be included in High Income Fund's annual income.
Companies such as the Funds, which seek to qualify for pass-through federal
income tax treatment as regulated investment companies, must distribute
substantially all of their net investment income each year, including non-cash
income. Accordingly, each Fund will be required to include in its dividends an
amount equal to the income attributable to its zero coupon, other OID and PIK
securities. See "Taxes" in the Statement of Additional Information. Those
dividends will be paid from the cash assets of a Fund or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might not
have done so. Zero coupon and PIK securities usually trade at a substantial
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 maturities that make current distributions of
interest in cash.
--RISKS OF FOREIGN SECURITIES. Investment Grade Income Fund may invest up to
10% of its net assets in U.S. dollar-denominated securities of foreign issuers
or foreign branches of U.S. banks that are traded in the U.S. securities
markets or in U.S. dollar-denominated securities, the value of which is linked
to the value of foreign currencies. High Income Fund may invest up to 25% of
its net assets in securities of foreign issuers, with no more than 10% of its
net assets in securities of foreign issuers that are denominated and traded in
currencies other than the U.S. dollar. The foreign securities in which these
Funds may invest involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets are subject.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy. Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. Foreign
securities may from time to time be difficult to liquidate rapidly without
significantly depressing the price of such securities. There may be less
publicly available information concerning foreign issuers of securities held by
the Funds than is available concerning U.S. issuers.
High Income Fund and Investment Grade Income Fund may each invest in dollar-
denominated securities whose value is linked to the value of foreign
currencies, and High Income Fund may invest in non-U.S. dollar denominated
securities. Accordingly, changes in foreign currency exchange rates will affect
the Fund's net asset value, the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income to be
distributed to shareholders by the Fund. In addition, some foreign currency
values may be volatile and there is the possibility of governmental controls on
currency exchange or governmental intervention in currency markets. Any of
these factors could adversely affect the Fund.
The costs attributable to foreign investing that High Income Fund must bear
frequently are higher than those attributable to domestic investing. For
example, the costs of maintaining custody of securities in foreign countries
exceed custodian costs related to domestic securities.
High Income Fund may enter into forward currency contracts to set the rate at
which currency exchanges will be made for specific contemplated transactions.
The Fund might also enter into forward currency contracts for the purchase or
sale of a specified currency at a specified future date either with respect to
contemplated transactions or with respect to portfolio positions. For example,
when Mitchell Hutchins anticipates making a currency exchange transaction in
connection with the purchase or sale of a security, the Fund may enter into a
forward currency contract in order to set the exchange rate at which the
transaction will be made. The Fund also may enter into a forward contract to
sell an amount of a foreign currency approximating the value of some or all of
its securities denominated in that currency.
High Income Fund may use forward contracts in one currency or a basket of
currencies to hedge
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INCOME FUND
against fluctuations in the value of another currency when Mitchell Hutchins
anticipates there will be a correlation between the two and may use forward
currency contracts to shift the Fund's exposure to foreign currency
fluctuations from one country to another. The purpose of entering into these
contracts is to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies.
High Income Fund may also write covered put and call options and purchase put
and call options on foreign currencies to hedge against movements in currency
exchange rates. The risks of these hedging strategies are similar to those of
the other hedging strategies in which the Fund may engage, as described under
"Hedging and Related Income Strategies." See the Statement of Additional
Information for more information on currency hedging strategies.
HEDGING AND RELATED INCOME STRATEGIES. Each Fund may use options (both
exchange-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 a Fund's average duration and other risks of its investments,
which can affect fluctuations in the Fund's net asset value. A Fund's ability
to use these strategies may be limited by market conditions, regulatory limits
and tax considerations. Appendix C to this Prospectus describes the hedging
instruments that the Funds may use and the Statement of Additional Information
contains further information on these strategies.
Each Fund may write (sell) covered call and put options, buy call and put
options, buy and sell interest rate futures contracts and buy call or put
options or write covered call options on such futures contracts. The Funds may
enter into options and futures contracts under which up to 100% of their
portfolios are at risk.
The Funds may enter into interest rate protection transactions, including
interest 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
increase in the price of securities a Fund anticipates purchasing at a later
date. A 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. A Fund would use these transactions as a hedge and
not as a speculative investment.
The Funds might not employ any of the strategies described above, and no
assurance 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 a Fund, the Fund would be in a better
position if it had not entered into the transaction at all. The use of these
strategies involves certain special risks, including (1) the fact that skills
needed to use hedging instruments are different from those needed to select the
Funds' 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 a 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 a Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with hedging transactions and the possible inability
of a Fund to close out or to liquidate its hedged position.
New financial products and risk management techniques continue to be developed.
Each Fund may use these instruments and techniques to the extent consistent
with its investment objective and regulatory and tax considerations.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government Income Fund may
enter into dollar rolls, in which the Fund sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially 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, but the Fund is compensated by the difference between
the current sales price and the lower price for the
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INCOME FUND
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.
U.S. Government Income 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 mutually agreed-upon date and price. The market value of securities
sold under reverse 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 proceeds. 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 repurchase 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 restricted pending such decision.
The dollar rolls and reverse repurchase agreements entered into by U.S.
Government Income Fund normally will be arbitrage transactions in which the
Fund will maintain an offsetting position in securities or repurchase
agreements that mature on or before 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 will mature on or before the settlement
date of 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 U.S. Government Income 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 enter 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 intention 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. Each Fund may use repurchase agreements. Repurchase
agreements are transactions in which a 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. Repurchase agreements carry certain risks not associated
with direct investments in securities, including possible decline in the market
value of the underlying securities and delays and costs to each Fund if the
other party to the repurchase agreement becomes insolvent. Each 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase debt
securities, including mortgage- and asset-backed securities, on a "when-issued"
basis or may purchase or sell securities for "delayed delivery." In when-issued
or delayed delivery transactions, delivery of the securities occurs beyond
normal settlement periods, but a Fund generally would not pay for such
securities or start earning interest on them until they are delivered. However,
when a 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 conditions,
a Fund's when-issued and delayed delivery purchase commitments could cause its
net asset value per share to be more volatile,
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INCOME FUND
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Purchases
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because such securities 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, exceeds its net assets.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid 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 board of trustees). Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act of 1933
("1933 Act"). Institutional markets for restricted 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. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held
by a Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
PORTFOLIO TURNOVER. Each 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 a particular Fund
(100% or more) will involve correspondingly greater transaction costs, which
will be borne directly by that Fund, and may increase the potential for short-
term capital gains.
OTHER INVESTMENT POLICIES. As noted above, Investment Grade Income Fund and
High Income Fund each may invest up to 35% of its assets in money market
instruments. In addition, when Mitchell Hutchins believes unusual circumstances
warrant a defensive position, each Fund temporarily may commit all or any
portion of its assets to cash or money market instruments. Such instruments may
include securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, commercial paper rated at least A-1 by S&P or P-1 by Moody's
(Investment Grade Income Fund) or without regard to rating (High Income Fund),
bank certificates of deposit, bankers' acceptances and repurchase agreements
secured by any of the foregoing. The money market investments of U.S.
Government Income Fund will be limited to obligations of the U.S. government,
its agencies or instrumentalities and repurchase agreements secured by such
obligations. The Funds may also engage in short sales of securities "against
the box" to defer realization of gains or losses for tax purposes.
Investment Grade Income Fund and High Income Fund each may enter into reverse
repurchase agreements with banks and dealers and may borrow money for temporary
or emergency purposes, but not in excess of 10% of its total assets.
GENERAL. Class A shares of the Funds are sold to investors subject to an
initial sales charge. Class B shares of the Funds are sold without an initial
sales charge but are subject to higher ongoing expenses than Class A shares and
a contingent deferred sales charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares approximately six years after
issuance. Class D shares are sold without an initial or a contingent deferred
sales charge but are subject to higher ongoing expenses than Class A shares and
do not convert into another Class. See "Flexible Pricing System" and
"Conversion of Class B Shares."
Shares of the Funds are available through PaineWebber and its correspondent
firms or, for shareholders who are not PaineWebber clients, through the
Transfer Agent. Investors may contact a local PaineWebber office to open an
account. The minimum initial investment for each Fund is $1,000 and the minimum
for additional purchases is $100. These minimums may be waived or reduced for
investments by employees of PaineWebber or its affiliates, certain pension
plans and retirement accounts and participants in the Funds' automatic
investment plan. Purchase orders will be priced at the net asset value per
share next determined (see "Valuation of
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INCOME FUND
Shares") after the order is received by PaineWebber's New York City offices or
by the Transfer Agent, plus any applicable sales charge for Class A shares.
Each Fund and Mitchell Hutchins reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
When placing purchase orders, investors should specify whether the order is for
Class A, Class B or Class D shares. All share purchase orders that fail to
specify a Class will automatically be invested in Class A shares.
PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due on
the fifth Business Day after the order is received at PaineWebber's New York
City offices. A "Business Day" is any day, Monday through Friday, on which the
New York Stock Exchange, Inc. ("NYSE") is open for business.
PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber clients
may purchase shares of the Funds through the Transfer Agent. Shares of a Fund
may be purchased, and an account with the Fund established, by completing and
signing the purchase application at the end of this Prospectus and mailing it,
together with a check to cover the purchase, to the Transfer Agent: PFPC Inc.,
Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware 19899.
Subsequent investments need not be accompanied by an application.
INITIAL SALES CHARGE--CLASS A SHARES. The public offering price of Class A
shares is the next determined net asset value, plus any applicable sales
charge, which will vary with the size of the purchase as shown in the following
table:
INITIAL SALES CHARGE SCHEDULE--CLASS A SHARES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE DISCOUNT TO
OF SELECTED DEALERS
---------------------------------- AS A PERCENTAGE
OFFERING NET AMOUNT INVESTED OF OFFERING
AMOUNT OF PURCHASE PRICE (NET ASSET VALUE) PRICE
------------------ -------- ------------------- ----------------
<S> <C> <C> <C>
Less than $100,000 4.00% 4.17% 3.75%
$100,000 to $249,999 3.00 3.09 2.75
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00
</TABLE>
-------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources.
Mitchell Hutchins may at times agree to reallow a higher discount to
PaineWebber, as exclusive dealer for each Fund's shares, than those shown
above. To the extent PaineWebber or any dealer receives 90% or more of the
sales charge, it may be deemed an "underwriter" under the 1933 Act.
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares of the Funds are available
without a sales charge through exchanges for Class A shares of most other
PaineWebber and MH/KP mutual funds. See "Exchanges." In addition, Class A
shares may be purchased without a sales charge, and exchanges of any Class of
shares made without the $5.00 exchange fee, by employees, directors and
officers of PaineWebber or its affiliates, directors or trustees and officers
of any PaineWebber or MH/KP fund, their spouses, parents and children and
advisory clients of Mitchell Hutchins.
Class A shares of the Funds also may be purchased without a sales charge if the
purchase is made through a PaineWebber investment executive who formerly was
employed as a broker with another firm registered as a broker-dealer with the
SEC, provided (1) the purchaser was the investment executive's client at the
competing brokerage firm, (2) within 90 days of the purchase of Class A shares
the purchaser redeemed shares of one or more mutual funds for which that
competing firm or its affiliates was principal underwriter, provided the
purchaser either paid a sales charge to invest in those funds, paid a
contingent deferred sales charge upon redemption or held shares of those funds
for the period required not to pay the otherwise applicable contingent deferred
sales charge and (3) the total amount of shares of all PaineWebber
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INCOME FUND
funds purchased under this sales charge waiver does not exceed the amount of
the purchaser's redemption proceeds from the competing firm's funds. To take
advantage of this waiver, an investor must provide satisfactory evidence that
all the above-noted conditions are met. Qualifying investors should contact
their PaineWebber investment executives for more information.
Certificate holders of unit investment trusts ("UITs") sponsored by PaineWebber
may acquire Class A shares of any Fund without regard to minimum investment
requirements and without sales charges by electing to have dividends and other
distributions from their UIT investment automatically invested in Class A
shares.
REDUCED SALES CHARGE PLANS--CLASS A SHARES. If an investor or eligible group of
related Fund investors purchases Class A shares of a Fund concurrently with
Class A shares of other PaineWebber or MH/KP mutual funds, the purchases may be
combined to take advantage of the reduced sales charge applicable to larger
purchases. In addition, the right of accumulation permits a Fund investor or
eligible group of related Fund investors to pay the lower sales charge
applicable to larger purchases by basing the sales charge on the dollar amount
of Class A shares currently being purchased, plus the net asset value of the
investor's or group's total existing Class A shareholdings in other PaineWebber
or MH/KP mutual funds.
An "eligible group of related Fund investors" includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ("IRA"), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to
Minors Act/Uniform Transfers to Minors Act accounts created by the individual
or eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes a group of
related employers and one or more qualified retirement plans of such employers.
For more information, an investor should consult the Statement of Additional
Information or contact a PaineWebber investment executive or correspondent firm
or the Transfer Agent.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The public offering price of
the Class B shares of each Fund is the next determined net asset value, and no
initial sales charge is imposed. A contingent deferred sales charge, however,
is imposed upon certain redemptions of Class B shares.
Class B shares of a Fund that are redeemed will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents
(1) capital appreciation of Fund assets, (2) reinvestment of dividends or
capital gain distributions or (3) shares redeemed more than six years after
their purchase. Otherwise, redemptions of Class B shares will be subject to a
contingent deferred sales charge. The amount of any applicable contingent
deferred sales charge will be calculated by multiplying the net asset value of
such shares at the time of redemption by the applicable percentage shown in the
table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
REDEMPTION NET ASSET VALUE
DURING AT REDEMPTION
---------- -------------------
<S> <C>
1st Year Since Purchase..................................... 5%
2nd Year Since Purchase..................................... 4
3rd Year Since Purchase..................................... 3
4th Year Since Purchase..................................... 2
5th Year Since Purchase..................................... 2
6th Year Since Purchase..................................... 1
7th Year Since Purchase..................................... None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption is made first of Class B shares
representing capital appreciation, next of shares representing the reinvestment
of dividends and capital gain distributions and finally of other shares held by
the shareholder for the longest period of time. The holding period of Class B
shares of a Fund acquired through an exchange with another PaineWebber mutual
fund will be calculated from the date that the Class B shares were initially
acquired in one of the other PaineWebber funds, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gain distribution reinvestments in such other funds.
This will result in any contingent deferred sales charge being imposed at the
lowest possible rate. The same method will be used in determining the
applicability and rate of any contingent deferred sales charge on Class A
shares. For federal income tax purposes, the amount of the contingent deferred
sales charge will reduce the gain or increase the loss, as the case may be,
realized on the redemption. The
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INCOME FUND
amount of any contingent deferred sales charge will be paid to Mitchell
Hutchins.
SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge will
be waived for exchanges, as described below, and for redemptions in connection
with each Fund's systematic withdrawal plan. In addition, the contingent
deferred sales charge will be waived for a total or partial redemption made
within one year of the death of the shareholder. The contingent deferred sales
charge waiver is available where the decedent is either the sole shareholder or
owns the shares with his or her spouse as a joint tenant with right of
survivorship. This waiver applies only to redemption of shares held at the time
of death. The contingent deferred sales charge will also be waived in
connection with a lump-sum or other distribution in the case of an IRA, a self-
employed individual retirement plan (so-called "Keogh Plan") or a custodial
account under Section 403(b) of the Internal Revenue Code following attainment
of age 59 1/2; any total or partial redemption resulting from any distribution
following retirement in the case of a tax-qualified retirement plan; and a
redemption resulting from a tax-free return of an excess contribution to an
IRA.
Contingent deferred sales charge waivers will be granted subject to
confirmation (by PaineWebber in the case of shareholders who are PaineWebber
clients or by the Transfer Agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
PURCHASES OF CLASS D SHARES. The public offering price of the Class D shares of
each Fund is the next determined net asset value. No initial or contingent
deferred sales charge is imposed.
--------------------------------------------------------------------------------
Exchanges
--------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of the corresponding Class of
the other Funds or the PaineWebber and Mitchell Hutchins/Kidder, Peabody mutual
funds, or may be acquired through an exchange of shares of the corresponding
Class of those funds. No initial sales charge is imposed on the shares being
acquired, and no contingent deferred sales charge is imposed on the shares
being disposed of, through an exchange. However, contingent deferred sales
charges may apply to redemptions of Class B shares of PaineWebber mutual funds
acquired through an exchange. Class B shares of MH/KP mutual funds differ from
those of PaineWebber mutual funds. Class B shares of MH/KP mutual funds are
equivalent to Class D shares of PaineWebber mutual funds. Thus, contingent
deferred sales charges are not applicable to redemptions of the Class B shares
of MH/KP mutual funds. A $5.00 exchange fee is charged for each exchange, and
exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
Exchanges are permitted among the Funds and with other PaineWebber and MH/KP
mutual funds, including:
INCOME FUNDS
.MH/KP Adjustable Rate Government Fund
.MH/KP Global Fixed Income Fund
.MH/KP Government Income Fund
.MH/KP Intermediate Fixed Income Fund
.PW Global Income Fund
.PW Short-Term U.S. Government Income Fund
.PW Short-Term U.S. Government Income Fund for Credit Unions
.PW Strategic Income Fund
TAX-FREE INCOME FUNDS
.MH/KP Municipal Bond Fund
.PW California Tax-Free Income Fund
.PW Municipal High Income Fund
.PW National Tax-Free Income Fund
.PW New York Tax-Free Income Fund
GROWTH FUNDS
.MH/KP Emerging Markets Equity Fund
.MH/KP Global Equity Fund
.MH/KP Small Cap Growth Fund
.PW Atlas Global Growth Fund
.PW Blue Chip Growth Fund
.PW Capital Appreciation Fund
.PW Communications & Technology Growth Fund
.PW Europe Growth Fund
.PW Growth Fund
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
.PW Regional Financial Growth Fund
.PW Small Cap Value Fund
GROWTH AND INCOME FUNDS
.MH/KP Asset Allocation Fund
.MH/KP Equity Income Fund
.PW Asset Allocation Fund
.PW Global Energy Fund
.PW Global Growth and Income Fund
.PW Growth and Income Fund
.PW Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms unless the shares to be exchanged
are held in certificate form. Shareholders who are not PaineWebber clients or
who hold their shares in certificated form must place exchange orders in
writing with the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual Funds,
P.O. Box 8950, Wilmington, Delaware 19899. All exchanges will be effected based
on the relative net asset values per share next determined after the exchange
order is received at PaineWebber's New York City offices or by the Transfer
Agent. See "Valuation of Shares." Shares of the Funds purchased through
PaineWebber or its correspondent firms may be exchanged only after the
settlement date has passed and payment for such shares has been made.
OTHER EXCHANGE INFORMATION. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is available only in those jurisdictions where
the sale of the PaineWebber and MH/KP fund shares to be acquired through such
exchange may be legally made. Before making any exchange, shareholders should
contact their PaineWebber investment executives or correspondent firms or the
Transfer Agent to obtain more information and prospectuses of the PaineWebber
and MH/KP funds to be acquired through the exchange.
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Redemptions
--------------------------------------------------------------------------------
As described below, Fund shares may be redeemed at their net asset value
(subject to any applicable contingent deferred sales charge) and redemption
proceeds will be paid within seven days of the receipt of a redemption request.
PaineWebber clients may redeem non-certificated shares through PaineWebber or
its correspondent firms; all other shareholders must redeem through the
Transfer Agent. If a redeeming shareholder owns shares of more than one Class,
the shares will be redeemed in the following order unless the shareholder
specifically requests otherwise: Class D shares, then Class A shares, and
finally Class B shares.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients may
submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As each Fund's agent,
PaineWebber may honor a redemption request by repurchasing Fund shares from a
redeeming shareholder at the shares' net asset value next determined after
receipt of the request by PaineWebber's New York City offices. Within seven
days, repurchase proceeds (less any applicable contingent deferred sales
charge) will be paid by check or credited to the shareholder's brokerage
account at the election of the shareholder. PaineWebber investment executives
and correspondent firms are responsible for promptly forwarding redemption
requests to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients or who wish to redeem certificated shares must redeem their
shares through the Transfer Agent by mail; other shareholders also may redeem
Fund shares through the Transfer Agent. Shareholders should mail redemption
requests directly to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual
Funds, P.O. Box 8950,
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INCOME FUND
Wilmington, Delaware 19899. A redemption request will be executed at the net
asset value next computed after it is received in "good order." "Good order"
means that the request must be accompanied by the following: (1) a letter of
instruction or a stock assignment specifying the number of shares or amount of
investment to be redeemed (or that all shares credited to a Fund account be
redeemed), signed by all registered owners of the shares in the exact names in
which they are registered, (2) a guarantee of the signature of each registered
owner by an eligible institution acceptable to the Transfer Agent and in
accordance with SEC rules, such as a commercial bank, trust company or member
of a recognized stock exchange, (3) other supporting legal documents for
estates, trusts, guardianships, custodianships, partnerships and corporations
and (4) duly endorsed share certificates, if any. Shareholders are responsible
for ensuring that a request for redemption is received in "good order."
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder who holds non-certificated
Fund shares may have redemption proceeds of $1 million or more wired to the
shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's PaineWebber
investment executive or correspondent firm, or to the Transfer Agent if the
shares are not held in a PaineWebber brokerage account. If a shareholder
requests redemption of shares which were purchased recently, a Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.
Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to redeem all Fund shares in any
shareholder account of less than $500 net asset value. If a Fund elects to do
so, it will notify the shareholder and provide the shareholder the opportunity
to increase the amount invested to $500 or more within 60 days of the notice. A
Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount redeemed by purchasing Class A
shares of the same Fund within 365 days of the redemption. To take advantage of
this reinstatement privilege, shareholders must notify their PaineWebber
investment executive or correspondent firm at the time the privilege is
exercised.
--------------------------------------------------------------------------------
Conversion of Class B Shares
--------------------------------------------------------------------------------
A shareholder's Class B shares will automatically convert to Class A shares in
the same Fund approximately six years after the date of issuance, together with
a pro rata portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares. The Class B shares so
converted will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net asset values per
share of the two Classes on the first Business Day of the month in which the
sixth anniversary of the issuance of the Class B shares occurs. See "Valuation
of Shares." If a shareholder effects one or more exchanges among Class B shares
of the PaineWebber mutual funds during the six-year period, the holding periods
for the shares so exchanged will be counted toward the six-year period.
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INCOME FUND
--------------------------------------------------------------------------------
Other Services and Information
--------------------------------------------------------------------------------
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll-free at 1-800-647-1568.
AUTOMATIC INVESTMENT PLAN. Shareholders may purchase shares of the Funds
through an automatic investment plan, under which an amount specified by the
shareholder of $50 or more each month will be sent to the Transfer Agent from
the shareholder's bank for investment in a Fund. In addition to providing a
convenient and disciplined manner of investing, participation in the automatic
investment plan enables the investor to use the technique of "dollar cost
averaging." When under the plan a shareholder invests the same dollar amount
each month, the shareholder will purchase more shares when a Fund's net asset
value per share is low and fewer shares when the net asset value per share is
high. Using this technique, a shareholder's average purchase price per share
over any given period will be lower than if the shareholder purchased a fixed
number of shares on a monthly basis during the period.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own non-certificated Class A or
Class D shares of a Fund with a value of $5,000 or more or Class B shares of a
Fund with a value of $20,000 or more may have PaineWebber redeem a portion of
their shares monthly, quarterly or semi-annually under the systematic
withdrawal plan. No contingent deferred sales charge will be imposed on such
withdrawals for Class B shares. The minimum amount for all withdrawals of Class
A or Class D shares is $100, and minimum monthly, quarterly and semi-annual
withdrawal amounts for Class B shares are $200, $400 and $600, respectively.
Quarterly withdrawals are made in March, June, September and December, and
semi-annual withdrawals are made in June and December. A Class B shareholder of
a Fund may not withdraw an amount exceeding 12% annually of his or her "Initial
Account Balance," a term that means the value of the Fund account at the time
the shareholder elects to participate in the systematic withdrawal plan. A
Class B shareholder's participation in the systematic withdrawal plan will
terminate automatically if the Initial Account Balance (plus the net asset
value on the date of purchase of Fund shares acquired after the election to
participate in the systematic withdrawal plan), less aggregate redemptions made
other than pursuant to the systematic withdrawal plan, is less than $20,000.
Shareholders who receive dividends or other distributions in cash may not
participate in the systematic withdrawal plan. Purchases of additional shares
of a Fund concurrent with withdrawals are ordinarily disadvantageous to
shareholders because of tax liabilities and, for Class A shares, sales charges.
INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Funds may be purchased through
IRAs available through the Funds. In addition, a Self-Directed IRA is available
through PaineWebber under which investments may be made in the Funds as well as
in other investments available through PaineWebber. Investors considering
establishing an IRA should review applicable tax laws and should consult their
tax advisers.
TRANSFER OF ACCOUNTS. If a shareholder holding shares of a Fund in a
PaineWebber brokerage account transfers his brokerage account to another firm,
the Fund shares normally will be transferred to an account with the Transfer
Agent. However, if the other firm has entered into a selected dealer agreement
with Mitchell Hutchins relating to a Fund, the shareholder may be able to hold
Fund shares in an account with the other firm.
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INCOME FUND
--------------------------------------------------------------------------------
Dividends and Taxes
--------------------------------------------------------------------------------
DIVIDENDS. Dividends from each Fund's net investment income are declared daily
and paid monthly on or about the 15th day of each month. Net investment income
includes accrued interest and discount, less amortization of premium and
accrued expenses. High Income Fund may, but is not required to, distribute with
any dividend all or a portion of any net realized gains from foreign currency
transactions. Substantially all of each 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, together with, for High Income Fund, with any
undistributed net realized gains from foreign currency transactions, are
distributed annually. The Funds may make additional distributions if necessary
to avoid a 4% excise tax on certain undistributed income and capital gain.
While High Income Fund will not declare any dividend in excess of the amount of
net investment income and net realized gains from foreign currency transactions
available for distribution at the time of declaration, it is possible that net
losses from foreign currency transactions after that time could convert a
portion of such a dividend to a non-taxable return of capital.
Dividends and other distributions paid on all Classes of shares of a Fund are
calculated at the same time and in the same manner. Dividends on Class B and
Class D shares of a Fund are expected to be lower than those on its Class A
shares because of the higher expenses resulting from distribution fees borne by
the Class B and Class D shares. For the same reason, dividends on Class B
shares are expected to be lower than those on Class D shares. Dividends on each
Class also might be affected differently by the allocation of other Class-
specific expenses. See "Valuation of Shares."
Shares purchased through PaineWebber investment executives and correspondent
firms begin earning dividends on the Business Day following the date payment
for such shares is due; shares purchased through the Transfer Agent begin
earning dividends on the Business Day following the Transfer Agent's receipt of
payment for such shares. Shares acquired through an exchange begin earning
dividends on the Business Day following the day on which the exchange is
effected.
Each Fund's dividends and capital gain distributions are paid in additional
Fund shares of the same Class at net asset value unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
capital gain distributions in cash, either mailed to the shareholder by check
or credited to the shareholder's PaineWebber account, should contact their
PaineWebber investment executives or correspondent firms or complete the
appropriate section of the application form.
TAXES. Each 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, net short-term capital gain
and, for High Income Fund, net gains from certain foreign currency
transactions) and net capital gain that is distributed to its shareholders.
Dividends from a Fund's investment company taxable income (whether paid in cash
or in additional shares) generally are taxable to its shareholders as ordinary
income. Distributions of a Fund's net capital gain (whether paid in cash or in
additional shares) are taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Shareholders not
subject to tax on their income will not be required to pay tax on amounts
distributed to them.
