<PAGE>
As filed with the Securities and Exchange Commission on March 29, 1996
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. 40 [X]
-----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 35
-----
(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.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
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, , 1996 pursuant to Rule 485(b)
---- -------------
____ 60 days after filing pursuant to Rule 485(a)(i)
____ On April 1, , 1996 pursuant to Rule 485(a)(i)
-------------
____ 75 days after filing pursuant to Rule 485(a)(ii)
____ On _____________, 1996 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 26, 1996.
<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 C shares of:
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund
- ----------------------------
Part A - Prospectus
Part B - Statement of Additional Information
Class Y shares of:
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
- ----------------------------------------------------
Part A - Prospectus
Part B - Statement of Additional Information
Part C- Other Information
Signature Page
Exhibits
- 2 -
<PAGE>
PaineWebber Managed Investments Trust:
Class A, B and C shares of:
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. Prospectus Caption
and Caption ------------------
--------------
<C> <S> <C>
1. Cover Page............................. Cover Page
2. Synopsis............................... Prospectus Summary
3. Condensed Financial
Information............................ Financial Highlights; Performance
Information
4. General Description of
Registrant............................. Prospectus Summary; Investment
Objectives and Policies; General
Information
5. Management of the Fund................. Management; General Information
6. Capital Stock and other
Securities............................. Cover Page; Conversion of Class B
Shares; Dividends and Taxes;
General Information
7. Purchase of Securities
Being Offered.......................... Purchases; Exchanges; Valuation of
Shares; Other Services and
Information; Management
8. Redemption or
Repurchase............................. Redemptions; Other Services and
Information
9. Legal Proceedings...................... Not Applicable
<CAPTION>
Part B Item No. Statement of Additional
and Caption Information Caption
-------------- -----------------------
<C> <S> <C>
10. Cover Page............................. Cover Page
11. Table of Contents...................... Table of Contents.........
12. General Information and
History................................ Other Information
13. Investment Objectives and
Policies............................... Investment Policies and
Restrictions; Hedging and Related
Income Strategies; Portfolio
Transactions
14. Management of the
Registrant............................. Trustees and Officers
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
15. Control Persons and
Principal Holders of
Securities............................. Trustees and Officers
16. Investment Advisory and
Other Services......................... Investment Advisory and
Distribution Arrangements; Other
Information
17. Brokerage Allocation................... Portfolio Transactions
18. Capital Stock and Other
Securities............................. Conversion of Class B Shares;
Other Information
19. Purchase, Redemption and
Pricing of Securities
Being Offered.......................... Reduced Sales Charges, Additional
Exchange and Redemption
Information and Other Services;
Valuation of Shares
20. Tax Status............................. Taxes
21. Underwriters........................... Investment Advisory and
Distribution Arrangements
22. Calculation of
Performance
Data................................... Performance Information
23. Financial Statements................... Financial Statements
</TABLE>
- 4 -
<PAGE>
PaineWebber Managed Investments Trust:
Class Y shares of:
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Prospectus Caption
Caption ------------------
-------------------
<C> <S> <C>
1. Cover Page............................. Cover Page
2. Synopsis............................... Fund Expenses
3. Condensed Financial
Information............................ Financial Highlights; Performance
Information
4. General Description of
Registrant............................. Investment Objectives and
Policies; General Information
5. Management of the Fund................. Management; General Information
6. Capital Stock and other
Securities............................. Cover Page; Dividends and Taxes;
General Information
7. Purchase of Securities
Being Offered.......................... Purchases; Valuation of Shares;
Management
8. Redemption or
Repurchase............................. Redemptions
9. Legal Proceedings...................... Not Applicable
Part B Item No. Statement of Additional
and Caption Information Caption
----------- -----------------------
10. Cover Page............................. Cover Page
11. Table of Contents...................... Table of Contents
12. General Information and
History................................ Other Information
13. Investment Objectives and
Policies............................... Investment Policies and
Restrictions; Hedging and Related
Income Strategies; Portfolio
Transactions
14. Management of the
Registrant............................. Trustees and Officers
</TABLE>
- 5 -
<PAGE>
<TABLE>
<C> <S> <C>
15. Control Persons and
Principal Holders of
Securities............................. Trustees and Officers
16. Investment Advisory and
Other Services......................... Investment Advisory and
Distribution Arrangements; Other
Information
17. Brokerage Allocation................... Portfolio Transactions
18. Capital Stock and Other
Securities............................. Other Information
19. Purchase, Redemption and
Pricing of Securities
Being Offered.......................... Valuation of Shares
20. Tax Status............................. Taxes
21. Underwriters........................... Investment Advisory and
Distribution Arrangements
22. Calculation of Performance
Data................................... Performance Information
23. Financial Statements................... Financial Statements
</TABLE>
- 6 -
<PAGE>
- -------------------------------------------------------------------------------
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration 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, 1996
- -------------------------------------------------------------------------------
. 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, 1996 (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 LOW DURATION 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.................................................... 18
Investment Objectives and Policies......................................... 19
Purchases.................................................................. 30
Exchanges.................................................................. 34
Redemptions................................................................ 35
Conversion of Class B Shares............................................... 36
Other Services and Information............................................. 36
Dividends and Taxes........................................................ 37
Valuation of Shares........................................................ 39
Management................................................................. 39
Performance Information.................................................... 41
General Information........................................................ 42
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 LOW DURATION 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 four 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 Low Highest level of income consistent with the preserva-
Duration tion of capital and low volatility of net asset value;
U.S. Government invests primarily in U.S. government securities, and
Income Fund ("Low seeks to limit the volatility of its net asset value
Duration per share by maintaining under normal circumstances,
Income Fund") an overall portfolio duration of from one to three
years.
PaineWebber High current income consistent with the preservation
Investment Grade of capital and liquidity; invests primarily in invest-
Income Fund ment grade corporate bonds and other fixed income se-
("Investment Grade curities.
Income Fund")
PaineWebber High Highest level of current income available without un-
Income Fund ("High due risk; invests primarily in high risk, high yield-
Income Fund") ing medium and lower quality corporate bonds. At a
special meeting of shareholders scheduled for April
10, 1996, shareholders of the Fund will be asked to
approve a change in the Fund's investment objective
from "to provide the highest level of current income
without undue risk" to "to provide high income."
Total Net Assets at
February 29, 1996:
U.S. Government Low Duration Investment Grade
Income Fund Income Fund Income Fund High Income Fund
$535.6 million $285.2 million $352.2 million $543.0 million
Investment Adviser: Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber"), manages over
$45.4 billion in assets. See "Management."
Sub-Adviser: Pacific Investment Management Company ("PIMCO") serves
as sub-adviser for Low Duration Income Fund. PIMCO
manages approximately $78 billion in assets. See "Man-
agement."
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 C
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."
-----------------
Prospectus Page 3
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Prospectus Summary
(Continued)
- --------------------------------------------------------------------------------
Class A Shares Offered at net asset value plus any applicable sales
charge (maximum is 4% of public offering price, except
for Low Duration Income Fund, which has a maximum of
3% of public offering price).
Class B Shares Offered at net asset value (a maximum contingent de-
ferred sales charge of 5% is imposed on most redemp-
tions made within six years of date of purchase, ex-
cept for Low Duration Income Fund, which has a maximum
contingent deferred sales charge of 3% on most redemp-
tions made within four years of date of purchase).
Class B shares automatically convert into Class A
shares (which pay lower ongoing expenses) approxi-
mately six years after purchase.
Class C Shares Offered at net asset value without an initial sales
charge (for shares purchased on or after November 10,
1995, a contingent deferred sales charge of 0.75% is
imposed on most redemptions made within one year of
date of purchase). Class C 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 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, except for Low Duration Income Fund, which is
$100 for initial and subsequent purchases.
Other Features:
Class A Shares Automatic investment plan Quantity discounts on
initial sales charge
Systematic withdrawal plan 365-day reinstatement
Rights of accumulation privilege
Class B Shares Automatic investment plan Systematic withdrawal plan
Class C 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. U.S. Government Income Fund is designed for investors seeking high
current income consistent with the preservation of capital and liquidity.
LOW DURATION INCOME FUND. Also, investing primarily in U.S. government
securities, this Fund seeks to limit the volatility of its net asset value
per share by maintaining, under normal circumstances, an overall portfolio
duration of from one to three years. Low Duration Income Fund is designed for
investors seeking income with less fluctuation in net asset value than
longer-term U.S. government bond funds.
INVESTMENT GRADE INCOME FUND. Investing in a diversified range of investment
grade bonds and
-----------------
Prospectus Page 4
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Prospectus Summary
(Continued)
- --------------------------------------------------------------------------------
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 or PIMCO, as
applicable, 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 and Low
Duration Income Fund each 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
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,
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, a division of The McGraw Hill Companies, Inc. ("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 and Low Duration Income Fund) dollar rolls
and reverse repurchase agreements also entails special risks.
-----------------
Prospectus Page 5
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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 Class A,
Class B and Class C shares of each Fund.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
INVESTMENT GRADE INCOME FUND
HIGH INCOME FUND CLASS A CLASS B CLASS C
---------------------------- ------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares (as a
percentage 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 net asset value at the time of
purchase or redemption, whichever is lower)....... None(2) 5% 0.75%(3)
</TABLE>
<TABLE>
<CAPTION>
LOW DURATION INCOME FUND CLASS A CLASS B CLASS C
------------------------ ------- ------- -------
<S> <C> <C> <C>
Maximum sales charge on purchases of shares (as a
percentage of public offering price).............. 3% 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 net asset value at the time of
purchase or redemption, whichever is lower) ...... None(2) 3% 0.75%(3)
</TABLE>
ANNUAL FUND OPERATING EXPENSES(4)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
U.S. GOVERNMENT
INCOME FUND LOW DURATION INCOME FUND
--------------------------- --------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Management fees......... 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
12b-1 fees(5)........... 0.25 1.00 0.75 0.25 1.00 0.75
Other expenses.......... 0.25(a) 0.28(a) 0.27(a) 0.40 0.52 0.50
---- ---- ---- -------- -------- --------
Total operating
expenses............... 1.00% 1.78% 1.52% 1.15% 2.02% 1.75%
==== ==== ==== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT GRADE
INCOME FUND HIGH INCOME FUND
----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management fees................. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
12b-1 fees(5)................... 0.25 1.00 0.75 0.25 1.00 0.75
Other expenses.................. 0.20 0.20 0.20 0.18 0.18 0.19
---- ---- ---- ---- ---- ----
Total operating expenses........ 0.95% 1.70% 1.45% 0.93% 1.68% 1.44%
==== ==== ==== ==== ==== ====
</TABLE>
- -------
(a) Does not include 0.03% in non-recurring reorganization expenses that U.S.
Government Income Fund incurred during the fiscal year ended November 30,
1995. If those expenses were included, "Other expenses" for its Class A, B
and C shares would be 0.28%, 0.31% and 0.30%, respectively, and "Total
operating expenses" would be 1.03%, 1.81% and 1.55%, respectively.
(1) Sales charge and exchange fee waivers are available for all shares and
reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares (3% for Low
Duration Income Fund) applies to redemptions during the first year after
purchase; the charge generally declines by 1% annually thereafter, reaching
zero after six years (four years for Low Duration Income Fund). See
"Purchases."
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Prospectus Page 6
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Prospectus Summary
(Continued)
- --------------------------------------------------------------------------------
(2) Purchases of Class A shares of $1 million or more are not subject to an
initial sales charge. However, a contingent deferred sales charge of 1%
will be applied to most redemptions of such shares within one year of
purchase. See "Purchases."
(3) A contingent deferred sales charge of 0.75% will be applied to most
redemptions of Class C shares within one year of purchase. See "Purchases."
(4) See "Management" for additional information. All expenses are those
actually incurred for the fiscal year ended November 30, 1995.
(5) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
12b-1 service fees...................................... 0.25% 0.25% 0.25%
12b-1 distribution fees................................. 0.00 0.75 0.50
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses on a $1,000
investment in 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).................................... $50 $71 $ 93 $158
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $68 $86 $116 $170
Assuming no redemption (3)........................... $18 $56 $ 96 $170
Class C Shares:
Assuming a complete redemption at end of period(2)... $23 $48 $ 83 $181
Assuming no redemption............................... $15 $48 $ 83 $181
LOW DURATION FUND
Class A Shares (4).................................... $41 $65 $ 91 $166
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $ 5 $83 $109 $192
Assuming no redemption (3)........................... $21 $63 $109 $192
Class C Shares:
Assuming a complete redemption at end of period (2).. $26 $55 $ 95 $206
Assuming no redemption............................... $18 $55 $ 95 $206
INVESTMENT GRADE INCOME FUND
Class A Shares (1).................................... $49 $69 $ 90 $152
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $17 $54 $112 $163
Assuming no redemption (3)........................... $67 $84 $ 92 $163
Class C Shares:
Assuming a complete redemption at end of period (2).. $22 $46 $ 79 $173
Assuming no redemption............................... $15 $46 $ 79 $173
</TABLE>
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Prospectus Page 7
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Prospectus Summary
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
HIGH INCOME FUND
Class A Shares (1).................................... $49 $68 $ 89 $150
Class B Shares:
Assuming a complete redemption at end of period
(2)(3).............................................. $67 $83 $111 $160
Assuming no redemption (3)........................... $17 $53 $ 91 $160
Class C Shares:
Assuming a complete redemption at end of period (2).. $22 $46 $ 79 $172
Assuming no redemption............................... $15 $46 $ 79 $172
</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.
(4) Assumes deduction at the time of purchase of the maximum 3% initial sales
charge.
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 8
<PAGE>
-----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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 C 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 Reports to
Shareholders for the fiscal year ended November 30, 1995, 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, 1995, have been audited by Ernst & Young
LLP, independent auditors, whose reports thereon are included in the Annual
Reports to Shareholders. Further information about the performance of each Fund
is also included in the Annual Reports to Shareholders, which may be obtained
without charge. The information appearing below for the periods prior to the
year ended November 30, 1991 also has been audited by Ernst & Young LLP, whose
reports thereon were unqualified.
-----------------
Prospectus Page 9
<PAGE>
-----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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,
------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31 $ 10.27
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Net investment income...... 0.58 0.60 0.67 0.75 0.77 0.76 0.80 0.80 0.81
Net realized and unrealized
gains (losses) from
investment, options and
futures transactions...... 0.62 (1.53) 0.05 0.01 0.49 (0.05) 0.23 -- (0.85)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Net increase (decrease) in
net asset value resulting
from investment
operations................ 1.20 (0.93) 0.72 0.76 1.26 0.71 1.03 0.80 (0.04)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Dividends from net
investment income......... (0.58) (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.............. (0.58) (0.60) (0.67) (0.75) (0.76) (0.75) (0.80) (0.83) (0.92)
-------- -------- -------- -------- -------- -------- -------- ---------- ----------
Net asset value, end of
period.................... $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47 $ 9.51 $ 9.28 $ 9.31
======== ======== ======== ======== ======== ======== ======== ========== ==========
Total investment
return (1)................ 14.70% (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)................... $430,285 $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........ 1.03%(2) 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.................... 6.65%(2) 6.48% 6.60% 7.42% 7.94% 8.57% 8.82% 8.83% 8.44%
Portfolio turnover rate.... 206% 358% 83% 28% 71% 34% 125% 302% 98%
</TABLE>
- -------
#Commencement of offering of shares.
*Annualized.
**Formerly Class D.
(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 each Class would be lower if sales charges were
included. Total investment returns for periods of less than one year have
not been annualized.
(2) These ratios include non-recurring reorganization expenses of 0.03% for
each Class of shares.
------------------
Prospectus Page 10
<PAGE>
-----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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 C**
- ---------- -------------------------------------------------------- ----------------------------------------------
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,
1986 1995 1994 1993 1992 1991 1995 1994 1993 1992
- ---------- ------- ------- -------- -------- -------------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.18 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 9.59 $ 8.49 $ 10.02 $ 9.98 $ 10.13
- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
0.96 0.51 0.53 0.60 0.67 0.29 0.53 0.55 0.62 0.25
0.32 0.63 (1.53) 0.05 0.01 0.39 0.63 (1.53) 0.04 (0.15)
- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
1.28 1.14 (1.00) 0.65 0.68 0.68 1.16 (0.98) 0.66 0.10
- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
(0.96) (0.52) (0.53) (0.60) (0.68) (0.29) (0.54) (0.55) (0.62) (0.25)
(0.23) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
(1.19) (0.52) (0.53) (0.60) (0.68) (0.29) (0.54) (0.55) (0.62) (0.25)
- ---------- ------- ------- -------- -------- ------- ------- ------- -------- --------
$ 10.27 $ 9.12 $ 8.50 $ 10.03 $ 9.98 $ 9.98 $ 9.11 $ 8.49 $ 10.02 $ 9.98
========== ======= ======= ======== ======== ======= ======= ======= ======== ========
13.51% 13.81% (10.31)% 6.57% 6.98% 6.78% 14.12% (10.08)% 6.75% 0.62%
========== ======= ======= ======== ======== ======= ======= ======= ======== ========
$3,139,662 $82,469 $99,581 $161,158 $132,357 $23,532 $53,832 $68,400 $143,473 $127,026
0.66% 1.81%(2) 1.72% 1.66% 1.67% 1.68%* 1.55%(2) 1.45% 1.40% 1.44%*
9.35% 5.88%(2) 5.71% 5.79% 6.38% 6.40%* 6.17%(2) 5.99% 6.06% 6.13%*
224% 206% 358% 83% 28% 71% 206% 358% 83% 28%
</TABLE>
------------------
Prospectus Page 11
<PAGE>
-----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
LOW DURATION INCOME FUND
---------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C***
-------------------------------------- ----------------------------------- ------------------------------------
FOR THE YEARS FOR THE YEARS FOR THE YEARS
ENDED FOR THE PERIOD ENDED NOVEMBER FOR THE PERIOD ENDED FOR THE PERIOD
NOVEMBER 30, MAY 3, 1993# 30, MAY 3, 1993# NOVEMBER 30, MAY 3, 1993#
------------------ TO NOVEMBER 30, --------------- TO NOVEMBER 30, ------------------ TO NOVEMBER 30,
1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- -------- --------------- ------ ------- --------------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $ 2.25 $ 2.48 $ 2.50 $ 2.25 $ 2.48 $ 2.50 $ 2.25 $ 2.47 $ 2.50
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Net investment
income......... 0.13 0.12 0.07 0.11 0.10 0.06 0.12 0.11 0.06
Net realized and
unrealized
gains (losses)
from
investment,
futures and
options
transactions... 0.09 (0.29) (0.02) 0.09 (0.29) (0.02) 0.09 (0.28) (0.03)
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Net increase
(decrease) in
net asset value
from
operations..... 0.22 (0.17) 0.05 0.20 (0.19) 0.04 0.21 (0.17) 0.03
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Dividends from
net investment
income......... (0.13) (0.12) (0.07) (0.11) (0.10) (0.06) (0.12) (0.11) (0.06)
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Contribution to
capital from
adviser........ -- .06 -- -- .06 -- -- .06 --
-------- -------- -------- ------ ------- ------- -------- -------- ----------
Net asset value,
end of period.. $ 2.34 $ 2.25 $ 2.48 $ 2.34 $ 2.25 $ 2.48 $ 2.34 $ 2.25 $ 2.47
======== ======== ======== ====== ======= ======= ======== ======== ==========
Total investment
return (1)..... 10.25% (4.50)%** 1.88% 9.30% (5.24)%** 1.47% 9.60% (4.99)%** 1.20%
======== ======== ======== ====== ======= ======= ======== ======== ==========
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $127,961 $158,712 $551,243 $9,147 $13,382 $31,706 $180,169 $296,182 $1,186,181
Ratio of
expenses to
average net
assets (2)..... 1.15% 0.84% 0.81%* 2.02% 1.62% 1.62%* 1.75% 1.36% 1.35%*
Ratio of net
investment
income to
average net
assets (2)..... 5.89% 5.16% 4.85%* 5.03% 4.40% 4.31%* 5.31% 4.65% 4.52%*
Portfolio
turnover rate.. 242% 246% 97% 242% 246% 97% 242% 246% 97%
</TABLE>
- -------
# Commencement of issuance of shares.
* Annualized.
** Net of $0.06 contribution of capital from adviser. If such contribution had
not been made the total investment returns would have been (7.02)% for
Class A, (7.74)% for Class B and (7.50)% for Class C (formerly Class D).
*** Formerly Class D.
(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 for each Class would be lower if sales charges were included. Total
investment returns for periods of less than one year have not been
annualized.
(2) During the year ended November 30, 1994, Mitchell Hutchins waived a portion
of its advisory and administration fees. If such waivers had not been made,
the annualized ratios of expenses to average net assets, and net investment
income to average net assets, respectively, would have been 0.88% and 5.12%
for Class A, 1.66% and 4.35% for Class B, and 1.39% and 4.61% for Class C
(formerly Class D).