Each Fund notifies its shareholders following the end of each calendar year of
the amounts of dividends and capital gain distributions paid (or deemed paid)
that year.
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
also is required from dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of shares of a Fund may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds payable to
the shareholder are more or less than the shareholder's adjusted basis for the
redeemed shares (which normally includes any initial sales charge paid on Class
A shares). An exchange of Fund shares for shares of another PaineWebber or
MH/KP fund generally will have similar tax consequences. However, special tax
rules apply when a shareholder (1) disposes of Class A shares of a Fund through
a redemption or exchange within 90 days of purchase and (2) subsequently
acquires Class A shares of a PaineWebber or MH/KP fund without paying a sales
charge due to the 365-day reinstatement privilege or the exchange privilege. In
these cases, any gain on the disposition of the original Class A shares will be
increased, or loss decreased, by the amount of the sales charge paid when the
shares were acquired, and that amount will increase the basis of the
PaineWebber or MH/KP fund shares subsequently acquired. In addition, if shares
of a Fund are purchased within 30 days before or after redeeming that Fund's
shares (regardless of Class) at a loss, all or a portion of that loss will not
be deductible and will increase the basis of the newly purchased shares.
No gain or loss will be recognized to a shareholder as a result of a conversion
of Class B shares into Class A shares.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. There may be
other federal, state or local tax considerations applicable to a particular
investor. Prospective investors are urged to consult their tax advisers.
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Valuation of Shares
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The net asset value of each Fund's shares fluctuates and is determined
separately for each Class as of the close of regular trading on the NYSE
(currently 4:00 p.m., eastern time) each Business Day. Each Fund's net asset
value per share is determined 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.
Each 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
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board of trustees determines that this does not represent
fair value. Investments of High Income Fund denominated in foreign currencies
are valued daily in U.S. dollars based on the then-prevailing exchange rate. It
should be recognized that judgment plays a greater role in valuing lower rated
debt securities because there is less reliable, objective data available.
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Management
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The Trust's board of trustees, as part of its overall management
responsibility, oversees various organizations responsible for the Funds' day-
to-day management. Mitchell Hutchins, investment adviser and administrator of
each Fund, makes and implements all investment decisions and supervises all
aspects of each Fund's operations. Mitchell Hutchins receives a monthly fee for
these services at the annual rate of 0.50% of each Fund's average daily net
assets.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Each Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for certain services not provided by the Transfer
Agent. Each Fund incurs other expenses, and, for the fiscal year ended November
30, 1994, the Funds' total expenses for their Class A, Class B and Class D
shares, stated as a percentage of average net assets, were as follows: 0.95%,
1.72% and 1.45% for U.S. Government Income Fund, 0.97%, 1.72% and 1.45% for
Investment Grade Income Fund and 0.91%, 1.64% and 1.38% for High Income Fund.
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 by Paine Webber Group Inc., a publicly owned financial services holding
company. As of February 28, 1995, Mitchell Hutchins was adviser or sub-adviser
of 42 investment companies with 77 separate portfolios and aggregate assets 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
diversified 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
responsible for managing approximately $3 billion in mortgage assets. From 1987
to 1990, Mr. Singh was a vice president of Lehman Brothers. Mr. Varrelman has
been with Mitchell Hutchins as a portfolio manager since 1988 and manages fixed
income portfolios with assets totaling approximately $1.5 billion, with an
emphasis on U.S. government securities.
Mary B. King has been responsible for the day-to-day management of Investment
Grade Income Fund's portfolio since February 1991. Mrs. King is a vice
president of the Trust and also a first vice president of Mitchell Hutchins.
She has been employed by Mitchell Hutchins since 1985.
Thomas J. Libassi has been responsible for the day-to-day management of High
Income Fund's portfolio since May 1994. Mr. Libassi is a senior vice president
of Mitchell Hutchins. Prior to May 1994, Mr. Libassi was a vice president of
Keystone Custodian Funds Inc. with portfolio management responsibility for
approximately $900 million in assets primarily invested in high yield debt
securities.
Other members of Mitchell Hutchins' domestic fixed income and high yield groups
provide input on market outlook, interest rate factors and other considerations
pertaining to fixed income investments.
Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics which establishes
procedures for personal investing and restricts certain transactions.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins is the distributor of each Fund's
shares and has appointed PaineWebber as the exclusive dealer for the sale of
those shares. Under separate plans of distribution pertaining to the Class A
shares, Class B shares and Class D shares ("Class A Plan," "Class B Plan" and
"Class D Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins
monthly service fees at the annual rate of 0.25% of the average daily net
assets of each Class of shares. Each Fund also pays Mitchell Hutchins monthly
distribution fees at the annual rate of 0.75% of the average daily net assets
of the Class B shares and 0.50% of the average daily net assets of the Class D
shares.
Under all three Plans, Mitchell Hutchins uses the service fees primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund by PaineWebber
clients. PaineWebber passes on a portion of these fees to its investment
executives to compensate them for shareholder servicing that they perform and
retains the remainder to offset its own expenses in servicing and maintaining
shareholder accounts. These expenses may include costs of the PaineWebber
branch office in which the investment executive is based, such as rent,
communications equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Class B Plan and Class D
Plan to offset the commissions it pays to PaineWebber for selling the Funds'
Class B and Class D shares. PaineWebber passes on to its investment executives
a portion of these commissions and retains the remainder to offset its expenses
in selling Class B and Class D shares. These
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
expenses may include the branch office costs noted above. In addition, Mitchell
Hutchins uses the distribution fees under the Class B and Class D Plans,
respectively, to offset each Fund's marketing costs attributable to such Class,
such as preparation of sales literature, advertising and printing and
distributing prospectuses and other shareholder materials to prospective
investors. Mitchell Hutchins also may use the distribution fees to pay
additional compensation to PaineWebber and other costs allocated to Mitchell
Hutchins' and PaineWebber's distribution activities, including employee
salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives
at the time of sale of Class D shares of one or more of the Funds. If
PaineWebber makes such payments, it will retain the service and distribution
fees on Class D shares until it has been reimbursed and thereafter will pass a
portion of the service and distribution fees on Class D shares on to its
investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class A shares and the contingent deferred sales charge paid
upon certain redemptions of Class B shares, and may use these proceeds for any
of the distribution expenses described above. See "Purchases."
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ("Distribution Contracts")
obligate the Funds to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. Thus, even if Mitchell Hutchins' expenses
exceed its service or distribution fees for any Fund, the Fund will not be
obligated to pay more than those fees, and, if Mitchell Hutchins' expenses are
less than such fees, it will retain its full fees and realize a profit. Each
Fund will pay the service and distribution fees to Mitchell Hutchins until
either the applicable Plan or Distribution Contract is terminated or not
renewed. In that event, Mitchell Hutchins' expenses in excess of service and
distribution fees received or accrued through the termination date will be
Mitchell Hutchins' sole responsibility and not obligations of the Fund. In
their annual consideration of the continuation of each Fund's Plans, the
trustees will review the Plan and Mitchell Hutchins' corresponding expenses for
each Class separately from the Plan and corresponding expenses for the other
two Classes.
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Performance Information
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Each Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for the Class
A shares of each Fund reflects deduction of the Fund's maximum initial sales
charge at the time of purchase, and standardized return for the Class B shares
of each Fund reflects deduction of the applicable contingent deferred sales
charge imposed on a redemption of shares held for the period. One-, five-and
ten-year periods will be shown, unless the Class has been in existence for a
shorter period. Total return calculations assume reinvestment of dividends and
other distributions.
Each Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were included.
Each Fund also may advertise its yield. Yield reflects investment income net of
expenses over a 30-day (or one-month) period on a Fund share, expressed as an
annualized percentage of the maximum offering price per share for Class A
shares and net asset value per share for Class B shares and Class D shares at
the end of the period. Yield computations differ from other accounting methods
and therefore may differ
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
from dividends actually paid or reported net income.
Each Fund will include performance data for all three Classes of Fund shares in
any advertisements or promotional materials including Fund performance data.
Total return and yield 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
shareholder's cost.
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General Information
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ORGANIZATION. PaineWebber Managed Investments Trust is registered with the SEC
as an open-end management investment company and was organized as a business
trust under the laws of the Commonwealth of Massachusetts by Declaration of
Trust dated November 21, 1986. The trustees have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$.001 per share. In addition to the Funds, shares of three other series have
been authorized.
The shares of beneficial interest of each Fund are divided into four Classes,
designated Class A shares, Class B shares, Class C shares and Class D shares.
Each Class represents interests in the same assets of each Fund. The Classes
differ as follows: (1) each Class of shares has exclusive voting rights on
matters pertaining to its plan of distribution, (2) Class A shares are subject
to an initial sales charge, (3) Class B shares bear ongoing distribution fees,
are subject to a contingent deferred sales charge upon certain redemptions and
will automatically convert to Class A shares approximately six years after
issuance, (4) Class C shares, which may be offered only to a limited class of
institutional investors, are subject to neither an initial or a contingent
deferred sales charge nor ongoing service or distribution fees, (5) 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
and (6) each Class may bear differing amounts of certain other Class-specific
expenses. The Trust's board of trustees does not anticipate that there will be
any conflicts among the interests of the holders of the different Classes of
shares of a Fund. On an ongoing basis, the board of trustees 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 holding office have been elected by shareholders. Shareholders of
record holding at least two-thirds of the outstanding shares of the Trust may
remove a trustee by votes cast in person or by proxy at a meeting called for
that purpose. The trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee when so
requested in writing by the shareholders of record holding at least 10% of the
Trust's outstanding shares. Each share of each Fund has equal voting rights,
except as noted above. Each share of each Fund is entitled to participate
equally in dividends and other distributions and the proceeds of any
liquidation except that, due to the differing expenses borne by the four
Classes, these dividends and proceeds are likely to be lower for the Class B
and Class D shares than for the Class A shares and are likely to be lower for
every other Class of shares than for Class C shares. The shares of the Funds
will be voted separately except when an aggregate vote of all series is
required by the Investment Company Act of 1940 ("1940 Act").
To avoid additional operating costs and for investor convenience, the Funds no
longer issue share certificates. Ownership of shares of each 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 Heritage
Drive, North Quincy, Massachusetts 02171, is custodian of each Fund's assets
and employs foreign sub-custodians, approved by the Trust's board of
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INCOME FUND
trustees in accordance with the applicable requirements of the 1940 Act, to
provide custody of High Income Fund's foreign assets. PFPC Inc., a subsidiary
of PNC Bank, National Association, whose principal business address is 400
Bellevue Parkway, Wilmington, Delaware 19809, is the Funds' transfer and
dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of shares of the Funds. PaineWebber clients receive statements
at least quarterly that report their Fund activity and consolidated year-end
statements that show all Fund transactions for that year. Shareholders who are
not PaineWebber clients receive quarterly statements from the Transfer Agent.
Shareholders also receive audited annual and unaudited semi-annual financial
statements of the Funds.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Appendix A
Mortgage-Backed Securities
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MORTGAGE-BACKED SECURITIES
The U.S. government securities in which the U.S. Government Income Fund and
Investment Grade Income Fund may invest include mortgage-backed securities
issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Other mortgage-
backed securities in which the Funds 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-
government credit enhancement. New types of mortgage-backed securities are
developed and marketed from time to time and, consistent with their investment
limitations, the Funds expect to invest in those new types of mortgage-backed
securities that Mitchell Hutchins believes may assist the Funds in achieving
their investment objectives. Similarly, the Funds 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 residential mortgage loans. These
securities are designed to provide monthly payments of interest and principal
to the investor. Timely payment of interest and principal is backed by the full
faith and credit of the U.S. government. Each mortgagor's monthly payments to
his lending institution on his residential mortgage are "passed through" to
certificateholders such as the Funds. Mortgage pools consist of whole mortgage
loans or participations in loans. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools.
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 referred 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 certificates"),
which represent pro rata shares of all interest and principal payments made and
owed on the underlying pools. Fannie Mae guarantees timely payment of interest
and principal on Fannie Mae certificates. The Fannie Mae guarantee is not
backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES
Freddie Mac also facilitates a national secondary market for conventional
residential and U.S. government-insured mortgage loans through its mortgage
purchase and mortgage-backed securities sales activities. Freddie Mac issues
two types of mortgage pass-through securities: mortgage participation
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 payment 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.
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INCOME FUND
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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
associations, 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 orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and are supported by one or more of
the types of private credit enhancements used by Private Mortgage Lenders.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS
CMOs are debt obligations that are collateralized 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
entities such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-through
securities 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 PO class)
on a monthly, quarterly or semi-annual basis. The principal and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in many
ways. In one structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in the
order of their respective stated maturities or final distribution dates so that
no payment of principal will be made on any class of the CMO until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. In some CMO structures, all or a portion of the interest
attributable to one or more of the CMO classes may be added to the principal
amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on each pay-
ment 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 securities are mortgage-backed securities that represent a
right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of mortgage loans bearing variable or adjustable
rates of interest (such mortgage loans are referred to as "ARMs"). Floating
rate
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INCOME FUND
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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 fluctuations than the values of fixed-rate
securities.
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on Mortgage Assets to make
payments, mortgage-backed securities may contain elements of credit
enhancement. Such credit enhancement falls into two categories: (1) liquidity
protection and (2) protection against losses resulting after default by an
obligor on the underlying assets and collection of all amounts recoverable
directly from the obligor and through liquidation of the collateral. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets (usually the bank, savings association or
mortgage banker that transferred the underlying loans to the issuer of the
security), to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting after default and
liquidation ensures ultimate payment of the obligations on at least a portion
of the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor, from
third parties, through various means of structuring the transaction or through
a combination of such approaches. The Funds will not pay any additional fees
for such credit enhancement, although the existence of credit enhancement may
increase the price of a security. Credit enhancements do not provide protection
against changes in the market value of the security.
Examples of credit enhancement arising out of the structure of the transaction
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
reserve against future losses) and "over-collateralization" (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 servicing 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 security.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Appendix B
Ratings
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DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. 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.
AA. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay
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INCOME FUND
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principal and differs from the highest rated issues only in small degree; A.
Debt rated A has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.
BB. Iindicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: "NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as matter of policy.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1. Issuers assigned this highest rating have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by the following characteristics: leading market positions
in well established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.
PRIME-2. Issuers assigned this rating have a strong ability for repayment of
senior short-term debt obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PRIME-3. Issuers assigned this rating have an acceptable capacity for repayment
of short-term promissory obligations. The effect of industry characteristics
and market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME. Issuers assigned this rating do not fall within any of the Prime
rating categories.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety; A-1. This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation; A-2. Capacity for timely payment on issues with this designation
is strong.
Prospectus Page B-2
<PAGE>
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----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
-------------
However, the relative degree of safety is not as high as for issues designated
A-1; A-3. Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations; B. Issues rated B are regarded as having only an adequate
capacity for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities; C. This rating is assigned to short-term
debt obligations with a doubtful capacity for payment; D. This rating indicates
that the issue is either in default or is expected to be in default upon
maturity.
Prospectus Page B-3
<PAGE>
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH
INCOME FUND
Appendix C
----------------------------------------------------------------------------
-------------
THE FUNDS MAY USE THE FOLLOWING INSTRUMENTS:
Options on Debt Securities and Foreign Currencies. 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 or currency 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 premium, has the obligation, upon exercise of the
option during the option term, to deliver the underlying security or currency
against payment of the exercise price. A put option is a similar contract which
gives its purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the term of the option. 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 underlying security
or currency 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
traditional 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
bilateral 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.
Although 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
options on securities, except that an option on a futures contract gives the
purchaser 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
specified 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 accompanied 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 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.
Forward Currency Contracts. A forward currency contract involves an obligation
to purchase or sell a specific currency at a specified future date, which may
be any fixed number of days from the contract date agreed upon by the parties,
at a price set at the time the contract is entered into.
Prospectus Page C-1
<PAGE>
Application Form
[_][_] - [_][_][_][_][_] - [_][_]
PaineWebber Account No.
THE PAINEWEBBER
MUTUAL FUNDS
--------------------------------------------------------------------------------
INSTRUCTIONS DO NOT USE THIS FORM IF YOU WOULD LIKE YOUR ACCOUNT SERVICED
THROUGH PAINEWEBBER. INSTEAD, CALL YOUR PAINEWEBBER INVESTMENT
EXECUTIVE (OR YOUR LOCAL PAINEWEBBER OFFICE TO OPEN AN ACCOUNT).
ALSO, DO NOT USE THIS FORM TO OPEN A Return this completed
RETIREMENT PLAN ACCOUNT. FOR form to: PFPC Inc. P.O.
RETIREMENT PLAN FORMS OR FOR Box 8950 Wilmington,
ASSISTANCE IN COMPLETING THIS FORM Delaware 19899 ATTN:
CONTACT PFPC INC. AT 1-800-647-1568. PaineWebber Mutual Funds
PLEASE PRINT
--------------------------------------------------------------------------------
[1] INITIAL INVESTMENT ($1,000 MINIMUM)
ENCLOSED IS A CHECK FOR:
$____(payable to PaineWebber U.S. Government Income Fund) to
purchase Class A [_] Class B [_] or Class D [_] shares
$____(payable to PaineWebber Investment Grade Income Fund)
to purchase Class A [_] Class B [_] or Class D [_] shares
$____(payable to PaineWebber High Income Fund) to purchase
Class A [_] Class B [_] or Class D [_] shares
(Check one; if no Class is specified, Class A shares will be
purchased)
A separate check is required for your investment in each
Fund.
[2] ACCOUNT REGISTRATION
Not valid
without 1. Individual / /
signature and ----------- --------------- --------------
Soc. Sec. or First Name Last Name MI Soc. Sec. No.
Tax ID # on
accompanying
Form W-9 2. Joint Tenancy / /
----------- --------------- --------------
--As joint First Name Last Name MI Soc. Sec. No.
tenants, use ("Joint Tenants with Rights of Survivorship"
Lines 1 and 2 unless otherwise specified)
--As custodian
for a minor, 3. Gifts to Minors / /
use Lines 1 ------------------------- --------------
and 3 Minor's Name Soc. Sec. No.
--In the name
of a Under the __________________ Uniform Gifts / Uniform Transfers
corporation, State of Residence to Minors Act to Minors Act
trust or other of Minor
organization
or any 4. Other Registrations
fiduciary ---------------------- --------------
capacity, use Name Tax Ident.
Line 4 No.
5. If Trust, Date of Trust Instrument: _______
[3] ADDRESS
---------------------------- U.S. Citizen [_] YES [_] NO*
Street
---------------------------- ----------------------------
City State Zip Code *Country of Citizenship
[4] DISTRIBUTION OPTIONS See Prospectus
Please select one of the following:
[_] Reinvest both dividends and capital gain distributions in
additional shares
[_] Pay dividends to my address above; reinvest capital gain
distributions
[_] Pay both dividends and capital gain distributions in cash
to my address above
[_] Reinvest dividends and pay capital gain distributions in
cash to my address above
NOTE: If a selection is not made, both dividends and cap-
ital gain distributions will be paid in additional Fund
shares of the same Class.
<PAGE>
[5] SPECIAL OPTIONS (For More Information--Check Appropriate Box)
[_] Prototype IRA [_] Automatic Invest- [_] Systematic Withdraw-
Application ment Plan al Plan
[6] RIGHTS OF ACCUMULATION--CLASS A SHARES See Prospectus
Indicate here any other account(s) in
the group of funds that qualify for the
cumulative quantity discount as outlined
in the Prospectus.
--------------------- ----------- ---------------------
Fund Name Account No. Registered Owner
--------------------- ----------- ---------------------
Fund Name Account No. Registered Owner
--------------------- ----------- ---------------------
Fund Name Account No. Registered Owner
[7] PLEASE INDICATE BELOW IF YOU ARE AFFILIATED WITH PAINEWEBBER
"Affiliated" persons are defined as officers,
directors/trustees and employees of the PaineWebber funds,
PaineWebber or its affiliates, and their parents, spouses and
children.
-----------------------------------------------
Nature of Relationship
[8] SIGNATURE (S) AND TAX CERTIFICATION
I warrant that I have full authority and am of legal age to
purchase shares of the Fund(s) specified and have received and
read a current Prospectus of the Fund(s) and agree to its
terms. The Fund(s) and their Transfer Agent will not be liable
for acting upon instructions or inquiries believed genuine.
Under penalties of perjury, I certify that (1) my taxpayer
identification number provided in this application is correct
and (2) I am not subject to backup withholding because (i) I
have not been notified that I am subject to backup withholding
as a result of failure to report interest or dividends or (ii)
the IRS has notified me that I am no longer subject to backup
withholding (STRIKE OUT CLAUSE (2) IF INCORRECT).
---------------------- ---------------------- -------
Individual (or Joint Registrant Date
Custodian) (if any)
---------------------- ---------------------- -------
Corporate Officer, Title Date
Partner, Trustee, etc.
[9] INVESTMENT EXECUTIVE IDENTIFICATION (To Be Completed By In-
vestment Executive Only)
-------------------------- --------------------------
Broker No./Name Branch Wire Code
( )
-------------------------- --------------------------
Branch Address Telephone
[10] CORRESPONDENT FIRM IDENTIFICATION (To Be Completed By Corre-
spondent Firm Only)
-------------------------- --------------------------
Name Address
--------------------------
MAIL COMPLETED FORM TO YOUR PAINEWEBBER INVESTMENT EXECUTIVE OR
CORRESPONDENT FIRM OR TO: PFPC INC., P.O. BOX 8950, WILMINGTON,
DELAWARE 19899.
<PAGE>
GROWTH AND INCOME FUNDS
.MH/KP Asset Allocation Fund
.MH/KP Equity Income Fund
.PW Asset Allocation Fund
.PW Global Energy Fund
.PW Global Growth and Income Fund
.PW Growth and Income Fund
.PW Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
<PAGE>
Shares of the Funds can be exchanged for shares of the following PaineWebber
("PW") and Mitchell Hutchins/Kidder, Peabody ("MH/KP") Mutual Funds:
.MH/KP Adjustable Rate Government Fund
.MH/KP Global Fixed Income Fund
.MH/KP Government Income Fund
.MH/KP Intermediate Fixed Income Fund
.PW Global Income Fund
.PW Short-Term U.S. Government Income Fund
. PW Short-Term U.S. Government Income Fund for Credit Unions
.PW Strategic Income Fund
TAX-FREE INCOME FUNDS
.MH/KP Municipal Bond Fund
.PW California Tax-Free Income Fund
.PW Municipal High Income Fund
.PW National Tax-Free Income Fund
.PW New York Tax-Free Income Fund
GROWTH FUNDS
.MH/KP Emerging Markets Equity Fund
.MH/KP Global Equity Fund
.MH/KP Small Cap Growth Fund
.PW Atlas Global Growth Fund
.PW Blue Chip Growth Fund
.PW Capital Appreciation Fund
.PW Communications & Technology Growth Fund
.PW Europe Growth Fund
.PW Growth Fund
.PW Regional Financial Growth Fund
.PW Small Cap Value Fund
----------
(continued on the inside of back cover)
A prospectus containing more complete information for any of the above funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Read the prospectus carefully before
investing.
(C) 1995 PaineWebber Incorporated
LOGO Recycled Paper
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
INVESTMENT GRADE
INCOME FUND
HIGH INCOME FUND
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
PROSPECTUS
April 1, 1995
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PAINEWEBBER HIGH INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The three Funds named above (each a "Fund") are diversified series of
PaineWebber Managed Investments Trust ("Trust"), a professionally managed
mutual fund. PaineWebber U.S. Government Income Fund ("U.S. Government Income
Fund") seeks to provide high current income consistent with the preservation of
capital and liquidity; it invests primarily in U.S. government securities.
PaineWebber Investment Grade Income Fund ("Investment Grade Income Fund") also
seeks to provide high current income consistent with the preservation of
capital and liquidity; it invests primarily in investment grade corporate bonds
and other fixed income securities. PaineWebber High Income Fund ("High Income
Fund") seeks to provide the highest level of current income available without
undue risk; it invests primarily in high risk, high yielding medium and lower
quality corporate bonds. The Funds' 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 Funds, Mitchell Hutchins has appointed PaineWebber to serve
as exclusive dealer for the sale of Fund shares. This Statement of Additional
Information is not a prospectus and should be read only in conjunction with the
Funds' current Prospectus, dated April 1, 1995. A copy of the Prospectus may be
obtained by calling any PaineWebber investment executive or correspondent firm,
or by calling toll-free 1-800-647-1568. This Statement of Additional
Information is dated April 1, 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Funds.
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 debt obligations. A description of the ratings assigned
to debt obligations by S&P and Moody's is included in Appendix B to the
Prospectus. 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 any, and the structural,
legal and tax aspects associated with such securities. Neither of such ratings
represents an assessment of the likelihood that principal prepayments will be
made by mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to
prepayments.
<PAGE>
A Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, 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 any 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
that 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 bonds and other debt securities in which the Funds invest 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 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
bonds 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.
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
2
<PAGE>
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 U.S. Government Income and Investment Grade Income Funds 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 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
3
<PAGE>
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.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are
usually subordinated to comparable nonconvertible securities. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed
income security. Convertible securities have unique investment characteristics
in that they generally (1) have higher yields than common stocks, but lower
yields than comparable nonconvertible securities, (2) are less subject to
fluctuation in value than the underlying stock since they have fixed income
characteristics and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value and generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its
4
<PAGE>
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding a fixed income
security.
Investment Grade Income Fund has no current intention of converting any
convertible securities it may own into equity or holding them as equity upon
conversion, although it may do so for temporary purposes. A convertible
security may be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will
be required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
ILLIQUID SECURITIES. Each 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 a 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 a 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, a Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
institutional buyers interested in purchasing Rule 144A-eligible restricted
securities held by a Fund,
5
<PAGE>
however, could affect adversely the marketability of such portfolio securities,
and a Fund might be unable to dispose of such securities promptly or at
favorable 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 bids are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of restricted securities in each Fund's
portfolio and reports periodically on such decisions to the board of trustees.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a 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. A 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 a
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 a Fund if the other party to
a repurchase agreement becomes insolvent. Each 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.
REVERSE REPURCHASE AGREEMENTS. Investment Grade Income Fund and High Income
Fund each may enter into reverse repurchase agreements with banks and
securities dealers up to an aggregate value of not more than 10% of its total
assets. Such agreements involve the sale of securities held by the Fund subject
to the Fund's agreement to repurchase the securities at an agreed-upon date and
price reflecting a market rate of interest. Such agreements are considered to
be borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, a Fund's custodian
segregates assets to cover the amount of the Fund's obligations under the
reverse repurchase agreement. See "Investment Policies and Restrictions--
Segregated Accounts."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
each 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 a
Fund's
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net asset value. When a 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 Funds
purchase 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 a Fund.
FOREIGN SECURITIES. Investment Grade Income Fund may invest up to 10% of its
net assets in U.S. dollar-denominated securities of foreign issuers or foreign
branches of U.S. banks that are traded in the U.S. securities markets, or in
U.S. dollar-denominated securities the value of which is linked to the value of
foreign currencies. High Income Fund may invest up to 25% of its net assets in
securities of foreign issuers, with no more than 10% of its net assets in
securities of foreign issuers that are denominated and traded in currencies
other than the U.S. dollar. An investment in these Funds may involve risks
relating to political, social and economic developments abroad as well as risks
resulting from the differences between the regulations to which U.S. and
foreign issuers and markets are subject. These risks include expropriation,
confiscatory taxation, withholding taxes, political or social instability or
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments positions. To the extent these Funds invest
in foreign securities, the securities may not be registered with the Securities
and Exchange Commission ("SEC"), nor the issuers thereof subject to its
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by these Funds than
is available concerning U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory requirements comparable to those applicable to U.S. companies.
Securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. Transactions in
foreign securities may be subject to less efficient settlement practices. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts. Foreign
securities trading practices, including those involving securities settlement
where High Income Fund assets may be released prior to receipt of payment, may
expose that Fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer.
If the value of a foreign currency rises against the value of the U.S.
dollar, the value of Fund assets denominated in that currency or linked to that
currency will increase; correspondingly, if the value of a foreign currency
declines against the value of the U.S. dollar, the value of Fund assets
denominated in that currency or linked to that currency will decrease. The
exchange rates between the U.S. dollar and other currencies are determined by
supply and demand in the currency exchange markets, international balances of
payments, governmental intervention, speculation and other economic and
political conditions.
The costs attributable to foreign investing borne by High Income Fund
frequently are higher than those attributable to domestic investing. For
example, the cost of maintaining custody of foreign securities exceeds
custodian costs for domestic securities, and transaction and settlement costs
of foreign investing also frequently are higher than those attributable to
domestic investing. Costs associated with the exchange of currencies also make
foreign investing more expensive than domestic investing. Investment income on
certain foreign securities in which the Fund may invest
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may be subject to foreign withholding or other government taxes that could
reduce the return of these securities. Tax treaties between the United States
and foreign countries, however, may reduce or eliminate the amount of foreign
tax to which the Fund would be subject.
LENDING OF PORTFOLIO SECURITIES. Although the Funds have no intention of
doing so during the coming year, each 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. Each Fund will retain authority to terminate
any loans at any time. A 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. A 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. A 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.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Although they have no intention of doing
so during the coming year, Investment Grade Income Fund and High Income Fund
each may invest up to 5% of its total assets in secured or unsecured fixed or
floating rate loans ("Loans") arranged through private negotiations between a
borrowing corporation and one or more financial institutions ("Lenders"). The
Funds' investments in Loans are expected in most instances to be in the form of
participations ("Participations") in Loans and assignments ("Assignments") of
all or a portion of Loans from third parties. Participations typically will
result in a Fund's having a contractual relationship only with the Lender, not
with the borrower. A Fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In connection with purchasing Participations, the Funds generally
have no direct right to enforce compliance by the borrower with the terms of
the loan agreement relating to the Loan, nor any rights of set-off against the
borrower, and the Funds may not directly benefit from any collateral supporting
the Loan in which they have purchased the Participation. As a result, the Funds
will assume the credit risk of both the borrower and the Lender that is selling
the Participation. In the event of the insolvency of the Lender selling a
Participation, a Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Funds
will acquire Participations only if the Lender interpositioned between the Fund
and the borrower is determined by Mitchell Hutchins to be creditworthy.
When a Fund purchases Assignments from Lenders, it acquires direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by a Fund as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.
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Assignments and Participations are generally not registered under the 1933
Act and thus are subject to each Fund's limitation on investment in illiquid
securities to 10% of its net assets. Because there is no liquid market for such
securities, the Funds anticipate that such securities could be sold only to a
limited number of institutional investors. The lack of a liquid secondary
market will have an adverse impact on the value of such securities and on the
Funds' ability to dispose of particular Assignments or Participations when
necessary to meet the Funds' liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the
borrower.
SEGREGATED ACCOUNTS. When a 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, interest rate protection transactions or forward
currency contracts.
INVESTMENT LIMITATIONS. U.S. Government Income Fund may not (1) purchase the
securities of any issuer if as a result more than 5% of the total assets of the
Fund would be invested in the securities of that issuer; provided that
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities are not subject to this limitation and further provided that
up to 25% of the value of the Fund's assets may be invested without regard to
this limitation; (2) issue senior securities or borrow money, except from banks
or through reverse repurchase agreements and dollar rolls, and then in an
aggregate amount not in excess of 33 1/3% of the Fund's total assets (including
the amount of the borrowings and senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of such borrowings,
except that the Fund may borrow up to an additional 5% of 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 ("Ginnie Mae") 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)
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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.
Investment Grade Income Fund and High Income Fund each 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 for temporary or emergency purposes,
and then in an aggregate amount not in excess of 10% of the Fund's total assets
at the time of such borrowings; provided that a Fund will not purchase
securities while borrowings (including reverse repurchase agreements) in excess
of 5% of its total assets are outstanding; (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 obligations issued or guaranteed by the U.S.
government, its agencies and instrumentalities; (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
Ginnie Mae 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 a 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
a 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 a 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 for any
Fund 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 for any Fund by the vote
of the Trust's board of trustees without shareholder approval: (1) no Fund may
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) no Fund may 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
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things, repurchase agreements maturing in more than seven days; (3) no Fund may
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; and (4) neither U.S. Government
Income Fund nor Investment Grade Income Fund will invest more than 35% of its
total assets in debt securities rated Ba or lower by Moody's or 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.
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 Funds' investment limitations or restrictions or of a
Fund's investment policies.
The Funds will continue to interpret fundamental investment limitation (5) to
prohibit investment in real estate limited partnerships. The Funds will
continue to interpret fundamental investment limitation (8) to prohibit
investment in oil, gas or mineral leases.
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 a Fund's
portfolio and to enhance income. Mitchell Hutchins also may attempt to hedge a
Fund's portfolio through the use of interest rate protection transactions, and
High Income Fund may use forward currency contracts for hedging purposes. The
particular Hedging Instruments used by the Funds are described in Appendix C 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 a Fund's portfolio. Thus, in a short hedge a 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, a
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 that 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 a Fund intends to acquire. Thus, in a long
hedge a Fund takes a position in a Hedging Instrument whose
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price is expected to move in the same direction as the price of the prospective
investment being hedged. For example, a 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.
Each 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. A 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 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. A 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 a 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
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, a 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 Funds' investment objectives and permitted by the
Funds' investment limitations and applicable regulatory authorities. The Funds'
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 and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is
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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, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a 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, a 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 a 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 a 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 a Fund sell a portfolio
security at a disadvantageous time. A 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 a Fund to an obligation to another party. A Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, currencies (for High Income
Fund) or other options, futures contracts or (for High Income Fund) forward
currency 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. Each 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
a 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.
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OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put and call options, on debt securities and (for High Income Fund)
foreign currencies. 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 a 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, 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 or currency 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 or
currency 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.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a 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 a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies 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. A Fund will enter into OTC option transactions only
with contra parties that have a net worth of at least $20 million.
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A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each 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 a 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.
If a 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 a 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.
A 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. Each 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. A 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 any
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, foreign currencies 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 Funds may purchase and sell interest rate futures contracts and
purchase put and call options, and write covered put and call options, on such
futures contracts. 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 a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration
of a Fund, the Fund may sell an interest rate 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 a Fund, the Fund may buy an
interest rate futures contract or a call option thereon or sell a put option
thereon.
15
<PAGE>
Each 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. A 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 a Fund is required to deposit in a segregated
account with its custodian, in the name of 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 futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a put or 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.
Each 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 a 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.
16
<PAGE>
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 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. Each 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 a Fund enters into futures contracts and options on futures
positions including, for High Income Fund, options on foreign currencies traded
on a commodities exchange 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, foreign currencies 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.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. High Income Fund
may use options on foreign currencies, as described above, and forward currency
contracts, as described below, to hedge against movements in the values of the
foreign currencies in which that Fund's securities are denominated. Such
currency hedges can protect against price movements in a security High Income
Fund owns or intends to acquire that are attributable to changes in the value
of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to
other causes.
High Income Fund might seek to hedge against changes in the value of a
particular currency when no Hedging Instruments on that currency are available
or such Hedging Instruments are more expensive than certain other Hedging
Instruments. In such cases, High Income Fund may hedge against price movements
in that currency by entering into transactions using Hedging Instruments on
another currency or a basket of currencies, the value of which Mitchell
Hutchins believes will have a positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Hedging Instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
17
<PAGE>
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, High Income Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than
for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the Hedging Instruments until they
reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, High Income Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. High Income Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, High Income Fund may purchase a forward currency contract
to lock in the U.S. dollar price of a security denominated in a foreign
currency that the Fund intends to acquire. Forward currency transactions may
also serve as short hedges--for example, High Income Fund may sell a forward
currency contract to lock in the U.S. dollar equivalent of the proceeds from
the anticipated sale of a security denominated in a foreign currency.
As noted above, High Income Fund also may seek to hedge against changes in
the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which Mitchell
Hutchins believes will have a positive correlation to the value of the currency
being hedged. In addition, the Fund may use forward currency contracts to shift
its exposure to foreign currency fluctuations from one country to another. For
example, if the Fund owned securities denominated in a foreign currency and
Mitchell Hutchins believed that currency would decline relative to another
currency, it might enter into a forward contract to sell an appropriate amount
of the first foreign currency, with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred
to as "cross hedging." Use of a different foreign currency magnifies the risk
that movements in the price of the Hedging Instrument will not correlate or
will correlate unfavorably with the foreign currency being hedged.
The cost to High Income Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then
18
<PAGE>
prevailing. Because forward currency contracts are usually entered into on a
principal basis, no fees or commissions are involved. When the Fund enters into
a forward currency contract, it relies on the contra party to make or take
delivery of the underlying currency at the maturity of the contract. Failure by
the contra party to do so would result in the loss of any expected benefit of
the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at
a favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities in a
segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
forward currency contract has been established. Thus, High Income Fund might
need to purchase or sell foreign currencies in the spot (cash) market to the
extent such foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. High Income Fund may
enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
position being hedged by such contracts or (2) the Fund maintains appropriate
assets in a segregated account in an amount not less than the value of its
total assets committed to the consummation of the contract and not covered as
provided in (1) above, as marked to market daily.
INTEREST RATE PROTECTION TRANSACTIONS
The Funds 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
19
<PAGE>
below a designated floor on predetermined dates or during a specified time
period. The Funds intend 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 Funds 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
Hutchins and the Funds 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 Funds 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 Funds.
The Funds 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, a 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.
20
<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* POSITION WITH TRUST OTHER DIRECTORSHIPS
----------------- ------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Trustee and Mr. Bewkes is a director of Paine
68** Chairman of the Webber Group Inc. ("PW Group")
Board of Trustees (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 Interstate Bakeries
Corporation and a director or trustee
of 26 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 52 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior
New York, New York 10027 to 1989, he was president of the Illi-
nois Institute of Technology. Dean
Feldberg is also a director of AMSCO
International Inc., Federated Depart-
ment Stores, Inc., Inco Homes Corpora-
tion and New World Communications
Group Incorporated and a director or
trustee of 18 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
George W. Gowen; 65 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, New York 10017 Prior to May 1994, he was a partner in
the law firm of Fryer, Ross & Gowen.
Mr. Gowen is also a director of
Columbia Real Estate Investments, Inc.
and a director or trustee of 16 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
----------------- ------------------- --------------------
<S> <C> <C>
Paul B. Guenther; 54** Trustee and Mr. Guenther is president and a direc-
President tor 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 in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Frederic V. Malek; 58 Trustee Mr. Malek is chairman of Thayer Capital
901 15th Street, N.W. Partners (investment bank) and a co-
Suite 300 chairman and director of CB Commercial
Washington, D.C. 20005 Group Inc. (real estate). From January
1992 to November 1992, he was campaign
manager of Bush-Quayle '92. From 1990
to 1992, he was vice chairman and,
from 1989 to 1990, he was president of
Northwest 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 Corpo-
ration (hotels, restaurants, airline
catering and contract feeding), where
he most recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is also
a director of American Management Sys-
tems, Inc., Automatic Data Processing,
Inc., Avis, Inc., FPL Group, Inc., ICF
International, Manor Care, Inc., Na-
tional Education Corporation and
Northwest Airlines Inc. and a director
or trustee of 16 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
----------------- ------------------- --------------------
<S> <C> <C>
Frank P. L. Minard; 49** Trustee Mr. Minard is chairman of the board and
a director of Mitchell Hutchins,
chairman of the board of Mitchell
Hutchins Institutional Investors Inc.
and a director of PaineWebber. Prior
to 1993, Mr. Minard was managing di-
rector of Oppenheimer Capital in New
York and Director of Oppenheimer Capi-
tal Ltd. in London. Mr. Minard is also
a president of 13 and director or
trustee of 16 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Judith Davidson Moyers; 59 Trustee Mrs. Moyers is president of Public Af-
Public Affairs Television fairs Television, Inc., an educational
356 W. 58th Street consultant and a home economist. Mrs.
New York, New York 10019 Moyers is also a director of Ogden
Corporation and a director or trustee
of 16 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Thomas F. Murray; 84 Trustee Mr. Murray is a real estate and
400 Park Avenue financial consultant. Mr. Murray is
New York, New York 10022 also a director and chairman of
American Continental Properties, Inc.,
a trustee of Prudential Realty Trust
and a director or trustee of 16 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president and
manager--advisory administration of
Mitchell Hutchins. Prior to November
1993, she was compliance manager of
Hyperion Capital Management, Inc., an
investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice
president and manager--legal
administration of Mitchell Hutchins.
Ms. Boyle is also a vice president of
39 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
----------------- ------------------- --------------------
<S> <C> <C>
Joan L. Cohen; 30 Vice President and Ms. Cohen is a vice president and at-
Assistant Secretary torney of Mitchell Hutchins. Prior to
December 1993, she was an associate at
the law firm of Seward & Kissel. Ms.
Cohen is also a vice president and as-
sistant secretary of 26 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Ellen R. Harris; 48 Vice President Ms. Harris is chief domestic equity
strategist and a managing director of
Mitchell Hutchins. Ms. Harris is also
a vice president 19 of other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Mary B. King; 31 Vice President Mrs. King is a first vice president and
a portfolio manager of Mitchell
Hutchins. Mrs. King is also a vice
president of 1 other investment com-
pany for which Mitchell Hutchins
serves as investment adviser.
Thomas J. Libassi; 36 Vice President Mr. Libassi is a senior vice president
of Mitchell Hutchins. Prior to May
1994, he was a vice president of
Keystone Custodian Funds Inc. with
portfolio management responsibility.
Mr. Libassi is also a vice president
of 1 other investment company for
which Mitchell Hutchins serves as
investment adviser.
Ann E. Moran; 37 Vice President and Ms. Moran is a vice president of Mitch-
Assistant Treasurer ell 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 Ms. O'Donnell is a senior vice presi-
and Secretary dent and senior associate general
counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice president and
secretary of 39 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
----------------- ------------------- --------------------
<S> <C> <C>
Victoria E. Schonfeld; 44 Vice President Ms. Schonfeld is a managing 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>
<TABLE>
<S> <C> <C>
Paul H. Schubert; 32 Vice President Mr. Schubert is a vice president of
and Assistant Mitchell Hutchins. From August 1992 to
Treasurer August 1994, he was a vice president
at BlackRock Financial Management L.P.
Prior to August 1992, he was an audit
manager with Ernst & Young LLP. Mr.
Schubert is also a vice president and
assistant treasurer of 39 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment 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 di-
rector for
a U.S. Senate campaign. Prior to Sep-
tember 1991, she was a tax manager
with
Arthur Andersen & Co. LLP. Ms. Slezak
is also a vice president and assistant
treasurer of 39 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Julian F. Sluyters; 34 Vice President and Mr. Sluyters is a senior vice president
Treasurer 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 com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
</TABLE>
25
<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 and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to 1993, he was a
partner in the law firm of Shereff,
Friedman, Hoffman & Goodman. Mr. Todd
is also a vice president and 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.
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 each
Fund. Because PaineWebber and Mitchell Hutchins perform substantially all of
the services necessary for the operation of the Trust and the Funds, 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.
26
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT ESTIMATED TOTAL
AGGREGATE BENEFITS ANNUAL COMPENSATION
COMPENSATION ACCRUED AS PART BENEFITS FROM THE TRUST
FROM THE OF THE TRUST'S UPON AND THE
NAME OF PERSON, POSITION TRUST* EXPENSES RETIREMENT TRUST COMPLEX+
------------------------ ------------ --------------- ---------- --------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr. . -- -- -- --
Trustee and Chairman of
the Board of Trustees
Meyer Feldberg.......... $10,250 -- -- $86,050
Trustee
George W. Gowen......... $ 9,250 -- -- $71,425
Trustee
Paul B. Guenther........ -- -- -- --
Trustee and President
Frederic V. Malek....... $ 9,750 -- -- $77,875
Trustee
Frank P.L. Minard....... -- -- -- --
Trustee
Judith Davidson Moyers.. $ 9,750 -- -- $71,125
Trustee
Thomas F. Murray........ $ 9,750 -- -- $71,925
Trustee
</TABLE>
--------
* Represents fees paid to each trustee during the fiscal year ended November
30, 1994.
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1994.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each 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 each 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 U.S. Government Income Fund, $1,897,899,
$1,393,289 and $1,145,651 with respect to the Investment Grade Income Fund and
$4,047,201, $3,100,195 and $1,638,701 with respect to the High Income Fund.
Under a service agreement pursuant to which PaineWebber provides certain
services to each Fund not otherwise provided by the Funds' transfer agent,
which agreement is reviewed by the Trust's board of trustees annually, during
the fiscal years ended November 30, 1994, November 30,
27
<PAGE>
1993 and November 30, 1992, PaineWebber earned fees under the service agreement
in the amounts of $196,490, $217,612 and $196,379 for U.S. Government Income
Fund, $97,475, $60,450 and $52,565 for Investment Grade Income Fund and
$181,748, $137,332 and $91,997 for High Income Fund.
Under the terms of the Advisory Contract, each 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 Fund are allocated among the Funds 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 Funds include the following (or each 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 a 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
a 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 a Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to a 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 $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees and extraordinary items, are excluded from this limitation. For the fiscal
years ended November 30, 1994, November 30, 1993 and November 30, 1992, no
reimbursements were required pursuant to such limitations.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or
any Fund in connection with the performance of the Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically with respect to each
28
<PAGE>
Fund upon assignment and is terminable at any time without penalty by the
Trust's board of trustees or by vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins
or by Mitchell Hutchins on 60 days' written notice to the Trust.
The following table shows the approximate net assets as of February 28, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<C> <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 In-
come............... 4,836.4
Tax-Free Fixed In-
come............... 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 other PaineWebber and Mitchell Hutchins/Kidder Peabody
("MH/KP") funds and other Mitchell Hutchins' advisory accounts by all Mitchell
Hutchins' directors, officers and employees, establishes procedures for
personal investing and restricts certain transactions. For example, employee
accounts generally must be maintained at PaineWebber, personal trades in most
securities require pre-clearance and short-term trading and participation in
initial public offerings generally are prohibited. In addition, the code of
ethics puts restrictions on the timing of personal investing in relation to
trades by PaineWebber and MH/KP funds and other Mitchell Hutchins advisory
clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class D shares of each Fund under separate distribution
contracts with the Trust dated July 7, 1993 (collectively, "Distribution
Contracts") that require Mitchell Hutchins to use its best efforts, consistent
with its other businesses, to sell shares of the Funds. Shares of the Funds are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber dated July 7, 1993 relating to the Class A,
Class B and Class D shares of each Fund (collectively, "Exclusive Dealer
Agreements"), PaineWebber and its correspondent firms sell each Fund's shares.
29
<PAGE>
Under separate plans of distribution pertaining to the Class A, Class B and
Class D shares of the Funds adopted by the Trust in the manner prescribed under
Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class D
Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of shares. Under the Class B Plan, each Fund
also pays Mitchell Hutchins a distribution fee, accrued daily and payable
monthly, at the annual rate of 0.75% of the average daily net assets of the
Class B shares. Under the Class D Plan, each Fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of
0.50% of the average daily net assets of the Class D shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will submit
to the Trust's board of trustees at least quarterly, and the trustees will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect
only so long as it is approved at least annually, and any material amendment
thereto is approved, by the Trust's board of trustees, including those trustees
who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to the Plan, acting in person at a meeting called for that purpose, (3)
payments by a Fund under the Plan shall not be materially increased without the
affirmative vote of the holders of a majority of the outstanding shares of the
relevant Class and (4) while the Plan remains in effect, the selection and
nomination of trustees who are not "interested persons" of the Trust shall be
committed to the discretion of the trustees who are not "interested persons" of
the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
shares to such Class based on the ratio of sales of such Class to the sales of
all three Classes of shares. The fees paid by one Class of Fund shares will not
be used to subsidize the sale of any other Class of Fund shares.
For the fiscal year ended November 30, 1994, the Funds paid (or accrued) the
following fees to Mitchell Hutchins under the Class A, Class B and Class D
Plans:
<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Class A.............................. $1,371,619 $646,924 $ 847,482
Class B.............................. 1,319,942 671,234 2,961,114
Class D.............................. 790,524 402,653 1,307,520
</TABLE>
30
<PAGE>
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Funds during the fiscal year ended November 30,
1994:
CLASS A
<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Marketing and advertising........... $ 161,227 $ 50,003 $ 61,185
Printing of prospectuses and state-
ments of additional information.... 1,236 982 699
Branch network costs allocated and
interest expense................... 1,991,104 824,751 1,016,724
Service fees paid to investment
executives......................... 617,229 291,116 381,367
CLASS B
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Marketing and advertising........... $ 135,692 $ 48,258 $ 119,321
Amortization of commissions......... 689,021 308,688 1,448,036
Printing of prospectuses and state-
ments of additional information.... 1,041 620 1,338
Branch network costs allocated and
interest expense................... 2,605,457 827,178 2,153,766
Service fees paid to investment
executives......................... 148,493 75,514 333,125
</TABLE>
CLASS D
<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ----------- -----------
<S> <C> <C> <C>
Marketing and advertising........... $ 123,828 $ 20,869 $ 90,456
Amortization of commissions......... 190,342 121,415 455,832
Printing of prospectuses and state-
ments of additional information.... 976 264 1,003
Branch network costs allocated and
interest expense................... 2,315,803 344,602 1,512,065
Service fees paid to investment
executives......................... 118,579 60,338 195,932
</TABLE>
31
<PAGE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. "Branch network costs
allocated and interest expense" consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of each Fund's
shares, including the PaineWebber retail branch system.
In approving the Funds' overall Flexible PricingSM system of distribution,
the Trust's board of trustees considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in the Funds
and attracting new investors and assets to the Funds to the benefit of each
Fund and its shareholders, (2) facilitate distribution of the Funds' shares and
(3) maintain the competitive position of the Funds in relation to other funds
that have implemented or are seeking to implement similar distribution
arrangements.
In approving the Class A Plan for each Fund, the trustees considered all the
features of the distribution system, including (1) the conditions under which
initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (4) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (5)
the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement
with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder service-related
expenses and costs.
In approving the Class B Plan for each Fund, the trustees considered all the
features of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from the Fund's purchase payments and instead having the entire amount
of their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive
to the investment executives and correspondent firms, resulting in greater
growth of the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class D Plan for each Fund, the trustees considered all the
features of the distribution system, including (1) the advantage to investors
in having no initial sales charges deducted from the Fund's purchase payments
and instead having the entire amount of their
32
<PAGE>
purchase payments immediately invested in Fund shares, (2) the advantage to
investors in being free from contingent deferred sales charges upon redemption
and paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales compensation for their sales of Class D shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class D shares and do not face
contingent deferred sales charges, would prove attractive to the investment
executives and correspondent firms, resulting in greater growth to the Fund
than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in the Fund's assets and potential
continued growth, (5) the services provided to the Fund and its shareholders by
Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service- and distribution-related expenses and costs. The trustees
also recognized that Mitchell Hutchins' willingness to compensate PaineWebber
and its investment executives without the concomitant receipt by Mitchell
Hutchins of initial sales charges or contingent deferred sales charges upon
redemption, was conditioned upon its expectation of being compensated under the
Class D Plan.
With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that
Mitchell Hutchins would receive service, distribution and advisory fees that
are calculated based upon a percentage of the average net assets of each Fund,
which fees would increase if the Plan were successful and the Funds attained
and maintained significant asset levels.
Under the Distribution Contract between the Trust and Mitchell Hutchins for
the Class A shares and similar prior distribution contracts, for the periods
set forth below, Mitchell Hutchins earned the following approximate amounts of
sales charges and retained the following approximate amounts, net of
concessions to PaineWebber as exclusive dealer:
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
NOVEMBER 30,
------------------------------
1992 1993 1994
---------- ---------- --------
<S> <C> <C> <C>
Earned..................................... $1,434,701 $ 555,888 $121,124
Retained................................... 100,280 48,390 10,336
INVESTMENT GRADE INCOME FUND
<CAPTION>
FISCAL YEARS ENDED
NOVEMBER 30,
------------------------------
1992 1993 1994
---------- ---------- --------
<S> <C> <C> <C>
Earned..................................... $ 183,364 $ 255,824 $137,013
Retained................................... 12,481 19,389 79,808
HIGH INCOME FUND
<CAPTION>
FISCAL YEARS ENDED
NOVEMBER 30,
------------------------------
1992 1993 1994
---------- ---------- --------
<S> <C> <C> <C>
Earned..................................... $ 936,778 $1,443,963 $793,898
Retained................................... 67,841 104,383 55,058
</TABLE>
33
<PAGE>
For the fiscal years set forth below, Mitchell Hutchins earned and retained
the following contingent deferred sales charges paid upon certain redemptions
of Class B shares:
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
--------------------------- ---------------------------- ----------------
<S> <C> <C>
1992 $288,330 $ 97,031 $ 294,997
1993 633,594 90,989 703,272
1994 927,086 359,379 1,899,408
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of trustees, Mitchell Hutchins
is responsible for the execution of each Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for each 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 year ended November 30, 1994, U.S. Government
Income Fund, Investment Grade Income Fund and High Income Fund paid
approximately $0, $21,500 and $74,838, respectively, in brokerage commissions.
During the fiscal year ended November 30, 1993, U.S. Government Income Fund and
Investment Grade Income Fund paid no brokerage commissions. During the fiscal
year ended November 30, 1993, High Income Fund paid approximately $4,145 in
brokerage commissions. During the fiscal year ended November 30, 1992, U.S.
Government Income Fund, Investment Grade Income Fund and High Income Fund paid
approximately $3,906, $7,810 and $0, respectively, in brokerage commissions.
No Fund has any obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Funds contemplate 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 Funds 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 year ended November 30, 1994, U.S. Government
Income Fund and Investment Grade Income Fund paid no brokerage commissions to
PaineWebber or any other affiliate of Mitchell Hutchins. During the fiscal year
ended November 30, 1994, High Income Fund paid approximately $30,915 in
brokerage commissions to PaineWebber, which represented 41.30% of the total
brokerage commissions paid by the Fund and 34.19% of all portfolio transactions
involving payment of commissions. During the fiscal years ended November 30,
1993, and November 30, 1992, the Funds paid no brokerage commissions to
PaineWebber or any other affiliate of Mitchell Hutchins.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. Each
Fund's procedures in
34
<PAGE>
selecting FCMs to execute that 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 a Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins may cause a Fund to purchase and
sell portfolio securities through brokers which 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 that Fund and its other
clients and that the total commissions paid by the Fund will be reasonable in
relation to the benefits to the Fund over the long term. During the fiscal year
ended November 30, 1994, the Funds 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 debt securities in return for research and execution services. These
transactions are entered into only in compliance with procedures ensuring that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide
research or execution services. These procedures include Mitchell Hutchins
receiving multiple quotes from dealers before executing the transaction on an
agency basis.
Research services furnished by brokers through which a Fund effects
securities transactions may be used by Mitchell Hutchins in advising other
funds or accounts and, conversely, research services furnished to Mitchell
Hutchins by brokers 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 will be in addition to, and
not in lieu of, the services required to be performed by Mitchell Hutchins
under the Advisory Contract. For the fiscal year ended November 30, 1994, U.S.