------------------
Prospectus Page 12
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
-------------
Prospectus Page 13
<PAGE>
-----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42 $ 10.74
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income... 0.76 0.77 0.79 0.81 0.82 0.84 0.86 0.83 0.88
Net realized and
unrealized gains
(losses) from
investment
transactions........... 1.01 (1.41) 0.70 0.22 0.66 (0.33) 0.27 0.10 (1.15)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease)
in net asset value
resulting from
operations............. 1.77 (0.64) 1.49 1.03 1.48 0.51 1.13 0.93 (0.27)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.76) (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.81) (0.92)
Distributions from net
realized gains from
investment
transactions........... -- -- -- -- -- -- -- -- (0.08)
Return of capital....... -- -- -- -- -- -- -- (0.01) (0.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders........... (0.76) (0.77) (0.79) (0.82) (0.81) (0.83) (0.84) (0.82) (1.05)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 10.68 $ 9.67 $ 11.08 $ 10.38 $ 10.17 $ 9.50 $ 9.82 $ 9.53 $ 9.42
======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment
return (1)............. 18.95% (5.99)% 14.77% 10.39% 16.17% 5.55% 12.28% 10.24% (2.69)%
======== ======== ======== ======== ======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of
period (000's)......... $258,898 $271,553 $204,418 $197,795 $220,216 $225,424 $269,381 $334,106 $543,919
Ratio of expenses to
average net assets..... 0.95% 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............. 7.42% 7.50% 7.24% 7.81% 8.32% 8.76% 8.96% 8.83% 8.67%
Portfolio turnover rate. 149% 142% 27% 44% 46% 31% 47% 35% 88%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
** Formerly Class D shares.
(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 each Class would be lower if sales charges were in-
cluded. Total investment returns for periods of less than one year have not
been annualized.
-------------
Prospectus Page 14
<PAGE>
-----------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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 C**
- -------- -------------------------------------------------- ---------------------------------------------
FOR THE
YEAR FOR THE FOR THE
ENDED FOR THE PERIOD FOR THE PERIOD
NOVEMBER YEARS ENDED JULY 1, 1991# YEARS ENDED JULY 2, 1992#
30, NOVEMBER 30, TO NOVEMBER 30, TO
- -------- ----------------------------------- NOVEMBER 30, -------------------------- NOVEMBER 30,
1986 1995 1994 1993 1992 1991 1995 1994 1993 1992
- -------- ------- ------- ------- ------- ------------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.27 $ 9.67 $ 11.07 $ 10.38 $ 10.17 $ 9.79 $ 9.67 $ 11.08 $ 10.38 $ 10.48
- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
1.00 0.68 0.69 0.71 0.73 0.31 0.70 0.72 0.74 0.28
0.69 1.00 (1.40) 0.69 0.22 0.38 1.01 (1.41) 0.70 (0.10)
- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
1.69 1.68 (0.71) 1.40 0.95 0.69 1.71 (0.69) 1.44 0.18
- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(1.00) (0.68) (0.69) (0.71) (0.74) (0.31) (0.70) (0.72) (0.74) (0.28)
(0.22) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(1.22) (0.68) (0.69) (0.71) (0.74) (0.31) (0.70) (0.72) (0.74) (0.28)
- -------- ------- ------- ------- ------- ------ ------- ------- ------- -------
$ 10.74 $ 10.67 $ 9.67 $ 11.07 $ 10.38 $10.17 $ 10.68 $ 9.67 $ 11.08 $ 10.38
======== ======= ======= ======= ======= ====== ======= ======= ======= =======
17.36% 17.97% (6.60)% 13.81% 9.56% 6.76% 18.37% (6.40)% 14.21% 1.32%
======== ======= ======= ======= ======= ====== ======= ======= ======= =======
$474,632 $71,372 $69,359 $52,301 $20,862 $5,368 $39,150 $45,473 $47,527 $16,067
0.68% 1.70% 1.72% 1.70% 1.74% 1.67%* 1.45% 1.45% 1.44% 1.49%*
9.27% 6.67% 6.73% 6.40% 6.88% 6.87%* 6.95% 6.99% 6.61% 6.83%*
81% 149% 142% 27% 44% 46% 149% 142% 27% 44%
</TABLE>
------------------
Prospectus Page 15
<PAGE>
-----------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Financial Highlights
(Continued)
----------------------------------------------------------------------------
-------------
Prospectus Page 16
<TABLE>
<CAPTION>
HIGH INCOME FUND
-------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94 $ 10.46
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income... 0.79 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........... (0.17) (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............. 0.62 (0.73) 1.72 1.59 2.67 (0.89) (0.05) 0.85 (0.16)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.80) (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........... (0.80) (0.86) (0.91) (0.97) (0.98) (0.97) (1.08) (1.19) (1.36)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 6.96 $ 7.14 $ 8.73 $ 7.92 $ 7.30 $ 5.61 $ 7.47 $ 8.60 $ 8.94
======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment return
(1).................... 9.01 % (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's)......... $248,619 $268,397 $360,281 $279,685 $243,210 $184,990 $322,426 $532,450 $683,692
Ratio of expenses to
average net assets..... 0.93% 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................. 11.17% 10.43% 10.61% 12.68% 15.12% 15.20% 13.50% 13.55% 12.05%
Portfolio turnover rate. 94% 156% 182% 185% 117% 110% 132% 111% 145%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
** Formerly Class D shares.
(1)Total return is calculated assuming a $1,000 investment on the first day of
each period, reinvestment of all dividends and other distributions at net as-
set value on the payable dates, and a sale at net asset value on the last day
of each period reported. The figures do not include sales charges; results
for each Class would be lower if sales charges were included. Total invest-
ment returns for periods of less than one year have not been annualized.
<PAGE>
-----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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 C**
- ------------ ---------------------------------------------------- -------------------------------------------
FOR THE
FOR THE PERIOD FOR THE
YEAR JULY 1, FOR THE YEARS ENDED PERIOD JULY
ENDED FOR THE YEARS ENDED NOVEMBER 30, 1991# TO NOVEMBER 30, 2, 1992# TO
NOVEMBER 30, -------------------------------------- NOVEMBER 30, ----------------------------- NOVEMBER 30,
1986 1995 1994 1993 1992 1991 1995 1994 1993 1992
- ------------ -------- -------- -------- ------- ------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.21 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.85 $ 7.15 $ 8.74 $ 7.92 $ 7.80
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
1.30 0.74 0.80 0.83 0.92 0.41 0.76 0.82 0.85 0.33
0.39 (0.18) (1.58) 0.82 0.61 0.44 (0.18) (1.59) 0.82 0.11
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
1.69 0.56 (0.78) 1.65 1.53 0.85 0.58 (0.77) 1.67 0.44
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
(1.30) (0.75) (0.80) (0.84) (0.91) (0.41) (0.76) (0.82) (0.85) (0.32)
(0.14) -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
(1.44) (0.75) (0.80) (0.84) (0.91) (0.41) (0.76) (0.82) (0.85) (0.32)
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
$ 10.46 $ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.97 $ 7.15 $ 8.74 $ 7.92
======== ======== ======== ======== ======= ======= ======== ======== ======== =======
17.31% 8.05% (9.77)% 21.89% 22.07% 11.93% 8.45% (9.62)% 22.19% 5.21%
======== ======== ======== ======== ======= ======= ======== ======== ======== =======
$770,137 $212,946 $235,480 $286,525 $99,645 $18,274 $103,911 $115,196 $176,161 $35,992
0.69% 1.68% 1.64% 1.66% 1.70% 1.73%* 1.44% 1.38% 1.39% 1.45%*
12.07% 10.42% 9.66% 9.69% 11.42% 12.43%* 10.63% 9.91% 9.81% 10.67%*
169% 94% 156% 182% 185% 117% 94% 156% 182% 185%
</TABLE>
------------------
Prospectus Page 17
<PAGE>
-----------------------------------------------------------------------------
PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION 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 charge Service fee of 0.25% Initial sales charge waived
of 4% (3% for Low Duration or reduced for certain
Income Fund) of the public purchases
offering price
CLASS B Maximum contingent deferred Service fee of 0.25%; Shares convert to Class A
sales charge of 5% upon distribution fee of shares approximately six
redemption (3% for Low 0.75% years after issuance
Duration Income Fund);
declines to zero after six
years (four years for Low
Duration Income Fund)
CLASS C Contingent deferred sales Service fee of 0.25%; --
charge of 0.75% upon distribution fee of
redemption for first year 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 (3% for Class A shares of Low
Duration Income Fund). 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% applies to most redemptions made within six years of purchase (for Low
Duration Income Fund, a contingent deferred sales charge of up to 3% applies to
most redemptions made within four years of purchase). Class C shareholders pay
no initial sales charges, although a contingent deferred sales charge of 0.75%
applies to most redemptions made within one year after purchase. Thus, the
entire amount of a Class B or Class C 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 C shares, investors eligible for complete waivers
should purchase Class A shares.
ONGOING ANNUAL EXPENSES. Class A, B and C shares of each Fund 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 C shares pay an annual 12b-1
distribution fee of 0.50%, of average daily net
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INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
- --------------------------------------------------------------------------------
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 the Class B shares of U.S. Government Income Fund, Investment Grade
Income Fund and High Income Fund 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. For these Funds, the cumulative distribution fees on
their Class C shares would approximate the expenses of the 4% maximum initial
sales charge on the Class A shares if the shares were held for approximately
eight years.
For Low Duration Income Fund, the cumulative distribution fees on its Class B
or Class C shares would approximate the 3% maximum initial sales charge on its
Class A shares if the shares were held approximately four years in the case of
the Class B shares or approximately six years in the case of the Class C
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 C shares would approximate the
cumulative distribution fees on the Class B shares if the shares were held for
nine 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
nine years (six years for Low Duration Income Fund) generally should expect to
pay the lowest cumulative expenses by purchasing Class C 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 Class A, B and C shares of each Fund. See also "Conversion of
Class B Shares," "Dividends and Taxes" and "General Information" for other dif-
ferences among the three Classes.
Investment Objectives and Policies
----------------------------------
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 the LOW DURATION INCOME FUND is to achieve the
highest level of income consistent with the preservation of capital and low
volatility of net asset value. The Fund invests primarily in U.S. government
securities and seeks to limit the volatility of its net asset value per share
by maintaining, under normal circumstances, an overall portfolio duration of
from one to three years.
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
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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. At a special
meeting of shareholders scheduled for April 10, 1996, shareholders of the Fund
will be asked to approve a change in the Fund's investment objective from "to
provide the highest level of current income without undue risk" to "to provide
high income."
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, the policy of U.S. Government Income Fund and Low Duration Income
Fund of each 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 AND LOW DURATION INCOME FUND
Under normal conditions, U.S. Government Income Fund and Low Duration Income
Fund each 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 guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements with
respect to those securities. U.S. government mortgage-backed securities and
other obligations guaranteed by the U.S. government, its agencies or
instrumentalities are guaranteed as to the payment of interest and principal
but not as to market value. Up to 35% of each Fund's total assets may be
invested in privately issued mortgage- and asset-backed securities 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 or PIMCO, as applicable, to be of comparable quality. As a
matter of fundamental policy, each 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.
Low Duration Income Fund seeks to limit the volatility of its net asset value
per share by maintaining, under normal circumstances, an overall portfolio
duration of from one to three years. U.S. Government Income Fund has no fixed
portfolio duration policy. Duration is a measure of the expected life of a
fixed income security on a present value basis. See "Risk Factors and Other
Investment Policies--Duration".
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. Issuers and
guarantors of the U.S. government mortgage-backed securities in which U.S.
Government Income Fund and Low Duration Income Fund may invest include the
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae"), or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). Private issuers of mortgage-backed securities, in
which each Fund may invest, are 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 Funds may invest, see Appendix A to this Prospectus.
Each Fund's policy of investing at least 25% of its total assets in mortgage-
and asset-backed securities
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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 and Low Duration 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 and Low Duration 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. The SEC staff currently takes the position that
"stripped" U.S. government securities that are not issued through the U.S.
Treasury are not U.S. government securities. As long as the SEC takes this
position, Certificates of Accrual Treasury Securities ("CATS") and Treasury
Income Growth Receipts ("TIGRs") that are not issued through the U.S. Treasury
will not be counted as U.S. government securities for purposes of the 65%
investment requirement. See "Risks of Zero Coupon Securities."
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 sale 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.
Each 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
protection transactions, and reverse repurchase agreements. In addition, U.S.
Government Income Fund and Low Duration Income Fund may use dollar rolls. 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 20% of the Fund's net
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
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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."
During its 1995 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)--13%, AA/Aa--7%, A/A--35%, BBB/Baa--29%, BB/Ba--15%, B/B--1% and
CCC/Caa--0%. It should be noted that this information reflects the average
composition of the Fund's assets during the fiscal year ended November 30, 1995
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,
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 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 35% 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."
If the proposed change in High Income Fund's investment objective is approved
by its shareholders, the Fund's investment policies will change at the same
time to permit investment of up to 25% of its total assets in securities that
do not currently provide income but that Mitchell Hutchins believes have the
potential for capital appreciation. The securities that the Fund could purchase
pursuant to this new investment policy include debt securities that are not
currently paying income and equity securities such as common stock, warrants,
rights and preferred stocks that are not paying current income.
During its 1995 fiscal year, High Income Fund had 80.18% of its average annual
net assets in debt securities that received a rating from S&P or Moody's or
another NRSRO and 15.11% 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)--2.3%, AA/Aa--0.04%, A/A--0%, BBB/Baa--0.17%, BB/Ba--20%, B/B--51.14%,
CCC/Caa--5.84%, CC--0%, C--0% and D--0%. It should be noted that this
information reflects the average composition of the Fund's assets during the
fiscal year ended November 30, 1995 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 fluctuates based on changes in the
value of its portfolio securities. Neither the issuance by, nor the guarantee
of, a U.S. government agency nor even the highest rating by a NRSRO constitutes
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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.
INTEREST RATE SENSITIVITY. The investment income of each Fund is based on the
income earned on the securities it holds, less expenses incurred; thus, each
Fund's investment income may be expected to fluctuate in response to changes in
such expenses or income. The investment income of a Fund also 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 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,
Low Duration 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 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 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 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
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.
While Low Duration Income Fund generally may invest in CMO classes that are
structured to sell at a premium or discount, the Fund may not invest in IO or
PO classes. U.S. Government Income Fund and Investment Grade Income Fund are
not subject to any similar limitation.
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
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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. Low Duration Income
Fund may not invest in inverse floating rate mortgage- or asset-backed
securities. U.S. Government Income Fund and Investment Grade Income Fund are
not subject to any similar limitation.
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, including IO and PO classes of mortgage-backed
securities and inverse floating rate securities, can be extremely volatile and
these securities may become illiquid. Mitchell Hutchins or PIMCO, as
applicable, 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 market interest rates or other factors that affect the volatility
of securities held by a Fund change in ways that Mitchell Hutchins or PIMCO
does not anticipate, 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, Low Duration
Income Fund and Investment Grade Income Fund may invest.
- --RATINGS OF DEBT SECURITIES. 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 or PIMCO
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.
- --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 investment grade. Investment grade bonds include debt securities rated
BBB by S&P, Baa by Moody's or comparably rated by another NRSRO. 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 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
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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.
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. 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. Zero coupon and PIK securities usually trade at a
substantial discount from their face or par value and are 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.
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.
- --RISKS OF FOREIGN SECURITIES. Investment Grade Income Fund may invest up to
20% of its net assets in U.S. dollar-denominated securities of foreign
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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
35% 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 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. The use of options and futures solely to enhance income
may be considered a form of speculation. 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.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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. Each Fund may
enter into options and futures contracts under which the full value of its
portfolio is at risk. Under normal circumstances, however, the Fund's use of
these instruments will place at risk a much smaller portion of its assets.
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 or PIMCO
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 or PIMCO 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.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government Income Fund and
Low Duration Income Fund each 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 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 and Low Duration Income Fund each 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 and Low Duration 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
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
receive interest on the securities or repurchase agreements in which it invests
the transaction proceeds, such transactions may involve leverage. However,
because such securities or repurchase agreements will mature on or before the
settlement date of the related dollar roll or reverse repurchase agreement,
Mitchell Hutchins and PIMCO believe that such arbitrage transactions do not
present the risks 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 Funds' limitations on
borrowings, which will restrict the aggregate of such transactions (plus any
other borrowings) to 33 1/3% of each Fund's total assets. The Funds 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 each Fund's total assets. The Funds have no present intention to enter
into dollar rolls other than in such arbitrage transactions, and have no
present intention to enter into reverse repurchase agreements other than in
such arbitrage transactions or for temporary or emergency purposes. Each 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 or PIMCO 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, 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, exceed its net
assets.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities (15% of net assets for Low Duration Income Fund). 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
price at which the Fund has valued the securities. Under current guidelines of
the staff of the SEC, IOs and POs are considered illiquid. However, IO and PO
classes of fixed-rate mortgage-backed securities issued by the U.S. government
or one of its agencies or instrumentalities will not be considered illiquid if
Mitchell Hutchins has determined that they are liquid pursuant to guidelines
established by the Trust's board of trustees. Illiquid securities also are
considered to include, among other things, written OTC options, repurchase
agreements with maturities in excess of seven days and securities whose
disposition is restricted under the federal securities laws (other than "Rule
144A" securities that Mitchell Hutchins or PIMCO has determined to be liquid
under procedures approved by the Trust's board of trustees).
Rule 144A establishes a "safe harbor" from the 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
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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.
A Fund may not be able to sell illiquid securities when Mitchell Hutchins or
PIMCO considers it desirable to do so or may have to sell such securities at a
price lower than could be obtained if they were more liquid. Also the sale of
illiquid securities may require more time and may result in higher dealer
discounts and other selling expenses than does the sale of securities that are
not illiquid. Illiquid securities may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and
investments in illiquid securities may have an adverse impact on net asset
value.
LENDING OF PORTFOLIO SECURITIES. 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 or PIMCO deems qualified. Lending securities
enables the Fund to earn additional income, but could result in a loss or delay
in recovering the securities.
DURATION. Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept "term to
maturity." Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure and is one of the fundamental
tools used by Mitchell Hutchins or PIMCO, as applicable, in portfolio selection
for the Funds. Traditionally, a debt security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However "term to maturity" measures only the time until a debt
security provides for a final payment, taking no account of the pattern of the
security's payments prior to maturity. Duration is a measure of the expected
life of a fixed income security on a present value basis. Duration takes the
length of the time intervals between the present time and the time that the
interest and the principal payments are scheduled to be made or, in the case of
a callable bond, expected to be received, and weights them by the present
values of the cash to be received at each future point in time. For any fixed
income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending upon
its coupon and the level of market yields, a treasury note with a remaining
maturity of five years might have a duration of 4.5 years. For mortgage-backed
and other securities that are subject to prepayments, put or call features or
adjustable coupons, the difference between the remaining stated maturity and
the duration is likely to be much greater.
Futures, options and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions (backed by a segregated account of cash
and cash equivalents) will lengthen the Fund's duration by approximately the
same amount as would holding an equivalent amount of the underlying securities.
Short futures or put options have durations roughly equal to the negative
duration of the securities that underlie these positions, and have the effect
of reducing portfolio duration by approximately the same amount as would
selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by the standard duration calculation is the case of mortgage-
backed securities. The stated final maturity of such securities is generally 30
years, but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell
Hutchins and PIMCO will use more sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
duration and, therefore, its interest rate exposure.
Duration allows Mitchell Hutchins or PIMCO to make certain predictions as to
the effect that changes in the level of interest rates will have on the value
of the Fund's portfolio. For example, when the level of interest rates
increases by 1%, a fixed income security having a positive duration of
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
three years generally will decrease in value by approximately 3%. Accordingly,
if PIMCO calculates the duration of the Fund's portfolio as being three years,
it normally would expect the portfolio to change in value by approximately 3%
for every 1% change in the level of interest rates. However various factors,
such as changes in anticipated prepayment rates, qualitative considerations and
market supply and demand, can cause particular securities to respond somewhat
differently to changes in interest rates than indicated in the above example.
Moreover, in the case of mortgage-backed and other complex securities duration
calculations are estimates and are not precise. This is particularly true
during periods of market volatility. Accordingly, the net asset value of the
Fund's portfolio may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
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 or PIMCO
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.
DERIVATIVES. The Funds may invest in instruments or securities that commonly
are referred to as "derivatives," because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. Derivative
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used by the Funds in hedging and
related income strategies. There is only limited consensus as to what
constitutes a "derivative" security. However, in Mitchell Hutchins' and PIMCO's
view, the derivative securities in which one or more of the Funds may invest
include "stripped" securities, such as CATS and TIGRs, and specially structured
types of mortgage- and asset-backed securities, such as IOs, POs and inverse
floaters, and, in the case of Investment Grade Income Fund and High Income
Fund, dollar-denominated securities whose value is linked to foreign
currencies. The market value of derivative instruments and securities sometimes
is more volatile than that of other investments, and each type of derivative
instrument may pose its own special risks. Mitchell Hutchins or PIMCO takes
these risks into account in its management of the Funds.
OTHER INVESTMENT POLICIES. Each Fund may hold up to 35% of its total assets in
cash or money market instruments for liquidity purposes or pending investment.
In addition, when Mitchell Hutchins or PIMCO 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
(Low Duration Income Fund and 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. Investment
Grade Income Fund and High Income Fund each may invest up to 5% of its net
assets in participations in or assignments of all or a portion of secured or
unsecured fixed or floating rate loans arranged through private negotiations
between a borrowing corporation and one or more financial institutions.