Government Income Fund, Investment Grade Income Fund and High Income Fund
directed no portfolio transactions to brokers chosen because they provided
research services. The Funds may purchase and sell portfolio securities to and
from dealers who provide the Funds with research services. Portfolio
transactions will not be directed by the Funds to dealers solely on the basis
of research services provided. The Funds will not purchase portfolio securities
at a higher price or sell such securities at a lower price in connection with
transactions effected with a dealer, acting as principal, who furnishes
research services to Mitchell Hutchins than would be the case if no weight were
given by Mitchell Hutchins to the dealer's furnishing of such services.
Research services furnished by the dealers through which or with which the
Funds effect securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts, and, conversely, research services furnished
to Mitchell Hutchins in connection with other funds or accounts that Mitchell
Hutchins advises may be used in advising the Funds.
35
<PAGE>
Investment decisions for the Funds 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 involved 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 a 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 Funds 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. Each 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 a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. During the fiscal years ended
November 30, 1994 and November 30, 1993, respectively, the portfolio turnover
rates were 358.07% and 83.13% for the U.S. Government Income Fund; 142.15% and
27.25% for the Investment Grade Income Fund; and 155.77% and 182.26% for the
High Income Fund. The increase in U.S. Government Income 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.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND
REDEMPTION INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber or MH/KP
mutual fund and thus take advantage of the reduced sales charges for Class A
shares indicated in the table of sales charges in the Prospectus. The sales
charge payable on the purchase of Class A shares of the Funds and Class A
shares of such other funds will be at the rates applicable to the total amount
of the combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
36
<PAGE>
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse; or
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed
related to that other employer).
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber or MH/KP
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order
is subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where
the decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only
to redemption of shares held at the time of death.
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing
system on July 1, 1991 ("CDSC Funds"). The contingent deferred sales charge is
waived with respect to redemptions of Class B shares of CDSC Funds purchased
prior to July 1, 1991 by officers, directors (trustees) or employees of the
CDSC Funds, Mitchell Hutchins or their affiliates (or their spouses and
children under age 21). In addition, the contingent deferred sales charge will
be reduced by 50% with respect to redemptions of Class B shares of CDSC Funds
purchased prior to July 1, 1991 with a net asset value at the time of purchase
of at least $1 million. If Class B shares of a CDSC Fund purchased prior to
July 1, 1991 are exchanged for Class B shares of a Fund, any waiver or
reduction of the contingent deferred sales charge that applied to the Class B
shares of the CDSC Fund will apply to the Class B shares of the Fund acquired
through the exchange.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Funds may be exchanged for shares of the
corresponding Class of most other PaineWebber or MH/KP mutual funds.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or a Fund temporarily
delays or ceases the sales of its shares because it is unable to invest
amounts effectively in accordance with the Fund's investment objective,
policies and restrictions.
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<PAGE>
If conditions exist which make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
a Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
one shareholder. This election is irrevocable unless the SEC permits its
withdrawal. A Fund may suspend redemption privileges or postpone the date of
payment during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for a Fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3) as
the SEC may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of a Fund's portfolio at the
time.
SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or semi-
annual plans, PaineWebber will arrange for redemption by a Fund of sufficient
Fund shares to provide the withdrawal payment specified by participants in the
Funds' systematic withdrawal plan. The payment generally is mailed
approximately five business days after the redemption date. Withdrawal payments
should not be considered dividends but redemption proceeds, with the tax
consequences described under "Dividends and Taxes" in the Prospectus. If
periodic withdrawals continually exceed reinvested dividends, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. ("Transfer Agent").
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber investment executives, correspondent
firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
without a sales charge. Shareholders may exercise the reinstatement privilege
by notifying the Transfer Agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
the shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described in "Dividends and Taxes" in the Prospectus.
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<PAGE>
PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM; PAINEWEBBER RESOURCE MANAGEMENT
ACCOUNT(R) (RMA(R)).
Shares of the PaineWebber and MH/KP mutual funds (each a "PW Fund" and,
collectively, the "PW Funds") are available for purchase by customers of
PaineWebber and its correspondent firms who maintain Resource Management
Accounts ("RMA accountholders") through the RMA Resource Accumulation Plan
("Plan"). The Plan allows an RMA accountholder to continually invest in one or
more of the PW Funds at regular intervals, with payment for shares purchased
automatically deducted from the client's RMA account. The client may elect to
invest at monthly or quarterly intervals and may elect either to invest a fixed
dollar amount (minimum $100 per period) or to purchase a fixed number of
shares. A client can elect to have Plan purchases executed on the first or
fifteenth day of the month. Settlement occurs five business days after the
trade date, and the purchase price of the shares is withdrawn from the
investor's RMA account on the settlement date from the following sources and in
the following order: uninvested cash balances, balances in RMA money market
funds, or margin borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to enrolling
in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may take
up to two weeks to become effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
Periodic investing in the PW Funds or other mutual funds, whether through the
Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of "dollar cost averaging". By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of low share prices. However, over time, dollar cost averaging
generally results in a lower average original investment cost than if an
investor invested a larger dollar amount in a mutual fund at one time.
39
<PAGE>
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard (R) transactions during the period, and provide realized and
unrealized gain and loss estimates for most securities held in the
account;
. comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
. automatic "sweep" of uninvested cash into the accountholder's choice of
the five RMA money market funds--RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money
Fund and RMA New York Municipal Money Fund. Each money market fund
attempts to maintain a stable price per share of $1.00, although there
can be no assurance that it will be able to do so. Investments in the
money market funds are not insured or guaranteed by the U.S. government;
. check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
. Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
. expanded account protection to $25 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and
. automatic direct deposit of checks into the investor's RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of each Fund automatically convert to Class A shares of that
Fund, based on the relative net asset value per share of each of the two
Classes, as of the close of business on the first Business Day (as defined
below) of the month in which the sixth anniversary of the initial issuance of
such Class B shares of the Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (1) the date on which such Class B shares were issued, or
(2) for Class B shares obtained through an exchange, or a series of exchanges,
the date on which the original Class B shares were issued. If a shareholder
acquired Class B shares of a Fund through an exchange of Class B shares of a
CDSC Fund that were acquired prior to July 1, 1991, the shareholder's holding
period for purposes of conversion is determined based on the date the CDSC
Fund shares were initially issued. For purposes of conversion to Class A
shares, Class B
40
<PAGE>
shares purchased through the reinvestment of dividends and other distributions
paid in respect of Class B shares are held in a separate sub-account. Each time
any Class B shares in the shareholder's regular account (other than those in
the sub-account) convert to Class A shares, a pro rata portion of the Class B
shares in the sub-account also convert to Class A shares. The portion is
determined by the ratio that the shareholder's Class B shares converting to
Class A bears to the shareholder's total Class B shares not acquired through
dividends and other distributions.
The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends
and other distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and (2) the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares would not be converted and would continue to
be subject to the higher ongoing expenses of the Class B shares beyond six
years from the date of purchase. Mitchell Hutchins has no reason to believe
that these conditions for the availability of the conversion feature will not
continue to be met.
VALUATION OF SHARES
Each 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 until 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. All investments of High Income Fund that are quoted in foreign
currency are valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time such valuation is determined by the Fund's
custodian.
Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of High Income Fund's net asset value on that day.
If events materially affecting the value of such investments or currency
exchange rates occur during such time period, the investments will be valued at
their fair value by or under the direction of the Trust's board of trustees.
The foreign currency exchange transactions of High Income Fund conducted on a
spot (that is, cash) basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. This rate under
normal conditions differs from the prevailing exchange rate in an amount
generally less than one-tenth of one percent due to the costs of converting
from one currency to another.
41
<PAGE>
PERFORMANCE INFORMATION
Each Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN. Average annual total return quotes ("Standardized Return") used
in a 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 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 $1,000 payment and, for
Class B shares, the applicable contingent deferred sales charge imposed on a
redemption of Class B shares held for the period is deducted. All dividends and
other distributions are assumed to have been reinvested at net asset value.
Each 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"). Each 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.
Both Standardized Return 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.
42
<PAGE>
The following table shows performance information for the Class A, Class B
and Class D shares of the Funds for the periods indicated. All returns for
periods of more than one year are expressed as an average annual return:
<TABLE>
<CAPTION>
U.S. GOVERNMENT INVESTMENT GRADE
INCOME FUND INCOME FUND HIGH INCOME FUND
--------------------------- -------------------------- ---------------------------
CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal year ended
November 30, 1994:
Standardized Return*.. (13.25)% (15.31)% (10.08)% (9.74)% (11.60)% (6.40)% (12.80)% (14.77)% (9.62)%
Non-Standardized
Return............... (9.62)% (10.31)% (10.08)% (5.99)% (6.60)% (6.40)% (9.20)% (9.77)% (9.62)%
Inception** to November
30, 1994:
Standardized Return*.. 7.59 % 2.05 % (1.43)% 9.30 % 6.07 % 3.32 % 10.27 % 12.20 % 6.40 %
Non-Standardized
Return............... 8.02 % 2.60 % (1.43)% 9.74 % 6.57 % 3.32 % 10.72 % 12.64 % 6.40 %
Five years ended
November 30, 1994:
Standardized Return*.. 4.38 % NA NA 6.99 % NA NA 11.62 % NA NA
Non-Standardized
Return............... 5.25 % NA NA 7.86 % NA NA 12.53 % NA NA
Ten years ended November
30, 1994:
Standardized Return*.. 7.28 % NA NA 8.99 % NA NA 9.92 % NA NA
Non-Standardized
Return............... 7.72 % NA NA 9.44 % NA NA 10.36 % NA NA
</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
charges imposed on a redemption of shares held for the period. 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 the Class A shares of each Fund was August 31, 1984.
The inception date for the Class B shares of each Fund was July 1, 1991. The
inception date for the Class D shares of each Fund was July 2, 1992.
43
<PAGE>
YIELD. Yields used in each 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
semiannual compounding) of the maximum offering price per share (in the case of
Class A shares) or the net asset value per share (in the case of Class B and
Class D shares) at the end of the Period. Yield quotations are calculated
according to the following formula:
a-b
YIELD = 2[( --- + 1) to the 6th power - 1]
cd
where: a = interest earned during the Period attributable to a Class of
shares
b = expenses accrued for the Period attributable to a Class of shares
(net of reimbursements)
c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive 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
and Class D shares) on the last day of the Period
Except as noted below, in determining net investment income earned during the
Period (variable "a" in the above formula), each 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 Funds' current maximum 4% initial sales charge on Class A
shares is included.
The following table shows the yield for the Class A, Class B and Class D
shares of each Fund for the 30-day period ended November 30, 1994.
<TABLE>
<CAPTION>
U.S. GOVERNMENT INVESTMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND FUND
--------------- ---------------- -----------
<S> <C> <C> <C>
Class A......................... 6.22% 8.00% 12.74%
Class B......................... 5.70% 7.58% 12.49%
Class D......................... 5.97% 7.87% 12.76%
</TABLE>
OTHER INFORMATION. In Performance Advertisements, each Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical
44
<PAGE>
Services, Inc. ("Lipper") for U.S. government funds (U.S. Government Income
Fund), corporate bond (BBB) funds (Investment Grade Income Fund) and high yield
funds (High Income Fund); 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, First Boston High Yield Index, Merrill Lynch High Yield
Indices, Shearson Lehman Bond Index, Shearson Lehman Government/Corporate Bond
Index, the Standard & Poor's 500 Composite Stock Index ("Standard & Poor's
500"), the Dow Jones Industrial Average, and changes in the Consumer Price
Index as published by the U.S. Department of Commerce. Such comparisons also
may include economic data and statistics published by the United States Bureau
of Labor Statistics, such as the cost of living index, information and
statistics on the residential mortgage market or the 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. Each 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
Funds and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.
A 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 Funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote(R) Money
Markets. In comparing a 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
values will fluctuate. The securities held by the Funds generally have longer
maturities than most CDs and may reflect interest rate fluctuations for longer
term securities. An investment in a Fund involves greater risks than an
investment in either a money market fund or a CD.
45
<PAGE>
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, each 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, net short-term
capital gain and, for High Income Fund, net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. With respect to each Fund, 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 foreign
currencies, or other income (including gains from options, futures or forward
currency contracts) derived with respect to its business of investing in
securities or those currencies ("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, or any of the following, that were held for less
than three months--options or futures (other than those on foreign currencies),
or foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the Fund's principal business of investing in
securities (or options and futures with respect to securities) ("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 a Fund in November or December
of any year and payable to shareholders of record on a date in either 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. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
U.S. Government Income Fund invests exclusively in debt securities and
receives no dividend income; accordingly, no portion of the dividends or other
distributions paid by this Fund will be eligible for the dividends-received
deduction allowed to corporations. Although High Income Fund and Investment
Grade Income Fund are authorized to hold equity securities, it is expected that
any dividend income received by the Funds will be minimal.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
Interest and dividends, if any, received by High Income Fund may be subject
to income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on its securities. Tax conventions
between certain countries and the United States, however, may reduce or
eliminate these foreign taxes, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors.
46
<PAGE>
Each 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 and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses a Fund
realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and
income from transactions in options, futures and forward currency contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies, will qualify as permissible income under the Income
Requirement. However, income from the disposition of options and futures
(other than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures and forward contracts
on foreign currencies, that are not directly related to a Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the Short-Short Limitation if they are
held for less than three months.
If a 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. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent a Fund does not qualify
for this treatment, it may be forced to defer the closing out of certain
options, futures and forward currency contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Fund to continue to
qualify as a RIC.
Each Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As a holder of such securities, a 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. Similarly, High Income Fund must include in its
gross income securities it receives as "interest" on payment-in-kind
securities. Each Fund has elected similar treatment with respect to securities
purchased at a discount from their face value ("market discount"). Because
each Fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID, market discount and other non-cash
income, to satisfy the Distribution Requirement and to avoid imposition of the
Excise Tax, a Fund may be required in a particular year distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from the Fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The Fund may
realize capital gains or losses from those sales, which would increase or
decrease its 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,
futures or forward currency contracts, held for less than three months that it
might wish to sell in the ordinary course of its portfolio management.
47
<PAGE>
OTHER INFORMATION
PAINEWEBBER MANAGED INVESTMENT TRUST. Effective April 1, 1991, the names of
the three series described herein were changed to U.S. Government Income Fund,
Investment Grade Income Fund and High Income Fund. Prior to that date, the
series' names were U.S. Government Portfolio (GNMA Portfolio prior to July 1,
1990), Investment Grade Bond Portfolio and High Yield Bond Portfolio,
respectively.
PaineWebber Managed Investments 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 a Fund. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of the Trust or
the Funds 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, a Fund,
the trustees or any of them in connection with the Trust. The Declaration of
Trust provides for indemnification from each 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 a 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
each Fund in such a way as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Fund.
CLASS-SPECIFIC EXPENSES. Each Fund might determine to allocate certain
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A or Class D shares. The higher fee is imposed due to the higher
costs incurred by the Transfer Agent in tracking shares subject to a contingent
deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the Transfer
Agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart, 1800 M Street, NW,
Washington, DC 20036-5891, counsel to the Funds, has passed upon the legality
of the shares offered by the Funds' 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.
48
<PAGE>
FINANCIAL STATEMENTS
The Funds' 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 are incorporated by reference in this
Statement of Additional Information.
49
<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 FUNDS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE FUNDS 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..................................... 11
Trustees and Officers..................................................... 21
Investment Advisory and Distribution Arrangements......................... 27
Portfolio Transactions.................................................... 34
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 36
Conversion of Class B Shares.............................................. 40
Valuation of Shares....................................................... 41
Performance Information................................................... 42
Taxes..................................................................... 46
Other Information......................................................... 48
Financial Statements...................................................... 49
</TABLE>
(C) 1995 PaineWebber Incorporated
LOGO Recycled Paper
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
PAINEWEBBER
INVESTMENT GRADE
INCOME FUND
PAINEWEBBER
HIGH INCOME FUND
--------------------------------------------------------------------------------
Statement of Additional Information
April 1, 1995
--------------------------------------------------------------------------------
PAINEWEBBER
<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.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES 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.
----------------
The date of this Prospectus is April 1, 1995.
PaineWebber Incorporated
<PAGE>
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.
--------------
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
YEARS ENDED
NOVEMBER 30,
-----------------------
FOR THE PERIOD
SEPTEMBER 11, 1991 #
TO
NOVEMBER 30,
1994 1993 1992 1991
------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of pe- $10.02 $ 9.97 $ 9.97 $ 9.88
riod............................ ------ ------ ------ ------
Net increase (decrease) from in-
vestment 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 opera- (0.91) 0.75 0.78 0.27
tions........................... ------ ------ ------ ------
Less distributions:
Dividends from net investment in- (0.62) (0.70) (0.78) (0.18)
come............................ ------ ------ ------ ------
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
<PAGE>
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, including Cer-
tificates of Accrual Treasury Se-
4
<PAGE>
curities ("CATS") and Treasury Income Growth Receipts ("TIGRs"). The SEC staff
currently takes the position that "stripped" U.S. government securities that
are not issued through the U.S. Treasury are not U.S. government securities. As
long as the SEC takes this position, CATS and TIGRs will not be counted as U.S.
government securities for purposes of the 65% investment 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 loan 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. The investment
income of the Fund is based on the income earned on the securities it holds,
less expenses incurred; thus, the Fund's investment income may be expected to
fluctuate in response to changes in such expenses or income. For example, the
investment income of the Fund may be affected if it experiences a net inflow of
new money that is then invested in securities whose yield is higher or lower
than that earned on then-current investments. Generally, the value of the 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 securities, 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 prepayments on securities purchased by the Fund at a premium
also impose a risk of loss of
5
<PAGE>
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 as-
set-backed securities is smaller and less liquid than the market for U.S. gov-
ernment mortgage-backed securities. CMO classes may be specially structured in
a manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate sensitivity. As market con-
ditions change, however, and particularly during periods of rapid or unantici-
pated changes in market interest rates, the attractiveness of the CMO classes
and the ability of the structure to provide the anticipated investment charac-
teristics 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.
While the market values of particular securities in which the Fund invests
may be volatile, or may become volatile under certain conditions, Mitchell
Hutchins seeks to manage the Fund so that the volatility of the Fund's portfo-
lio, 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 securities held by the Fund, the Fund's abil-
ity 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.
During 1994, the value and liquidity of many mortgage-backed securities de-
clined
6
<PAGE>
sharply due primarily to increases in interest rates. There can be no assurance
that such declines will not recur. The market value of certain mortgage-backed
securities in which the Fund may invest, including interest-only and principal-
only classes of mortgage-backed securities and inverse floating rate securi-
ties, can be extremely volatile and these securities may become illiquid.
--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.
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 paid monthly on or about the 15th day of each month. Net investment income
includes accrued interest and discount, less amortization of premium and ac-
crued expenses. Substantially all of the Fund's net capital gain (the ex-
10
<PAGE>
cess 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 Exchange, 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 by PW Group, the sponsor of the PW SIP and a publicly owned finan-
cial services holding company. At February 28, 1995, Mitchell Hutchins was ad-
viser or sub-adviser to 42 investment companies with 77 separate portfolios and
aggregate assets of over $26.8 billion.
Nirmal Singh and Craig M. Varrelman have been responsible for the day-to-day
man-
11
<PAGE>
agement 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. 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.
12
<PAGE>
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 subsidiary of PNC Bank, National Association, whose princi-
pal business address is 103 Belle
13
<PAGE>
vue 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 the 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.
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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>
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
Class C Shares
PROSPECTUS
April 1, 1995
LOGO Recycled Paper
(C)1995 PaineWebber Incorporated
<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
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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, however, 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.
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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%
6
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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,
10
<PAGE>
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.
11
<PAGE>
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* 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 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* 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 com-
panies 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* POSITION WITH TRUST OTHER DIRECTORSHIPS
----------------- ------------------- --------------------
<S> <C> <C>
Frank P. L. Minard; 49** Trustee Mr. Minard is chairman and a direc-
tor of Mitchell Hutchins, chairman
of the board of Mitchell Hutchins
Institutional Investors Inc. and a
director of PaineWebber. Prior to
1993, Mr. Minard was managing di-
rector of Oppenheimer Capital in
New York and Director of 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>
BUSINESS EXPERIENCE;
NAME AND ADDRESS* 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 chief domestic equity
strategist and 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* 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 responsi-
bility. Mr. Libassi is also a vice
president of one other investment
company 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 pres-
Secretary ident and senior associate general
counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice president
and secretary of 39 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
44 and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Prior to
April 1990, she was a partner in
the law firm of Shereff, Friedman,
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* 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 brokers 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 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 will be in addition to, and
not in lieu of, the services required to be performed by Mitchell Hutchins
under the Advisory Contract. During the fiscal year ended November 30, 1994,
the Fund directed no portfolio transactions to brokers chosen because they
provided research services. The Fund may purchase and sell portfolio securities
to and from dealers who provide the Fund with research services. Portfolio
transactions will not be directed by the Fund to dealers solely on the basis of
research services provided. The Fund will not purchase portfolio securities at
a higher price or sell such securities at a lower price in connection with
transactions effected with a dealer, acting as principal, who furnishes
research services to Mitchell Hutchins than would be the case if no weight were
given by Mitchell Hutchins to the dealer's furnishing of such services.
Research services furnished by the dealers through which or with which the Fund
effects securities transactions may be used by Mitchell Hutchins in advising
other funds or accounts, and, conversely, research services furnished to
Mitchell Hutchins in connection with other funds or accounts that Mitchell
Hutchins advises may be used in advising the Fund.
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
27
<PAGE>
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 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
28
<PAGE>
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 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
29
<PAGE>
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.
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 = a-b
2[(--- + 1) to the 6th power - 1]
cd
<TABLE>
<C> <C> <S>
interest earned during the Period attributable to a Class of
where: a = 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.
30
<PAGE>
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 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.
31
<PAGE>
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 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.
32
<PAGE>
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
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 INVESTMENT 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.
33
<PAGE>
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.
34
<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...................................................................... 32
Other Information.......................................................... 33
Financial Statements....................................................... 34
</TABLE>
LOGO RECYCLED PAPER
(C)1995 PAINEWEBBER INCORPORATED
PaineWebber
U.S. Government
Income Fund
Class C Shares
--------------------------------------------------------------------------------
Statement of Additional Information
April 1, 1995
--------------------------------------------------------------------------------
<PAGE>
PAINEWEBBER
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
PaineWebber Managed Investments Trust
We have audited the accompanying statement of assets and
liabilities, including the portfolio of investments, of
PaineWebber U.S. Government Income Fund, PaineWebber Investment
Grade Income Fund, and PaineWebber High Income Fund (three of the
portfolios of PaineWebber Managed Investments Trust) (the "Funds")
as of November 30, 1994, and the related statement of operations
and the U.S. Government Income Fund statement of cash flows for
the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. These
financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
investments owned at November 30, 1994 by correspondence with the
custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of PaineWebber U.S. Government Income Fund,
PaineWebber Investment Grade Income Fund, and PaineWebber High
Income Fund at November 30, 1994, and the results of their
operations and the U.S. Government Income Fund statement of cash
flows for the year then ended, the changes in their net assets for
each of the two years in the period then ended, and the financial
highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
January 20, 1995
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
RECENT PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN/1/
NET ASSET VALUE -------------------------------
---------------------------- 12 MONTHS 6 MONTHS
11/30/94 05/31/94 11/30/93 ENDED 11/30/94 ENDED 11/30/94
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $8.50 $9.06 $10.03 - 9.62% -2.92%
-------------------------------------------------------------------------------
Class B Shares 8.50 9.06 10.03 -10.31 -3.39
-------------------------------------------------------------------------------
Class D Shares 8.49 9.05 10.02 -10.08 -3.27
-------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
NET ASSET VALUE
------------------
PERIOD CAPITAL GAINS TOTAL
COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
08/31/84-
12/31/84 $ 9.57 $ 9.78 $ -- $0.3515 5.95%
----------------------------------------------------------------------------
1985 9.78 10.32 -- 1.2600 19.79
----------------------------------------------------------------------------
1986 10.32 10.21 0.0053 1.1924 11.18
----------------------------------------------------------------------------
1987 10.21 9.34 0.0027 0.9160 0.59
----------------------------------------------------------------------------
1988 9.34 9.18 -- 0.7937 7.83
----------------------------------------------------------------------------
1989 9.18 9.49 -- 0.7994 12.58
----------------------------------------------------------------------------
1990 9.49 9.57 -- 0.7883 9.25
----------------------------------------------------------------------------
1991 9.57 10.18 -- 0.7683 15.04
----------------------------------------------------------------------------
1992 10.18 10.05 -- 0.7713 6.23
----------------------------------------------------------------------------
1993 10.05 10.03 -- 0.6590 6.48
----------------------------------------------------------------------------
01/01/94-
11/30/94 10.03 8.50 -- 0.5224 -10.28
----------------------------------------------------------------------------
Total: $0.0080 $8.8223
----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 120.59%
----------------------------------------------------------------------------
Performance Summary Class B Shares
<CAPTION>
NET ASSET VALUE
------------------
PERIOD CAPITAL GAINS TOTAL
COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-
12/31/91 $ 9.59 $10.19 -- $0.3535 10.09%
----------------------------------------------------------------------------
1992 10.19 10.05 -- 0.6898 5.31
----------------------------------------------------------------------------
1993 10.05 10.04 -- 0.5821 5.78
----------------------------------------------------------------------------
01/01/94-
11/30/94 10.04 8.50 -- 0.4611 -10.97
----------------------------------------------------------------------------
Total: $0.0000 $2.0865
----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 9.19%
----------------------------------------------------------------------------
Performance Summary Class D Shares
<CAPTION>
NET ASSET VALUE
------------------
PERIOD CAPITAL GAINS TOTAL
COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-
12/31/92 $10.13 $10.05 -- $0.3281 2.16%
----------------------------------------------------------------------------
1993 10.05 10.02 -- 0.6089 5.85
----------------------------------------------------------------------------
01/01/94-
11/30/94 10.02 8.49 -- 0.4823 -10.68
----------------------------------------------------------------------------
Total: $0.0000 $1.4193
----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/94: -3.41%
----------------------------------------------------------------------------
</TABLE>
/1/ Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date and do not include sales charges;
results for Class A and B would be lower if sales charges were included.
/2/ Certain distributions may contain short-term capital gains.
Note: The Fund offers Class C shares to the trustee of The PaineWebber Savings
Investment Plan. For the year ended November 30, 1994, and since
inception, September 11, 1991 through November 30, 1994, Class C shares
have a total return of -9.37% and 8.05%, respectively. Class C shares do
not have initial or contingent sales charges or ongoing distribution and
service fees.