New types of mortgage- and asset-backed securities, derivative securities,
hedging instruments and risk management techniques are developed and marketed
from time to time. Each Fund may invest in these securities and instruments and
use these techniques to the extent consistent with its investment objective and
limitations and with regulatory and tax considerations.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
- --------------------------------------------------------------------------------
Purchases
- --------------------------------------------------------------------------------
GENERAL. Class A shares are sold to investors subject to an initial sales
charge. Class B shares 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 most redemptions. Class B shares automatically convert to
Class A shares approximately six years after issuance. Class C shares are sold
without an initial sales charge but are subject to higher ongoing expenses than
Class A shares and a contingent deferred sales charge of 0.75% payable on most
redemptions made within one year of purchase. Class C shares 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 ($100 for Low
Duration Income Fund) 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 plans. Purchase orders will be
priced at the net asset value per share next determined (see "Valuation of
Shares") after the order is received by PaineWebber's New York City offices or
by the Transfer Agent, plus any 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 C 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 third 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 calling
PaineWebber at 1-800-647-1568 to obtain an application form completing and
signing the application 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 SCHEDULES-- CLASS A SHARES
U.S. GOVERNMENT INCOME FUND
INVESTMENT GRADE INCOME FUND
HIGH INCOME FUND
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS A PERCENTAGE 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>
LOW DURATION INCOME FUND
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS A PERCENTAGE 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 3.00% 3.09% 2.75%
$100,000 to $249,999 2.50 2.56 2.25
$250,000 to $499,999 2.00 2.04 1.75
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over(1) None None 1.00
</TABLE>
- -------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources. Most redemptions of these shares within one year of purchase will
be subject to a contingent deferred sales charge of 1.0%. See "Contingent
Deferred Sales Charge--Class A Shares."
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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.
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 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 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.
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 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 mutual fund, their spouses, parents and children and advisory
clients of Mitchell Hutchins.
Class A shares may also be purchased without a sales charge by employee benefit
plans qualified under section 401 or 403(b) of the Internal Revenue Code (the
"Code"), including salary reduction plans qualified under section 401(k) of the
Code, subject to minimum requirements established by Mitchell Hutchins with
respect to number of employees or amount of purchase. Currently, the employers
establishing the plan must have 100 or more eligible employees or the amount
invested or to be invested during the subsequent 13-month period in the Fund or
any other PaineWebber mutual fund must total at least $1 million. If
investments by an employee benefit plan without a sales charge are made through
a dealer (including PaineWebber) who has executed a dealer agreement with
Mitchell Hutchins, Mitchell Hutchins may make a payment, out of its own
resources, to the dealer in an amount not to exceed 1% of the amount invested.
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 mutual 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.
Class A shares may be acquired without a sales charge if issued by a Fund in
connection with a
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FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
reorganization pursuant to which the Fund acquires substantially all of the
assets and liabilities of another investment company in exchange solely for
shares of the Fund.
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES. Class A shares purchased
without an initial sales charge due to the sales charge waiver for purchases of
$1 million or more and held less than one year are subject to a contingent
deferred sales charge upon redemption equal to 1% of the lower of (a) the net
asset value of the shares at the time of purchase or (b) the net asset value of
the shares at the time of redemption. The holding period of Class A shares
acquired through an exchange with another PaineWebber mutual fund is calculated
from the date the Class A shares of the other PaineWebber mutual fund were
initially purchased without a sales charge, and Class A shares acquired through
an exchange will be considered to represent, as applicable, dividend and
capital gain distribution reinvestments in such other funds. Redemption order
will be determined as described for Class B shares (see "Contingent Deferred
Sales Charge--Class B Shares"). Class A shares held one year or longer and
Class A shares acquired through reinvestment of dividends or capital gains
distributions are not subject to this contingent deferred sales charge. The
contingent deferred sales charge is waived for exchanges, as described below,
and for most redemptions in connection with the systematic withdrawal plan.
THIS CONTINGENT DEFERRED SALES CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS A
SHARES PURCHASED PRIOR TO NOVEMBER 10, 1995. 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 amount
of any contingent deferred sales charge will be paid to Mitchell Hutchins.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The public offering price of
the Class B shares is the next determined net asset value, and no initial sales
charge is imposed. A contingent deferred sales charge, however, is imposed upon
most redemptions of Class B shares.
The maximum contingent deferred sales charge for Class B shares equals 5% (3%
for Low Duration Income Fund) of the lower of (a) the net asset value of the
shares at the time of purchase or (b) the net asset value of the shares at the
time of redemption. Class B shares held six years or longer (four years Low
Duration Fund) and Class B shares acquired through reinvestment of dividends or
capital gains distributions are not subject to the contingent deferred sales
charge. The following table shows the contingent deferred sales charge
percentages charged in each year following purchase:
U.S. GOVERNMENT INCOME
INVESTMENT GRADE INCOME
FUND
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE
---------- -----------------------------
<S> <C>
1st Year Since Purchase........................... 5%
2nd Year Since Purchase........................... 4
3rd Year Since Purchase........................... 3
4th Year Since Purchase........................... 2
5th Year Since Purchase........................... 2
6th Year Since Purchase........................... 1
7th Year Since Purchase........................... None
LOW DURATION INCOME FUND
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
REDEMPTION PERCENTAGE OF
DURING NET ASSET VALUE AT REDEMPTION
---------- -----------------------------
<S> <C>
1st Year Since Purchase........................... 3%
2nd Year Since Purchase........................... 2
3rd Year Since Purchase........................... 2
4th Year Since Purchase........................... 1
5th Year Since Purchase........................... None
</TABLE>
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 the reinvestment of dividends and capital gains distributions and
then of other shares held by the shareholder for the longest period of time.
The holding period of Class B shares acquired through an exchange with another
PaineWebber mutual fund will be calculated from the date that the Class B
shares were initially acquired in one of the other PaineWebber mutual funds,
and Class B shares being redeemed will be considered to represent, as
applicable, dividend and capital gain distribution reinvestments in such other
funds. This will result in any contingent deferred sales charge being imposed
at the lowest possible rate. 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 amount
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INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
of any contingent deferred sales charge will be paid to Mitchell Hutchins.
Class B shareholders of Low Duration Income Fund who exchange those shares for
Class B shares of other PaineWebber mutual funds will be subject to the
contingent deferred sales charge schedule of the Class B shares acquired
through the exchange, which, in most instances, is both higher than that
applicable to the Class B shares of Low Duration Income Fund and is imposed
over a longer period. Class B shareholders of one of these other funds who
acquire Class B shares of Low Duration Income Fund through an exchange will
continue to be subject to the contingent deferred sales charge of their
original fund.
SALES CHARGE WAIVERS--CLASS B SHARES. The contingent deferred sales charge will
be waived for exchanges, as described below, and for most 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 any
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 C SHARES. The public offering price of the Class C shares is
the next determined net asset value. No initial sales charge is imposed.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. Class C shares held less than
one year will be subject to a contingent deferred sales charge on redemptions
in an amount equal to .75% of the lower of (a) the net asset value of the
shares at the time of purchase or (b) the net asset value of the shares at the
time of redemption. The holding period of Class C shares acquired through an
exchange with another PaineWebber mutual fund is calculated from the date the
Class C shares of the other PaineWebber mutual fund were initially purchased
and Class C shares acquired through an exchange will be considered to
represent, as applicable, dividend and capital gain distribution reinvestments
in such other funds. Redemption order will be determined as described for Class
B shares (see "Contingent Deferred Sales Charge--Class B Shares"). The amount
of the contingent deferred sales charges imposed on redemptions of Class C
shares may be different for other PaineWebber mutual funds. Redemptions of
Class C shares acquired through an exchange and held less than one year will be
subject to the same contingent deferred sales charge that would have been
imposed on Class C shares of the PaineWebber mutual fund originally purchased.
Class C shares held one year or longer and Class C shares acquired through
reinvestment of dividends or capital gains distributions are not subject to
this contingent deferred sales charge. The contingent deferred sales charge is
waived for exchanges, as described below, and for most redemptions in
connection with the systematic withdrawal plan. THIS CONTINGENT DEFERRED SALES
CHARGE DOES NOT APPLY TO REDEMPTIONS OF CLASS C SHARES PURCHASED PRIOR TO
NOVEMBER 10, 1995. 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 amount of any contingent
deferred sales charge will be paid to Mitchell Hutchins.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
- --------------------------------------------------------------------------------
Exchanges
- --------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of the corresponding Class of
other PaineWebber mutual funds (including the other 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 shares of PaineWebber mutual funds acquired through an exchange. 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.
The other PaineWebber mutual funds, with which Fund shares may be exchanged
include:
PAINEWEBBER INCOME FUNDS
.Global Income Fund
.Strategic Income Fund
PAINEWEBBER TAX-FREE INCOME FUNDS
.California Tax-Free Income Fund
.Municipal High Income Fund
.National Tax-Free Income Fund
.New York Tax-Free Income Fund
PAINEWEBBER GROWTH FUNDS
.Capital Appreciation Fund
.Emerging Markets Equity Fund
.Global Equity Fund
.Growth Fund
.Financial Services Growth Fund
.Small Cap Growth Fund
.Small Cap Value Fund
PAINEWEBBER GROWTH AND INCOME FUNDS
.Balanced Fund
.Growth and Income Fund
.Tactical Allocation Fund
.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 mutual 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
mutual funds to be acquired through the exchange.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
- --------------------------------------------------------------------------------
Redemptions
- --------------------------------------------------------------------------------
Fund shares may be redeemed at their net asset value (subject to any applicable
contingent deferred sales charge) and redemption proceeds will be paid after
receipt of a redemption request, as described below. 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 A shares, then Class C 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 three
Business Days after receipt of the request, 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, Wilmington, Delaware 19899. A redemption request will be
executed at the net asset value next computed after it is received in "good
order" and redemption proceeds will be paid within seven days of the receipt of
the request. "Good order" means that the request must be accompanied by the
following: (1) a letter of instruction or a stock assignment specifying the
number of shares or amount of investment to be redeemed (or that all shares
credited to a Fund account be redeemed), signed by all registered owners of the
shares in the exact names in which they are registered, (2) a guarantee of 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 having a net asset value below the lesser of $500 or the
current minimum for initial purchases. If a Fund elects to do so, it will
notify the shareholder and provide the shareholder the opportunity to increase
the amount invested to the required minimum level or more within 60 days of the
notice. A Fund will not redeem accounts
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INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
----------------------------------------------
that fall below the minimum required level solely as a result of a reduction in
net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund 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.
- --------------------------------------------------------------------------------
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. Of course, investing
through the automatic investment plan does not assure a profit or protect
against loss in declining markets. Additionally, since the automatic investment
plan involves continuous investing regardless of price levels, an investor
should consider his or her financial ability to continue purchases through
periods of low price levels.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own non-certificated Class A or
Class C shares with a value of $5,000 or more or Class B shares 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. Shareholders
who participate in the systematic withdrawal plan must elect to have all
dividends reinvested in additional shares of the same Class. The minimum amount
for all withdrawals of Class A or Class C 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. Provided that the shareholder does not withdraw an amount exceeding
12% (in the first year after purchase for Class A and Class C shares, annually
for Class B
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INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
----------------------------------------------
shares) 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, no contingent deferred sales charge is imposed on
such withdrawals. A 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 $5,000
for Class A and Class C shareholders or $20,000 for Class B shareholders.
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 or her 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.
- --------------------------------------------------------------------------------
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, 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 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 C 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 C shares. For the same reason, dividends on Class B
shares are expected to be lower than those on Class C 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
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INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
----------------------------------------------
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 generally 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 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 mutual
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 mutual 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 mutual fund shares subsequently acquired. In addition, if shares of
a Fund are purchased within 30 days before or after redeeming other Fund 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.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
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
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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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 in which High Income Fund and
Investment Grade Income Fund may invest 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 each Fund's day-
to-day management. Mitchell Hutchins, investment adviser and administrator of
each Fund, supervises all aspects of each Fund's operations, supervises the
activities of PIMCO as sub-adviser for Low Duration Income Fund and makes and
implements all investment decisions for U.S. Government Income Fund, Investment
Grade Income Fund and High Income Fund. Mitchell Hutchins receives a monthly
fee for these services at the annual rate of 0.50% of each Fund's average daily
net assets.
PIMCO, as sub-adviser for Low Duration Income Fund, makes and implements all
investment decisions for that Fund. Under the sub-advisory contract, Mitchell
Hutchins (not the Fund) pays PIMCO a fee for its services as sub-adviser at the
annual rate of 0.25% of the Fund's average daily net assets.
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, 1995, the Funds' total expenses for their Class A, Class B and Class C
shares, stated as a percentage of average net assets, were as follows:
1.03%,1.81% and 1.55% for U.S. Government Income Fund, 1.15%, 2.02% and 1.75%
for Low Duration Income Fund, 0.95%, 1.70% and 1.45% for Investment Grade
Income Fund and 0.93%, 1.68% and 1.44% 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 29, 1996, Mitchell Hutchins was adviser or sub-adviser
of 32 investment companies with 66 separate portfolios and aggregate assets of
over $31.2 billion.
PIMCO is located at 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is a subsidiary of PIMCO Advisors L.P., a publicly held
investment advisory firm. As of February 29, 1996, PIMCO had approximately $78
billion in assets under management and was adviser or sub-adviser of investment
companies with 47 portfolios and aggregate assets of approximately $8.5
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 and Mr. Varrelman are both first vice presidents of Mitchell Hutchins.
Prior to joining Mitchell Hutchins in September 1993, Mr. Singh was with
Merrill Lynch Asset Management, Inc., where he was a member of the portfolio
management team. From 1990 to 1993, Mr. Singh was a senior portfolio manager at
Nomura Mortgage Fund Management Corporation. Mr. Varrelman has been with
Mitchell Hutchins as a portfolio manager since 1988.
William C. Powers, a Manager Director of PIMCO, is responsible for the day-to-
day management of the Low Duration Income Fund's portfolio. Mr. Powers has
participated in the management of the portfolio since PIMCO assumed sub-
advisory responsibilities for the Fund in October 1994. Since 1991, Mr. Powers
has been a senior member of the fixed income portfolio management group of
PIMCO. He was previously associated with Salomon Brothers Inc. and Bear Stearns
as a Senior Managing Director.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Mary B. King and Julieanna Berry are responsible for the day-to-day management
of Investment Grade Income Fund's portfolio. Mrs. King has held her fund
responsibilities since February 1991 and was joined by Mrs. Berry in June 1995.
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. Mrs.
Berry is a vice president of Mitchell Hutchins and has been employed as a
portfolio manager since 1989. Effective April 15, 1996, James Keegan and
Julieanna Berry will be responsible for the day-to-day management of the Fund.
Prior to joining Mitchell Hutchins in March 1996, Mr. Keegan was a director
with Merrion Group, L.P. From 1987 to 1994, he was a vice president of global
investment management of Bankers Trust Company.
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 vice president of the
Trust and also 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 for U.S. Government Income Fund,
Investment Grade Income Fund and High Income Fund.
Mitchell Hutchins and PIMCO investment personnel may engage in securities
transactions for their own accounts pursuant to codes of ethics which establish
procedures for personal investing and restrict 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 C shares ("Class A Plan," "Class B Plan" and
"Class C 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 C
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 C
Plan to offset the commissions it pays to PaineWebber for selling the Funds'
Class B and Class C 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 C shares. These expenses may include the branch
office costs noted above. In addition, Mitchell Hutchins uses the distribution
fees under the Class B and Class C 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 C shares of one or more of the Funds. If
PaineWebber makes such payments, it will retain the service and distribution
fees on Class C shares until it has been reimbursed and thereafter will pass a
portion of the service and distribution fees on Class C shares on to its
investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid upon
the purchase of Class
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
A shares and the contingent deferred sales charge paid upon certain redemptions
of 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 reflects deduction of the Fund's maximum initial sales charge at the
time of purchase, and standardized return for the Class B shares and Class C
shares 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 C shares at
the end of the period. Yield computations differ from other accounting methods
and therefore may differ from dividends actually paid or reported net income.
Total return and yield information reflect past performance and do not
necessarily indicate future results. Investment return and principal values
will fluctuate, and proceeds upon redemption may be more or less than a
shareholder's cost.
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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 one other series has been
authorized.
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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 Y shares.
Each Class represents interests in the same assets of each Fund. Class A, B and
C differ as follows: (1) each Class 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 most redemptions and will
automatically convert to Class A shares approximately six years after issuance,
(4) Class C shares are not subject to an initial sales charge, but are subject
to a contingent deferred sales charge if redeemed within one year of purchase,
bear ongoing distribution fees and do not convert into another Class and (5)
each Class may bear differing amounts of certain other Class-specific expenses.
Class Y shares, which may be offered only to limited classes of investors, are
subject to neither an initial or contingent deferred sales charge nor ongoing
service or distribution fees.
The different sales charges and other expenses applicable to the different
Classes of Fund shares may affect the performance of those Classes. More
information concerning Class Y shares of U.S. Government Income Fund and Low
Duration Income Fund may be obtained from a PaineWebber investment executive or
correspondent firm or by calling 1-800-647-1568. The other Funds do not
currently offer Class Y shares.
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 on the Class B and
Class C shares than on the Class A shares and are likely to be lower on every
other Class of shares than for Class Y 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 share 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 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 LOW DURATION 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, Low
Duration Income Fund and Investment Grade Income Fund may invest include
mortgage-backed securities issued or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac. These mortgage-backed securities are guaranteed as to payment of
interest and principal but are not guaranteed as to market value. 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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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, held assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquired such assets in its corporate capacity. These
assets included, 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 established a vehicle registered with the SEC through
which it sold mortgage-backed securities. RTC mortgage-backed securities
represent pro rata interests in pools of mortgage loans that RTC held or had
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 mortgage-
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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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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 principal and differs
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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. However, the
-------------------
Prospectus Page B-2
<PAGE>
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PAINEWEBBER U.S. GOVERNMENT INCOME FUND LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
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 LOW DURATION U.S. GOVERNMENT INCOME
FUND
INVESTMENT GRADE INCOME FUND HIGH INCOME FUND
Appendix C
----------------------------------------------------------------------------
THE FOLLOWING ARE DESCRIPTIONS OF INSTRUMENTS THAT ONE OR MORE OF THE FUNDS MAY
USE:
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.
Debt Security Index Futures Contracts. An index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the securities comprising the index is made; generally,
contracts are closed out prior to the expiration date of the contract.
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.
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Prospectus Page C-1
<PAGE>
Shares of the Funds can be exchanged for shares of the following PaineWebber
Mutual Funds:
PAINEWEBBER INCOME FUNDS
.Global Income Fund
.Strategic Income Fund
PAINEWEBBER TAX-FREE INCOME FUNDS
.California Tax-Free Income Fund
.Municipal High Income Fund
.National Tax-Free Income Fund
.New York Tax-Free Income Fund
PAINEWEBBER GROWTH FUNDS
.Capital Appreciation Fund
.Emerging Markets Equity Fund
.Global Equity Fund
.Growth Fund
.Regional Financial Growth Fund
.Small Cap Growth Fund
.Small Cap Value Fund
PAINEWEBBER GROWTH AND INCOME FUNDS
.Balanced Fund
.Growth and Income Fund
.Tactical Allocation Fund
.Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
----------
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) 1996 PaineWebber Incorporated
[LOGO OF RECYCLED PAPER APPEARS HERE]
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
LOW DURATION
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, 1996
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION
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 four 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 Low Duration U.S. Government Income Fund ("Low Duration Income
Fund") seeks high current income consistent with the preservation of capital
and low volatility of net asset value; it invests primarily in U.S. government
securities and seeks to limit the volatility of its net asset value per share
by maintaining an overall portfolio duration of from one to three years.
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. Pacific Investment Management
Company ("PIMCO") serves as investment sub-adviser for Low Duration Income
Fund. This Statement of Additional Information is not a prospectus and should
be read only in conjunction with the Funds' current Prospectus, dated April 1,
1996. 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, 1996.
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, a division of The McGraw Hill
Companies, Inc. ("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
<PAGE>
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. Not even the highest 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.
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
or PIMCO, as applicable, 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- 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,
2
<PAGE>
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 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 Fund, Low Duration Income Fund and Investment
Grade Income 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
3
<PAGE>
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 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.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to "lock-
in" at a lower interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments with respect
to ARMs has fluctuated in recent years.
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
4
<PAGE>
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 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 (15%
for Low Duration Income Fund) 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 or PIMCO 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
5
<PAGE>
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, 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 or PIMCO, pursuant to
guidelines approved by the board. Mitchell Hutchins and PIMCO take 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 or PIMCO 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
6
<PAGE>
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 or PIMCO to present minimum credit risks in accordance with
guidelines established by the Trust's board of trustees. Mitchell Hutchins or
PIMCO reviews and monitors the creditworthiness of those institutions under the
board's general supervision.
REVERSE REPURCHASE AGREEMENTS. As stated in the Prospectus, each Fund each
may enter into reverse repurchase agreements with banks and securities dealers.
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 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 or PIMCO 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 20% 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 35% 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
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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 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. As indicated in the Prospectus, 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 acceptable collateral with the
Fund's custodian, marked to market daily, in an amount at least equal to the
market value of the securities loaned, plus accrued interest and dividends.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. 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 loan 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.