2
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
RECENT PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN/1/
NET ASSET VALUE -----------------------------
--------------------------- 12 MONTHS 6 MONTHS
11/30/94 05/31/94 11/30/93 ENDED 11/30/94 ENDED 11/30/94
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $ 9.67 $10.06 $11.08 -5.99% -0.18%
-------------------------------------------------------------------------
Class B Shares 9.67 10.05 11.07 -6.60 -0.45
-------------------------------------------------------------------------
Class D Shares 9.67 10.06 11.08 -6.40 -0.41
-------------------------------------------------------------------------
</TABLE>
Performance Summary Class A Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
08/31/84-12/31/84 $ 9.57 $ 9.77 $ -- $0.3549 5.88%
-----------------------------------------------------------------------------
1985 9.77 10.52 -- 1.3080 22.76
-----------------------------------------------------------------------------
1986 10.52 10.75 0.0125 1.2060 14.47
-----------------------------------------------------------------------------
1987 10.75 9.55 0.0279 0.9846 -1.51
-----------------------------------------------------------------------------
1988 9.55 9.51 -- 0.8003 8.88
-----------------------------------------------------------------------------
1989 9.51 9.77 -- 0.8363 11.98
-----------------------------------------------------------------------------
1990 9.77 9.54 -- 0.8284 6.04
-----------------------------------------------------------------------------
1991 9.54 10.42 -- 0.8180 18.04
-----------------------------------------------------------------------------
1992 10.42 10.50 -- 0.8458 8.87
-----------------------------------------------------------------------------
1993 10.50 11.08 -- 0.7920 13.35
-----------------------------------------------------------------------------
01/01/94-11/30/94 11.08 9.67 -- 0.6673 -6.83
-----------------------------------------------------------------------------
Total: $0.0404 $9.4416
-----------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 159.31%
-----------------------------------------------------------------------------
Performance Summary Class B Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-12/31/91 $9.79 $10.41 -- $0.3795 10.38%
--------------------------------------------------------------------------
1992 10.41 10.49 -- 0.7623 8.05
--------------------------------------------------------------------------
1993 10.49 11.08 -- 0.7101 12.63
--------------------------------------------------------------------------
01/01/94-11/30/94 11.08 9.67 -- 0.6001 -7.44
--------------------------------------------------------------------------
Total: $0.0000 $2.4520
--------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 24.33%
--------------------------------------------------------------------------
Performance Summary Class D Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-12/31/92 $10.48 $10.50 -- $0.3377 3.44%
--------------------------------------------------------------------------
1993 10.50 11.08 -- 0.7383 12.80
--------------------------------------------------------------------------
01/01/94-11/30/94 11.08 9.67 -- 0.6247 -7.18
--------------------------------------------------------------------------
Total: $0.0000 $1.7007
--------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 8.22%
--------------------------------------------------------------------------
/1/ Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date and do not include sales charges;
results for Class A and B would be lower if sales charges were included.
/2/ Certain distributions may contain short-term capital gains.
3
<PAGE>
PAINEWEBBER HIGH INCOME FUND
RECENT PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------- -----------------------------
12 MONTHS 6 MONTHS
11/30/94 05/31/94 11/30/93 ENDED 11/30/94 ENDED 11/30/94
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $7.14 $8.30 $8.73 -9.20% -9.26%
------------------------------------------------------------------------
Class B Shares 7.14 8.30 8.72 -9.77 -9.59
------------------------------------------------------------------------
Class D Shares 7.15 8.31 8.74 -9.62 -9.47
------------------------------------------------------------------------
</TABLE>
Performance Summary Class A Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
08/31/84-12/31/84 $ 9.57 $ 9.80 $0.0100 $0.3717 6.46%
-----------------------------------------------------------------------------
1985 9.80 10.38 0.1500 1.6397 21.67
-----------------------------------------------------------------------------
1986 10.38 10.36 0.0250 1.4160 14.27
-----------------------------------------------------------------------------
1987 10.36 8.88 0.0475 1.3010 -1.98
-----------------------------------------------------------------------------
1988 8.88 8.44 -- 1.8239 16.42
-----------------------------------------------------------------------------
1989 8.44 7.26 -- 1.0687 -1.83
-----------------------------------------------------------------------------
1990 7.26 5.70 -- 0.9744 -9.25
-----------------------------------------------------------------------------
1991 5.70 7.23 -- 0.9661 45.92
-----------------------------------------------------------------------------
1992 7.23 7.93 -- 0.9698 24.06
-----------------------------------------------------------------------------
1993 7.93 8.77 -- 0.8894 22.74
-----------------------------------------------------------------------------
01/01/94-11/30/94 8.77 7.14 -- 0.7516 -10.77
-----------------------------------------------------------------------------
Total: $0.2325 $12.1723
-----------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 184.03%
-----------------------------------------------------------------------------
Performance Summary Class B Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-12/31/91 $6.85 $7.22 -- $0.4960 12.92%
--------------------------------------------------------------------------
1992 7.22 7.92 -- 0.9037 23.07
--------------------------------------------------------------------------
1993 7.92 8.77 -- 0.8237 21.97
--------------------------------------------------------------------------
01/01/94-11/30/94 8.77 7.14 -- 0.6977 -11.34
--------------------------------------------------------------------------
Total: $0.0000 $2.9211
--------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 50.27%
--------------------------------------------------------------------------
Performance Summary Class D Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-12/31/92 $7.80 $7.94 -- $0.4041 7.07%
--------------------------------------------------------------------------
1993 7.94 8.79 -- 0.8456 22.22
--------------------------------------------------------------------------
01/01/94-11/30/94 8.79 7.15 -- 0.7172 -11.23
--------------------------------------------------------------------------
Total: $0.0000 $1.9669
--------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/94: 16.18%
--------------------------------------------------------------------------
/1/ Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date and do not include sales charges;
results for Class A and B would be lower if sales charges were included.
/2/ Certain distributions may contain short-term capital gains.
4
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- --------------- ------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 13.45%
$39,500 U.S. Treasury Bonds .... 05/15/20 to 08/15/23 6.250 to 8.750% $ 36,073,438
45,800 U.S. Treasury Notes .... 11/15/97 to 09/30/99 7.125 to 7.375 44,833,750
------------
Total U.S. Government Obligations
(cost - $81,600,789)............. 80,907,188
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 16.09%
23 GNMA ................... 03/15/17 7.500 20,986
39,186 GNMA ................... 06/15/01 to 07/15/09 8.500 39,320,361
135 GNMA ................... 10/15/20 9.500 139,236
27,801 GNMA ................... 11/15/09 to 04/15/21 11.000 30,520,588
23,616 GNMA ................... 01/15/11 to 12/15/15 13.000 26,826,782
------------
Total Government National Mortgage Association Certificates
(cost - $99,361,877)............. 96,827,953
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES - 7.89%
31,850 FHLMC .................. 08/01/19 to 01/01/23 8.000 30,486,585
3,560 FHLMC .................. 06/01/22 8.500 3,496,679
10 FHLMC .................. 07/01/18 9.500 10,434
4,841 FHLMC .................. 09/01/05 10.000 5,061,539
7,588 FHLMC .................. 06/01/04 to 12/01/05 10.500 7,984,412
394 FHLMC .................. 12/01/10 11.250 426,059
------------
Total Federal Home Loan Mortgage Corporation Certificates
(cost - $49,731,983)............. 47,465,708
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 0.92%
17 FNMA ................... 08/01/16 7.500 15,402
4,901 FNMA ................... 10/01/12 10.500 5,159,914
309 FNMA ................... 10/01/13 11.250 337,073
------------
Total Federal National Mortgage Association Certificates
(cost - $5,596,724).............. 5,512,389
------------
AGENCY BACKED NOTES - 31.14%
Federal Home Loan
72,500 Mortgage Corporation .. 10/20/97 to 09/08/04 7.325 to 7.980 69,502,078
Federal Home Loan
20,000 Mortgage Corporation... 04/26/99 6.200* 19,079,840
Federal National
81,470 Mortgage Association... 10/16/97 to 08/11/04 7.260 to 8.900 79,078,489
Student Loan Marketing
20,000 Association ........... 10/14/99 7.820 19,681,160
------------
Total Agency Backed Notes (cost -
$191,593,569)................... 187,341,567
------------
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 6.35%
FHLMC Series 172, Class
10,000 172-J ................. 07/15/21 7.000 8,895,390
FHLMC Series 1684, Class
10,000 1684-N ................ 07/15/22 6.500 8,372,190
FNMA REMIC Trust 1994-
23,233 58, Class 58-A ........ 01/25/07 5.000 20,958,157
------------
Total Agency Collateralized Mortgage Obligations
(cost - $39,944,455).............. 38,225,737
------------
</TABLE>
5
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS (CONCLUDED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- ------------------- ------------- ------------
<C> <S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE BACKED SECURITIES - 5.87%
$25,042 DLJ Mortgage Acceptance
Corp., Series 1993-QI3,
Class S................ 09/25/23 2.335%** $ 1,402,330
42,658 DLJ Mortgage Acceptance
Corp., Series 1994-QE1,
Class S................ 04/25/24 4.278** 4,415,079
25,428 DLJ Mortgage Acceptance
Corp., Series 1994-15,
Class A-1.............. 10/25/24 6.535 25,778,113
71,664 Greenwich Capital
Acceptance Inc., Series
92, Class S............ 10/25/22 2.540** 3,690,709
------------
Total Adjustable Rate Mortgage Backed Securities
(cost - $36,350,145)............. 35,286,231
------------
PRIVATE LABEL COLLATERALIZED MORTGAGE OBLIGATION - 4.48%
36,899+ Fund America Investment
Corp., Series 93-1,
Class F-1 (cost -
$36,898,797).......... 07/29/23 7.063* 26,936,122
------------
ASSET - BACKED SECURITIES - 9.07%
15,000 Banc One Credit Card,
Series 1994 B ......... 12/15/99 7.550 14,866,035
10,000 Standard Credit Card,
Series 1990, Class A .. 07/10/98 9.500 10,335,990
6,000 Western Financial,
Series 1994-4, Class A-
1 ..................... 01/01/00 7.100 5,928,750
13,840 Western Financial,
Series 1994-4, Class A-
2 ..................... 01/01/00 7.100 13,658,350
10,000 Western Financial,
Series 1994-3 ......... 12/01/99 6.650 9,800,590
------------
Total Asset - Backed Securities
(cost - $55,194,131)............. 54,589,715
------------
REPURCHASE AGREEMENTS - 4.95%
19,806 Repurchase Agreement
dated 11/30/94, with
Daiwa Securities
America, Inc.,
collateralized by
$21,265,000 U.S.
Treasury Bonds, 7.625%
due 11/15/22; proceeds:
$19,809,136............ 12/01/94 5.700 19,806,000
10,000 Repurchase Agreement
dated 11/30/94, with
Nomura Securities
International Inc.,
collateralized by
$10,795,000 U.S.
Treasury Bills, due
10/19/95: proceeds:
$10,001,569............ 12/01/94 5.650 10,000,000
------------
Total Repurchase Agreements (cost -
$29,806,000).................... 29,806,000
------------
Total Investments (cost
$626,078,470) - 100.21%.......... 602,898,610
Liabilities in excess of other
assets - (0.21%)................. (1,240,595)
------------
Net Assets - 100.00%.............. $601,658,015
============
</TABLE>
-------
* Adjustable rate instrument
** Interest only security. This security entitles the holder to receive
interest payments from an underlying pool of mortgages. The risk associated
with this security is related to the speed of principal paydowns. High
prepayments would result in a smaller amount of interest being received and
cause the yield to decrease. Low prepayments would result in a greater
amount of interest being received and cause the yield to increase.
+ Illiquid Security
REMIC - Real Estate Mortgage Conduit
See accompanying notes to financial statements
6
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - 91.41%
Airlines - 2.89%
$11,750 Delta Air Lines Inc. ... 04/30/16 10.500% $ 11,165,955
------------
Auto/Truck Manufacturers - 5.63%
10,000 Auburn Hills............ 05/01/20 12.375 13,107,110
8,500 Ford Motor Co........... 06/15/99 8.875 8,655,830
------------
21,762,940
------------
Banking - 13.63%
9,000 BankAmerica Corp........ 02/01/03 10.000 9,658,728
11,000 Chase Manhattan Corp.... 06/15/99 to 08/01/04 7.875 to 8.000 10,496,158
15,000 Citicorp Bank Corp...... 11/01/04 8.625 14,944,185
7,000 First Chicago Corp. .... 05/01/01 10.250 7,578,907
10,000 Shawmut Bank............ 04/15/96 5.855* 9,987,500
------------
52,665,478
------------
Cable/Communications - 4.05%
Tele Communications
11,000 Inc.................... 01/15/23 9.250 10,346,028
5,000 TKR Cable Inc........... 10/30/07 10.500 5,300,000
------------
15,646,028
------------
Chemicals - 1.44%
5,500 Huntsman Corp........... 04/15/01 10.625 5,568,750
------------
Containers - 1.33%
5,000 Owens-Illinois Inc...... 12/01/03 11.000 5,125,000
------------
Diversified/Industrial - 4.83%
4,000 American Standard Inc... 05/15/04 11.375 4,100,000
5,000 Americold Corp.......... 05/01/97 11.000 4,350,000
5,000 Dow Corning Corp........ 02/01/08 9.375 4,337,800
2,000 Ogden Corp.............. 03/01/22 9.250 2,045,954
3,750 Overhead Door Corp...... 02/01/00 12.250 3,825,000
------------
18,658,754
------------
Finance - 9.52%
12,450 Bear Stearns & Co....... 06/01/01 to 02/01/02 8.250 to 9.375 12,255,011
General Motors
13,000 Acceptance Corp........ 02/15/97 to 06/01/99 7.125 to 7.625 12,537,235
Indah Kiat Finance Co.
4,500 B.V. .................. 06/15/02 11.875 4,432,500
Lomas Mortgage USA
3,000 Inc. .................. 10/01/02 10.250 2,550,000
5,000 Transamerica Corp. ..... 01/01/95 9.625 5,011,165
------------
36,785,911
------------
Food & Beverage - 1.83%
Chiquita Brands
2,000 International.......... 06/01/01 11.500 2,015,000
5,000 Seagram Corp............ 05/01/98 9.650 5,055,650
------------
7,070,650
------------
</TABLE>
7
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- ------------------ -------------- -------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONTINUED)
Forest Products & Paper - 3.82%
$14,350 Georgia Pacific Corp.... 11/01/21 9.875% $ 14,759,219
-------------
Healthcare - 3.94%
Columbia Healthtrust
10,000 Inc.................... 07/28/97 5.775* 9,975,000
5,000 Healthtrust Inc......... 05/01/02 10.750 5,275,000
-------------
15,250,000
-------------
Hotel/Gaming - 3.22%
5,000 Bally's Grand Inc....... 12/15/03 10.375 4,250,000
4,000 GNS Finance Corp........ 03/15/03 9.250 3,660,000
Host Marriott
4,529 Hospitality............ 11/01/01 10.875 4,540,323
-------------
12,450,323
-------------
Insurance - 2.37%
4,000 Chubb Corp. ............ 11/15/99 8.750 4,088,376
New York Life Funding
5,000 Corp................... 05/15/95 9.250 5,066,770
-------------
9,155,146
-------------
Media - 7.79%
News America Holdings
19,000 Inc.................... 10/15/12 10.125 19,673,778
12,000 Time Warner Inc......... 02/01/23 9.150 10,425,000
-------------
30,098,778
-------------
Oil and Gas - 1.25%
Occidental Petroleum
5,000 Corp................... 09/15/04 8.500 4,825,895
-------------
Railroad Equipment - 1.13%
Consolidated Rail
3,975 Corp. ................. 06/15/20 9.750 4,355,244
-------------
Retail Stores - 2.87%
Dayton Hudson
6,250 Corporation............ 12/01/22 8.500 5,929,087
Mays Department Stores
4,750 Co..................... 06/15/21 9.875 5,151,684
-------------
11,080,771
-------------
Steel - 1.25%
5,000 AK Steel Corp........... 04/01/04 10.750 4,812,500
-------------
Supermarkets - 0.66%
2,500 Hook SuperX Inc......... 06/01/02 10.125 2,550,000
-------------
Telephone Companies & Telecommunications - 4.63%
5,100 Alltel Corp............. 03/01/21 9.500 5,224,884
8,000 Pacific Bell............ 08/15/31 8.500 7,617,176
Rogers Cantel Mobile
5,000 Inc. .................. 11/01/01 10.750 5,050,000
-------------
17,892,060
-------------
</TABLE>
8
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PORTFOLIO OF INVESTMENTS (CONCLUDED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONCLUDED)
Utilities - 10.91%
$10,500 Commonwealth Edison Co.. 01/15/07 to 06/15/20 8.125 to 9.875% $ 10,176,276
Consolidated Edison Co.
2,000 of New York Inc........ 12/01/25 9.700 2,108,764
7,000 Cooperative Utilities... 03/15/19 9.520 7,492,751
7,750 Duke Power Co........... 03/01/21 8.750 7,484,508
Long Island Lighting
6,000 Co..................... 07/01/24 9.625 5,503,074
New York State Electric
2,000 & Gas Co............... 02/01/20 9.875 2,091,050
Texas Utilities Electric
7,145 Co..................... 05/01/21 9.750 7,308,506
------------
42,164,929
------------
Yankee - 2.42%
Banca Commerziale
5,000 Italiana............... 07/15/07 8.250 4,670,165
Saskatchewan Province
4,500 CDA.................... 12/15/20 9.375 4,663,166
------------
9,333,331
------------
Total Corporate Bonds (cost -
$365,436,954).................... 353,177,662
------------
<CAPTION>
NUMBER
OF SHARES
---------
<C> <S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK - 0.33%
Telecommunication - 0.33%
Mobile Telecommunication
50,000 - (cost - $2,500,000).. 1,275,000
------------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
---------
<C> <S> <C> <C> <C>
SHORT-TERM U.S. GOVERNMENT OBLIGATIONS - 2.07%
United States Treasury Bills (cost -
$ 8,000 $7,993,023)........... 12/08/94 4.485 7,993,023
------------
REPURCHASE AGREEMENT - 4.34%
16,772 Repurchase Agreement
dated 11/30/94, with
Nomura Securities
International Inc.,
collateralized by
$17,550,000 U.S.
Treasury Bills, due
05/04/95: proceeds:
$16,774,632 (cost -
$16,772,000) ......... 12/01/94 5.650 16,772,000
------------
Total Investments (cost -
$392,701,977) - 98.15%........... 379,217,685
Other assets in excess of
liabilities - 1.85%............... 7,166,906
------------
Net Assets - 100.00%............... $386,384,591
============
</TABLE>
-------
*Adjustable rate instrument
See accompanying notes to financial statements
9
<PAGE>
PAINEWEBBER HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - 91.27%
Aerospace - 5.21%
$ 3,770 B E Aerospace........... 03/01/03 9.750% $ 3,543,800
21,500 GPA Holland BV.......... 01/15/99 to 12/10/01 8.625 to 9.750 16,323,438
1,000 Rohr.................... 05/15/03 11.625 995,000
12,750 SabreLiner Corp. Ser A.. 04/15/03 12.500 11,411,250
------------
32,273,488
------------
Airlines - 1.14%
8,500# US Africa Airways....... 05/31/99 12.000 7,037,500
------------
Cable - 2.93%
Continental Cablevision
5,350 Inc.................... 08/15/03 to 09/15/05 8.625 to 8.875 4,743,250
6,250 Insight Communications.. 03/01/00 8.250+ 5,875,000
8,000 Marcus Cable Co......... 10/01/05 11.875 7,520,000
------------
18,138,250
------------
Chemicals - 2.47%
8,390 Associated Materials.... 08/15/03 11.500 8,054,400
NL Industries Senior
4,500 Notes.................. 10/15/03 11.750+ 4,365,000
NL Industries Senior
5,000 Subordinated Notes..... 10/15/05 13.000+ 2,862,500
------------
15,281,900
------------
Communications - 1.99%
4,940 Celcaribe SA............ 03/15/04 13.500+ 4,100,200
7,000 Comcast Cellular........ 03/05/00 0.000 4,567,500
6,000 PageMart................ 11/01/03 12.250+ 3,630,000
------------
12,297,700
------------
Consumer Manufacturing - 5.95%
8,000# Acme Boot Inc........... 12/15/00 11.500 3,600,000
5,500 Apparel Ventures........ 12/31/00 12.250 4,922,500
11,000 Chattem Inc............. 06/15/04 12.750 10,395,000
13,000# Icon Health & Fitness... 11/15/04 15.000+ 6,240,000
5,500 Mary Kay Corp........... 12/31/00 10.250 5,197,500
7,500 US Leather Inc.......... 07/31/03 10.250 6,450,000
------------
36,805,000
------------
Energy - 3.76%
8,500 Empire Gas Corp......... 07/15/04 7.000+ 6,290,000
5,000 Flores & Ruckes......... 12/01/04 13.500 5,000,000
7,000 TransTexas Gas.......... 09/01/00 10.500 6,650,000
6,000 WilRig AS............... 03/15/04 11.250 5,310,000
------------
23,250,000
------------
</TABLE>
10
<PAGE>
PAINEWEBBER HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONTINUED)
Financial - 4.13%
American Life Holding
$ 2,500 Co..................... 09/15/04 11.250% $ 2,437,500
Imperial Credit
9,750 Industries............. 01/15/04 9.750 7,507,500
5,000 Lomas Mortgage USA Inc.. 10/01/02 10.250 4,150,000
New Street Acquisition
8,480 Corp................... 02/28/98 12.000 8,352,800
Reliance Group Holdings
3,500 Inc.................... 11/15/00 9.000 3,097,500
------------
25,545,300
------------
Food & Beverage - 6.34%
Fresh Delmonte Produce
6,000 N.V.................... 05/01/03 10.000 4,380,000
42,000 Iowa Select Farms....... 02/15/04 17.250+ 15,006,600
6,500 Specialty Equipment Co.. 12/01/03 11.375 6,305,000
Specialty Foods
Acquisition Corp. Ser
10,500 B...................... 08/15/05 13.000+ 4,147,500
5,000 Specialty Foods Ser B... 08/15/03 11.250 4,362,500
9,750 White Rose Foods Inc.... 11/01/98 0.000 5,070,000
------------
39,271,600
------------
Gaming - 12.66%
Capital Gaming
10,000 International Inc...... 02/01/01 11.500+ 5,500,000
Capital Gaming
115 International Inc...... 08/01/95 0.000 57,500
5,000 Casino America Inc...... 11/15/01 11.500 4,225,000
El Comandante Capital
11,075 Corp................... 12/15/03 11.750 9,967,500
Empress River Casino
2,000 FInancial Corp......... 04/01/02 10.750 1,780,000
7,000 Grand Casino Ser B...... 02/01/00 12.500 6,440,000
8,500 Grand Palais Casinos.... 11/01/97 18.250 8,500,000
23,044 Hemmeter Enterprises.... 12/15/00 12.000 14,978,600
11,000 PRT Funding Inc......... 04/15/04 11.625 7,370,000
4,400 Pioneer Financial....... 12/01/98 13.500 3,432,000
7,931 Sahara Finance Corp..... 08/31/96 12.125 7,217,474
3,667 Sahara Mission Valley... 03/31/95 12.000 3,667,000
11,175# Sam Houston Race Park... 07/15/99 11.750 1,676,250
4,000# Santa Fe Hotel Inc...... 12/15/00 11.000 3,600,000
------------
78,411,324
------------
Healthcare - 2.11%
Amerisource Distribution
7,896 Corp................... 07/15/05 11.250 7,935,217
7,000 Total Renal Care Inc.... 08/15/04 12.000+ 5,110,000
------------
13,045,217
------------
Homebuilding - 3.81%
7,000 Baldwin Co Ser B........ 08/01/03 10.375 4,270,000
Inter City Products
7,070 Corp................... 03/01/00 9.750 6,645,800
10,250 MDC Corp................ 12/15/03 11.125* 8,353,750
5,000 Peters JM Inc........... 05/01/02 12.750 4,300,000
------------
23,569,550
------------
Hotels/Lodging - 0.23%
1,500 Kloster Cruise Ltd...... 05/01/03 13.000 1,425,000
------------
</TABLE>
11
<PAGE>
PAINEWEBBER HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- ------------------ -------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONTINUED)
Industrial - 7.21%
$4,500 Berg Electronics Inc.... 05/01/03 11.375% $ 4,455,000
4,725 Harrow's Industries..... 04/15/02 12.375 4,677,750
6,200 Intelogic Trace Inc(a).. 07/15/96 11.990 1,488,000
Kindercare Learning
5,000 Ctrs................... 06/01/01 10.375 4,925,000
3,500 Owens Illinois Inc...... 12/01/03 11.000 3,587,500
9,000 Poindexter JB Inc....... 05/15/04 12.500 8,550,000
10,100 Synthetic Industries.... 12/01/02 12.750 9,696,000
Uniroyal Technology
8,500# Corp................... 06/01/03 11.750 7,225,000
------------
44,604,250
------------
Media - 3.26%
12,000 Affiliated Newspaper.... 07/01/06 13.250+ 5,880,000
Chancellor Broadcasting
5,500 Co..................... 10/01/04 12.500 5,390,000
4,000 KIII Communications..... 06/01/04 10.250 3,770,000
Universal Outdoor
10,000 Holdings Inc........... 07/01/04 14.000+ 5,150,000
------------
20,190,000
------------
Packaging - 4.70%
6,500 Data Documents Inc...... 07/15/02 13.500 6,500,000
5,250 Doman Industries........ 03/15/04 8.750 4,567,500
Grupo Industrial Durango
6,000 S.A. .................. 07/15/01 12.000 5,820,000
Indah Kiat
9,000 International.......... 06/15/06 12.500 8,820,000
3,500 Stone Container......... 10/01/02 10.750 3,368,750
------------
29,076,250
------------
Retail - 13.88%
15,000 Apparel Retailers Inc... 08/15/05 12.750+ 8,475,000
3,000 Big Five Holdings....... 09/15/02 13.625 3,120,000
Carter Hawley Hale
5,150 Stores................. 12/31/00 6.250 5,201,500
5,000 Central Rents........... 12/15/03 12.875 4,550,000
8,250 Color Tile Inc.......... 12/15/01 10.750 7,260,000
3,000 Cort Furniture Rental... 09/01/00 12.000 2,835,000
8,000# County Seat............. 10/01/01 12.000 7,840,000
12,350# Finlay Enterprises Inc.. 05/01/05 12.000+ 7,410,000
Great American Cookie
6,000 Inc.................... 01/15/01 10.875 5,400,000
5,000 Pamida Inc.............. 03/15/03 11.750 4,750,000
9,250 Pantry Inc.............. 11/15/00 12.000 8,833,750
7,406 Petro PSC Properties.... 06/01/02 12.500 6,980,155
5,000 Specialty Retailers Inc. 08/15/03 11.000 4,650,000
8,800 Wickes Lumber........... 12/15/03 11.625 8,624,000
------------
85,929,405
------------
</TABLE>
12
<PAGE>
PAINEWEBBER HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- ---------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONCLUDED)
Supermarkets/Drugstores - 3.38%
$ 3,500 Duane Reade Corp........ 09/15/02 12.000% $ 2,800,000
Duane Reade Holding
13,709 Corp................... 09/15/04 15.000+ 4,798,150
12,308 Farm Fresh Holdings..... 10/01/02 14.250 7,692,753
7,500 Victory Markets Inc..... 03/15/00 12.500 5,625,000
------------
20,915,903
------------
Technology - 1.46%
10,250 ComputerVision.......... 08/15/97 to 08/15/99 10.875 to 11.375 9,055,000
------------
Transport Non-Air - 4.65%
4,000 Gearbulk Holding........ 12/01/04 11.250 3,995,000
9,000 TNT Trans Europe........ 04/15/04 11.500 8,865,000
Transtar Holding LP Ser
21,808 A...................... 12/15/03 13.375+ 11,231,120
5,200 Viking Star............. 07/15/03 9.625 4,706,000
------------
28,797,120
------------
Total Corporate Bonds - (cost -
$645,456,290).................... 564,919,757
------------
CONVERTIBLE BONDS - 3.36%
Gaming - 1.74%
Bally Entertainment
12,828 Corp................... 12/15/06 10.000 10,775,520
------------
Technology - 1.62%
3,000 Ampex Inc............... 06/30/97 0.000 1,500,000
7,000 EMC Corp................ 01/01/01 4.250 8,557,500
------------
10,057,500
------------
Total Convertible Bonds - (cost -
$20,480,800)..................... 20,833,020
------------
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
COMMON STOCK (A) - 1.40%
Chemical - 0.11%
74,306 UCC Investors Holding Corp..................................... 668,754
------------
Consumer Manufacturing - 0.01%
36,000 Acme Boot...................................................... 36,000
------------
Food/Beverage - 0.03%
240,000 Specialty Foods Acquisition Corp. ............................. 180,000
------------
</TABLE>
13
<PAGE>
PAINEWEBBER HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------------- ----------
<C> <S> <C>
COMMON STOCK (a) - (CONCLUDED)
Gaming - 0.69%
140,035 Capital Gaming International Inc................ $ 612,653
506,666 Hollywood Casino Corp........................... 2,533,330
364,322 Lady Luck Gaming Corp........................... 1,138,506
----------
4,284,489
----------
Industrial - 0.26%
333,840 Berg Electronics................................. 1,502,280
7,926 Dimac Corp....................................... 103,038
----------
1,605,318
----------
Retail - 0.01%
5,000 Vestar/LPA Invt Corp............................. 90,000
----------
Supermarkets/Drugstores - 0.29%
21,787 Duane Reade Corp................................. 392,165
40,000 Farm Fresh Holdings Corp. ....................... 1,400,000
----------
1,792,165
----------
Total Common Stock - (cost - $2,305,715)...................... 8,656,726
----------
PREFERRED STOCK - 0.52%
Airlines - 0.31%
5,145# US Africa Airways, Inc. (a)...................... 1,929,375
----------
Consumer Manufacturing - 0.06%
4,000 Acme Boot Inc. (a)............................... 400,000
----------
General Industrial - 0.15%
58,937 JPS Textile Group Inc............................ 942,992
----------
Total Preferred Stock (cost - $11,954,500).................... 3,272,367
----------
<CAPTION>
NUMBER OF
WARRANTS
---------------
<C> <S> <C>
WARRANTS (A) - 1.63%
Aerospace - 0.02%
12,750 SabreLiner Corp. ................................ 127,500
----------
Communications - 0.02%
27,600 Pagemart Inc. ................................... 110,400
----------
Consumer Manufacturing - 0.01%
11,000 Chattem Inc. .................................... 55,000
----------
Food/Beverage - 0.55%
420,000 Iowa Select Farms ............................... 3,405,360
----------
</TABLE>
14
<PAGE>
PAINEWEBBER HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONCLUDED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS VALUE
--------- ------------
<C> <S> <C>
WARRANTS (a) - (CONCLUDED)
Gaming - 0.85%
222,500 Capital Gaming International Inc. .............. $ 389,375
42,000 Casino Magic Finance Corp. ..................... 4,200
2,304,862 Grand Palais Hemmeter........................... 3,941,843
267,931 Enterprises .................................... 401,897
11,075 HDA Management Corp. ........................... 553,750
------------
5,291,065
------------
Homebuilding - 0.00%
39,500 Peters JM Inc................................... 19,750
------------
Media - 0.09%
12,000 Affiliated Newspaper ........................... 300,000
5,500 AVI Holdings Inc. .............................. 247,500
10,000 Universal Outdoor Holdings Inc.................. 40,000
------------
587,500
------------
Retail - 0.09%
Central Rents
5,000 Inc. ........... 150,000
Cookies USA
1,080 Inc. ........... 43,200
Cort Holdings
99,000 Corp. .......... 99,000
Petro PSC
7,406 Properties ..... 259,210
------------
551,410
------------
Total Warrants (cost -
$7,106,234)............... 10,147,985
------------
Total Investments (cost -
$687,303,539) - 98.18%.... 607,829,855
Other assets in excess of
liabilities - 1.82%....... 11,242,974
------------
Net Assets - 100.00%....... $619,072,829
============
</TABLE>
-------
(a) Non-income producing security
# Security represents a unit which is comprised of the stated bond or
preferred stock with attached warrants or common stock.