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LOAN PARTICIPATIONS AND ASSIGNMENTS. Investment Grade Income Fund and High
Income Fund each may invest up to 5% of its net 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.
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
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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) 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.
Low Duration 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 mortgage dollar rolls, and then in an aggregate amount not in
excess of 33 1/3% of the Fund's total assets (including the amount of the
borrowings and senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of such borrowings, except that the
Fund may borrow up to an additional 5% of total assets (not including the
amount borrowed) for temporary or emergency purposes; (3) purchase securities
if, as a result of the purchase, the Fund would have more than 25% of the value
of its total assets invested in securities of issuers in any one industry,
except that this limitation does not apply to (a) obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities and (b)
investments in mortgage- and asset-backed securities, which (whether or not
issued or guaranteed by an agency or instrumentality of the U.S. government)
shall be
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considered a single industry for purposes of this limitation; (4) underwrite
securities of other issuers, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed an underwriter
under federal securities laws; (5) purchase or sell real estate (including real
estate limited partnerships), except that investments in mortgage-backed
securities and other debt securities secured by real estate or interests
therein are not subject to this limitation, and provided further that the Fund
may exercise rights under agreements relating to such securities, including the
right to enforce security interests and to liquidate real estate acquired as a
result of such enforcement; (6) purchase securities on margin, make short sales
of securities or maintain a short position in any security, except that the
Fund may (a) make margin deposits, make short sales and maintain short
positions in connection with its use of options, futures contracts and (b) sell
short "against the box"; (7) purchase or sell commodities or commodity
contracts, except that the Fund may purchase or sell financial futures
contracts, such as interest rate and bond index futures contracts and options
thereon; (8) invest in oil, gas or mineral exploration or development programs
or leases, except that the Fund may invest in issuers which invest in such
programs; (9) purchase securities of other open-end investment companies,
except in connection with a merger, consolidation or acquisition; or (10) make
loans, except through repurchase agreements and except in connection with the
loan of securities as described herein or in the Prospectus; provided that for
purposes of this restriction the acquisition of bonds or other debt
instruments, or interests therein, shall not be deemed to be the making of a
loan.
For purposes of Low Duration Income Fund's fundamental investment limitation
(1), mortgage- and asset-backed securities will not be considered to have been
issued by the same issuer by reason of such securities having the same sponsor,
and mortgage- and asset-backed securities issued by a finance subsidiary or
other single purpose subsidiary of a corporation that are not guaranteed by the
parent corporation will be considered to be issued by a separate issuer from
its parent corporation.
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
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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 apply to U.S. Government Income Fund,
Investment Grade Income Fund and High Income Fund, are non-fundamental and may
be changed for any of these Funds 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 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. ("AMEX"), 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.
The following investment restrictions of Low Duration Income Fund are non-
fundamental and may be changed by the vote of the Trust's board of trustees
without shareholder approval: the Fund may not (1) purchase or retain the
securities of any issuer if the officers and trustees of the Trust and the
officers and directors of Mitchell Hutchins and PIMCO (each owning beneficially
as principal for its own account more than 0.5% of the outstanding securities
of the issuer) beneficially so own in the aggregate more than 5% of the
securities of the issuer; (2) purchase any security, other than mortgage- and
asset-backed securities if as a result more than 5% of the Fund's total assets
would be invested in securities of companies that together with any
predecessors have been in continuous operation for less than three years; (3)
invest more than 15% of its net assets in illiquid securities, a term that
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and (4) invest in warrants, valued at the lower of cost or
market, in excess of 5% of the value of
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its net assets, which amount may include warrants that are not listed on the
NYSE or the AMEX, 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.
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, restrictions or
investment policies.
U.S. Government Income Fund, Investment Grade Income Fund and High Income
Fund 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.
PROPOSED CHANGES TO INVESTMENT LIMITATIONS OF THE FUNDS
At a special meeting of the shareholders scheduled for April 10, 1996,
shareholders of each Fund will be asked to approve changes to that Fund's
fundamental investment limitations. If approved, the following fundamental
investment limitations will supersede and replace those listed in the preceding
section titled "Investment Limitations."
Each Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer
or the Fund would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Fund's total
assets may be invested without regard to this limitation, and except
that this limitation does not apply to securities issued or guaranteed
by the U.S. government, its agencies and instrumentalities or to
securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not
be considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that
are not guaranteed by the parent company will be considered to be issued
by a separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities or to
municipal securities, and except that U.S. Government Income Fund and
Low Duration Income Fund, under normal circumstances, each will invest
25% or more of its total assets in mortgage- 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.
(3) issue senior securities or borrow money, except as permitted under the
1940 Act and then not in excess 33 1/3% of the Fund's total assets
(including the amount of the senior securities
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issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the
Fund may borrow up to an additional 5% of its total assets (not
including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction,
the acquisition of bonds, debentures, other debt securities or
instruments, or participations or other interests therein and
investments in government obligations, commercial paper, certificates
of deposit, banker's acceptances or similar instruments will not be
considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter
under the federal securities laws in connection with its disposition of
portfolio securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Fund may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real
estate can be liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or
derivative instruments.
If the foregoing fundamental restrictions are approved by the Funds'
shareholders, the Funds would become subject to the non-fundamental investment
restrictions listed below. These non-fundamental restrictions would replace
certain of the Funds' current fundamental restrictions and would be in addition
to the non-fundamental policies and restrictions already described in the
Statement of Additional Information.
The following investment restrictions are not fundamental and may be changed
by the Trust's Board of Trustees without shareholder approval.
Each Fund will not:
. purchase securities on margin, except for short-term credit necessary for
clearance of portfolio transactions and except that the Fund may make
margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
. engage in short sales of securities or maintain a short position, except
that the Fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures,
forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
. invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition.
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. purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply
to securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation, or merger.
HEDGING AND RELATED INCOME STRATEGIES
GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins or PIMCO 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 or PIMCO 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 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 or
PIMCO 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
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Fund might enter into a short straddle when Mitchell Hutchins or PIMCO 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 and PIMCO expect to discover additional
opportunities in connection with options, futures contracts and other hedging
techniques. These new opportunities may become available as Mitchell Hutchins
and PIMCO develop new techniques, as regulatory authorities broaden the range
of permitted transactions and as new options, futures contracts or other
techniques are developed. Mitchell Hutchins or PIMCO 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' or PIMCO's 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 and PIMCO are
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 or PIMCO projected a decline in the price
of a security in the Fund's
16
<PAGE>
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.
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
17
<PAGE>
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.
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.
18
<PAGE>
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
Low Duration Fund may purchase and sell debt securities under future contracts.
The Funds also may purchase put and call options, and write covered put and
call options, on such futures contracts they may purchase. 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 or PIMCO 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 or PIMCO 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.
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,
19
<PAGE>
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.
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,
20
<PAGE>
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.
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.
21
<PAGE>
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 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.
22
<PAGE>
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 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.
23
<PAGE>
The Funds may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether a Fund 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, PIMCO 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 a 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." Each 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 Funds will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Mitchell Hutchins or PIMCO
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.
24
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; 69** Trustee and Mr. Bewkes is a director and a consul-
Chairman of the tant to Paine Webber Group Inc. ("PW
Board of Trustees Group") (holding company of
PaineWebber and Mitchell Hutchins).
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 In-
terstate Bakeries Corporation, NaPro
BioTherapeutics, Inc. and a director
or trustee of 24 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Meyer Feldberg; 53 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., and New World Com-
munications Group Incorporated and a
director or trustee
of 16 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
George W. Gowen; 66 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 Colum-
bia Real Estate Investments, Inc. and
a director or trustee of 14 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Frederic V. Malek; 59 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 14 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Judith Davidson Moyers; 60 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 14 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Margo N. Alexander; 49 President Mrs. Alexander is president, chief ex-
ecutive officer and a director of
Mitchell Hutchins (since January 1995)
and also an executive vice president
and a director of PaineWebber. Mrs.
Alexander is also a director or
trustee of eight investment companies
and president of 29 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Julieanna Berry; 32 Vice President Ms. Berry is a vice president and a
portfolio manager of Mitchell
Hutchins.
Teresa M. Boyle; 37 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 pres-
ident and manager--legal administra-
tion of Mitchell Hutchins. Ms. Boyle
is also a vice president of 29 other
investment companies for which Mitch-
ell Hutchins or PaineWebber serves as
investment adviser.
Joan L. Cohen; 31 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 24 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Karen L. Finkel; 38 Vice President Mrs. Finkel is a first vice president
and a portfolio manager of Mitchell
Hutchins. Mrs. Finkel is also a vice
president of one other investment com-
pany for which Mitchell Hutchins
serves as investment adviser.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Ellen R. Harris; 49 Vice President Ms. Harris is a managing director and a
portfolio manager of Mitchell
Hutchins. Ms. Harris is also a vice
president of two other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary B. King; 32 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 com-
pany for which Mitchell Hutchins
serves as investment adviser.
Thomas J. Libassi; 37 Vice President Mr. Libassi is a senior vice president
and a portfolio manager 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 three other invest-
ment companies for which Mitchell
Hutchins serves as investment adviser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice president and
Assistant Treasurer a senior manager of the mutual fund
finance division of Mitchell Hutchins.
Mr. Maher is also a vice president and
assistant treasurer of 29 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director and
chief investment officer--fixed income
of Mitchell Hutchins. Prior to Decem-
ber 1994, he was Director of Fixed In-
come Investments of IBM Corporation.
Mr. McCauley is also a vice president
of 17 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Ann E. Moran; 38 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
29 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 43 Vice President Ms. O'Donnell is a senior vice presi-
and Secretary dent and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
also a vice president and secretary of
29 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 45 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. Ms. Schonfeld is also
a vice president of 29 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice president
and Assistant and a senior manager of the mutual
Treasurer fund finance division of Mitchell
Hutchins. From August 1992 to 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 29 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president of
Mitchell Hutchins. Prior to September
1993, he was a member of the portfolio
management team at Merrill Lynch Asset
Management, Inc. Mr. Singh is also
vice president of four other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment adviser.
Julian F. Sluyters; 35 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 29 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment ad-
viser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director and
chief investment officer--U.S. equity
investments of Mitchell Hutchins.
Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas
of Chase Manhattan Private Bank. Mr.
Tincher is also vice president of ten
other investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Gregory K. Todd; 39 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 29 other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
---------------------- ------------------- --------------------
<S> <C> <C>
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice president
and a portfolio manager of Mitchell
Hutchins. Mr. Varrelman is also vice
president of three other investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. From September 1987
to May 1995, he was an attorney in
private practice. Mr. Weller is also a
vice president and assistant secretary
of 23 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.
** Mr. Bewkes is an "interested person" of the Trust as defined in the
Investment Company Act of 1940 ("1940 Act") by virtue of his position with
PW Group.
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.
31
<PAGE>
The Table below includes certain information relating to the compensation of
the Trust's current trustees who held office during the fiscal year ended
November 30, 1995.
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.......... $7,250 -- -- $106,375
Trustee
George W. Gowen......... $7,250 -- -- $ 99,750
Trustee
Frederic V. Malek....... $7,250 -- -- $ 99,750
Trustee
Judith Davidson Moyers.. $7,250 -- -- $ 98,500
Trustee
</TABLE>
- --------
* Represents fees paid to each trustee during the fiscal year ended November
30, 1995.
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995.
BENEFICIAL OWNERSHIP OF GREATER THAN 5% OF FUND SHARES
The following individuals are shown in the Fund's records as owning more than
5% of the Funds shares.
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
NAME AND ADDRESS* NAME OF FUND AS OF JANUARY 31, 1996
- ----------------- ----------------- ------------------------
<S> <C> <C>
Hilton Hotels Corporation............ Low Duration Fund 9,100,500.000 (7.2%)
Kern County Treasurer................ Low Duration Fund 8,585,131.170 (6.8%)
</TABLE>
- --------
* Each of the Shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
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, as supplemented by a separate fee agreement dated March
26, 1993 with respect to Low Duration Income Fund ("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, 1995, November 30, 1994 and
November 30, 1993, respectively, the Trust paid (or accrued) to Mitchell
Hutchins investment advisory and administrative fees of $2,784,437, $3,958,127
and $4,999,240 with respect to the U.S. Government Income Fund, $1,890,394,
$1,897,899 and $1,393,289 with respect to the Investment Grade Income Fund and
$3,050,197, $4,047,201 and $3,100,195 with respect to the High Income Fund.
During the fiscal years ended November 30, 1995 and November 30, 1994 and the
period May 3, 1993
32
<PAGE>
(commencement of operations) to November 30, 1993, the Trust paid (or accrued)
to Mitchell Hutchins investment advisory and administrative fees of $1,839,876,
$5,598,491 (of which $400,611 was waived by Mitchell Hutchins) and $3,519,442
with respect to Low Duration 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, 1995, November 30, 1994 and November 30,
1993, PaineWebber earned fees under the service agreement in the amounts of
$154,428, $196,490 and $217,612 for U.S. Government Income Fund, $99,641,
$97,475 and $60,450 for Investment Grade Income Fund and $158,323, $181,748 and
$137,332 for High Income Fund. During the fiscal years ended November 30, 1995
and November 30, 1994 and the period May 3, 1993 (commencement of operations)
to November 30, 1993, PaineWebber earned fees under the service agreement in
the amounts of $107,999, $139,291 and $71,854 for Low Duration Income Fund.
The Advisory Contract authorized Mitchell Hutchins to retain one or more sub-
advisers but does not require Mitchell Hutchins to do so. Under a sub-
investment advisory contract ("Sub-Advisory Contract") dated November 14, 1994
with Mitchell Hutchins, PIMCO serves as sub-adviser for Low Duration Income
Fund. Under the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays
PIMCO a fee in the annual amount of 0.25% of the Fund's average daily net
assets. PIMCO bears all expenses incurred by it in connection with its services
under the Sub-Advisory Contract. For the fiscal year ended November 30, 1995
and the period October 20, 1994 to November 30, 1994, Mitchell Hutchins paid
(or accrued) to PIMCO sub-advisory fees of $919,938 and $147,540, pursuant to
the Sub-Advisory Contract and a substantially similar prior contract.
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 Series of the Trust are allocated among the series (including
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
33
<PAGE>
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, 1995, November 30, 1994 and November 30, 1993, 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. Under the Sub-Advisory
Contract PIMCO will not be liable for any error of judgment or mistake of law
or for any loss suffered by the Trust, Low Duration Income Fund, its
shareholders or Mitchell Hutchins in connection with the Sub-Advisory Contract,
except any liability to the Trust, Low Duration Income Fund, its shareholders
or Mitchell Hutchins to which PIMCO would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and duties
under the Sub-Advisory Contract. The Advisory Contract terminates automatically
with respect to each 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 Sub-Advisory Contract terminates automatically upon its assignment
or the termination of the Advisory Contract and is terminable at any time
without penalty by the board of trustees or by vote of the holders of a
majority of Low Duration Income Fund's outstanding voting securities on 60
days' notice to PIMCO, or by PIMCO on 120 days' written notice to Mitchell
Hutchins. The Sub-Advisory Contract may also be terminated by Mitchell Hutchins
(1) upon material breach by PIMCO of its representations and warranties, which
breach shall not have been cured within a 20 day period after notice of such
breach; (2) if PIMCO becomes unable to discharge its duties and obligations
under the Sub-Advisory Contract or (3) on 120 days' notice to PIMCO.
The following table shows the approximate net assets as of February 29, 1996,
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)......... $5,653.6
Global................. 2,836.8
Equity/Balanced........ 2,922.3
Fixed Income (excluding
Money Market)......... 5,568.1
Taxable Fixed In-
come............... 3,854.2
Tax-Free Fixed In-
come............... 1,713.9
Money Market Funds..... 22,732.0
</TABLE>
34
<PAGE>
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 funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other
Mitchell Hutchins advisory clients.
PIMCO personnel also may invest in securities for their own accounts pursuant
to PIMCO's code of ethics, which establishes procedures for personal investing
and restricts certain transactions.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class C shares of each Fund under separate distribution
contracts with the Trust dated July 7, 1993 or November 10, 1995,
(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
or November 10, 1995, relating to the Class A, Class B and Class C shares of
each Fund (collectively, "Exclusive Dealer Agreements"), PaineWebber and its
correspondent firms sell each Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C 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 C
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 C 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 C 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.
35
<PAGE>
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, 1995, the Funds paid (or accrued) the
following fees to Mitchell Hutchins under the Class A, Class B and Class C
Plans:
<TABLE>
<CAPTION>
LOW
DURATION INVESTMENT
U.S. GOVERNMENT INCOME GRADE HIGH INCOME
INCOME FUND FUND INCOME FUND FUND
--------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Class A................... $1,010,288 $ 399,903 $660,995 $ 658,053
Class B................... 897,787 106,689 722,217 2,336,921
Class C................... 434,110 1,648,558 310,949 848,445
</TABLE>
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,
1995:
CLASS A
<TABLE>
<CAPTION>
LOW
DURATION INVESTMENT
U.S. GOVERNMENT INCOME GRADE HIGH INCOME
INCOME FUND FUND INCOME FUND FUND
--------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Marketing and advertis-
ing..................... $ 79,987 $ 273,013 $ 64,609 $ 66,700
Printing of prospectuses
and statements of
additional information.. 661 794 490 537
Branch network costs
allocated and interest
expense................. 1,037,098 1,106,705 463,908 557,069
Service fees paid to
investment executives... 454,630 152,957 297,448 296,123
</TABLE>
CLASS B
<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT LOW DURATION GRADE HIGH INCOME
INCOME FUND INCOME FUND INCOME FUND FUND
--------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Marketing and advertis-
ing.................... $ 138,340 $ 90,544 $ 84,202 $ 155,680
Amortization of commis-
sions.................. 467,264 61,239 338,598 1,207,701
Printing of prospectuses
and statements of
additional information. 1,142 264 642 1,215
Branch network costs
allocated and interest
expense................ 1,625,399 398,080 664,703 1,550,931
Service fees paid to
investment executives.. 101,000 12,003 81,251 262,904
</TABLE>
36
<PAGE>
CLASS C
<TABLE>
<CAPTION>
INVESTMENT
U.S. GOVERNMENT LOW DURATION GRADE HIGH INCOME
INCOME FUND INCOME FUND INCOME FUND FUND
--------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Marketing and advertis-
ing.................... $ 80,284 $ 407,685 $ 74,751 $ 135,045
Amortization of commis-
sions.................. 116,418 467,016 69,150 159,408
Printing of prospectuses
and statements of
additional information. 663 1,186 557 1,074
Branch network costs
allocated and interest
expense................ 950,363 2,487,562 494,093 1,128,112
Service fees paid to
investment executives.. 65,116 247,284 46,643 127,266
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. "Branch network costs
allocated and interest expense" consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of 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
37
<PAGE>
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 C 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 purchase payments immediately
invested in Fund shares, (2) the advantage to investors in being free from
contingent deferred sales charges upon redemption for shares held more than
one year 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 C
shares on an ongoing basis, along with continuing service fees, while their
customers invest their entire purchase payments immediately in Class C shares
and generally 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 C 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
38
<PAGE>
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,
-----------------------------------
1993 1994 1995
------------------ -------- -------
<S> <C> <C> <C>
Earned.......................... $ 555,888 $121,124 $41,959
Retained........................ 48,390 10,336 3,492
LOW DURATION INCOME FUND
<CAPTION>
PERIOD MAY 3, 1993 FISCAL YEARS ENDED
(COMMENCEMENT OF NOVEMBER 30,
OPERATIONS) TO ------------------
NOVEMBER 30, 1993 1994 1995
------------------ --------- --------
<S> <C> <C> <C>
Earned.......................... $5,336,484 $892,216 $ 5,994
Retained........................ 31,294 494,591 3,637
INVESTMENT GRADE INCOME FUND
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
-----------------------------------
1993 1994 1995
------------------ -------- -------
<S> <C> <C> <C>
Earned.......................... $ 255,824 $137,013 $48,610
Retained........................ 19,389 79,808 28,121
HIGH INCOME FUND
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
-----------------------------------
1993 1994 1995
------------------ -------- -------
<S> <C> <C> <C>
Earned.......................... $1,443,963 $793,898 $48,610
Retained........................ 104,383 55,058 28,121
</TABLE>
For the fiscal years ended November 30, 1995, Mitchell Hutchins earned and
retained the following contingent deferred sales charges paid upon certain
redemptions of Class A, Class B and Class C shares:
<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION INVESTMENT HIGH
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Class A................. $ 0 $ 0 $ 0 $ 0
Class B................. 473,452 74,418 276,231 1,194,903
Class C................. 0 0 0 0
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of trustees, Mitchell Hutchins
or PIMCO, as applicable, is responsible for the execution of each Fund's
portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins and PIMCO seeks
39
<PAGE>
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, 1995, U.S. Government Income Fund, Low
Duration Income Fund, Investment Grade Income Fund and High Income Fund paid
approximately no brokerage commissions. During the fiscal year ended November
30, 1994, U.S. Government Income Fund, Low Duration Income Fund, Investment
Grade Income Fund and High Income Fund paid approximately $0, $88,421, $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 period May 3, 1993 (commencement of operations) to
November 30, 1993, Low Duration Income Fund paid no 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, 1995, U.S. Government
Income Fund, Low Duration Income Fund, Investment Grade Income Fund and High
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.