+ Denotes a step-up bond or zero coupon bond that converts to the noted fixed
rate at a designated future date.
* Adjustable rate instrument
See accompanying notes to financial statements
15
<PAGE>
PAINEWEBBER
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1994
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
------------- ------------ -------------
<S> <C> <C> <C>
Assets
Investments in securities, at value
(cost $626,078,470, $392,701,977
and $687,303,539, respectively)... $ 602,898,610 $379,217,685 $ 607,829,855
Dividends and interest receivable.. 6,923,504 8,000,841 16,192,551
Receivable for investments sold.... -- 11,959,715 14,754,198
Receivable for shares of beneficial
interest sold..................... 454,554 515,066 1,082,354
Other assets....................... 87,541 38,663 30,048
------------- ------------ -------------
Total assets....................... 610,364,209 399,731,970 639,889,006
------------- ------------ -------------
Liabilities
Payable for investments purchased.. -- 7,902,930 9,003,750
Payable for shares of beneficial
interest repurchased.............. 5,514,830 2,855,236 6,365,024
Dividends payable.................. 1,927,881 1,344,950 3,047,554
Payable to affiliate............... 484,208 320,677 611,490
Accrued expenses and other
liabilities....................... 779,275 923,586 1,788,359
------------- ------------ -------------
Total liabilities.................. 8,706,194 13,347,379 20,816,177
============= ============ =============
Net Assets
Beneficial interest--$0.001 par
value (unlimited amount
authorized)....................... 893,290,738 467,739,929 920,103,966
Overdistributed net investment
income............................ (1,927,881) (540,267) (1,741,303)
Accumulated net realized losses
from investment, option and
futures transactions.............. (266,524,982) (67,330,779) (219,816,150)
Net unrealized depreciation of
investments....................... (23,179,860) (13,484,292) (79,473,684)
------------- ------------ -------------
Net assets......................... $ 601,658,015 $386,384,591 $ 619,072,829
============= ============ =============
Class A:
Net assets......................... $ 428,721,681 $271,552,870 $ 268,397,238
------------- ------------ -------------
Shares outstanding................. 50,464,242 28,076,009 37,586,833
------------- ------------ -------------
Net asset value and redemption
value per share................... $8.50 $9.67 $7.14
===== ===== =====
Maximum offering price per share
(net asset value plus sales charge
of 4.00% of offering price)....... $8.85 $10.07 $7.44
===== ====== =====
Class B:
Net assets......................... $ 99,580,827 $ 69,358,755 $ 235,479,709
------------- ------------ -------------
Shares outstanding................. 11,720,246 7,172,966 32,995,692
------------- ------------ -------------
Net asset value and offering price
per share......................... $8.50 $9.67 $7.14
===== ===== =====
Class C:
Net assets......................... $ 4,955,267
-------------
Shares outstanding................. 583,709
-------------
Net asset value, offering price and
redemption value per share........ $8.49
=====
Class D:
Net assets......................... $ 68,400,240 $ 45,472,966 $ 115,195,882
------------- ------------ -------------
Shares outstanding................. 8,058,933 4,701,697 16,106,514
------------- ------------ -------------
Net asset value, offering price and
redemption value per share........ $8.49 $9.67 $7.15
===== ===== =====
</TABLE>
See accompanying notes to financial statements
16
<PAGE>
PAINEWEBBER
STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
------------- ------------ -------------
<S> <C> <C> <C>
Investment Income:
Interest and dividends............. $ 58,822,071 $ 32,118,771 $ 91,563,700
------------- ------------ -------------
Expenses:
Investment advisory and
administration.................... 3,958,127 1,897,899 4,047,201
Service fees--Class A.............. 1,371,619 646,924 847,482
Service and distribution fees--
Class B........................... 1,319,942 671,234 2,961,114
Service and distribution fees--
Class D........................... 790,524 402,653 1,307,520
Transfer agency and service fees... 621,594 314,545 561,252
Custody and accounting............. 359,582 153,376 202,600
Reports and notices to
shareholders...................... 261,563 113,457 87,655
Legal and audit.................... 173,041 124,657 116,005
State registration fees............ 141,407 79,073 116,028
Trustees' fees..................... 6,042 6,042 6,042
Other expenses..................... 48,625 39,779 84,284
------------- ------------ -------------
9,052,066 4,449,639 10,337,183
------------- ------------ -------------
Net investment income.............. 49,770,005 27,669,132 81,226,517
------------- ------------ -------------
Realized and unrealized losses from
investment activities:
Net realized losses from
investment, option and futures
transactions...................... (90,205,295) (18,925,323) (42,848,247)
Net change in unrealized
appreciation/depreciation of
investments....................... (41,153,792) (29,597,304) (111,001,210)
------------- ------------ -------------
Net realized and unrealized losses
from investment activities........ (131,359,087) (48,522,627) (153,849,457)
------------- ------------ -------------
Net decrease in net assets
resulting from operations......... $ (81,589,082) $(20,853,495) $ (72,622,940)
============= ============ =============
</TABLE>
See accompanying notes to financial statements
17
<PAGE>
PAINEWEBBER
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
U.S. GOVERNMENT
INCOME FUND
---------------
<S> <C>
Cash flows provided from operating activities:
Interest received............................................ $ 59,587,706
Expenses paid................................................ (8,875,162)
Sale of short-term portfolio investments, net................ 129,695,326
Purchase of long-term portfolio investments.................. (3,144,539,887)
Sale of long-term portfolio investments...................... 3,240,541,530
Net loss on futures contracts................................ (728,547)
---------------
Net cash provided from operating activities.................. 275,680,966
---------------
Cash flows used for financing activities:
Net proceeds from sale of shares............................. 77,309,487
Cost of shares repurchased................................... (330,240,610)
Proceeds from dividends and distributions reinvested......... 27,332,029
Dividends and distributions paid to shareholders ............ (50,082,457)
---------------
Net cash used for financing activities....................... (275,681,551)
---------------
Net decrease in cash......................................... (585)
Cash at beginning of period.................................. 585
---------------
Cash at end of period........................................ $ 0
===============
Reconciliation of net decrease in net assets resulting from
operations to net cash provided from operating activities:
Net decrease in net assets resulting from operations......... (81,589,082)
---------------
Decrease in cost of investments.............................. 494,025,326
Increase in unrealized depreciation.......................... 41,153,792
Increase in interest receivable.............................. (1,229,013)
Decrease in other assets..................................... 29,509
Decrease in payable for investment purchased................. (176,856,961)
Increase in accrued expenses and other liabilities........... 147,395
---------------
Total adjustments............................................ $ 357,270,048
---------------
Net cash provided from operating activities.................. $ 275,680,966
===============
</TABLE>
See accompanying notes to financial statements
18
<PAGE>
PAINEWEBBER
STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED NOVEMBER
30, 1994
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
------------- ------------- -------------
<S> <C> <C> <C>
From operations:
Net investment income............. $ 49,770,005 $ 27,669,132 $ 81,226,517
Net realized losses from
investment, option and futures
transactions..................... (90,205,295) (18,925,323) (42,848,247)
Net change in unrealized
appreciation/depreciation of
investments...................... (41,153,792) (29,597,304) (111,001,210)
------------- ------------- -------------
Net decrease in net assets
resulting from operations........ (81,589,082) (20,853,495) (72,622,940)
------------- ------------- -------------
Dividends to shareholders from:
Net investment income--Class A.... (35,554,012) (19,418,731) (35,523,144)
Net investment income--Class B.... (7,531,696) (4,525,799) (28,733,202)
Net investment income--Class C.... (377,439) -- --
Net investment income--Class D.... (6,309,747) (3,757,399) (17,359,463)
------------- ------------- -------------
(49,772,894) (27,701,929) (81,615,809)
------------- ------------- -------------
From beneficial interest
transactions:
Net proceeds from the sale of
shares........................... 73,782,062 81,155,923 377,540,744
Proceeds from the acquisition of
PaineWebber Income Fund (net of
reorganization costs of
$150,000)........................ -- 167,067,960 --
Cost of shares repurchased........ (327,879,970) (131,961,171) (463,708,223)
Proceeds from dividends
reinvested....................... 27,332,029 14,432,019 36,511,036
------------- ------------- -------------
Net increase (decrease) in net
assets from beneficial interest
transactions..................... (226,765,879) 130,694,731 (49,656,443)
------------- ------------- -------------
Net increase (decrease) in net
assets........................... (358,127,855) 82,139,307 (203,895,192)
Net assets:
Beginning of year................. 959,785,870 304,245,284 822,968,021
------------- ------------- -------------
End of year ...................... $ 601,658,015 $ 386,384,591 $ 619,072,829
============= ============= =============
<CAPTION>
FOR THE YEAR ENDED NOVEMBER 30, 1993
<S> <C> <C> <C>
From operations:
Net investment income............. $ 63,936,790 $ 19,652,787 $ 63,168,151
Net realized gains from investment
transactions..................... 10,377,615 3,681,043 35,374,245
Net change in unrealized
appreciation/depreciation of
investments...................... (4,661,716) 12,840,269 20,887,302
------------- ------------- -------------
Net increase in net assets
resulting from operations........ 69,652,689 36,174,099 119,429,698
------------- ------------- -------------
Dividends to shareholders from:
Net investment income--Class A.... (45,396,389) (14,951,335) (34,763,871)
Net investment income--Class B.... (9,035,325) (2,411,609) (18,756,469)
Net investment income--Class C.... (414,740) -- --
Net investment income--Class D.... (9,087,447) (2,265,386) (10,169,097)
------------- ------------- -------------
(63,933,901) (19,628,330) (63,689,437)
------------- ------------- -------------
From beneficial interest
transactions:
Net proceeds from the sale of
shares........................... 266,641,413 104,615,630 513,968,391
Cost of shares repurchased........ (316,922,992) (61,419,703) (189,688,470)
Proceeds from dividends
reinvested....................... 36,250,482 9,778,808 27,625,431
------------- ------------- -------------
Net increase (decrease) in net
assets from beneficial interest
transactions..................... (14,031,097) 52,974,735 351,905,352
------------- ------------- -------------
Net increase (decrease) in net
assets........................... (8,312,309) 69,520,504 407,645,613
Net assets:
Beginning of year................. 968,098,179 234,724,780 415,322,408
------------- ------------- -------------
End of year (including
undistributed net investment
income of $2,889, $24,358 and
$424,587, respectively).......... $ 959,785,870 $304,245,284 $ 822,968,021
============= ============= =============
</TABLE>
See accompanying notes to financial statements
19
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Managed Investments Trust ("Trust") was organized
under Massachusetts law by a Declaration of Trust dated November
21, 1986 and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended,
as an open-end, diversified investment company. The Trust is a
series mutual fund with six funds: PaineWebber U.S. Government
Income Fund ("U.S. Government Income Fund"), PaineWebber
Investment Grade Income Fund ("Investment Grade Income Fund"),
PaineWebber High Income Fund ("High Income Fund") (collectively
the "Funds"), PaineWebber Short-Term U.S. Government Income Fund,
PaineWebber Short-Term U.S. Government Income Fund for Credit
Unions and PaineWebber Utility Income Fund. The financial
statements for PaineWebber Short-Term U.S. Government Income Fund,
PaineWebber Short-Term U.S. Government Income Fund for Credit
Unions and PaineWebber Utility Income Fund are not included
herein.
Organizational Matters -- Prior to commencing its operations, the
Trust had no activities other than organizational matters and
activities related to the initial public offering and the
issuance, at net asset value, of 10,500 Class A shares of the
Trust to PaineWebber Incorporated ("PaineWebber").
Prior to July 1, 1991, each Fund issued only Class A shares.
Subsequent to that date each Fund issued Class A and Class B
shares. On September 11, 1991, U.S. Government Income Fund
commenced issuing Class C shares. Class C shares are available
only to the trustee of the PaineWebber Savings Investment Plan on
behalf of that Plan. On July 2, 1992, each Fund commenced issuing
Class D shares. Each Class represents interests in the same assets
of the applicable Fund, and the Classes are identical except for
differences in their sales charge structures, ongoing distribution
charges and certain transfer agency expenses. In addition, Class B
shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years
after issuance. All Classes of shares have equal voting
privileges, except that each Class has exclusive voting rights
with respect to its distribution plan.
Acquisition of PaineWebber Income Fund -- Effective as of the
close of business on April 29, 1994, Investment Grade Income Fund
acquired all of the net assets of PaineWebber Income Fund ("Income
Fund") in a tax-free exchange for shares of Investment Grade
Income Fund. The acquisition was accomplished by a tax-free
exchange of 12,647,181 Class A, 2,618,902 Class B, and 1,093,463
Class D shares of Investment Grade Income Fund for 13,591,398
Class A, 2,817,387 Class B, and 1,175,099 Class D shares of Income
Fund outstanding on April 29, 1994. Income Fund's net assets at
that date, valued at $167,217,960, including overdistributed net
investment income of $99,550, accumulated net realized losses of
$36,695,472 and net unrealized depreciation of investments of
6,651,112, were combined with those of Investment Grade Income
Fund.
20
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Valuation of Investments -- Where market quotations are readily
available, portfolio securities are valued thereon, provided such
quotations adequately reflect, in the judgment of Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned subsidiary of PaineWebber and investment adviser and
administrator of the Funds, the fair value of the securities. When
market quotations are not readily available, securities are valued
based upon appraisals derived from information concerning those
securities or similar securities received from recognized dealers
in those securities. All other securities 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,
which approximates market value, is used to value 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.
The ability of the issuers of the debt securities held by the
Funds to meet their obligations may be affected by economic
developments, including those particular to a specific industry,
country or region.
Investment Transactions and Investment Income -- Investment
transactions are recorded on the trade date. Realized gains and
losses from investment transactions are calculated using the
identified cost method. Interest income is recorded on an accrual
basis. Dividend income is recorded on the ex-dividend date. The
U.S. Government Income Fund may enter into transactions in which
the U.S. Government Income Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities
on a specified future date (the "roll period"). During the roll
period the U.S. Government Income Fund forgoes principal and
interest paid on the securities. The U.S. Government Income Fund
is compensated by the interest earned on the cash proceeds of the
initial sale and by fee income or a lower repurchase price.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains/losses are allocated proportionately to
each class of shares based upon the relative net asset value of
outstanding shares (or the value of dividend-eligible shares, as
appropriate) of each class at the beginning of the day (after
adjusting for current capital share activity of the respective
classes). Class-specific expenses are charged directly to the
applicable class of shares.
Futures Contracts -- Upon entering into a financial futures
contract, a Fund is required to pledge to a broker an amount of
cash and/or U.S. Government securities equal to a certain
percentage of the contract amount. This amount is known as the
"initial margin." Subsequent payments, known as "variation
margin," are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying financial
futures contracts. Such variation margin is recorded for financial
statement purposes on a daily basis as
21
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
unrealized gain or loss until the financial futures contract is
closed, at which time the net gain or loss is reclassified to
realized.
Using financial futures contracts involves various market risks.
The maximum amount at risk from the purchase of a futures contract
is the contract value. The Fund is subject to a number of
guidelines which reduce this risk by seeking to ensure that
financial futures contracts are used for hedging purposes as well
as to manage the average duration of a Fund's portfolio and not
for leverage. However, imperfect correlations between futures
contracts and the portfolio securities being hedged or, market
disruptions, do not normally permit full control of these risks at
all times. At November 30, 1994 there were no open futures
contracts.
Option Writing -- When a Fund writes a call or a put option, an
amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as an asset and as
an equivalent liability. The amount of the liability is
subsequently marked-to-market to reflect the current market value
of the option written. If an option which the Fund has written
either expires on its stipulated expiration date or the Fund
enters into a closing purchase transaction, the Fund realizes a
gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was written) without
regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is extinguished. If a
call option which the Fund has written is exercised, the Fund
realizes a capital gain or loss (long-term or short-term,
depending on the holding period of the underlying security) from
the sale of the underlying security and the proceeds from the sale
are increased by the premium originally received. If a put option
which a Fund has written is exercised, the amount of the premium
originally received reduces the cost of the security which the
Fund purchases upon exercise of the option. At November 30, 1994,
there were no unexpired options.
Repurchase Agreements -- The Funds' custodian takes possession of
the collateral pledged for investments in repurchase agreements.
The underlying collateral is valued daily on a mark-to-market
basis to ensure that the value, including accrued interest, is at
least equal to the repurchase price. In the event of default of
the obligation to repurchase, each Fund has the right to liquidate
the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default
or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal
proceedings. Each of the Funds occasionally participates in joint
repurchase agreement transactions with other funds managed by
Mitchell Hutchins.
Federal Tax Status -- Each Fund intends to distribute all of its
taxable income and to comply with the other requirements of the
Internal Revenue Code applicable to regulated investment
companies. Accordingly, no provision for federal income taxes is
required. In addition, by distributing during each calendar year\
22
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
substantially all of its net investment income, capital gains and
certain other amounts, if any, each Fund intends not to be subject
to a federal excise tax.
Dividends and Distributions -- Dividends and distributions to
shareholders are recorded on the ex-dividend date. Each Fund
declares dividends on a daily basis from net investment income.
During the year ended November 30, 1994, the Fund adopted
Statement of Position 93-2, "Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies".
Accordingly, the amount of dividends and distributions are
determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These
"book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital
accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment
income or distributions in excess of net realized capital gains.
To the extent they exceed net investment income and net realized
capital gains for tax purposes, they are reported as distributions
of paid-in-capital.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory
and Administration Contract ("Advisory Contract") with Mitchell
Hutchins, under which Mitchell Hutchins serves as investment
adviser and administrator of the Funds. In accordance with the
Advisory Contract, each Fund pays Mitchell Hutchins an investment
advisory and administration fee, which is accrued daily and paid
monthly, at the annual rate of 0.50% of each Fund's average daily
net assets. At November 30, 1994, U.S. Government Income Fund,
Investment Grade Income Fund and High Income Fund owed Mitchell
Hutchins $252,565, $160,889 and $264,517, respectively, in
investment advisory and administration fees.
In compliance with applicable state securities laws, Mitchell
Hutchins will reimburse each Fund if and to the extent that the
aggregate operating expenses in any fiscal year, exclusive of
taxes, distribution fees, interest, brokerage fees and
extraordinary expenses, exceed limitations imposed by various
state regulations. Currently, the most restrictive limitation
applicable to each Fund is 2.5% of the first $30 million of
average daily net assets, 2.0% of the next $70 million and 1.5% of
any excess over $100 million. For the year ended November 30,
1994, no reimbursements were required pursuant to the above
limitation for any of the Funds.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of each Fund's shares and has
appointed PaineWebber as the exclusive dealer for the sale of
those shares. Under separate
23
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
plans of distribution pertaining to the Class A, Class B and Class
D shares, each Fund pays Mitchell Hutchins monthly service fees at
the annual rate of 0.25% of the average daily net assets of each
Class of shares and monthly distribution fees at the annual rate
of 0.75% and 0.50% of the average daily net assets of Class B
shares and Class D shares, respectively. At November 30, 1994,
U.S. Government Income Fund, Investment Grade Income Fund and High
Income Fund owed Mitchell Hutchins $217,014, $142,879 and
$332,743, respectively, in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales
charges paid by the shareholders upon the purchase of Class A
shares and the contingent deferred sales charges paid by the
shareholders upon certain redemptions of Class B shares. Mitchell
Hutchins has informed each Fund that for the year ended November,
30, 1994, it earned the following amounts in sales charges:
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -----------
<S> <C> <C> <C>
Initial sales charges--Class A............. $121,124 $137,013 $ 793,898
Contingent deferred sales charges--Class B $927,086 $359,379 $1,899,408
</TABLE>
TRANSFER AGENCY SERVICE FEES
Each Fund pays PaineWebber an annual fee of $4.00 per active
PaineWebber shareholder account for certain services not provided
by the Funds' transfer agent. For these services for the year
ended November 30, 1994, PaineWebber earned $196,490, $97,475 and
$181,748 in transfer agency service fees from U.S. Government
Income Fund, Investment Grade Income Fund and High Income Fund,
respectively. At November 30, 1994, the U.S. Government Income
Fund, Investment Grade Income Fund and High Income Fund owed
PaineWebber $14,629, $16,909 and $14,230, respectively, for
shareholder service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at
November 30, 1994 was substantially the same as the cost of
securities for financial statement purposes.
At November 30, 1994, the components of the net unrealized
depreciation of investments were as follows:
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
------------ ------------ ------------
<S> <C> <C> <C>
Gross appreciation (investments
having an excess of value over
cost)............................... $ 140,756 $ 1,614,890 $ 13,058,304
Gross depreciation (investments
having an excess of cost over
value).............................. (23,320,616) (15,099,182) (92,531,988)
------------ ------------ ------------
Net unrealized depreciation of
investments......................... $(23,179,860) $(13,484,292) $(79,473,684)
============ ============ ============
</TABLE>
24
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
For the year ended November 30, 1994, total aggregate purchases
and sales of portfolio securities, excluding short-term
securities, were as follows:
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
-------------- ------------ --------------
<S> <C> <C> <C>
Purchases............................ $2,967,682,926 $604,394,551 $1,203,111,565
Sales................................ $3,240,541,530 $483,914,014 $1,274,735,226
</TABLE>
FEDERAL INCOME TAX STATUS
At November 30, 1994, U.S. Government Income Fund, Investment
Grade Income Fund and High Income Fund had net capital loss
carryforwards of approximately $265,000,000, $67,000,000 and
$220,000,000, respectively. These loss carryforwards are available
as reductions, to the extent provided in the regulations, of
future net realized capital gains, and will expire between
November 30, 1996 and November 30, 2002.
In addition, Investment Grade Income Fund has a net capital loss
carryforward of approximately $37,000,000 at November 30, 1994
pursuant to its reorganization with PaineWebber Income Fund. This
additional loss carryforward is available as a reduction, to the
extent provided in the regulations, of future net realized capital
gains, and will expire, between 1996 and 2000.
To the extent that all such losses are used to offset future
capital gains, it is probable that the gains so offset will not be
distributed.
At November 30, 1993, the cumulative effect of permanent book/tax
reclassifications resulted in increases (decreases) to the
components of net assets as follows:
<TABLE>
<CAPTION>
OVERDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED BENEFICIAL
INCOME LOSSES INTEREST
--------------- ------------ ----------
<S> <C> <C> <C>
U.S. Government Income Fund............ $(2,240,333) -- $2,240,333
Investment Grade Income Fund........... (531,828) -- 531,828
High Income Fund....................... (1,776,598) 702,588 1,074,010
</TABLE>
For the year ended November 30, 1994, the reclassification arising
from permanent book/tax differences resulted in increases
(decreases) to the components of net assets as follows:
<TABLE>
<CAPTION>
OVERDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED BENEFICIAL
INCOME LOSSES INTEREST
--------------- ------------ ----------
<S> <C> <C> <C>
U.S. Government Income Fund............ $312,452 -- $(312,452)
Investment Grade Income Fund........... -- -- --
High Income Fund....................... -- -- --
</TABLE>
25
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS - (CONCLUDED)
SHARES OF BENEFICIAL INTEREST
THERE IS AN UNLIMITED AMOUNT OF $0.001 PAR VALUE SHARES OF
BENEFICIAL INTEREST AUTHORIZED. TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST WERE AS FOLLOWS:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------------ ----------------------- ------------------ ------------------------
For the Years Ended November 30,
-----------------------------------------------------------------------------------------------
1994 1993 1994 1993 1994 1993 1994 1993
----------- ----------- ----------- ---------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Income
Fund:
Shares sold............ 2,194,886 4,396,996 2,683,818 7,093,511 107,988 132,997 2,771,863 14,732,335
Shares repurchased..... (18,389,111) (12,727,169) (7,474,061) (4,582,800) (186,721) (105,723) (9,522,607) (13,819,825)
Shares converted from
Class B to Class A.... 50,083 261,073 (50,083) (260,951) -- -- -- --
Dividends reinvested in
additional Fund
shares................ 1,915,098 2,270,828 495,622 555,538 40,709 41,078 493,223 670,572
----------- ----------- ----------- ---------- -------- -------- ----------- -----------
Net increase (decrease)
in shares outstanding. (14,229,044) (5,798,272) (4,344,704) 2,805,298 (38,024) 68,352 (6,257,521) 1,583,082
=========== =========== =========== ========== ======== ======== =========== ===========
Investment Grade Income
Fund:
Shares sold............ 2,253,575 1,720,829 2,748,255 3,577,454 -- -- 2,777,103 4,262,479
Shares issued in
connection with the
acquisition of the
PaineWebber Income
Fund.................. 12,647,181 -- 2,618,902 -- -- -- 1,093,463 --
Shares repurchased..... (6,542,726) (3,081,611) (2,848,257) (865,212) -- -- (3,671,524) (1,647,613)
Shares converted from
Class B to Class A.... 312,181 120,032 (312,190) (120,110) -- -- -- --
Dividends reinvested in
additional Fund
shares................ 955,311 642,286 242,740 120,944 -- -- 212,380 127,799
----------- ----------- ----------- ---------- -------- -------- ----------- -----------
Net increase (decrease)
in shares outstanding. 9,625,522 (598,464) 2,449,450 2,713,076 -- -- 411,422 2,742,665
=========== =========== =========== ========== ======== ======== =========== ===========
High Income Fund:
Shares sold............ 8,883,010 10,745,406 18,254,951 26,506,038 -- -- 16,905,382 23,648,611
Shares repurchased..... (15,069,065) (6,979,418) (18,822,027) (6,658,331) -- -- (22,171,116) (8,711,618)
Shares converted from
Class B to Class A.... 487,991 422,700 (488,453) (423,063) -- -- -- --
Dividends reinvested in
additional Fund
shares................ 2,002,590 1,775,635 1,199,402 826,428 -- -- 1,215,286 673,080
----------- ----------- ----------- ---------- -------- -------- ----------- -----------
Net increase (decrease)
in shares outstanding. (3,695,474) 5,964,323 143,873 20,251,072 -- -- (4,050,448) 15,610,073
=========== =========== =========== ========== ======== ======== =========== ===========
</TABLE>
26
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
For the Years Ended November 30,
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations:
Net investment income.... 0.60 0.67 0.75 0.77 0.76
Net realized and
unrealized gains
(losses) from investment
transactions............ (1.53) 0.05 0.01 0.49 (0.05)
-------- -------- -------- -------- --------
Net increase (decrease)
in net assets resulting
from operations......... (0.93) 0.72 0.76 1.26 0.71
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net
investment income....... (0.60) (0.67) (0.75) (0.76) (0.75)
-------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 8.50 $10.03 $ 9.98 $ 9.97 $ 9.47
======== ======== ======== ======== ========
Total investment return
(1)..................... (9.62)% 7.38% 7.92% 13.80% 8.36%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted)......... $428,722 $648,923 $703,198 $737,189 $795,240
Ratio of expenses to
average net assets...... 0.95% 0.91% 0.93% 0.87% 0.66%
Ratio of net investment
income to average net
assets.................. 6.48% 6.60% 7.42% 7.94% 8.57%
Portfolio turnover rate.. 358.07% 83.13% 28.33% 71.22% 34.48%
</TABLE>
-------
# Commencement of offering of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges;
results of Class A and Class B shares would be lower if sales charges were
included. Total investment returns for periods of less than one year have
not been annualized.
27
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS D
-------------------------------------------- -------------------------------------- ---------------------------------
For the Period
For the For the Period For the September 11, For the For the Period
Years Ended July 1, 1991# Years Ended 1991# Years Ended July 2, 1992#
November 30, to November 30, to November 30, to
---------------------------- November 30, ---------------------- November 30, ----------------- November 30,
1994 1993 1992 1991 1994 1993 1992 1991 1994 1993 1992
------- -------- -------- -------------- ------ ------ ------ -------------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$10.03 $ 9.98 $ 9.98 $ 9.59 $10.02 $ 9.97 $ 9.97 $ 9.88 $10.02 $ 9.98 $10.13
------- -------- -------- ------- ------ ------ ------ ------ ------- -------- --------
0.53 0.60 0.67 0.29 0.62 0.70 0.77 0.18 0.55 0.62 0.25
(1.53) 0.05 0.01 0.39 (1.53) 0.05 0.01 0.09 (1.53) 0.04 (0.15)
------- -------- -------- ------- ------ ------ ------ ------ ------- -------- --------
(1.00) 0.65 0.68 0.68 (0.91) 0.75 0.78 0.27 (0.98) 0.66 0.10
------- -------- -------- ------- ------ ------ ------ ------ ------- -------- --------
(0.53) (0.60) (0.68) (0.29) (0.62) (0.70) (0.78) (0.18) (0.55) (0.62) (0.25)
------- -------- -------- ------- ------ ------ ------ ------ ------- -------- --------
$ 8.50 $10.03 $ 9.98 $ 9.98 $ 8.49 $10.02 $ 9.97 $ 9.97 $ 8.49 $10.02 $ 9.98
======= ======== ======== ======= ====== ====== ====== ====== ======= ======== ========
(10.31)% 6.57% 6.98% 6.78% (9.37)% 7.69% 8.13% 2.37% (10.08)% 6.75% 0.62%
======= ======== ======== ======= ====== ====== ====== ====== ======= ======== ========
$99,581 $161,158 $132,357 $23,532 $4,955 $6,232 $5,517 $4,514 $68,400 $143,473 $127,026
1.72% 1.66% 1.67% 1.68%* 0.65% 0.62% 0.63% 0.72%* 1.45% 1.40% 1.44%*
5.71% 5.79% 6.38% 6.40%* 6.76% 6.87% 7.70% 8.36%* 5.99% 6.06% 6.13%*
358.07% 83.13% 28.33% 71.22% 358.07% 83.13% 28.33% 71.22% 358.07% 83.13% 28.33%
</TABLE>
28
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
For the Years Ended November 30,
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $11.08 $10.38 $10.17 $ 9.50 $ 9.82
-------- -------- -------- -------- --------
Net increase (decrease) from
investment operations:
Net investment income........ 0.77 0.79 0.81 0.82 0.84
Net realized and unrealized
gains (losses) from
investment transactions..... (1.41) 0.70 0.22 0.66 (0.33)
-------- -------- -------- -------- --------
Net increase (decrease) in
net assets resulting from
operations.................. (0.64) 1.49 1.03 1.48 0.51
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment
income...................... (0.77) (0.79) (0.82) (0.81) (0.83)
-------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 9.67 $11.08 $10.38 $10.17 $ 9.50
======== ======== ======== ======== ========
Total investment return (1).. (5.99)% 14.77% 10.39% 16.17% 5.55%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted)............. $271,553 $204,418 $197,795 $220,216 $225,424
Ratio of expenses to average
net assets.................. 0.97% 0.96% 1.01% 0.91% 0.66%
Ratio of net investment
income to average net
assets...................... 7.50% 7.24% 7.81% 8.32% 8.76%
Portfolio turnover rate...... 142.15% 27.25% 43.88% 45.68% 31.42%
</TABLE>
-------
# Commencement of offering of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period, reinvestment of all dividends at net asset value
on the payable dates and a sale at net asset value on the last day of each
period reported. The figures do not include sales charges; results for
Class A and Class B shares would be lower if sales charges were included.
Total investment returns for periods of less than one year have not been
annualized.
29
<PAGE>
PAINEWEBBER INVESTMENT GRADE INCOME FUND
<TABLE>
<CAPTION>
CLASS B CLASS D
------------------------------------------ ---------------------------------
For the For the Period For the For the Period
Years Ended July 1, 1991# Years Ended July 2, 1992 #
November 30, to November 30, to
-------------------------- November 30, ----------------- November 30,
1994 1993 1992 1991 1994 1993 1992
------- ------- ------- -------------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
$11.07 $10.38 $10.17 $ 9.79 $11.08 $10.38 $10.48
------- ------- ------- ------ ------- ------- -------
0.69 0.71 0.73 0.31 0.72 0.74 0.28
(1.40) 0.69 0.22 0.38 (1.41) 0.70 (0.10)
------- ------- ------- ------ ------- ------- -------
(0.71) 1.40 0.95 0.69 (0.69) 1.44 0.18
------- ------- ------- ------ ------- ------- -------
(0.69) (0.71) (0.74) (0.31) (0.72) (0.74) (0.28)
------- ------- ------- ------ ------- ------- -------
$ 9.67 $11.07 $10.38 $10.17 $ 9.67 $11.08 $10.38
======= ======= ======= ====== ======= ======= =======
(6.60)% 13.81% 9.56% 6.76% (6.40)% 14.21% 1.32%
======= ======= ======= ====== ======= ======= =======
$69,359 $52,301 $20,862 $5,368 $45,473 $47,527 $16,067
1.72% 1.70% 1.74% 1.67%* 1.45% 1.44% 1.49%*
6.73% 6.40% 6.88% 6.87%* 6.99% 6.61% 6.83%*
142.15% 27.25% 43.88% 45.68% 142.15% 27.25% 43.88%
</TABLE>
30
<PAGE>
PAINEWEBBER HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
For the Years Ended November 30,
-------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations:
Net investment income...... 0.86 0.89 0.98 0.98 0.99
Net realized and unrealized
gains (losses) from
investment transactions... (1.59) 0.83 0.61 1.69 (1.88)
-------- -------- -------- -------- --------
Net increase (decrease) in
net asset value resulting
from operations........... (0.73) 1.72 1.59 2.67 (0.89)
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net
investment income......... (0.86) (0.91) (0.97) (0.98) (0.97)
-------- -------- -------- -------- --------
Net asset value, end of
period.................... $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61
======== ======== ======== ======== ========
Total investment return
(1)....................... (9.20)% 22.89% 22.99% 51.11% (12.95)%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted)........... $268,397 $360,281 $279,685 $243,210 $184,990
Ratio of expenses to
average net assets........ 0.91% 0.93% 0.98% 1.05% 0.85%
Ratio of net investment
income to average net
assets.................... 10.43% 10.61% 12.68% 15.12% 15.20%
Portfolio turnover rate.... 155.77% 182.26% 185.43% 116.97% 109.68%
</TABLE>
-------
# Commencement of offering of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period, reinvestment of all dividends at net asset value
on the payable dates and a sale at net asset value on the last day of each
period reported. The figures do not include sales charges; results for
Class A and Class B shares would be lower if sales charges were included.
Total investment returns for periods of less than one year have not been
annualized.
31
<PAGE>
PAINEWEBBER HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS B CLASS D
-------------------------------------------- -----------------------------------
For the For the Period For the For the Period
Years Ended July 1, 1991# Years Ended July 2, 1992 #
November 30, to November 30, to
---------------------------- November 30, ------------------- November 30,
1994 1993 1992 1991 1994 1993 1992
-------- -------- ------- -------------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.72 $ 7.91 $ 7.29 $ 6.85 $ 8.74 $ 7.92 $ 7.80
-------- -------- ------- ------- -------- -------- -------
0.80 0.83 0.92 0.41 0.82 0.85 0.33
(1.58) 0.82 0.61 0.44 (1.59) 0.82 0.11
-------- -------- ------- ------- -------- -------- -------
(0.78) 1.65 1.53 0.85 (0.77) 1.67 0.44
-------- -------- ------- ------- -------- -------- -------
(0.80) (0.84) (0.91) (0.41) (0.82) (0.85) (0.32)
-------- -------- ------- ------- -------- -------- -------
$ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 7.15 $ 8.74 $ 7.92
======== ======== ======= ======= ======== ======== =======
(9.77)% 21.89% 22.07% 11.93% (9.62)% 22.19% 5.21%
======== ======== ======= ======= ======== ======== =======
$235,480 $286,525 $99,645 $18,274 $115,196 $176,161 $35,992
1.64% 1.66% 1.70% 1.73%* 1.38% 1.39% 1.45%*
9.66% 9.69% 11.42% 12.43%* 9.91% 9.81% 10.67%*
155.77% 182.26% 185.43% 116.97% 155.77% 182.26% 185.43%
</TABLE>
32
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements: (filed herewith)
Included in Part A of this Registration Statement for U.S.
Government Income Fund, Investment Grade Income Fund and High Income Fund:
Financial Highlights for one Class A share of each Fund for each
of the ten years in the period ended November 30, 1994.
Financial Highlights for one Class B share of each Fund for each
of the three years in the period ended November 30, 1994 and the
period
July 1, 1991 (commencement of offering) to November 30, 1991.
Financial Highlights for one Class D share of each Fund for each
of the two years in the period ended November 30, 1994 and the
period July 2, 1992 (commencement of offering) to November 30,
1992.
Financial Highlights for one Class C share of U.S. Government
Income Fund for each of the three years in the period ended
November 30, 1994 and the period September 11, 1991 (commencement
of offering) to November 30, 1991.
Included in Part B of this Registration Statement for U.S.
Government Income Fund, Investment Grade Income Fund and High Income Fund
through incorporation by reference from the annual report to shareholders
(a copy of these financial statements is transmitted herewith):
Portfolio of Investments at November 30, 1994.
Statement of Assets and Liabilities at November 30, 1994.
Statement of Operations for the year ended November 30, 1994.
Statement of Changes in Net Assets for each of the two years in
the period ended November 30, 1994.
Notes to Financial Statements.
Financial Highlights for one Class A share of each Fund for each
of the five years in the period ended November 30, 1994.
Financial Highlights for one Class B share of each Fund for each
of the three years in the period ended November 30, 1994 and the
C-1
<PAGE>
period July 1, 1991 (commencement of offering) to November 30,
1991.
Financial Highlights for one Class D share of each Fund for each
of the two years in the period ended November 30, 1994 and the
period July 2, 1992 (commencement of offering) to November 30,
1992.
Financial Highlights for one Class C share of U.S. Government
Income Fund for each of the three years in the period ended
November 30, 1994 and the period September 11, 1991 (commencement
of offering) to November 30, 1991.
Report of Ernst & Young LLP, Independent Auditors, dated January
20, 1995.
(b) Exhibits:
(1) (a) Declaration of Trust1/
(b) Amendment to Declaration of Trust effective
January 28, 19882/
(c) Amendment to Declaration of Trust effective July
1, 19906/
(d) Amendment to Declaration of Trust effective March
21, 19917/
(e) Amendment to Declaration of Trust effective April
1, 19918/
(f) Amendment to Declaration of Trust effective July
1, 199111/
(g) Amendment to Declaration of Trust effective
February 26, 199210/
(h) Amendment to Declaration of Trust effective
January 25, 199312/
(i) Amendment to Declaration of Trust effective May
25, 199314/
(j) Amendment to Declaration of Trust effective July
30, 199314/
(k) Amendment to Declaration of Trust effective
November 13, 199318/
(2) (a) By-Laws1/
(b) Amendment to By-Laws effective March 19, 19917/
(c) Amendment to By-Laws effective September 28,
199418/
(3) Voting trust agreement - none
(4) Specimen Security - none
(5) (a) Investment Advisory and Administration Contract4/
(b) Investment Advisory Fee Agreement with respect to
PaineWebber Utility Income Fund15/
C-2
<PAGE>
(c) Investment Advisory Fee Agreement with respect to
PaineWebber Short-Term U.S. Government Income
Fund15/
(d) Investment Advisory Fee Agreement with respect to
PaineWebber Short-Term U.S. Government Income
Fund for Credit Unions16/
(6) (a) Distribution Contract with respect to Class A
Shares15/
(b) Distribution Contract with respect to Class B
Shares15/
(c) Distribution Contract with respect to Class C
Shares9/
(d) Distribution Contract with respect to Class D
Shares15/
(e) Exclusive Dealer Agreement with respect to Class
A Shares15/
(f) Exclusive Dealer Agreement with respect to Class
B Shares15/
(g) Exclusive Dealer Agreement with respect to Class
C Shares9/
(h) Exclusive Dealer Agreement with respect to Class
D Shares15/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement2/
(9) (a) Transfer Agency and Service Contract6/
(b) Service Contract5/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to Class
A and Class B shares of U.S. Government Income
Fund, Investment Grade Income Fund, and High
Income Fund8/
(b) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to Class
A and Class B shares of PaineWebber Utility
Income Fund9/
(c) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to Class
D Shares of the above-referenced Funds11/
(d) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to
PaineWebber Short-Term U.S. Government Income
Fund12/
(e) Opinion and Consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to
PaineWebber Short-Term U.S. Government Income
Fund for Credit Unions14/
(11) Auditor's Consent (filed herewith)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent3/
(14) Prototype Retirement Plan10/
C-3
<PAGE>
(15) (a) Plan pursuant to Rule 12b-1 with respect to Class
A Shares9/
(b) Plan pursuant to Rule 12b-1 with respect to Class
B Shares9/
(c) Plan pursuant to Rule 12b-1 with respect to Class
D Shares12/
(d) Distribution Fee Addendum with respect to Class D
shares of PaineWebber Short-Term U.S. Government
Income Fund15/
(e) Distribution Fee Addendum with respect to Class D
shares of PaineWebber Short-Term U.S. Government
Income Fund for Credit Unions16/
(16) Schedule for Computation of Performance Quotations8/
(a) Schedule for Computation of Performance
Quotations for Class A shares of U.S. Government
Income Fund, Investment Grade Income Fund,
and High Income Fund7/
(b) Schedule for Computation of Performance
Quotations for Class B shares of U.S. Government
Income Fund, Investment Grade Income Fund, and
High Income Fund10/
(c) Schedule for Computation of Performance
Quotations for Class C shares of U.S. Government
Income Fund10/
(d) Schedule for Computation of Performance
Quotations For Class D shares of U.S. Government
Income Fund, Investment Grade Income Fund, and
High Income Fund13/
(e) Schedule for Computation of Performance
Quotations for Class A, Class B and Class D
shares of PaineWebber Utility Income Fund16/
(f) Schedule for Computation of Performance
Quotations for Class A, Class B, and Class D
shares of PaineWebber Short-Term U.S. Government
Income Fund16/
(g) Schedule for computation of Performance
Quotations for Class A and Class D shares of
PaineWebber Short-Term U.S. Government Income
Fund for Credit Unions17/
_______________________
1/ Incorporated by reference from Post-Effective Amendment No. 5 to
the registration statement, SEC File No. 2-91362, filed January
30, 1987.
2/ Incorporated by reference from Post-Effective Amendment No. 8 to
the registration statement, SEC File No. 2-91362, filed March 31,
1988.
C-4
<PAGE>
3/ Incorporated by reference from Pre-Effective Amendment No. 1 to
the registration statement, SEC File No. 2-91362, filed July 18,
1984.
4/ Incorporated by reference from Post-Effective Amendment No. 10 to
the registration statement, SEC File No. 2-91362, filed March 6,
1989.
5/ Incorporated by reference from Post-Effective Amendment No. 12 to
the registration statement, SEC File No. 2-91362, filed January
31, 1990.
6/ Incorporated by reference from Post-Effective Amendment No. 15 to
the registration statement, SEC File No. 2-91362, filed January
31, 1991.
7/ Incorporated by reference from Post-Effective Amendment No. 16 to
the registration statement, SEC File No. 2-91362, filed March 28,
1991.
8/ Incorporated by reference from Post-Effective Amendment No. 18 to
the registration statement, SEC File No. 2-91362, filed May 2,
1991.
9/ Incorporated by reference from Post-Effective Amendment No. 19 to
the registration statement, SEC File No. 2-91362, filed March 2,
1992.
10/ Incorporated by reference from Post-Effective Amendment No. 20 to
the registration statement, SEC File No. 2-91362, filed April 1,
1992.
11/ Incorporated by reference from Post-Effective Amendment No. 21 to
the registration statement, SEC File No. 2-91362, filed May 1,
1992.
12/ Incorporated by reference from Post-Effective Amendment No. 23 to
the registration statement, SEC File No. 2-91362, filed January
26, 1993.
13/ Incorporated by reference from Post-Effective Amendment No. 24 to
the registration statement, SEC File No. 2-91362, filed April 1,
1993.
14/ Incorporated by reference from Post-Effective Amendment No. 25 to
the registration statement, SEC File No. 2-91362, filed August
10, 1993.
15/ Incorporated by reference from Post-Effective Amendment No. 26 to
the registration statement, SEC File No. 2-91362, filed October
4, 1993.
C-5
<PAGE>
16/ Incorporated by reference from Post-Effective Amendment No. 28 to
the registration statement, SEC File No. 2-91362, filed April 1,
1994.
17/ Incorporated by reference from Post-Effective Amendment No. 30 to
the registration statement, SEC File No. 2-91362, filed July 1,
1994.
18/ Incorporated by reference form Post-Effective Amendment No. 34 to
the registration statement, SEC File No. 2-91362, filed January
27, 1995.
C-6
<PAGE>
Item 25. Persons Controlled by or under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Number of Record
Title of Class Shareholders as of
-------------- January 19, 1995
-------------------
<S> <C>
Shares of beneficial interest, par value $0.001 per share, in
U.S. Government Income Fund
Class A Shares 45,979
Class B Shares 12,048
Class C Shares 2
Class D Shares 8,270
Investment Grade Income Fund
Class A Shares 25,724
Class B Shares 6,469
Class C Shares 0
Class D Shares 3,916
High Income Fund
Class A Shares 26,990
Class B Shares 21,662
Class C Shares 0
Class D Shares 13,192
PaineWebber Utility Income Fund
Class A Shares 1,887
Class B Shares 5,594
Class C Shares 0
Class D Shares 2,254
PaineWebber Short-Term U.S. Government Income Fund
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
Number of Record
Title of Class Shareholders as of
-------------- January 19, 1995
-------------------
<S> <C>
Class A Shares 2,890
Class B Shares 2,799
Class C Shares 0
Class D Shares 47,446
PaineWebber Short-Term U.S. Government Income Fund for Credit Unions
Class A Shares 25
Class B Shares 0
Class C Shares 0
Class D Shares 34
</TABLE>
Item 27. Indemnification
---------------
Section 2 of "Indemnification" in Article X of the Declaration of
Trust provides that the Registrant will indemnify its trustees and
officers to the fullest extent permitted by law against claims and
expenses asserted against or incurred by them by virtue of being or having
been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination,
as described in Article X, that such person is liable to the Registrant or
its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his or her office or did not act in good faith in the reasonable belief
that his or her action was in the best interest of the Registrant.
Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the
Declaration of Trust provides that the trustees or officers of the
Registrant shall not be personally liable to any person extending credit
to, contracting with, or having a claim against, the Trust; and that,
provided they have exercised reasonable care and have acted under the
reasonable belief that their actions are in the best interest of the
Registrant, the trustees and officers shall not be liable for neglect or
wrongdoing by them or any officer, agent, employee or investment adviser
of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally
provides that, subject to the provisions of Section 1 of
Article XI and to Article X, the trustees shall not be liable for errors
of judgment or mistakes of fact or law, or for any act or omission in
accordance with advice of counsel or other experts, or failing to follow
such advice, with respect to the meaning and operation of the Declaration
of Trust.
C-8
<PAGE>
Article XI of the By-Laws provides that the Registrant may
purchase and maintain insurance on behalf of any person who is or was a
trustee, officer or employee of the Trust, or is or was serving at the
request of the Trust as a trustee, officer or employee of a corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any
such capacity or arising out of his or her status as such, whether or not
the Registrant would have the power to indemnify him or her against such
liability, provided that the Registrant may not acquire insurance
protecting any trustee or officer against liability to the Registrant or
its shareholders to which he or she would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his or her office.
Section 9 of the Investment Advisory and Administration Contract
(the "Contract") between Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins") and the Trust provides that Mitchell Hutchins shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Registrant in connection with the matters to which the
Contract relates, except for a loss resulting from willful misfeasance,
bad faith, or gross negligence of Mitchell Hutchins in the performance of
its duties or from its reckless disregard of its obligations and duties
under the Contract. Section 10 of the Contract provides that the trustees
shall not be liable for any obligations of the Trust under the Contract
and that Mitchell Hutchins shall look only to the assets and property of
the Trust in settlement of such right or claim and not to the assets and
property of the trustees.
Section 9 of each Distribution Contract provides that the Trust
will indemnify Mitchell Hutchins and its officers, directors or
controlling persons against all liabilities arising from any alleged
untrue statement of material fact in the Registration Statement or from
any alleged omission to state in the Registration Statement a material
fact required to be stated in it or necessary to make the statements in
it, in light of the circumstances under which they were made, not
misleading, except insofar as liability arises from untrue statements or
omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect
any such persons against liabilities arising by reason of their bad faith,
gross negligence or willful misfeasance; and shall not inure to the
benefit of any such persons unless a court of competent jurisdiction or
controlling precedent determines that such result is not against public
policy as expressed in the Securities Act of 1933. Section 9 of each
Distribution Contract also provides that Mitchell Hutchins agrees to
indemnify, defend and hold the Trust, its officers and trustees free and
harmless of any claims arising out of any alleged untrue statement or any
alleged omission of material fact contained in information furnished by
Mitchell Hutchins for use in the Registration Statement or arising out of
an agreement between Mitchell Hutchins and any retail dealer, or arising
out of supplementary literature or advertising used by Mitchell Hutchins
in connection with each Distribution Contract.
C-9
<PAGE>
Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of each Distribution Contract, with respect to
PaineWebber Incorporated ("PaineWebber").
Section 6 of the Service Contract provides that PaineWebber shall
be indemnified and held harmless by the Trust against all liabilities,
except those arising out of bad faith, gross negligence, willful
misfeasance or reckless disregard of its duties under the Service
Contract.
Section 10 of each Distribution Contract and Section 7 of the
Service Contract contain provisions similar to that of Section 10 of the
Investment Advisory and Administration Contract, with respect to Mitchell
Hutchins and PaineWebber, as appropriate.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be provided to trustees, officers
and controlling persons of the Trust, pursuant to the foregoing provisions
or otherwise, the Trust has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Trust of expenses incurred or paid by a trustee,
officer or controlling person of the Trust in connection with the
successful defense of any action, suit or proceeding or payment pursuant
to any insurance policy) is asserted against the Trust by such trustee,
officer or controlling person in connection with
the securities being registered, the Trust will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered investment
advisor and is a wholly owned subsidiary of PaineWebber which is, in turn,
a wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to
the officers and directors of Mitchell Hutchins is included in its Form
ADV filed on August 22, 1994 with the Securities and Exchange Commission
(registration number 801-13219) and is incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
(a) Mitchell Hutchins serves as principal underwriter and/or
investment adviser for the following other investment companies:
. ALL-AMERICAN TERM TRUST INC.
. GLOBAL HIGH INCOME DOLLAR FUND INC.
C-10
<PAGE>
. GLOBAL INCOME PLUS FUND, INC.
. GLOBAL SMALL CAP FUND INC.
. MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND,
INC.
. MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND,
INC.
. MITCHELL HUTCHINS INSTITUTIONAL SERIES TRUST
. MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST
. MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST II
. MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST III
. PAINEWEBBER AMERICA FUND
. PAINEWEBBER ATLAS FUND
. PAINEWEBBER INVESTMENT SERIES
. PAINEWEBBER MANAGED ASSETS TRUST
. PAINEWEBBER MANAGED INVESTMENTS TRUST
. PAINEWEBBER MASTER SERIES, INC.
. PAINEWEBBER MUNICIPAL SERIES
. PAINEWEBBER MUTUAL FUND TRUST
. PAINEWEBBER OLYMPUS FUND
. PAINEWEBBER PREMIER HIGH INCOME TRUST INC.
. PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND, INC.