During the fiscal years ended November 30, 1994 and November 30, 1993, the
Funds paid no other 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 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 or PIMCO determines in good faith that
such commission is reasonable in terms either of that particular transaction or
of the overall responsibility of Mitchell
40
<PAGE>
Hutchins or PIMCO 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, 1995,
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 or PIMCO may
receive certain research or execution services in connection with these
transactions, neither will 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, neither
Mitchell Hutchins nor PIMCO will 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 or PIMCO 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.
Information and research services furnished by brokers or dealers through
which or with which a Fund effects securities transactions may be used by
Mitchell Hutchins or PIMCO in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins or PIMCO by dealers or brokers
in connection with other funds or accounts Mitchell Hutchins or PIMCO advises
may be used by Mitchell Hutchins or PIMCO in advising the Fund. Information and
research received from such brokers or dealers will be in addition to, and not
in lieu of, the services required to be performed by Mitchell Hutchins under
the Advisory Contract or PIMCO under the Sub-Advisory Contract.
Investment decisions for the Funds and other investment accounts managed by
Mitchell Hutchins or PIMCO 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.
41
<PAGE>
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, 1995 and November 30, 1994, respectively, the portfolio turnover
rates were 206% and 358% for U.S. Government Income Fund; 242% and 246% for Low
Duration Income Fund; 149% and 142% for Investment Grade Income Fund; and 94%
and 156% for High Income Fund.
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 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);
(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).
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
42
<PAGE>
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 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 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.
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
43
<PAGE>
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.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM; PAINEWEBBER RESOURCE MANAGEMENT
ACCOUNT(R) (RMA(R)).
Shares of the PaineWebber 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
44
<PAGE>
more of the PW Funds at regular intervals, with payment for shares purchased
automatically deducted from the client's RMA account. The client may elect to
invest at monthly or quarterly intervals and may elect either to invest a fixed
dollar amount (minimum $100 per period) or to purchase a fixed number of
shares. A client can elect to have Plan purchases executed on the first or
fifteenth day of the month. Settlement occurs three Business Days (defined
under "Valuation of Shares") after the trade date, and the purchase price of
the shares is withdrawn from the investor's RMA account on the settlement date
from the following sources and in the following 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.
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;
45
<PAGE>
. 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 seven RMA money market funds--RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money
Fund, RMA Connecticut Municipal Money Fund, RMA New Jersey 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 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
46
<PAGE>
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 or PIMCO, 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.
47
<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 (3% for Low Duration Income Fund) is deducted from the
initial $1,000 payment and, for Class B and Class C shares, the applicable
contingent deferred sales charge imposed on a redemption of Class B and Class C
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.
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<PAGE>
The following table shows performance information for the Class A, Class B
and Class C (formerly 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 LOW DURATION INVESTMENT GRADE
INCOME FUND INCOME FUND INCOME FUND HIGH INCOME FUND
----------------------- ----------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal year ended
November 30, 1995:
Standardized
Return*.......... 10.16% 8.81% 13.37% 6.92% 6.30% 8.85% 14.23% 12.97% 17.62% 4.61% 3.05% 7.70%
Non-Standardized
Return........... 14.70% 13.61% 14.12% 10.25% 9.30% 9.60% 18.95% 17.97% 18.37% 9.01% 8.05% 8.45%
Inception** to
November 30, 1995:
Standardized
Return*.......... 8.20% 4.63% 2.89% 1.51% 1.19% 2.21% 10.12% 8.71% 7.52% 10.16% 11.27% 7.00%
Non-Standardized
Return........... 8.60% 5.01% 2.89% 2.76% 1.95% 2.21% 10.53% 9.05% 7.52% 10.56% 11.59% 7.00%
Five years ended
November 30, 1994:
Standardized
Return*.......... 5.60% NA NA NA NA 8.46% NA NA NA 16.77% NA NA
Non-Standardized
Return........... 6.45% NA NA NA NA 8.90% NA NA NA 17.71% NA NA
Ten years ended
November 30, 1995:
Standardized
Return*.......... 6.96% NA NA NA NA NA 8.46% NA NA 8.96% NA NA
Non-Standardized
Return........... 7.39% NA NA NA NA NA 8.90% NA NA 9.41% NA NA
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4% (3% for Low Duration Income Fund). All
Standardized Return figures for Class B and Class C shares reflect deduction
of the applicable contingent deferred sales charges imposed on a redemption
of shares held for the period.
** For U.S. Government Income Fund, Investment Grade Income Fund and High Income
Fund, the inception dates for each Class were as follows: Class A shares-
August 31, 1984; Class B shares-July 1, 1991; and Class C shares-July 2,
1992. For Low Duration Income Fund, the inception date for its Class A,
Class B and Class C shares was May 3, 1993.
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)
49
<PAGE>
or the net asset value per share (in the case of Class B and Class C shares) at
the end of the Period. Yield quotations are calculated according to the
following formula:
a-b
YIELD = 2[( --- + 1)/6/ - 1]
cd
where: a = interest earned during the Period attributable to a Class of shares
b = expenses accrued for the Period attributable to a Class of shares
(net of reimbursements)
c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive 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 C 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 C
shares of each Fund for the 30-day period ended November 30, 1995.
<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION INVESTMENT GRADE HIGH INCOME
INCOME FUND INCOME FUND INCOME FUND FUND
--------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Class A........... 5.57% 5.80% 6.69% 12.12%
Class B........... 5.01% 5.11% 6.23% 11.85%
Class C........... 5.28% 5.36% 6.47% 12.10%
</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 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
50
<PAGE>
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, or may otherwise discuss,
the performance of bank certificates of deposit (CDs) as measured by the CDA
Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote(R) Money
Markets. In comparing a Fund or its performance to CDs or 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.
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
51
<PAGE>
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 and Low Duration Income Fund each invests
exclusively in debt securities and receives no dividend income; accordingly, no
portion of the dividends or other distributions paid by these Funds 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.
52
<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 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 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
53
<PAGE>
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.
OTHER INFORMATION
PAINEWEBBER MANAGED INVESTMENT TRUST. Prior to October 20, 1995, Low Duration
Income Fund was known as "PaineWebber Short-Term U.S. Government Income Fund."
Prior to November 10, 1995, the Class C shares of all four Funds were called
"Class D shares".
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 C 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 LLP, 1800 Massachusetts
Avenue, NW, Washington, DC 20036-1800, counsel to the Funds, has passed upon
the legality of the shares offered by the Funds' Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to Mitchell Hutchins and PaineWebber in
connection with other matters.
54
<PAGE>
INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, serves as independent auditors for the Trust.
FINANCIAL STATEMENTS
The Funds' Annual Reports to Shareholders for the fiscal year ended November
30, 1995 are separate documents supplied with this Statement of Additional
Information and the financial statements, accompanying notes and reports of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
55
<PAGE>
[This page intentionally left blank]
<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..................................... 15
Trustees and Officers..................................................... 25
Investment Advisory and Distribution Arrangements......................... 32
Portfolio Transactions.................................................... 39
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services........................................................... 42
Conversion of Class B Shares.............................................. 46
Valuation of Shares....................................................... 47
Performance Information................................................... 48
Taxes..................................................................... 51
Other Information......................................................... 54
Financial Statements...................................................... 55
</TABLE>
(C) 1996 PaineWebber Incorporated
[LOGO FOR RECYCLED PAPER APPEARS HERE]
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
PAINEWEBBER
LOW DURATION
U.S. GOVERNMENT
INCOME FUND
PAINEWEBBER
INVESTMENT GRADE
INCOME FUND
PAINEWEBBER
HIGH INCOME FUND
- --------------------------------------------------------------------------------
Statement of Additional Information
April 1, 1996
- --------------------------------------------------------------------------------
PAINEWEBBER
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND
CLASS Y SHARES
1285 Avenue of the Americas, New York, New York 10019
PaineWebber U.S. Government Income Fund ("U.S. Government Income Fund") seeks
high current income consistent with the preservation of capital and liquidity.
PaineWebber Low Duration U.S. Government Income Fund ("Low Duration Income
Fund") seeks the highest level of income consistent with the preservation of
capital and low volatility of net asset value. Both Funds invest primarily in
U.S. government securities.
These Funds are series of PaineWebber Managed Investment Trust ("Trust"). This
Prospectus concisely sets forth information about the Funds a prospective in-
vestor should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information dated April 1, 1996 (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 Funds,
your PaineWebber investment executive or PaineWebber's correspondent firms or
by calling toll-free 1-800-647-1568. Participants in the PaineWebber Savings
Investment Plan ("PW SIP") may make further inquiries 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 Y shares described in this Prospectus are currently offered for sale
primarily to participants in the INSIGHT Investment Advisory Program
("INSIGHT"), when purchased through that program. The Class Y shares of U.S.
Government Income Fund also are offered to the trustee of the PW SIP on
behalf of that Plan. See "Purchases."
----------------
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.
----------------
The date of this Prospectus is April 1, 1996.
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 FUNDS OR
THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE FUNDS OR THEIR DISTRIBUTOR IN ANY JURIS-
DICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
--------------
FUND EXPENSES
The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales charge on purchases of shares ..................................... None
Sales charge on reinvested dividends..................................... None
Redemption fee or deferred sales charge.................................. None
Maximum annual investment advisory fee payable by shareholders through
INSIGHT
(as a percentage of average daily value of shares held) (1)............. 1.50%
</TABLE>
<TABLE>
ANNUAL FUND OPERATING EXPENSES(2)
(as a percentage of average net assets)
<CAPTION>
U.S. GOVERNMENT LOW DURATION
INCOME FUND INCOME FUND
--------------- ------------
<S> <C> <C>
Management fees.................................... 0.50% 0.50%
12b-1 fees......................................... 0.00% 0.00%
Other expenses..................................... 0.18%(a) 0.40%
---- ----
Total operating expenses........................... 0.68% 0.90%
==== ====
</TABLE>
(a) Does not include 0.03% in non-recurring reorganization expenses that U.S.
Government Income Fund incurred during the fiscal year ended November 30,
1995. If those expenses were included, "Other expenses" would be 0.21% and
"Total operating expenses" would be 0.71%.
(1) Participation in INSIGHT is subject to payment of an advisory fee at the
maximum annual rate of 1.50% of assets held through INSIGHT (generally
charged quarterly in advance), which may be charged to the INSIGHT partici-
pant's PaineWebber account.
(2) See "Management" for additional information. The fees and expenses are
those actually incurred for the fiscal year ended November 30, 1995, except
that "Other expenses" for Low Duration Income Fund are estimated based on
the expenses incurred by that Fund's Class A shares for the fiscal year
ended November 30, 1995. The INSIGHT fee is not included.
EXAMPLE OF EFFECT OF FUND EXPENSES
An investor would directly or indirectly pay the following expenses
(including 1.50% annual INSIGHT fee) on a $1,000 investment in the Fund,
assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government Income Fund........... $22 $68 $117 $251
Low Duration Income Fund.............. $25 $78 $133 $283
</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 Y shares of a Fund.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES, AND A FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN. The
actual expenses attributable to a Fund's Class Y 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 Y
share of each Fund for each of the periods shown. This information is supple-
mented by the financial statements and accompanying notes appearing in each
Fund's Annual Report to Shareholders for the fiscal year ended November 30,
1995, which are incorporated by reference into the Statement of Additional In-
formation. The financial statements and notes, as well as the information in
the table appearing below insofar as it relates to the fiscal year ended No-
vember 30, 1995 and for the prior periods, have been audited by Ernst & Young
LLP, independent auditors, whose reports thereon are included in the Annual
Reports to Shareholders. Further information about each Fund's performance is
also included in the Annual Reports to Shareholders, which may be obtained
without charge.
<TABLE>
<CAPTION>
CLASS Y SHARES**
-----------------------------------------------------------------
LOW DURATION
U.S. GOVERNMENT INCOME FUND INCOME FUND
-------------------------------------------------- --------------
FOR THE PERIOD FOR THE PERIOD
FOR THE SEPTEMBER 11, OCTOBER 20,
YEARS ENDED NOVEMBER 30, 1991 # TO 1995 # TO
---------------------------------- NOVEMBER 30, NOVEMBER 30,
1995 1994 1993 1992 1991 1995
------ ------ ------ ------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 8.49 $10.02 $ 9.97 $ 9.97 $ 9.88 $2.33
beginning of period.... ------ ------ ------ ------ ------ -----
Net increase (decrease)
from investment
operations:
Net investment income... 0.61 0.62 0.70 0.77 0.18 0.01
Net realized and
unrealized gains
(losses) from
investment 0.62 (1.53) 0.05 0.01 0.09 0.01
transactions........... ------ ------ ------ ------ ------ -----
Net increase (decrease)
in net assets resulting 1.23 (0.91) 0.75 0.78 0.27 0.02
from operations........ ------ ------ ------ ------ ------ -----
Less distributions:
Dividends from net
investment (0.61) (0.62) (0.70) (0.78) (0.18) (0.01)
income................. ------ ------ ------ ------ ------ -----
Net asset value, end of $ 9.11 $ 8.49 $10.02 $ 9.97 $ 9.97 $2.34
period................. ====== ====== ====== ====== ====== =====
Total investment return 15.06% (9.37)% 7.69% 8.13% 2.37% 0.83%
(1).................... ====== ====== ====== ====== ====== =====
Ratios/Supplemental
Data:
Net assets, end of
period (000's omitted). $7,957 $4,955 $6,232 $5,517 $4,514 $ 321
Ratio of expenses to
average net assets..... 0.71%(2) 0.65% 0.62% 0.63% 0.72%* 0.99%*
Ratio of net investment
income to average net
assets................. 6.96%(2) 6.76% 6.87% 7.70% 8.36%* 5.87%*
Portfolio turnover rate. 206% 358% 83% 28% 71% 242%
</TABLE>
- -------
# Commencement of offering of shares.
* Annualized.
** Formerly Class C shares.
(1) Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends and other distribu-
tions 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 pe-
riods of less than one year have not been annualized.
(2) These ratios include non-recurring reorganization expenses of 0.03%.
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INVESTMENT OBJECTIVES AND POLICIES
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 Low Duration Income Fund is to achieve the high-
est level of income consistent with the preservation of capital and low vola-
tility of net asset value. The Fund invests primarily in U.S. government secu-
rities and seeks to limit the volatility of its net asset value per share by
maintaining, under normal circumstances, an overall portfolio duration of from
one to three years.
Both Funds are diversified series of an open-end management investment com-
pany. Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") is each
Fund's investment adviser and administrator. Pacific Investment Management
Company ("PIMCO") serves as sub-adviser for Low Duration Income Fund.
Under normal conditions, each 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 guaran-
teed by the U.S. government, its agencies or instrumentalities and repurchase
agreements with respect to those securities. U.S. government mortgage-backed
securities and other obligations guaranteed by the U.S. government, its agen-
cies or instrumentalities are guaranteed as to the payment of interest and
principal but not as to market value. Up to 35% of each Fund's total assets
may be invested in privately issued mortgage- and asset-backed securities that
at the time of purchase have been rated AAA by Standard & Poor's, a division
of The McGraw Hill Companies, Inc. ("S&P"), or Aaa by Moody's Investors Serv-
ice, Inc. ("Moody's"), have an equivalent rating from another nationally rec-
ognized statistical rating organization ("NRSRO") or, if unrated, have been
determined by Mitchell Hutchins or PIMCO, as applicable, to be of comparable
quality. As a matter of fundamental policy, each 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.
Low Duration Income Fund seeks to limit the volatility of its net asset
value per share by maintaining, under normal circumstances, an overall portfo-
lio duration of from one to three years. U.S. Government Income Fund has no
fixed portfolio duration policy. Duration is a measure of the expected life of
a fixed income security on a present value basis. See "Investment Objectives
and Policies--Duration."
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. Issuers and
guarantors of the U.S. government mortgage-backed securities in which the
Funds may invest include the Government National Mortgage Association ("Ginnie
Mae"), the Federal National Mortgage Association ("Fannie Mae") or the Federal
Home Loan Mortgage Corporation ("Freddie Mac"). Private issuers of mortgage-
backed securities are generally originators of and investors in mortgage
loans, including savings associations, mortgage bankers, commercial banks, in-
vestment bankers and special purpose entities (collectively, "Private Mortgage
Lenders"). Payments of principal and interest (but not the market value) of
such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or in-
directly, by the U.S. government or one of its agencies
4
<PAGE>
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 se-
curities in which the Funds may invest, see Appendix A to this Prospectus.
Non-mortgage-related U.S. government securities in which the Funds may in-
vest 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 Asso-
ciation, the Federal Home Loan Banks and the Tennessee Valley Authority.
The Funds may invest in certain zero coupon securities that are U.S. Trea-
sury notes and bonds that have been stripped of their unmatured interest cou-
pon receipts or interests in such U.S. Treasury securities or coupons. The SEC
staff currently takes the position that "stripped" U.S. government securities
that are not issued through the U.S. Treasury are not U.S. government securi-
ties. As long as the SEC takes this position, Certificates of Accrual Treasury
Securities ("CATS") and Treasury Income Growth Receipts ("TIGRs") that are not
issued through the U.S. Treasury will not be counted as U.S. government secu-
rities for purposes of the 65% investment requirement. See "Risks of Zero Cou-
pon Securities."
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle install-
ment sale contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property and receivables from re-
volving credit (credit card) agreements. Such assets are securitized through
the use of trusts or special purpose corporations. Payments or distributions
of principal and interest on asset-backed securities may be guaranteed up to
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 is-
suer or other credit enhancements may be present.
Each 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, interest rate protec-
tion transactions, dollar rolls and reverse repurchase agreements. See "Hedg-
ing and Related Income Strategies" and "Dollar Rolls and Reverse Repurchase
Agreements".
RISK FACTORS. Each Fund's net asset value fluctuates based on changes in the
value of its portfolio securities. Neither the issuance by, nor the guarantee
of, a U.S. government agency, nor even the highest rating by a NRSRO 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.
--INTEREST RATE SENSITIVITY. The investment income of each 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. The investment income of a Fund also 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 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 ex-
pected to decline.
--RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics
of the mort-
5
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gage- and asset-backed securities in which the Funds may invest differ from
those of traditional debt securities. Among the major differences are that in-
terest 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 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 a Fund are likely to be greater dur-
ing 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 pre-
mium 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 sensitivity. As market conditions change, however, and particu-
larly 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 re-
duced. 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 secu-
rities 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 mort-
gage 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 from mortgage-
backed securities that are not CMOs. The yields on IOs, POs and other mort-
gage-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 under-
lying an IO experience greater than anticipated principal prepayments, an in-
vestor may fail to recoup fully his or her initial investment even if the se-
curity is government issued or guaranteed or is rated AAA or the equivalent.
While Low Duration Income Fund generally may invest in CMO classes that are
structured to sell at a premium or discount, the Fund may not invest in IO or
PO classes. U.S. Government Income Fund is not subject to any similar limita-
tion.
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 attrac-
tive 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 in-
terest 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
6
<PAGE>
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. Low Duration Income Fund, however, may not invest in in-
verse floating rate mortgage- or asset-backed securities. U.S. Government In-
come Fund is not subject to any similar limitation.
During 1994, the value and liquidity of many mortgage-backed securities de-
clined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain mort-
gage-backed securities, including IO and PO classes of mortgage-backed securi-
ties and inverse floating rate securities, can be extremely volatile and these
securities may become illiquid. Mitchell Hutchins or PIMCO, as applicable,
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 mar-
ket interest rates or other factors that affect the volatility of securities
held by a Fund change in ways that Mitchell Hutchins or PIMCO does not antici-
pate, the Fund's ability to meet its investment objective may be reduced.
See Appendix A to this Prospectus for more information concerning the types
of mortgage-backed securities in which the Funds may invest.
- --RATINGS OF DEBT SECURITIES. 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 or PIMCO
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 at-
tempt to evaluate the safety of principal and interest payments and do not re-
flect 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.
--RISKS OF ZERO COUPON SECURITIES. Each Fund may invest in certain zero cou-
pon securities that are "stripped" U.S. Treasury notes and bonds. Zero coupon
securities pay no interest to holders prior to maturity. Zero coupon securi-
ties usually trade at a substantial discount from their face or par value and
are subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities that make cur-
rent distributions of interest in cash.
Federal tax law requires that a holder of a security with OID accrue a por-
tion 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 secu-
rities prior to their maturity or disposition, it will have income attribut-
able to such securities.
Companies such as the Funds, which seek to qualify for pass-through federal
income tax treatment as regulated investment companies, must distribute sub-
stantially 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 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.
HEDGING AND RELATED INCOME STRATEGIES. Each 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 a
7
<PAGE>
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 con-
siderations. The use of options and futures solely to enhance income may be
considered a form of speculation. Appendix B 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 op-
tions or write covered call options on such futures contracts. Each Fund may
enter into options and futures contracts under which the full value of its
portfolio is at risk. Under normal circumstances, however, the Fund's use of
these instruments will place at risk a much smaller portion of its assets.
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 it 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 or PIMCO 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 as-
surance can be given that any strategy used will succeed. If Mitchell Hutchins
or PIMCO incorrectly forecasts interest rates, market values or other economic
factors in utilizing a strategy for a Fund, the Fund would be in a better po-
sition 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 correla-
tion, 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 in-
vestments and (4) the possible inability of a Fund to purchase or sell a port-
folio 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 securi-
ties in connection with hedging transactions and the possible inability of a
Fund to close out or to liquidate its hedged position.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. Each 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 sub-
stantially similar securities on a specified future date. In the case of dol-
lar 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 securi-
ties sold, 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 in-
terest 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.
Each 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.
8
<PAGE>
The market value of securities sold under reverse repurchase agreements typi-
cally 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 se-
curities 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 re-
ceive an extension of time to determine whether to enforce the Fund's obliga-
tion to repurchase the securities and the Fund's use of the proceeds of the
reverse repurchase agreement may effectively be restricted pending such deci-
sion.
The dollar rolls and reverse repurchase agreements entered into by a 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 a Fund will receive interest on the securities or repurchase
agreements in which it invests the transaction proceeds, such transactions may
involve leverage. However, since such securities or repurchase agreements must
satisfy the quality requirements of the Fund, and will mature on or before the
settlement date on the related dollar roll or reverse repurchase agreement,
Mitchell Hutchins and PIMCO believe that such arbitrage transactions do not
present the risks to the Funds that are associated with other types of lever-
age.
Dollar rolls and reverse repurchase agreements will be considered to be
borrowings and, accordingly, will be subject to each 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. A 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 Funds have no present intention to enter into dollar
rolls other than in such arbitrage transactions, and they have no present in-
tention to enter into reverse repurchase agreements other than in such arbi-
trage transactions or for temporary or emergency purposes. Each Fund may bor-
row money for temporary or emergency purposes, but not in excess of an addi-
tional 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 secu-
rities 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 pur-
chased securities. Repurchase agreements carry certain risks not associated
with direct investments in securities, including possible decline in the mar-
ket value of the underlying securities and delays and costs to the 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 transac-
tions believed by Mitchell Hutchins or PIMCO 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 securi-
ties 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 period, but the 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, includ-
ing the risk of price fluctuation. Failure by a
9
<PAGE>
counter party to deliver a security purchased on a when-issued or delayed de-
livery 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, 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, exceed its net assets.
ILLIQUID SECURITIES. U.S. Government Income Fund may invest up to 10% of its
net assets in illiquid securities and Low Duration Income Fund may invest up
to 15% of its net assets in such 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 price at which the
Fund has valued the securities. Under current guidelines of the staff of the
SEC, IOs and POs are considered illiquid. However, IO and PO classes of fixed-
rate mortgage-backed securities issued by the U.S. government or one of its
agencies or instrumentalities will not be considered illiquid if Mitchell
Hutchins has determined that they are liquid pursuant to guidelines estab-
lished by the Trust's board of trustees. Illiquid securities also are consid-
ered to include, among other things, written OTC options, repurchase agree-
ments with maturities in excess of seven days and securities whose disposition
is restricted under the federal securities laws (other than "Rule 144A" secu-
rities that Mitchell Hutchins or PIMCO has determined to be liquid under pro-
cedures approved by the Trust's board of trustees).
Rule 144A establishes a "safe harbor" from the requirements of the Securi-
ties 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 institu-
tional buyers interested in purchasing Rule 144A-eligible restricted securi-
ties held by a Fund, however, could affect adversely the marketability of such
portfolio securities and the Fund might be unable to dispose of such securi-
ties promptly or at favorable prices.
A Fund may not be able to sell illiquid securities when Mitchell Hutchins or
PIMCO considers it desirable to do so or may have to sell such securities at a
price lower than could be obtained if they were more liquid. Also the sale of
illiquid securities may require more time and may result in higher dealer dis-
counts and other selling expenses than does the sale of securities that are
not illiquid. Illiquid securities may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and invest-
ments in illiquid securities may have an adverse impact on net asset value.
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 10%
of the total value of its portfolio securities to broker-dealers or institu-
tional investors that Mitchell Hutchins or PIMCO deems qualified. Lending se-
curities enables the Fund to earn additional income, but could result in a
loss or delay in recovering the securities.
DURATION. Duration is a measure of the expected life of a fixed income secu-
rity that was developed as a more precise alternative to the concept "term to
maturity." Duration incorporates a bond's yield, coupon interest payments, fi-
nal maturity and call features into one measure and is one of the fundamental
tools used by Mitchell Hutchins or PIMCO, as applicable, in portfolio selec-
tion for the Funds. Traditionally, a debt security's "term to maturity" has
been used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the secu-
rity). However, "term to maturity" measures only the time until a
10
<PAGE>
debt security provides for a final payment, taking no account of the pattern
of the security's payments prior to maturity. Duration is a measure of the ex-
pected life of a fixed income security on a present value basis. Duration
takes the length of the time intervals between the present time and the time
that the interest and the principal payments are scheduled to be made or, in
the case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For
any fixed income security with interest payments occurring prior to the pay-
ment of principal, duration is always less than maturity. For example, depend-
ing upon its coupon and the level of market yields, a treasury note with a re-
maining maturity of five years might have a duration of 4.5 years. For mort-
gage-backed and other securities that are subject to prepayments, put or call
features or adjustable coupons, the difference between the remaining stated
maturity and the duration is likely to be much greater.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account
of cash and cash equivalents) will lengthen the Fund's duration by approxi-
mately the same amount as would holding an equivalent amount of the underlying
securities. Short futures or put options have durations roughly equal to the
negative duration of the securities that underlie these positions, and have
the effect of reducing portfolio duration by approximately the same amount as
would selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by the standard duration calculation is the case of mort-
gage-backed securities. The stated final maturity of such securities is gener-
ally 30 years, but current prepayment rates are critical in determining the
securities' interest rate exposure. In these and other similar situations,
Mitchell Hutchins and PIMCO will use more sophisticated analytical techniques
that incorporate the economic life of a security into the determination of its
duration and, therefore, its interest rate exposure.
Duration allows Mitchell Hutchins or PIMCO to make certain predictions as to
the effect that changes in the level of interest rates will have on the value
of a Fund's portfolio. For example, when the level of interest rates increases
by 1%, a fixed income security having a positive duration of three years gen-
erally will decrease in value by approximately 3%. Accordingly, if Mitchell
Hutchins or PIMCO calculates the duration of the Fund's portfolio as being
three years, it normally would expect the portfolio to change in value by ap-
proximately 3% for every 1% change in the level of interest rates. However,
various factors, such as changes in anticipated prepayment rates, qualitative
considerations, market supply and demand, can cause partial securities to re-
spond somewhat differently to changes in interest rates than indicated in the
above example. Moreover, in the case of mortgage-backed and other complex se-
curities, duration calculations are estimates and are not precise. This is
particularly true during per market volatility. Accordingly, the net asset
value of the Fund's portfolio may vary in relation to interest rates by a
greater or lesser percentage than indicated by the above example.
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 or
PIMCO deems portfolio changes appropriate. A higher turnover rate for a Fund
(100%
11
<PAGE>
or more) will involve correspondingly greater transaction costs, which will be
borne directly by the Fund, and may increase the potential for short-term capi-
tal gains.
DERIVATIVES. The Funds may invest in instruments or securities that commonly
are referred to as "derivatives," because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. Derivative in-
struments include options, futures contracts, interest rate protection con-
tracts and similar instruments that may be used by the Funds in hedging and re-
lated income strategies. There is only limited consensus as to what constitutes
a "derivative" security. However, in Mitchell Hutchins' and PIMCO's view, the
derivative securities in which the Funds may invest include "stripped" securi-
ties, such as CATS and TIGRs, and specially structured types of mortgage- and
asset-backed securities, such as IOs, POs and inverse floaters. The market
value of derivative instruments and securities sometimes is more volatile than
that of other investments, and each type of derivative may pose its own special
risks. Mitchell Hutchins or PIMCO takes these risks into account in its manage-
ment of a Fund.
OTHER INFORMATION. Each Fund may hold up to 35% of its total assets in cash
or money market instruments for liquidity purposes or pending investment. In
addition, when Mitchell Hutchins or PIMCO believes unusual circumstances war-
rant a defensive position, each Fund temporarily may commit all or any portion
of its assets to cash or money market instruments. For each Fund, such instru-
ments may include obligations of the U.S. government, its agencies or instru-
mentalities, bank certificates of deposit, bankers' acceptances and repurchase
agreements secured by such obligations. For Low Duration Income Fund, such in-
vestments also may include commercial paper rated at least A-1 by S&P or P-1 by
Moody's. The Funds may also engage in short sales of securities "against the
box" to defer realization of gains or losses for tax purposes.
New types of mortgage- and asset-backed securities, derivative securities,
hedging instruments and risk management techniques are developed and marketed
from time to time. Each Fund may invest in these securities and instruments and
use these techniques to the extent consistent with its investment objective and
limitations and with regulatory and tax considerations.
There can be no assurance that either Fund will achieve its investment objec-
tive. 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
other investment limitations as described in the Statement of Additional Infor-
mation are fundamental policies and may not be changed without shareholder ap-
proval. Each Fund's policy of normally concentrating at least 25% of its total
assets in mortgage- and asset-backed securities also 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.
PURCHASES
Class Y shares are sold to eligible investors at the net asset value next de-
termined (see "Valuation of Shares") after the purchase order is received at
PaineWebber's New York City offices, or, with respect to U.S. Government Income
Fund, for purchases by the trustee of the PW SIP, by the Fund's transfer agent
("Transfer Agent"). No initial or contingent deferred sales charges is imposed,
nor are Class Y shares subject to Rule 12b-1 distribution or service fees.
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber Incorporated ("PaineWebber") as the exclusive dealer for the sale
of those shares. Each Fund and Mitchell Hutchins reserve the right to reject
any purchase order and to suspend the offering of the Class Y shares for a pe-
riod of time.
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PURCHASES BY INSIGHT PARTICIPANTS. An investor who purchases $50,000 or more
of shares of mutual funds that are available to INSIGHT participants (which
include the PaineWebber mutual funds in the Flexible Pricing System SM and
certain specified other mutual funds) may take part in INSIGHT, a total port-
folio asset allocation program sponsored by PaineWebber, and thus become eli-
gible to purchase Class Y shares. INSIGHT offers comprehensive investment
services, including a personalized asset allocation investment strategy using
an appropriate combination of funds, monitoring of investment performance and
comprehensive quarterly reports that cover market trends, portfolio summaries
and personalized account information. Participation in INSIGHT is subject to
payment of an advisory fee to PaineWebber at the maximum annual rate of 1.50%
of assets held through the program (generally charged quarterly in advance),
which covers all INSIGHT investment advisory services and program administra-
tion fees. Employees of PaineWebber and its affiliates are entitled to a 50%
reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT
clients may elect to have their INSIGHT fees charged to their PaineWebber ac-
counts (by the automatic redemption of money market fund shares) or, if a
qualified plan, invoiced. Please contact your PaineWebber investment executive
or PaineWebber's correspondent firms or call 1-800-647-1568 for more informa-
tion concerning mutual funds that are available to INSIGHT participants or for
other INSIGHT information.
PURCHASES BY THE TRUSTEE OF THE PW SIP. Class Y shares of U.S. Government
Income Fund also are offered for sale to the trustee of the PW SIP, a defined
contribution plan sponsored by Paine Webber Group Inc. ("PW Group"). The
trustee of the PW SIP purchases these Class Y shares to implement the invest-
ment choices of individual plan participants with respect to their PW SIP con-
tributions. INDIVIDUAL PLAN PARTICIPANTS SHOULD CONSULT THE PLAN INFORMATION
STATEMENT AND SUMMARY PLAN DESCRIPTION OF THE PW SIP (COLLECTIVELY, "PLAN DOC-
UMENTS") FOR A DESCRIPTION OF THE PROCEDURES AND LIMITATIONS APPLICABLE TO
MAKING AND CHANGING INVESTMENT CHOICES. Copies of the Plan Documents are
available 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 Y shares of U.S. Government Income Fund are purchased 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 participants made their investment choices or made their contributions to
the PW SIP.
ACQUISITION OF CLASS Y SHARES BY OTHERS. Certain present holders of Class Y
shares who are not current INSIGHT participants may acquire Class Y shares of
the Fund. This category includes former employees of Kidder, Peabody & Co.,
Incorporated, their associated accounts and present and former directors and
trustees of the former Mitchell Hutchins, Kidder, Peabody mutual funds.
The Funds are authorized to offer Class Y shares to other employee benefit
and retirement plans of PW Group and its affiliates and certain investment ad-
visory programs that are sponsored by PaineWebber and that may invest in
PaineWebber mutual funds. At present, however, INSIGHT participants and the PW
SIP are the only purchasers in these categories.
REDEMPTIONS
Class Y shares may be redeemed at their net asset value and redemption pro-
ceeds will be paid after receipt of a redemption request, as described below.
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REDEMPTIONS THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. INSIGHT participants
who are Class Y shareholders may submit redemption requests to their invest-
ment executives or correspondent firms in person or by telephone, mail or
wire. As each Fund's agent, PaineWebber may honor a redemption request by re-
purchasing Class Y shares from a redeeming shareholder at the shares' net as-
set value next determined after receipt of the request by PaineWebber's New
York City offices. Within three Business Days after receipt of the request,
repurchase proceeds 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 re-
demption requests to 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.
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. Shareholders also may redeem Class Y
shares through each Fund's transfer agent, PFPC Inc. ("Transfer Agent").
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. A redemption request will be executed at the net asset value next com-
puted after it is received in "good order," and redemption proceeds will be
paid within seven days of the receipt of the request. "Good order" means that
the request must be accompanied by the following: (1) a letter of instruction
or a stock assignment specifying the number of shares or amount of investment
to be redeemed (or that all shares credited to the 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 recog-
nized stock exchange and (3) other supporting legal documents for estates,
trusts, guardianships, custodianships, partnerships and corporations. Share-
holders are responsible for ensuring that a request for redemption is received
in "good order."
REDEMPTIONS FOR PARTICIPANTS IN PW SIP. The trustee of the PW SIP redeems
Class Y shares of U.S. Government Income Fund to implement the investment
choices of individual plan participants with respect to their PW SIP contribu-
tions, as described in the Plan Documents referenced under "Purchases" above.
As described in the Plan Documents, the average net asset value per share at
which Class Y shares are redeemed by the trustee of the PW SIP might be more
or less than the net asset value per share prevailing at the time that such
participants made their investment choices.
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder (other than a partici-
pant in the PW SIP) may have redemption proceeds of $1 million or more wired
to the shareholder's PaineWebber brokerage account or a commercial bank ac-
count designated by the shareholder. Questions about this option, or redemp-
tion requirements generally, should be referred to the shareholder's
PaineWebber investment executive or correspondent firm. If a shareholder re-
quests 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 each Fund incurs certain fixed costs in maintaining shareholder ac-
counts, it reserves the right to redeem all Fund shares in any shareholder ac-
count having a net asset value below the lesser of $500 or the current minimum
for initial
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purchases. If a Fund elects to do so, it will notify the shareholder and pro-
vide the shareholder the opportunity to increase the amount invested to the
minimum required level or more within 60 days of the notice. A Fund will not
redeem accounts that fall below the minimum required level solely as a result
of a reduction in net asset value per share.
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. 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, are distributed annually with the Fund's next regu-
lar dividend. A Fund may make additional distributions if necessary to avoid a
4% excise tax on undistributed income and capital gain.
PW SIP PARTICIPANTS: Dividends and capital gain distributions are paid in ad-
ditional U.S. Government Income Fund Class Y shares at net asset value unless
the Transfer Agent is instructed otherwise.
INSIGHT PARTICIPANTS: Dividends and other distributions are paid in addi-
tional Class Y shares 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 invest-
ment executives or correspondent firms.
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 and net short-term capital gain)
and net capital gain that is distributed to its shareholders.
PW SIP PARTICIPANTS. Qualified profit-sharing plans such as the PW SIP pay no
federal income tax. Individual participants in the PW SIP should consult the
Plan Documents and their own tax advisers for information on the tax conse-
quences associated with participating in the PW SIP.
INSIGHT PARTICIPANTS: Dividends from a Fund's investment company taxable in-
come (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 generally 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 distri-
butions and re- demption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and capital gain distributions payable to 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. An exchange of Fund shares for
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<PAGE>
shares of another PaineWebber mutual fund generally will have similar tax con-
sequences. In addition, if shares of a Fund are purchased within 30 days be-
fore or after redeeming other Fund shares at a loss, all or a portion of that
loss will not be deductible and will increase the basis of the newly acquired
shares.
The foregoing is only a summary of some of the important federal tax consid-
erations generally affecting the Fund and its shareholders; see the Statement
of Additional Information for a further discussion. There may be other feder-
al, state or local tax considerations applicable to a particular investor.
Prospective investors are urged to consult their tax advisers.
VALUATION OF SHARES
The net asset value of each Fund's shares fluctuates and is determined as of
the close of regular trading on the NYSE (currently 4:00 p.m., Eastern time)
each Business Day. Net asset value per share is computed by dividing the value
of the securities held by the Fund plus any cash or other assets minus all li-
abilities 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 gen-
erally is used to value debt obligations with 60 days or less remaining to ma-
turity, unless the board of trustees determines that this does not represent
fair value.
MANAGEMENT
The Trust's board of trustees, as part of its overall management responsi-
bility, oversees various organizations responsible for each Fund's day-to-day
management. Mitchell Hutchins, investment adviser and administrator for each
Fund, supervises all aspects of the Fund's operations, makes and implements
all investment decisions for U.S. Government Income Fund and supervises the
activities of PIMCO as sub-adviser for Low Duration Income Fund. Mitchell
Hutchins receives a monthly fee for these services at the annual rate of 0.50%
of each Fund's average daily net assets.
PIMCO, as sub-adviser for Low Duration Income Fund, makes and implements all
investment decisions for that Fund. Under the sub-advisory contract, Mitchell
Hutchins (not the Fund) pays PIMCO a fee for its services as sub-adviser at
the annual rate of 0.25% of the Fund's average daily net assets.
Each Fund also pays PaineWebber an annual fee of $4.00 per active share-
holder account held at PaineWebber for certain services not provided by the
Transfer Agent. The Funds incur other expenses and, for the fiscal year ended
November 30, 1995, U.S. Government Income Fund's expenses for its Class Y
shares, stated as a percentage of average net assets was 0.71%. For the fiscal
period October 20, 1995 (commencement of offering) to November 30, 1995, Low
Duration Income Fund's expenses for its Class Y shares, stated as a percentage
of average net assets and annualized, was 0.99%.
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 fi-
nancial services holding company. At February 29, 1996, Mitchell Hutchins was
adviser or sub-adviser to 32 investment companies with 66 separate portfolios
and aggregate assets of over $31.2 billion.
PIMCO is located at 840 Newport Center Drive, Suite 360, Newport Beach, Cal-
ifornia 92660. PIMCO is a subsidiary of PIMCO Advisors L.P., a publicly held
investment advisory firm. As of February 29, 1996, PIMCO had approximately $78
billion in assets under management and was
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<PAGE>
adviser or sub-adviser of investment companies with 47 portfolios and aggre-
gate assets of approximately $8.5 billion.
Nirmal Singh and Craig M. Varrelman have been responsible for the day-to-day
management of the Fund's portfolio since December 1994. Mr. Singh and Mr. Var-
relman are both vice presidents of Mitchell Hutchins. Prior to joining Mitch-
ell Hutchins in September 1993, Mr. Singh was with Merrill Lynch Asset Manage-
ment, Inc., where he was a member of the portfolio management team. From 1990
to 1993, Mr. Singh was a senior portfolio manager at Nomura Mortgage Fund Man-
agement Corporation. Mr. Varrelman has been with Mitchell Hutchins as a port-
folio manager since 1988.
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 for U.S. Government Income Fund.
William C. Powers, a Managing Director of PIMCO, is responsible for the day-
to-day management of Low Duration Income Fund's portfolio. Mr. Powers has par-
ticipated in the management of the portfolio since PIMCO assumed sub-advisory
responsibilities for the Fund in October 1994. Since 1991, Mr. Powers has been
a senior member of the fixed income portfolio management group of PIMCO. He
was previously associated with Salomon Brothers Inc and Bear Stearns as a Se-
nior Managing Director.
Mitchell Hutchins and PIMCO investment personnel may engage in securities
transactions for their own accounts pursuant to codes of ethics which estab-
lish procedures for personal investing and restricts certain transactions.
PERFORMANCE INFORMATION
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 com-
pound annual 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 calculations assume reinvestment of dividends and other
distributions.
Each 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.
Each Fund also may advertise its yield. Yield reflects investment income net
of expenses over a 30-day (or one-month) period on a Class Y share, expressed
as an annualized percentage of the net asset value per share at the end of the
period. Yield computations differ from other accounting methods and therefore
may differ from dividends actually paid or reported net income.
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 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 five series, including both Funds, have been autho-
rized.