. PAINEWEBBER PREMIER TAX-FREE INCOME FUND INC.
. PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
. PAINEWEBBER SECURITIES TRUST
. PAINEWEBBER SERIES TRUST
. STRATEGIC GLOBAL INCOME FUND, INC.
. TRIPLE A AND GOVERNMENT SERIES - 1995, INC.
. TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
. 2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the principal underwriter for the
Registrant. PaineWebber acts as exclusive dealer for the shares of the
Registrant. The directors and officers of Mitchell Hutchins, their
principal business addresses and their positions and offices with Mitchell
Hutchins are identified in its Form ADV filed
August 22, 1994, with the Securities and Exchange Commission (registration
number 801-13219). The directors and officers of PaineWebber, their
principal business addresses and their positions and offices with
PaineWebber are identified in its Form ADV filed March 31, 1994, with the
Securities and Exchange Commission (registration number 801-7163). The
foregoing information is hereby incorporated by reference. The
information set forth below is furnished for those directors and officers
of Mitchell Hutchins or PaineWebber who also serve as trustees or officers
of the Registrant:
C-11
<PAGE>
<TABLE>
<CAPTION>
Position Position and Offices With
Name and Principal With Underwriter or Exclusive
Business Address Registrant Dealer
------------------- ---------- -------------------
<S> <C> <C>
Paul B. Guenther Trustee and Director of PaineWebber and
1285 Avenue of the Americas President Mitchell Hutchins
New York, New York 10019
Frank P. L. Minard Trustee Director of Mitchell
1285 Avenue of the Americas Hutchins and PaineWebber
New York, New York 10019
Teresa M. Boyle Vice Vice President and Manager -
1285 Avenue of the Americas President Advisory Administration of
New York, New York 10019 Mitchell Hutchins
Joan L. Cohen Vice Vice President and Attorney
1285 Avenue of the Americas President of Mitchell Hutchins
New York, New York 10019
Ellen R. Harris Vice Managing Director and Chief
1285 Avenue of the Americas President Domestic Equity Strategist
New York, New York 10019 of Mitchell Hutchins
Mary B. King Vice First Vice President and a
1285 Avenue of the Americas President Portfolio Manager of
New York, New York 10019 Mitchell Hutchins
Thomas J. Libassi Vice Senior Vice President and
1285 Avenue of the Americas President a Portfolio Manager
New York, New York 10019 of Mitchell Hutchins
Ann E. Moran Vice Vice President of
1285 Avenue of the Americas President Mitchell Hutchins
New York, New York 10019 and Assistant
Treasurer
Dianne E. O'Donnell Vice Senior Vice President and
1285 Avenue of the Americas President Senior Associate General
New York, New York 10019 and Secretary Counsel of Mitchell Hutchins
</TABLE>
C-12
<PAGE>
<TABLE>
<CAPTION>
Position Position and Offices With
Name and Principal With Underwriter or Exclusive
Business Address Registrant Dealer
------------------- ---------- -------------------
<S> <C> <C>
Victoria E. Schonfeld Vice Managing Director and
1285 Avenue of the Americas President General Counsel of Mitchell
New York, New York 10019 Hutchins
Paul H. Schubert Vice Vice President of Mitchell
1285 Avenue of the Americas President Hutchins
New York, New York 10019 and Assistant
Treasurer
Martha J. Slezak Vice Vice President of Mitchell
1285 Avenue of the Americas President Hutchins
New York, New York 10019 and Assistant
Treasurer
Julian F. Sluyters Vice Senior Vice President and
1285 Avenue of the Americas President Director of Mutual Fund
New York, New York 10019 and Treasurer Finance Division of Mitchell
Hutchins
Gregory K. Todd Vice First Vice President and
1285 Avenue of the Americas President Associate General Counsel of
New York, New York 10019 and Assistant Mitchell Hutchins
Secretary
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c)
and (d) of Rule 31a-1 under the Investment Company Act of 1940 are
maintained in the physical possession of Mitchell Hutchins, 1285 Avenue of
the Americas, New York, New York 10019. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession
of Registrant's transfer agent and custodian.
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
C-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant, PaineWebber Managed
Investments Trust, certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment No. 35 to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in this City of New York and
State of New York, on the 23rd day of March, 1995.
PAINEWEBBER MANAGED INVESTMENTS TRUST
By: s/Dianne E. O'Donnell
______________________________________
Dianne E. O'Donnell
Vice President, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
s/Paul B. Guenther* Trustee and President (Chief March 23, 1995
-------------------- Executive Officer)
Paul B. Guenther
s/E. Garrett Bewkes, Jr.** Trustee and Chairman of the March 23, 1995
-------------------------- Board of Trustees
E. Garrett Bewkes, Jr.
s/Meyer Feldberg*** Trustee March 23, 1995
-------------------
Meyer Feldberg
s/George W. Gowen**** Trustee March 23, 1995
---------------------
George W. Gowen
s/Frederic V. Malek**** Trustee March 23, 1995
-----------------------
Frederic V. Malek
s/Frank P. L. Minard***** Trustee March 23, 1995
-------------------------
Frank P. L. Minard
s/Judith Davidson Moyers**** Trustee March 23, 1995
-------------------------
Judith Davidson Moyers
s/Thomas F. Murray**** Trustee March 23, 1995
--------------------------
Thomas F. Murray
s/Julian F. Sluyters Vice President and Treasurer March 23, 1995
-------------------------- (Principal Financial and
Julian F. Sluyters Accounting Officer)
</TABLE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated August 29, 1994 and incorporated by reference from Post-
Effective Amendment No. 28 to the registration statement of PaineWebber
Managed Municipal Trust, SEC File No. 2-89016, filed
June 29, 1994.
** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated January 3, 1994 and incorporated by reference from Post-
Effective Amendment No. 25 to the registration statement of PaineWebber
Investment Series, SEC File 33-11025, filed March 1, 1994.
*** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated June 12, 1991 and incorporated by reference from Post-
Effective Amendment No. 16 to the registration statement of PaineWebber
Investment Series, SEC File No. 33-11025, filed
July 31, 1991.
**** Signature affixed by Elinor W. Gammon pursuant to power of
attorney dated March 27, 1990 and incorporated by reference from Post-
Effective Amendment No. 7 to the registration statement of PaineWebber
Municipal Series, SEC File No. 33-11611, filed June 28, 29, 1990.
*****Signature affixed by Elinor W. Gammon pursuant to power of attorney
dated November 17, 1993 and incorporated by reference from Post-Effective
Amendment No. 28 to the registration statement of PaineWebber America
Fund, SEC File No. 2-78626, December 29, 1993.
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
EXHIBIT INDEX
-------------
Ex
Number Page
------ ----
(1) (a) Declaration of Trust1/
(b) Amendment to Declaration of Trust effective
January 28, 19882/
(c) Amendment to Declaration of Trust effective July
1, 19906/
(d) Amendment to Declaration of Trust effective March
21, 19917/
(e) Amendment to Declaration of Trust effective April
1, 19918/
(f) Amendment to Declaration of Trust effective July
1, 199111/
(g) Amendment to Declaration of Trust effective
February 26, 199210/
(h) Amendment to Declaration of Trust effective
January 25, 199312/
(i) Amendment to Declaration of Trust effective May
25, 199314/
(j) Amendment to Declaration of Trust effective July
30, 199314/
(k) Amendment to Declaration of Trust effective
November 13, 199318/
(2) (a) By-Laws1/
(b) Amendment to By-Laws effective March 19, 19917/
(c) Amendment to By-Laws effective September 28,
199418/
(3) Voting trust agreement - none
(4) Specimen Security - none
(5) (a) Investment Advisory and Administration Contract4/
(b) Investment Advisory Fee Agreement with respect to
PaineWebber Utility Income Fund15/
(c) Investment Advisory Fee Agreement with respect to
PaineWebber Short-Term U.S. Government Income
Fund15/
(d) Investment Advisory Fee Agreement with respect to
PaineWebber Short-Term U.S. Government Income Fund
for Credit Unions16/
(6) (a) Distribution Contract with respect to Class A
Shares15/
(b) Distribution Contract with respect to Class B
Shares15/
- 1 -
<PAGE>
(c) Distribution Contract with respect to Class C
Shares9/
(d) Distribution Contract with respect to Class D
Shares15/
(e) Exclusive Dealer Agreement with respect to Class A
Shares15/
(f) Exclusive Dealer Agreement with respect to Class B
Shares15/
(g) Exclusive Dealer Agreement with respect to Class C
Shares9/
(h) Exclusive Dealer Agreement with respect to Class D
Shares15/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement2/
(9) (a) Transfer Agency and Service Contract6/
(b) Service Contract5/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to Class A
and Class B shares of U.S. Government Income Fund,
Investment Grade Income Fund, and High Income
Fund8/
(b) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to Class A
and Class B shares of PaineWebber Utility Income
Fund9/
(c) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to Class D
Shares of the above-referenced Funds11/
(d) Opinion and consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to
PaineWebber Short-Term U.S. Government Income
Fund12/
(e) Opinion and Consent of Kirkpatrick & Lockhart,
counsel to the Registrant, with respect to
PaineWebber Short-Term U.S. Government Income Fund
for Credit Unions14/
(11) Auditor's Consent (filed herewith)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent3/
(14) Prototype Retirement Plan10/
(15) (a) Plan pursuant to Rule 12b-1 with respect to Class
A Shares9/
(b) Plan pursuant to Rule 12b-1 with respect to Class
B Shares9/
(c) Plan pursuant to Rule 12b-1 with respect to Class
D Shares12/
(d) Distribution Fee Addendum with respect to Class D
shares of PaineWebber Short-Term U.S. Government
Income Fund15/
(e) Distribution Fee Addendum with respect to Class D
shares of PaineWebber Short-Term U.S. Government
Income Fund for Credit Unions16/
- 2 -
<PAGE>
(16) Schedule for Computation of Performance Quotations8/
(a) Schedule for Computation of Performance Quotations
for Class A shares of U.S. Government Income Fund,
Investment Grade Income Fund, and High Income
Fund7/
(b) Schedule for Computation of Performance Quotations
for Class B shares of U.S. Government Income Fund,
Investment Grade Income Fund, and High Income
Fund10/
(c) Schedule for Computation of Performance Quotations
for Class C shares of U.S. Government Income
Fund10/
(d) Schedule for Computation of Performance Quotations
for Class D shares of U.S. Government Income Fund,
Investment Grade Income Fund, and High Income
Fund13/
(e) Schedule for Computation of Performance Quotations
for Class A, Class B and Class D shares of
PaineWebber Utility Income Fund16/
(f) Schedule for Computation of Performance Quotations
for Class A, Class B, and Class D shares of
PaineWebber Short-Term U.S. Government Income
Fund16/
(g) Schedule for computation of Performance Quotations
for Class A and Class D shares of PaineWebber
Short-Term U.S. Government Income Fund for Credit
Unions17/
-------------------------
1/ Incorporated by reference from Post-Effective Amendment No.
5 to the registration statement, SEC File No. 2-91362,
filed January 30, 1987.
2/ Incorporated by reference from Post-Effective Amendment No.
8 to the registration statement, SEC File No. 2-91362,
filed March 31, 1988.
3/ Incorporated by reference from Pre-Effective Amendment No.
1 to the registration statement, SEC File No. 2-91362,
filed July 18, 1984.
4/ Incorporated by reference from Post-Effective Amendment No.
10 to the registration statement, SEC File No. 2-91362,
filed March 6, 1989.
5/ Incorporated by reference from Post-Effective Amendment No.
12 to the registration statement, SEC File No. 2-91362,
filed January 31, 1990.
6/ Incorporated by reference from Post-Effective Amendment No.
15 to the registration statement, SEC File No. 2-91362,
filed January 31, 1991.
- 3 -
<PAGE>
7/ Incorporated by reference from Post-Effective Amendment No.
16 to the registration statement, SEC File No. 2-91362,
filed March 28, 1991.
8/ Incorporated by reference from Post-Effective Amendment No.
18 to the registration statement, SEC File No. 2-91362,
filed May 2, 1991.
9/ Incorporated by reference from Post-Effective Amendment No.
19 to the registration statement, SEC File No. 2-91362,
filed March 2, 1992.
10/ Incorporated by reference from Post-Effective Amendment No.
20 to the registration statement, SEC File No. 2-91362,
filed April 1, 1992.
11/ Incorporated by reference from Post-Effective Amendment No.
21 to the registration statement, SEC File No. 2-91362,
filed May 1, 1992.
12/ Incorporated by reference from Post-Effective Amendment No.
23 to the registration statement, SEC File No. 2-91362,
filed January 26, 1993.
13/ Incorporated by reference from Post-Effective Amendment No.
24 to the registration statement, SEC File No. 2-91362,
filed April 1, 1993.
14/ Incorporated by reference from Post-Effective Amendment No.
25 to the registration statement, SEC File No. 2-91362,
filed August 10, 1993.
15/ Incorporated by reference from Post-Effective Amendment No.
26 to the registration statement, SEC File No. 2-91362,
filed October 4, 1993.
16/ Incorporated by reference from Post-Effective Amendment No.
28 to the registration statement, SEC File No. 2-91362,
filed April 1, 1994.
17/ Incorporated by reference from Post-Effective Amendment No.
30 to the registration statement, SEC File No. 2-91362,
filed July 1, 1994.
18/ Incorporated by reference from Post-Effective Amendment No.
34 to the registration statement, SEC File No. 2-91362,
filed January 27, 1995
- 4 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<SERIES>
<NUMBER> 1
<NAME> U.S. GOVERNMENT INCOME FUND - CLASS A
</SERIES>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 446,123
<INVESTMENTS-AT-VALUE> 429,606
<RECEIVABLES> 5,257
<ASSETS-OTHER> 62
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 434,925
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,203
<TOTAL-LIABILITIES> 6,203
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 636,530
<SHARES-COMMON-STOCK> 50,464
<SHARES-COMMON-PRIOR> 64,693
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,374
<ACCUMULATED-NET-GAINS> (189,917)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (16,517)
<NET-ASSETS> 428,722
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 40,772
<OTHER-INCOME> 0
<EXPENSES-NET> (5,221)
<NET-INVESTMENT-INCOME> 35,551
<REALIZED-GAINS-CURRENT> (64,277)
<APPREC-INCREASE-CURRENT> (29,325)
<NET-CHANGE-FROM-OPS> (58,051)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,554)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,245
<NUMBER-OF-SHARES-REDEEMED> (18,389)
<SHARES-REINVESTED> 1,915
<NET-CHANGE-IN-ASSETS> (223,140)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 3
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,743
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,221
<AVERAGE-NET-ASSETS> 548,648
<PER-SHARE-NAV-BEGIN> 10.03
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> (1.53)
<PER-SHARE-DIVIDEND> (0.60)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.50
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> U.S. GOVERNMENT INCOME FUND - CLASS B
</SERIES>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 103,623
<INVESTMENTS-AT-VALUE> 99,786
<RECEIVABLES> 1,221
<ASSETS-OTHER> 14
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 101,022
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,441
<TOTAL-LIABILITIES> 1,441
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 147,849
<SHARES-COMMON-STOCK> 11,720
<SHARES-COMMON-PRIOR> 16,065
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 319
<ACCUMULATED-NET-GAINS> (44,113)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,837)
<NET-ASSETS> 99,581
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,799
<OTHER-INCOME> 0
<EXPENSES-NET> (2,267)
<NET-INVESTMENT-INCOME> 7,532
<REALIZED-GAINS-CURRENT> (14,930)
<APPREC-INCREASE-CURRENT> (6,811)
<NET-CHANGE-FROM-OPS> (14,209)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,532)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,684
<NUMBER-OF-SHARES-REDEEMED> (7,524)
<SHARES-REINVESTED> 496
<NET-CHANGE-IN-ASSETS> (60,989)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 660
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,267
<AVERAGE-NET-ASSETS> 131,994
<PER-SHARE-NAV-BEGIN> 10.03
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> (1.53)
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.50
<EXPENSE-RATIO> 1.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> U.S. GOVERNMENT INCOME FUND - CLASS D
</SERIES>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 71,177
<INVESTMENTS-AT-VALUE> 68,541
<RECEIVABLES> 839
<ASSETS-OTHER> 10
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69,390
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 990
<TOTAL-LIABILITIES> 990
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,555
<SHARES-COMMON-STOCK> 8,059
<SHARES-COMMON-PRIOR> 14,316
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 219
<ACCUMULATED-NET-GAINS> (30,300)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,635)
<NET-ASSETS> 68,400
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,837
<OTHER-INCOME> 0
<EXPENSES-NET> (1,527)
<NET-INVESTMENT-INCOME> 6,310
<REALIZED-GAINS-CURRENT> (10,255)
<APPREC-INCREASE-CURRENT> (4,679)
<NET-CHANGE-FROM-OPS> (8,624)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,310)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> (2,772)
<NUMBER-OF-SHARES-REDEEMED> (9,523)
<SHARES-REINVESTED> 493
<NET-CHANGE-IN-ASSETS> (72,578)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 527
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,527
<AVERAGE-NET-ASSETS> 105,403
<PER-SHARE-NAV-BEGIN> 10.02
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> (1.53)
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.49
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> INVESTMENT GRADE INCOME FUND - CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 275,993
<INVESTMENTS-AT-VALUE> 266,516
<RECEIVABLES> 14,390
<ASSETS-OTHER> 27
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 280,933
<PAYABLE-FOR-SECURITIES> 5,554
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,827
<TOTAL-LIABILITIES> 9,381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 328,730
<SHARES-COMMON-STOCK> 28,076
<SHARES-COMMON-PRIOR> 18,450
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (380)
<ACCUMULATED-NET-GAINS> (47,320)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9,477)
<NET-ASSETS> 271,553
<DIVIDEND-INCOME> 107
<INTEREST-INCOME> 21,798
<OTHER-INCOME> 9
<EXPENSES-NET> (2,517)
<NET-INVESTMENT-INCOME> 19,397
<REALIZED-GAINS-CURRENT> (13,364)
<APPREC-INCREASE-CURRENT> (20,802)
<NET-CHANGE-FROM-OPS> (14,769)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,419)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,214
<NUMBER-OF-SHARES-REDEEMED> (6,543)
<SHARES-REINVESTED> 955
<NET-CHANGE-IN-ASSETS> 84,452
<ACCUMULATED-NII-PRIOR> 16
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,294
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,517
<AVERAGE-NET-ASSETS> 258,770
<PER-SHARE-NAV-BEGIN> 11.08
<PER-SHARE-NII> 0.77
<PER-SHARE-GAIN-APPREC> (1.41)
<PER-SHARE-DIVIDEND> (0.77)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 0.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> INVESTMENT GRADE INCOME FUND - CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 70,493
<INVESTMENTS-AT-VALUE> 68,072
<RECEIVABLES> 3,676
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71,755
<PAYABLE-FOR-SECURITIES> 1,419
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 977
<TOTAL-LIABILITIES> 2,396
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,963
<SHARES-COMMON-STOCK> 7,173
<SHARES-COMMON-PRIOR> 4,724
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (97)
<ACCUMULATED-NET-GAINS> (12,086)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,421)
<NET-ASSETS> 69,359
<DIVIDEND-INCOME> 28
<INTEREST-INCOME> 5,644
<OTHER-INCOME> 2
<EXPENSES-NET> (1,154)
<NET-INVESTMENT-INCOME> 4,520
<REALIZED-GAINS-CURRENT> (3,363)
<APPREC-INCREASE-CURRENT> (5,313)
<NET-CHANGE-FROM-OPS> (4,156)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,526)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,366
<NUMBER-OF-SHARES-REDEEMED> (3,160)
<SHARES-REINVESTED> 243
<NET-CHANGE-IN-ASSETS> 9,747
<ACCUMULATED-NII-PRIOR> 4
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 335
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,154
<AVERAGE-NET-ASSETS> 67,123
<PER-SHARE-NAV-BEGIN> 11.07
<PER-SHARE-NII> 0.69
<PER-SHARE-GAIN-APPREC> (1.40)
<PER-SHARE-DIVIDEND> (0.69)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 1.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> INVESTMENT GRADE INCOME FUND - CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 46,216
<INVESTMENTS-AT-VALUE> 44,630
<RECEIVABLES> 2,410
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 47,044
<PAYABLE-FOR-SECURITIES> 930
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 641
<TOTAL-LIABILITIES> 1,571
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55,048
<SHARES-COMMON-STOCK> 4,702
<SHARES-COMMON-PRIOR> 4,290
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (64)
<OVERDISTRIBUTION-GAINS> (7,924)
<ACCUM-APPREC-OR-DEPREC> (1,587)
<NET-ASSETS> 45,473
<DIVIDEND-INCOME> 25
<INTEREST-INCOME> 4,505
<OTHER-INCOME> 21
<EXPENSES-NET> (779)
<NET-INVESTMENT-INCOME> 3,752
<REALIZED-GAINS-CURRENT> (2,198)
<APPREC-INCREASE-CURRENT> (3,483)
<NET-CHANGE-FROM-OPS> (1,929)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,757)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,871
<NUMBER-OF-SHARES-REDEEMED> (3,672)
<SHARES-REINVESTED> 212
<NET-CHANGE-IN-ASSETS> (12,059)
<ACCUMULATED-NII-PRIOR> 4
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 268
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 779
<AVERAGE-NET-ASSETS> 53,687
<PER-SHARE-NAV-BEGIN> 11.08
<PER-SHARE-NII> 0.72
<PER-SHARE-GAIN-APPREC> (1.41)
<PER-SHARE-DIVIDEND> (0.72)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> HIGH INCOME FUND - CLASS A
</SERIES>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 297,978
<INVESTMENTS-AT-VALUE> 263,523
<RECEIVABLES> 13,886
<ASSETS-OTHER> 13
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 277,422
<PAYABLE-FOR-SECURITIES> 3,904
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,121
<TOTAL-LIABILITIES> 9,025
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 398,908
<SHARES-COMMON-STOCK> 37,587
<SHARES-COMMON-PRIOR> 41,282
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 755
<ACCUMULATED-NET-GAINS> (95,301)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (34,456)
<NET-ASSETS> 268,397
<DIVIDEND-INCOME> 235
<INTEREST-INCOME> 38,132
<OTHER-INCOME> 60
<EXPENSES-NET> (3,071)
<NET-INVESTMENT-INCOME> 35,356
<REALIZED-GAINS-CURRENT> (18,577)
<APPREC-INCREASE-CURRENT> (48,124)
<NET-CHANGE-FROM-OPS> (31,345)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,523)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,371
<NUMBER-OF-SHARES-REDEEMED> (15,069)
<SHARES-REINVESTED> 2,003
<NET-CHANGE-IN-ASSETS> (27,936)
<ACCUMULATED-NII-PRIOR> 186
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,698
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,071
<AVERAGE-NET-ASSETS> 338,993
<PER-SHARE-NAV-BEGIN> 8.73
<PER-SHARE-NII> 0.86
<PER-SHARE-GAIN-APPREC> (1.59)
<PER-SHARE-DIVIDEND> (0.86)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.14
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> HIGH INCOME FUND - CLASS B
</SERIES>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 261,433
<INVESTMENTS-AT-VALUE> 231,203
<RECEIVABLES> 12,183
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 243,398
<PAYABLE-FOR-SECURITIES> 3,425
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,493
<TOTAL-LIABILITIES> 7,918
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 349,984
<SHARES-COMMON-STOCK> 32,996
<SHARES-COMMON-PRIOR> 32,852
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 662
<ACCUMULATED-NET-GAINS> (83,613)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (30,230)
<NET-ASSETS> 235,480
<DIVIDEND-INCOME> 202
<INTEREST-INCOME> 33,164
<OTHER-INCOME> 82
<EXPENSES-NET> (4,852)
<NET-INVESTMENT-INCOME> 28,596
<REALIZED-GAINS-CURRENT> (16,298)
<APPREC-INCREASE-CURRENT> (42,222)
<NET-CHANGE-FROM-OPS> (29,924)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (28,733)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,255
<NUMBER-OF-SHARES-REDEEMED> (19,310)
<SHARES-REINVESTED> 1,199
<NET-CHANGE-IN-ASSETS> 6,991
<ACCUMULATED-NII-PRIOR> 148
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,477
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,852
<AVERAGE-NET-ASSETS> 296,111
<PER-SHARE-NAV-BEGIN> 8.72
<PER-SHARE-NII> 0.80
<PER-SHARE-GAIN-APPREC> (1.58)
<PER-SHARE-DIVIDEND> (0.80)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.14
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 9
<NAME> HIGH INCOME FUND - CLASS D
</SERIES>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 127,892
<INVESTMENTS-AT-VALUE> 113,104
<RECEIVABLES> 5,960
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 119,069
<PAYABLE-FOR-SECURITIES> 1,675
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,198
<TOTAL-LIABILITIES> 3,873
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 171,211
<SHARES-COMMON-STOCK> 16,107
<SHARES-COMMON-PRIOR> 20,157
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 324
<ACCUMULATED-NET-GAINS> (40,903)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (14,788)
<NET-ASSETS> 115,196
<DIVIDEND-INCOME> 133
<INTEREST-INCOME> 19,488
<OTHER-INCOME> 68
<EXPENSES-NET> (2,414)
<NET-INVESTMENT-INCOME> 17,274
<REALIZED-GAINS-CURRENT> (7,973)
<APPREC-INCREASE-CURRENT> (20,655)
<NET-CHANGE-FROM-OPS> (11,354)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,359)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,905
<NUMBER-OF-SHARES-REDEEMED> (22,171)
<SHARES-REINVESTED> 1,215
<NET-CHANGE-IN-ASSETS> (28,711)
<ACCUMULATED-NII-PRIOR> 91
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 872
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,414
<AVERAGE-NET-ASSETS> 174,336
<PER-SHARE-NAV-BEGIN> 8.74
<PER-SHARE-NII> 0.82
<PER-SHARE-GAIN-APPREC> (1.59)
<PER-SHARE-DIVIDEND> (0.82)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.15
<EXPENSE-RATIO> 1.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
11/30/94-Annual and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 10
<NAME> U.S. GOVERNMENT INCOME FUND - CLASS C
</SERIES>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 5,156
<INVESTMENTS-AT-VALUE> 4,965
<RECEIVABLES> 61
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,027
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 72
<TOTAL-LIABILITIES> 72
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,357
<SHARES-COMMON-STOCK> 584
<SHARES-COMMON-PRIOR> 622
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 16
<ACCUMULATED-NET-GAINS> (2,195)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (191)
<NET-ASSETS> 4,955
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 414
<OTHER-INCOME> 0
<EXPENSES-NET> (37)
<NET-INVESTMENT-INCOME> 377
<REALIZED-GAINS-CURRENT> (743)
<APPREC-INCREASE-CURRENT> (339)
<NET-CHANGE-FROM-OPS> (705)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (377)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 108
<NUMBER-OF-SHARES-REDEEMED> (187)
<SHARES-REINVESTED> 41
<NET-CHANGE-IN-ASSETS> (1,421)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 28
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 37
<AVERAGE-NET-ASSETS> 5,580
<PER-SHARE-NAV-BEGIN> 10.02
<PER-SHARE-NII> 0.62
<PER-SHARE-GAIN-APPREC> (1.53)
<PER-SHARE-DIVIDEND> (0.62)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.49
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectuses and "Independent Auditors" in the Statements of
Additional Information and to the incorporation by reference of our report dated
January 20, 1995, in this Registration Statement (Form N-1A No. 2-91362) of
PaineWebber U.S. Government Income Fund, PaineWebber Investment Grade Income
Fund and PaineWebber High Income Fund (three of the portfolios in PaineWebber
Managed Investments Trust).
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
March 20, 1995