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<PAGE>
The shares of beneficial interest of each Fund are divided into four clas-
ses, designated Class A, Class B, Class C and Class Y shares. Each Class rep-
resents interests in the same assets of the Fund. Class A, B and C differ as
follows: (1) each Class has exclusive voting rights on matters pertaining to
its plan of distribution, (2) Class A shares generally are subject to an ini-
tial sales charge, (3) Class B shares bear ongoing distribution fees, may be
subject to a contingent deferred sales charge upon most redemptions and will
automatically convert to Class A shares approximately six years after issu-
ance, (4) Class C shares are not subject to an initial sales charge, but are
subject to a contingent deferred sales charge if redeemed within one year of
purchase, bear ongoing distribution fees and do not convert into another Class
and (5) each Class may bear differing amounts of certain Class-specific ex-
penses. Class Y shares are subject to neither an initial or contingent de-
ferred sales charge nor ongoing service or distribution fees.
The different sales charges and other expenses applicable to the different
classes of each Fund's shares may affect the performance of those classes.
More information concerning the other Classes of shares of the Funds may be
obtained from a PaineWebber investment executive or correspondent firm or by
calling 1-800-647-1568.
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 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 a Fund has equal
voting rights, except as noted above. Each share of a Fund is entitled to par-
ticipate equally in dividends and other distributions and the proceeds of any
liquidation except that, due to the differing expenses borne by the four Clas-
ses, these dividends and proceeds are likely to be lower for the other Classes
than for the Class Y shares. The shares of each Fund and the other series of
the Trust will be voted separately except when an aggregate vote of all series
is required by the Investment Company Act of 1940 ("1940 Act").
To avoid additional operating costs and for investor convenience, share cer-
tificates are not issued. Ownership of shares of each Fund is re corded on a
share 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 each Fund's as-
sets. PFPC Inc., a subsidiary of PNC Bank, National Association, whose princi-
pal business address is 103 Bellevue Parkway, Wilmington, Delaware 19809, is
each Fund's transfer and dividend disbursing agent.
Confirmations and Statements. Shareholders receive confirmations of pur-
chases and redemptions of shares of the Funds. PaineWebber clients receive
statements at least quarterly that report their activity and consolidated
year-end statements that show all Fund transactions for that year. Sharehold-
ers also receive audited annual and semi-annual financial statements. The PW
SIP receives confirmations of purchases and redemptions of shares of the U.S.
Government Income Fund and quarterly statements from the Transfer Agent. The
PW SIP also receives audited annual and unaudited semi-annual financial state-
ments of the U.S. Government Income Fund. PW SIP participants receive periodic
information, including quarterly statements, about their plan participation
from the PW SIP plan administrator.
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APPENDIX A
MORTGAGE-BACKED SECURITIES
The U.S. government securities in which the Funds may invest include mort-
gage-backed securities issued or guaranteed by Ginnie Mae, Fannie Mae or Fred-
die Mac. These mortgage-backed securities are guaranteed as to payment of in-
terest and principal but are not guaranteed as to market value. Other mort-
gage-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 guaran-
teed, 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 en-
hancement. New types of mortgage-backed securities are developed and marketed
from time to time and, consistent with its investment limitations, each of the
Funds expects to invest in those new types of mortgage-backed securities that
Mitchell Hutchins or PIMCO believes may assist the Fund in achieving its in-
vestment objective. Similarly, the Funds may invest in mortgage-backed securi-
ties 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
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. Mort-
gage 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 agen-
cies and in privately insured or uninsured residential mortgage loans (some-
times 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 guaran-
tees 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-
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. govern-
ment.
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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, held assets of
failed savings associations as either a conservator or receiver for such asso-
ciations, or it acquired such assets in its corporate capacity. These assets
included, 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 established a vehicle registered with the SEC through
which it sold mortgage-backed securities. RTC mortgage-backed securities rep-
resent pro rata interests in pools of mortgage loans that RTC held or 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 mort-
gage pass-through securities (such collateral collectively being called "Mort-
gage 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 indi-
cates otherwise, references herein to CMOs include multi-class mortgage pass-
through securities. Payments of principal of and interest on the Mortgage As-
sets (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 re-
tired 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 sev-
eral 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
payment date to
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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 secu-
rities are mortgage-backed securities that represent a right to receive inter-
est 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 secu-
rities 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 speci-
fied 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 ele-
ments of credit enhancement. Such credit enhancement falls into two catego-
ries; (1) liquidity protection and (2) protection against losses resulting af-
ter 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, gener-
ally 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 under-
lying pool occurs in a timely fashion. Protection against losses resulting af-
ter default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring
the transaction or through a combination of such approaches. The Fund will not
pay any additional fees for such credit enhancement, although the existence of
credit enhancement may increase the price of a security. Credit enhancements
do not provide protection against changes in the market value of the security.
Examples of credit enhancement arising out of the structure of the transac-
tion include "senior-subordinated securities" (multiple class securities with
one or more classes subordinate to other classes as to the payment of princi-
pal thereof and interest thereon, with the result that defaults on the under-
lying assets are borne first by the holders of the subordinated class), crea-
tion of "spread accounts" or "reserve funds" (where cash or investments, some-
times funded from a portion of the payments on the underlying assets, are held
in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets ex-
ceed that required to make payment of the securities and pay any servicing or
other fees). The degree of credit enhancement provided for each issue gener-
ally is based on historical information regarding the level of credit risk as-
sociated with the underlying assets. Delinquency or loss in excess of that an-
ticipated could adversely affect the return on an investment in such a securi-
ty.
21
<PAGE>
APPENDIX B
THE FOLLOWING ARE DESCRIPTIONS OF INSTRUMENTS THAT ONE OR BOTH OF THE FUNDS
MAY USE:
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
premium, 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 premium, the right to sell the underlying security at a specified price
during the option term. The writer of the put option, who receives the premi-
um, has the obligation, upon exercise of the option during the option term, to
buy the underlying 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 tra-
ditional 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
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 op-
tion, 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 a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short po-
sition in the case of a call and a long position in the case of a put.
22
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Fund Expenses............................................................... 2
Financial Highlights........................................................ 3
Investment Objective and Policies........................................... 4
Purchases................................................................... 12
Redemptions................................................................. 13
Dividends and Taxes......................................................... 15
Valuation of Shares......................................................... 16
Management.................................................................. 16
Performance Information..................................................... 17
General Information......................................................... 17
Appendix A.................................................................. 19
Appendix B.................................................................. 22
</TABLE>
[LOGO OF RECYCLED PAPER APPEARS HERE]
(C)1996 PaineWebber Incorporated
- --------------------------------
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
LOW DURATION
U.S. GOVERNMENT
INCOME FUND
Class Y Shares
PROSPECTUS
April 1, 1996
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The two 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 and invests primarily in U.S. government securities.
PaineWebber Low Duration U.S. Government Income Fund ("Low Duration Income
Fund") seeks high current income consistent with the preservation of capital
and low volatility of net asset value; it also invests primarily in U.S.
government securities and seeks to limit the volatility of its net asset value
per share by maintaining an overall portfolio duration of from one to three
years. 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 Fund,
Mitchell Hutchins has appointed PaineWebber to serve as exclusive dealer for
the sale of Fund shares. Pacific Investment Management Company ("PIMCO") serves
as investment sub-adviser for Low Duration Income Fund. The Class Y shares
described in this Statement of Additional Information are currently offered for
sale primarily to participants in the INSIGHT Investment Advisory Program
("INSIGHT"), when purchased through that program. The Class Y shares of
U.S. Government Income Fund also are offered for sale 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 Funds' current Prospectus, dated April 1, 1996. 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.
Participants in the PaineWebber Savings Investment Plan may obtain a copy of
the Prospectus 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, 1996.
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, a division of The McGraw Hill
Companies, Inc. ("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 Funds may use these ratings
in determining whether to purchase, sell or hold a security.
<PAGE>
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 any, and
the structural, legal and tax aspects associated with such securities. Neither
of such ratings represents an assessment of the likelihood that principal
prepayments will be made by mortgagors or the degree to which such prepayments
may differ from that originally anticipated, nor do such ratings address the
possibility that investors may suffer a lower than anticipated yield or that
investors in such securities may fail to recoup fully their initial investment
due to prepayments.
It should be emphasized that ratings are general and are not absolute
standards of quality. Consequently, debt obligations with the same maturity,
interest rate and rating may have different market prices. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events so that an issuer's current financial condition may be better
or worse than the rating indicates. The rating assigned to a security by a
NRSRO does not reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security. Subsequent to its
purchase by a 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
or PIMCO, as applicable, 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 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 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- 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,
2
<PAGE>
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 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 a Fund.
The 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
3
<PAGE>
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 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.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to "lock-
in" at a lower interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments with respect
to ARMs has fluctuated in recent years.
ILLIQUID SECURITIES. U.S. Government Income Fund may invest up to 10% of its
net assets and Low Duration Income Fund may invest up to 15% of its net assets
in illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Fund has valued the
securities and includes, among other things, purchased over-the-counter ("OTC")
options,
4
<PAGE>
repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins or PIMCO 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, 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 and PIMCO, pursuant to
guidelines approved by the board. Mitchell Hutchins or PIMCO 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 or PIMCO monitors the liquidity of restricted
securities in the Fund's portfolio and reports periodically on such decisions
to the board of trustees.
5
<PAGE>
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 or PIMCO to present minimum credit risks in accordance with
guidelines established by the Trust's board of trustees. Mitchell Hutchins or
PIMCO reviews and monitors the creditworthiness of those institutions under the
board's general supervision.
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 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 or PIMCO deems it advantageous to do so, which may result in
capital gain or loss to a Fund.
LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, 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 or PIMCO
deems qualified, but only when the borrower maintains acceptable collateral
with the Fund's custodian, marked to market daily, in an amount at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins or PIMCO will
consider, and during the period of the loan will monitor, all relevant facts
and circumstances, including the creditworthiness of the borrower. A 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
6
<PAGE>
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.
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 or interest rate protection transactions.
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 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
7
<PAGE>
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.
Low Duration Income Fund may not (1) purchase the securities of any issuer if
as a result more that 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 mortgage dollar rolls, and then in an aggregate amount not in
excess of 33 1/3% of the Fund's total assets (including the amount of the
borrowings and senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of such borrowings, except that the
Fund may borrow up to an additional 5% of total assets (not including the
amount borrowed) for temporary or emergency purposes; (3) purchase securities
if, as a result of the purchase, the Fund would have more than 25% of the value
of its total assets invested in securities of issuers in any one industry,
except that this limitation does not apply to (a) obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities and (b)
investment in mortgage- 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
(including real estate limited partnerships), except that investments in
mortgage-backed securities and other debt securities secured by real estate or
interests therein are not subject to this limitation, and provided further that
the Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and to liquidate real estate
acquired as a result of such enforcement; (6) purchase securities on margin,
make short sales of securities or maintain a short position in any security,
except that the Fund may (a) make margin deposits, make short sales and
maintain short positions in connection with its use of options, futures
contracts and options on futures contracts and (b) sell short "against the
box"; (7) purchase or sell commodities or commodity contracts, except that the
Fund may purchase or sell financial futures contracts, such as interest rate
contracts, except that the Fund may purchase or sell financial futures
contracts, such as interest rate and bond index futures contracts and options
therein; (8) invest in oil, gas or mineral exploration or development programs
or leases, except that the Fund may invest in issuers which invest in such
programs; (9) purchase securities of other open-end investment companies,
except in connection with a merger, consolidation or acquisition; or (10) make
loans, except through repurchase agreements and except in connection with the
loan of securities as described herein or in the Prospectus; provided that for
purposes of this restriction the acquisition of bonds or other debt
instruments, or interests therein, shall not be deemed to be the making of a
loan.
For purposes of Low Duration Income Fund's fundamental investment limitation
(1), mortgage- and asset-backed securities will not be considered to have been
issued by the same issuer by reason of such securities having the same sponsor,
and mortgage- and asset-backed securities issued by a finance subsidiary or
other single purpose subsidiary of a corporation that are not guaranteed by the
parent corporation will be considered to be issued by a separate issuer from
its parent corporation.
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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 of U.S. Government Income Fund are non-
fundamental and may be changed by the vote of the Trust's board of trustees
without shareholder approval. U.S. Government Income 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., (AMEX)
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.
The following investment restrictions of Low Duration Income Fund are non-
fundamental and may be changed by the vote of the Trust's board of trustees
without shareholder approval. Low Duration Income Fund may not (1) purchase or
retain the securities of any issuer if the officers and trustees of the Trust
and the officers and directors of Mitchell Hutchins and PIMCO (each owning
beneficially as principal for its own account more than 0.5% of the outstanding
securities of the issuer) beneficially so own in the aggregate more than 5% of
the securities of the issuer; (2) purchase any security, other than mortgage-
and asset-backed securities if as a result more than 5% of the Fund's total
assets would be invested in securities of companies that together with any
predecessors have been in continuous operation for less than three years; (3)
invest more than 15% of its net assets in illiquid securities, a term that
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and (4) invest in warrants, valued at the lower of cost or
market, in excess of 5% of the value of its net assets, which amount may
include warrants that are not listed on the NYSE or the AMEX, 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.
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 a Fund's investment limitations, restrictions or investment
policies.
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U.S. Government Income Fund will continue to interpret its fundamental
investment limitation (5) to prohibit investment in real estate limited
partnerships.
PROPOSED CHANGES TO INVESTMENT LIMITATIONS OF THE FUNDS
At a special meeting of the shareholders scheduled for April 10, 1996,
shareholders of each Fund will be asked to approve changes to that Fund's
fundamental investment limitations. If approved, the following fundamental
investment limitations will supersede and replace those listed in the preceding
section titled "Investment Limitations."
Each Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that issuer
or the Fund would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Fund's total assets
may be invested without regard to this limitation, and except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued by
other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more
of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities, and except that the Fund, under normal circumstances, will
invest 25% or more of its total assets in mortgage- 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.
(3) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Fund's total assets
(including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance
or borrowing, except that the Fund may borrow up to an additional 5% of its
total assets (not including the amount borrowed) for temporary or emergency
purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a
loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
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(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Fund may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to hold
real estate acquired by reason of such enforcement until that real estate
can be liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or
enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
If the foregoing fundamental restrictions are approved by the Funds'
shareholders, the Funds would become subject to the non-fundamental investment
restrictions listed below. These non-fundamental restrictions would replace
certain of the Funds' current fundamental restrictions and would be in addition
to the non-fundamental policies and restrictions already described in the
Statement of Additional Information.
The following investment restrictions are not fundamental and may be changed
by the Trust's board of trustees without shareholder approval.
Each Fund will not:
. purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.
. engage in short sales of securities or maintain a short position, except
that the Fund may (a) sell short "against the box" and (b) maintain
short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.
. invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition.
. purchase securities of other investment companies, except to the extent
permitted by the 1940 act and except that this limitation does not apply
to securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation, or merger.
HEDGING AND RELATED INCOME STRATEGIES
GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
Mitchell Hutchins or PIMCO 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 or PIMCO also may
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attempt to hedge a 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 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 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 a Fund intends to acquire. Thus, in a long
hedge a 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, 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 or
PIMCO 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 or PIMCO 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
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, a Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes."
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In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins and PIMCO expect to discover additional
opportunities in connection with options, futures contracts and other hedging
techniques. These new opportunities may become available as Mitchell Hutchins
or PIMCO 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 or PIMCO may utilize these
opportunities to the extent that they are consistent with a Fund's investment
objective and permitted by the Fund's 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' or PIMCO's 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 and PIMCO are 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 or PIMCO 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 the Fund sell a
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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 a 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 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. 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.
OPTIONS. Each 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, 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.
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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 option that it had written by purchasing an identical
call 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.
A 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 a Fund and its contra party (usually a securities dealer or a
bank) with no clearing organization guarantee. Thus, when a 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.
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. 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.
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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. Each Fund may purchase and sell interest rate futures contracts.
Each 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 a
Fund's portfolio. If Mitchell Hutchins or PIMCO wishes to shorten the average
duration of a 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 or PIMCO wishes to lengthen the average duration of a Fund, the Fund
may buy a futures contract or a call option thereon or sell a put option
thereon.
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 a Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
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 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
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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.
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 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.
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2. 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.
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
Each 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. Each 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.
Each 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
Hutchins, PIMCO and the Funds believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to a Fund's
borrowing restrictions. The net amount of the excess, if any, of a 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." A 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.
A Fund will enter into interest rate protection transactions only with banks
and recognized securities dealers believed by Mitchell Hutchins or PIMCO 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.
18
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their business addresses
and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; Trustee and Chairman of Mr. Bewkes is a director and a con-
69** the Board of Trustees sultant to Paine Webber Group Inc.
("PW Group") (holding company
of PaineWebber and Mitchell
Hutchins). 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, NaPro
BioTherapeutics, Inc. and a direc-
tor or trustee of 24 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Meyer Feldberg; 53 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., and New World Commu-
nications Group Incorporated and is
a director or trustee of 16 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as an investment adviser.
George W. Gowen; 66 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 14 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Frederic V. Malek; 59 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 14 other investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Judith Davidson Moyers; 60 Trustee Mrs. Moyers is president of Public
Public Affairs Television Affairs Television, Inc., an educa-
356 W. 58th Street tional consultant and a home econo-
New York, New York 10019 mist. Mrs. Moyers is also a direc-
tor of Ogden Corporation and a di-
rector or trustee of 14 other in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Margo N. Alexander; 49 President Mrs. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins (since January
1995) and also an executive vice
president and a director of
PaineWebber. Mrs. Alexander is also
a director or trustee of one in-
vestment company and president of
29 other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Julieanna Berry; 32 Vice President Ms. Berry is a vice president and a
portfolio manager of Mitchell
Hutchins.
Teresa M. Boyle; 37 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 Mitch-
ell Hutchins. Ms. Boyle is also
vice president of 29 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Joan L. Cohen; 31 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 24 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Karen L. Finkel; 38 Vice President Mrs. Finkel is a first vice presi-
dent and portfolio manager of
Mitchell Hutchins. Mrs. Finkel is
also a vice president of one other
investment company for which Mitch-
ell Hutchins serves as investment
adviser.
Ellen R. Harris; 49 Vice President Ms. Harris is a managing director
and portfolio manager of Mitchell
Hutchins. Ms. Harris is also a vice
president of two other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Mary B. King; 32 Vice President Mrs. King is a first vice president
and a portfolio manager of Mitchell
Hutchins. Mrs. King is also a vice
president of one other investment
company for which Mitchell Hutchins
serves as investment adviser.
Thomas J. Libassi; 37 Vice President Mr. Libassi is a senior vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Prior to May
1994, he was a vice president of
Keystone Custodian Funds Inc. with
portfolio management responsibili-
ty. Mr. Libassi is also a vice
president of three other investment
companies for which Mitchell
Hutchins serves as investment
adviser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and the senior manager of the mu-
tual fund finance division of
Mitchell Hutchins. Mr. Maher is
also a vice president and assistant
treasurer of 29 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director
and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was Director
of Fixed Income Investments of IBM
Corporation. Mr. McCauley is also a
vice president of 17 other invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 38 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 29 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
also a vice president and secretary
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
45 and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schon-
feld is also a vice president of 29
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice presi-
Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
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 29 other investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president
and a portfolio manager of Mitchell
Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is
also vice president of four other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Julian F. Sluyters; 35 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 29
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director
and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and eq-
uity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
also vice president of ten other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
- ---------------------- ------------------- --------------------
<S> <C> <C>
Gregory K. Todd; 39 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 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Mr. Varrelman is
also vice president of three other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. From September
1987 to May 1995, he was an attor-
ney in private practice. Mr. Weller
is also a vice president and assis-
tant secretary of 23 other invest-
ment 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.
** Mr. Bewkes is "interested person" of the Trust as defined in the
Investment Company Act of 1940 ("1940 Act") by virtue of his position with PW
Group.
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 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.
25
<PAGE>
The table below includes certain information relating to the compensation of
the Trust's current trustees who held office during the fiscal year ended
November 30, 1995.
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................ $7,250 -- -- $106,375
George W. Gowen,
Trustee................ $7,250 -- -- $ 99,750
Frederick V. Malek,
Trustee................ $7,250 -- -- $ 99,750
Judith Davidson Moyers,
Trustee................ $7,250 -- -- $ 98,500
</TABLE>
- --------
(degrees) Represents fees paid to each trustee during the fiscal year ended
November 30, 1995.
+ Represents total compensation paid to each trustee during the year ended
December 31, 1995.
BENEFICIAL OWNERSHIP OF GREATER THAN 5% OF FUND SHARES
The following individuals are shown in the Fund's records as owning more than
5% of the Funds shares.
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
NAME AND ADDRESS* NAME OF FUND AS OF JANUARY 31, 1996
- ----------------- ----------------- ------------------------
<S> <C> <C>
Hilton Hotels Corporation............ Low Duration Fund 9,100,500.000 (7.2%)
Kern County Treasurer................ Low Duration Fund 8,585,131.170 (6.8%)
</TABLE>
- --------
* Each of the Shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
26
<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, as supplemented by a separate fee agreement dated March
26, 1993 with respect to Low Duration Income Fund ("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, 1995, November 30, 1994 and
November 30, 1993, respectively, the Trust paid (or accrued) to Mitchell
Hutchins investment advisory and administrative fees of $2,784,437, $3,958,127
and $4,999,240 with respect to U.S. Government Income Fund. During the fiscal
years ended November 30, 1995 and November 30, 1994 and the period May 3, 1993
(commencement of operations) to November 30, 1993, the Trust paid (or accrued)
to Mitchell Hutchins investment advisory and administrative fees of $1,839,876,
$5,598,491 (of which $400,611 was waived by Mitchell Hutchins) and $3,519,442
with respect to Low Duration Income Fund.
Under a service agreement pursuant to which PaineWebber provides certain
services to each 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, 1995, November 30, 1994 and November 30,
1993, PaineWebber earned fees under the service agreement in the approximate
amounts of $154,428, $196,490 and $217,612, respectively, for U.S. Government
Income Fund. During the fiscal years ended November 30, 1995 and November 30,
1994 and the period May 3, 1993 (commencement of operations) to November 30,
1993, PaineWebber earned fees under the service agreement in the amounts of
$107,999, $139,291 and $71,854 for Low Duration Income Fund.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more sub-
advisers but does not require Mitchell Hutchins to do so. Under a sub-
investment advisory contract ("Sub-Advisory Contract") dated November 14, 1994
with Mitchell Hutchins, PIMCO serves as sub-adviser for Low Duration Income
Fund. Under the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays
PIMCO a fee in the annual amount of 0.25% of the Fund's average daily net
assets. PIMCO bears all expenses incurred by it in connection with its services
under the Sub-Advisory Contract. For the fiscal year ended November 30, 1995
and the period October 20, 1994 to November 30, 1994, Mitchell Hutchins paid
(or accrued) to PIMCO sub-advisory fees of $919,938 and $147,540, pursuant to
the Sub-Advisory Contract and a substantially similar prior contract.
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 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 each 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
27
<PAGE>
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 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 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, 1995, November 30, 1994 and November 30, 1993, 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 a
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. PIMCO will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust, Low Duration Income Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to the Trust,
Low Duration Income Fund, its shareholders or Mitchell Hutchins to which PIMCO
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Sub-Advisory Contract.
The Advisory Contract terminates automatically with respect to each 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 Sub-Advisory
Contract terminates automatically upon its assignment or the termination of the
Advisory Contract and its terminable at any time without penalty by the board
of trustees or by vote of the holders of a majority of Low Duration Income
Fund's outstanding voting securities on 60 days' notice to PIMCO, or by PIMCO
on 120 days' written notice to Mitchell Hutchins. The Sub-
28
<PAGE>
Advisory Contract may also be terminated by Mitchell Hutchins (1) upon material
breach by PIMCO of its representations and warranties, which breach shall not
have been cured within a 20 day period after notice of such breach; (2) if
PIMCO becomes unable to discharge its duties and obligations under the Sub-
Advisory Contract or (3) on 120 days' notice to PIMCO.
The following table shows the approximate net assets as of February 29, 1996,
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)............................... $ 5,653.6
Global.......................................................... 2,836.8
Equity/Balanced................................................. 2,922.3
Fixed Income (excluding Money Market)........................... 5,568.1
Taxable Fixed Income.......................................... 3,854.2
Tax-Free Fixed Income......................................... 1,713.9
Money Market Funds.............................................. 22,732.0
</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 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 mutual funds and other
Mitchell Hutchins advisory clients.
PIMCO personnel also may invest in securities for their own accounts pursuant
to PIMCO's code of ethics, which establishes procedures for personal investing
and restricts certain transactions.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class Y shares of each Fund under a distribution contract with the Trust dated
July 1, 1991 ("Distribution Contract") that requires Mitchell Hutchins to use
its best efforts, consistent with its other businesses, to sell shares of the
Funds. Class Y shares of the Funds are offered continuously. Under an exclusive
dealer contract between Mitchell Hutchins and PaineWebber dated July 1, 1991
("Exclusive Dealer Contract"), PaineWebber sells each Fund's Class Y 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
29
<PAGE>
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, 1995, November 30,
1994 and November 30, 1993, U.S. Government Income Fund paid no brokerage
commissions. During the fiscal years ended November 30, 1995 and November 30,
1994 and the period May 3, 1993 to November 30, 1993, Low Duration Income Fund
paid $0, $88,421 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 years ended November 30, 1995, November 30, 1994
and November 30, 1993, neither Fund paid 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. Each
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 a Fund and subject to the review of the
Trust's board of trustees, Mitchell Hutchins or PIMCO 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
reasonable in relation to the benefits to the Fund over the long term. During
the fiscal year ended November 30, 1995, neither Fund directed portfolio
transactions to brokers chosen because they provided research services.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins or PIMCO seeks best execution. Although Mitchell Hutchins or
PIMCO may receive certain research or execution services in connection with
these transactions, neither will not purchase securities at a higher price or
sell securities at a lower price than would otherwise be paid if no weight was
30
<PAGE>
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins and PIMCO 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 or PIMCO 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 or
PIMCO receiving multiple quotes from dealers before executing the transaction
on an agency basis.
Information and research services furnished by dealers or brokers with or
through which a Fund effects securities transactions may be used by Mitchell
Hutchins or PIMCO in advising other funds or accounts and, conversely, research
services furnished to Mitchell Hutchins or PIMCO by dealers or brokers in
connection with other funds or accounts Mitchell Hutchins advises may be used
by Mitchell Hutchins or PIMCO in advising a Fund. Information and research
received from such brokers or dealers will be in addition to, and not in lieu
of, the services required to be performed by Mitchell Hutchins under the
Advisory Contract or PIMCO under the Sub-Advisory Contract.
Investment decisions for a Fund and other investment accounts managed by
Mitchell Hutchins or PIMCO 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 a 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 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 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, 1995 and November 30, 1994, respectively, the portfolio turnover
rates were 206% and 358% for U.S. Government Income Fund and 242% and 246% for
Low Duration Income Fund.
31
<PAGE>
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 or PIMCO, 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
Each Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in the Fund's Performance Advertisements are calculated according
to the following formula:
P(1 + T)/n/ = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to 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. 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"). The
32
<PAGE>
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.
The following table shows performance information for Class Y shares
(formerly Class C shares) of each Fund for the periods indicated. All returns
for periods of more than one year are expressed as an annualized average
return:
<TABLE>
<CAPTION>
U.S. GOVERNMENT LOW DURATION
INCOME FUND INCOME FUND
--------------- ------------
<S> <C> <C>
Fiscal Year Ended November 30, 1995:
Standardized Return*............................. 15.06% 0.83%
Non-Standardized Return.......................... 15.06 0.83
Inception to November 30, 1995:**
Standardized Return*............................. 24.32 0.83
Non-Standardized Return.......................... 24.32 0.83
</TABLE>
- --------
* Class Y shares do not impose an initial or a contingent deferred sales
charge; therefore, Non-Standardized Return is identical to Standardized
Return.
** For U.S. Government Income Fund, the inception date for its Class Y shares
is September 11, 1991; for Low Duration Income Fund, the inception date for
its Class Y shares is October 20, 1995.
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 semi-
annual compounding) of the net asset value per share at the end of the Period.
Yield quotations are calculated according to the following formula:
YIELD = 2[(a-b + 1)/6/-1]
---
cd
<TABLE>
<C> <C> <S>
where: a = interest earned during the Period attributable to a Class of
shares
b = expenses accrued for the Period attributable to a Class of shares
(net of reimbursements)
c = the average daily number of shares of the Class outstanding
during the Period that were entitled to receive dividends
d = the net asset value per share 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
33
<PAGE>
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. The yield of the Funds' Class Y
shares for the 30-day period ended November 30, 1995 was 6.11% for U.S.
Government Income Fund and 6.24% for Low Duration Income Fund.
OTHER INFORMATION. In Performance Advertisements each 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.
Each 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.
A 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 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
34
<PAGE>
may vary depending on the financial institution offering the CD and prevailing
interest rates. Fund shares are not insured or guaranteed by the U.S.
government and returns thereon and net asset value will fluctuate. The
securities held by the Fund generally have longer maturities than most CDs and
may reflect interest rate fluctuations for longer term securities. An
investment in the Fund involves greater risks than an investment in either a
money market fund or a CD.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, 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 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 a 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.
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.
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, 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 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.
35
<PAGE>
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. A 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 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.
Each 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 INVESTMENTS TRUST. Prior to October 20, 1995, the name of
Low Duration Income Fund was "PaineWebber Short-Term U.S. Government Income
Fund." Prior to November 10, 1995, the Fund's Class Y shares were called "Class
C" shares.
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 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,
36
<PAGE>
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 LLP, 1800 Massachusetts
Avenue, NW, Washington, DC 20036-1800, counsel to the Fund, has passed upon the
legality of the shares offered by the Prospectus. Kirkpatrick & Lockhart LLP
also acts as counsel to Mitchell Hutchins and PaineWebber in connection with
other matters.
INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, serves as independent auditors for the Trust.
FINANCIAL STATEMENTS
The Funds' Annual Reports to Shareholders for the fiscal year ended November
30, 1995, are separate documents supplied with this Statement of Additional
Information and the financial statements, accompanying notes and reports of
independent auditors appearing therein relating to the Funds are incorporated
by reference in this Statement of Additional Information.
37
<PAGE>
[This page intentionally left blank]
<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...................................... 11
Trustees and Officers...................................................... 19
Investment Advisory and Distribution Arrangements.......................... 27
Portfolio Transactions..................................................... 29
Valuation of Shares........................................................ 32
Performance Information.................................................... 32
Taxes...................................................................... 35
Other Information.......................................................... 36
Financial Statements....................................................... 37
</TABLE>
RECYCLED PAPER
LOGO
(C)1996 PAINEWEBBER INCORPORATED
PaineWebber
U.S. Government
Income Fund
PaineWebber
Low Duration
U.S. Government
Income Fund
Class Y Shares
- -------------------------------------------------------------------------------
Statement of Additional Information
April 1, 1996
- -------------------------------------------------------------------------------
<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 PaineWebber U.S.
Government Income Fund, PaineWebber Investment Grade Income Fund and PaineWebber
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, 1995.
Financial Highlights for one Class B share of each Fund for each of the
four years in the period ended November 30, 1995 and the period July 1,
1991 (commencement of issuance of shares) to November 30, 1991.
Financial Highlights for one Class C share of each Fund for each of the
three years in the period ended November 30, 1995 and the period July 2,
1992 (commencement of issuance of shares) to November 30, 1992.
Financial Highlights for one Class Y share of U.S. Government Income Fund
for each of the four years in the period ended November 30, 1995 and the
period September 11, 1991 (commencement of issuance of shares) to November
30, 1991.
Included in Part A of this Registration Statement for PaineWebber Low
Duration U.S. Government Income Fund:
Financial Highlights for one Class A share, one Class B share and one Class
C share of the Fund for each of the two years in the period ended November
30, 1995 and for the period May 3, 1993 (commencement of operations) to
November 30, 1993.
Financial Highlights for one Class Y share of the Fund for the period
October 20, 1995 (commencement of issuance of shares) to November 30, 1995.
Included in Part B of this Registration Statement for PaineWebber U.S.
Government Income Fund, PaineWebber Investment Grade Income Fund and PaineWebber
High Income Fund through incorporation by reference from the annual report to
shareholders previously filed with the Securities and Exchange Commission
through EDGAR on February 1, 1996 (Accession No. 0000950130-96-000345):
Portfolio of Investments at November 30, 1995.
Statement of Assets and Liabilities at November 30, 1995.
Statement of Operations for the year ended November 30, 1995.
C-1
<PAGE>
Statement of Changes in Net Assets for each of the two years in the period
ended November 30, 1995.
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, 1995.
Financial Highlights for one Class B share of each Fund for each of the
four years in the period ended November 30, 1995 and the period July 1,
1991 (commencement of issuance of shares) to November 30, 1991.
Financial Highlights for one Class C share of each Fund for each of the
three years in the period ended November 30, 1995 and the period July 2,
1992 (commencement of issuance of shares) to November 30, 1992.
Financial Highlights for one Class Y share of U.S. Government Income Fund
for each of the four years in the period ended November 30, 1995 and the
period September 11, 1991 (commencement of issuance of shares) to November
30, 1991.
Report of Ernst & Young LLP, Independent Auditors, dated January 25, 1996.
Included in Part B of this Registration Statement for PaineWebber Low
Duration U.S. Government Income Fund through incorporation by reference from the
annual report to shareholders previously filed with the Securities and Exchange
Commission through EDGAR on January 31, 1996 (Accession No. 0000950130-96-
000346):
Portfolio of Investments at November 30, 1995.
Statement of Assets and Liabilities at November 30, 1995.
Statement of Operations for the year ended November 30, 1995.
Statement of Changes in Net Assets for each of the two years in the period
ended November 30, 1995.
Notes to Financial Statements.
Financial Highlights for one Class A share, one Class B share and one Class
C share of the Fund for each of the two years in the period ended November
30, 1995 and the period May 3, 1993 (commencement of operations) to
November 30, 1993.
Financial Highlights for one Class Y share of the Fund for the period
October 20, 1995 (commencement of issuance of shares) to November 30, 1995.
C-2
<PAGE>
Report of Ernst & Young LLP, Independent Auditors, dated January 20, 1996.
(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/
--
(l) Amendment to Declaration of Trust effective July 20, 199520/
--
(m) Amendments to Declaration of Trust effective October 20, 1995,
November 10, 1995 and November 29, 199521/
--
(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) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest19/
--
(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 Low
Duration U.S. Government Income Fund15/
--
(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 Shares21/
--
(d) Distribution Contract with respect to Class Y Shares21/
--
(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 Shares21/
--
(h) Exclusive Dealer Agreement with respect to Class Y Shares21/
--
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement2/
-
(9) (a) Transfer Agency and Service Contract6/
-
(b) Service Contract5/
-
C-3
<PAGE>
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP , 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 LLP , 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 LLP, counsel to
the Registrant, with respect to Class C Shares of the above-
referenced Funds11/
--
(d) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to
the Registrant, with respect to PaineWebber Low Duration U.S.
Government Income Fund12/
--
(e) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to
the Registrant, with respect to Class Y shares of PaineWebber
Low Duration U.S. Government Income Fund20/
--
(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 C Shares12/
--
(d) Distribution Fee Addendum with respect to Class C shares of
PaineWebber Low Duration U.S. Government Income Fund15/
--
(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 Y
shares of U.S. Government Income Fund10/
--
(d) Schedule for Computation of Performance Quotations For Class C
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 C shares of PaineWebber Utility Income Fund16/
--
(f) Schedule for Computation of Performance Quotations for Class A,
Class B, and Class C shares of PaineWebber Low Duration U.S.
Government Income Fund16/
--
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
- ---------------------
C-4
<PAGE>
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.
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.
C-5
<PAGE>
18/ Incorporated by reference form Post-Effective Amendment No. 34 to the
- -- registration statement, SEC File No. 2-91362, filed January 27, 1995.
19/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- -- Registrant's Declaration of Trust, as amended effective January 28, 1988,
July 1, 1990, March 21, 1991, April 1, 1991, July 1, 1991, February 26,
1992, January 25, 1993, July 30, 1993, November 13, 1993, July 20, 1995,
October 20, 1995, November 10, 1995 and November 29, 1995 and from Articles
II, VII and X of Registrant's By-Laws, as amended March 19, 1993 and
September 28, 1994.
20/ Incorporated by reference from Post-Effective Amendment No. 38 to the
- -- registration statement, SEC File No. 2-91362, filed September 5, 1995.
21/ Incorporated by reference from Post-Effective Amendment No. 39 to the
- -- registration statement, SEC File No. 2-91362, filed February 14, 1996.
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 18, 1996
------------------
<S> <C>
Shares of beneficial interest, par value
$0.001 per share, in
U.S. Government Income Fund
Class A Shares 28,438
Class B Shares 5,745
Class C Shares 3,453
Class Y Shares 204
Investment Grade Income Fund
Class A Shares 16,933
Class B Shares 3,921
Class C Shares 2,098
Class Y Shares 0
High Income Fund
Class A Shares 16,671
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Class B Shares 12,787
Class C Shares 6,457
Class Y Shares 0
PaineWebber Utility Income Fund
Class A Shares 1,004
Class B Shares 3,353
Class C Shares 1,139
Class Y Shares 0
PaineWebber Low Duration U.S. Government Income Fund
Class A Shares 1,149
Class B Shares 970
Class C Shares 18,007
Class Y Shares 43
</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.
C-7
<PAGE>
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.
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
C-8
<PAGE>
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.
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, as filed with the
Securities and Exchange Commission (registration number 801-13219) and is
incorporated herein by reference.
C-9
<PAGE>
Pacific Investment Management Company ("PIMCO") serves as sub-adviser for
PaineWebber Low Duration U.S. Government Income Fund. PIMCO, a Delaware
partnership, is a registered investment adviser and a subsidiary general
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in
PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Financial Asset Management Corporation, an indirect wholly owned
subsidiary of Pacific Mutual Life Insurance Company ("Pacific Mutual") and PIMCO
Partners, L.L.C., a limited liability company controlled by the PIMCO Managing
Directors. PIMCO is primarily engaged in the investment advisory business.
Information as to the officers and Managing Directors and partners of PIMCO is
included in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-48187) 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.
. GLOBAL SMALL CAP FUND INC.
. INSURED MUNICIPAL INCOME FUND INC.
. INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
. MANAGED HIGH YIELD FUND INC.
. PAINEWEBBER AMERICA FUND
. PAINEWEBBER INVESTMENT SERIES
. PAINEWEBBER INVESTMENT TRUST
. PAINEWEBBER INVESTMENT TRUST II
. PAINEWEBBER INVESTMENT TRUST III
. PAINEWEBBER MANAGED ASSETS TRUST
. PAINEWEBBER MANAGED INVESTMENTS TRUST
. PAINEWEBBER MASTER SERIES, INC.
. PAINEWEBBER MUNICIPAL SERIES
. PAINEWEBBER MUTUAL FUND TRUST
. PAINEWEBBER OLYMPUS FUND
. PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
. PAINEWEBBER SECURITIES TRUST
. PAINEWEBBER SERIES TRUST
. STRATEGIC GLOBAL INCOME FUND, 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, as filed 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, as filed with the
C-10
<PAGE>
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:
<TABLE>
<CAPTION>
Position and Offices
Name and Principal Position With With Underwriter or
Business Address Registrant Exclusive Dealer
- ---------------- ------------- -------------------
<S> <C> <C>
Margo N. Alexander President Director, President
1285 Avenue of the Americas and Chief Executive
New York, New York 10019 Officer of Mitchell
Hutchins and Director
and Executive Vice
President of
PaineWebber
Julianna Berry Vice Vice President and a
1285 Avenue of the Americas President Portfolio Manager of
New York, New York 10019 Mitchell Hutchins
Teresa M. Boyle Vice Vice President and
1285 Avenue of the Americas President Manager - Advisory
New York, New York 10019 Administration of
Mitchell Hutchins
Joan L. Cohen Vice Vice President and
1285 Avenue of the Americas President Attorney of Mitchell
New York, New York 10019 Hutchins
Karen L. Finkel Vice First Vice President
1285 Avenue of the Americas President and a Portfolio
New York, New York 10019 Manager of Mitchell
Hutchins
Ellen R. Harris Vice Managing Director and
1285 Avenue of the Americas President a Portfolio Manager
New York, New York 10019 of Mitchell Hutchins
Mary B. King Vice First Vice President
1285 Avenue of the Americas President and a Portfolio
New York, New York 10019 Manager of Mitchell
Hutchins
Thomas J. Libassi Vice Senior Vice President
1285 Avenue of the Americas President and a Portfolio
New York, New York 10019 Manager of Mitchell
Hutchins
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
C. William Maher Vice First Vice President
1285 Avenue of the Americas President and and a Senior Manger
New York, New York 10019 Assistant of the Mutual Fund
Treasurer Finance Division
of Mitchell Hutchins
Dennis McCauley Vice Managing Director and
1285 Avenue of the Americas President Chief Investment
New York, New York 10019 Officer - Fixed
Income 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
1285 Avenue of the Americas President and Deputy General
New York, New York 10019 and Secretary Counsel of Mitchell
Hutchins
Victoria E. Schonfeld Vice Managing Director and
1285 Avenue of the Americas President General Counsel of
New York, New York 10019 Mitchell Hutchins
Paul H. Schubert Vice Vice President of
1285 Avenue of the Americas President Mitchell Hutchins
New York, New York 10019 and Assistant
Treasurer
Nirmal Singh Vice First Vice President
1285 Avenue of the Americas President and a Portfolio
New York, New York 10019 Manager of Mitchell
Hutchins
Julian F. Sluyters Vice Senior Vice President
1285 Avenue of the Americas President and Director of
New York, New York 10019 and Treasurer Mutual Fund Finance
Division of Mitchell
Hutchins
Mark A. Tincher Vice Managing Director and
1285 Avenue of the Americas President Chief Investment
New York, New York 10019 Officer - U.S. Equity
Investments of
Mitchell Hutchins
Gregory K. Todd Vice First Vice President
1285 Avenue of the Americas President and Associate General
New York, New York 10019 and Assistant Counsel of Mitchell
Secretary Hutchins
</TABLE>
C-12
<PAGE>
<TABLE>
<S> <C> <C>
Craig M. Varrelman Vice First Vice President
1285 Avenue of the Americas President and a Portfolio
New York, New York 10019 Manager of Mitchell
Hutchins
Keith A. Weller Vice First Vice President
1285 Avenue of the Americas President and Associate General
New York, New York 10019 and Assistant Counsel of Mitchell
Secretary Hutchins
</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 the requirements for effectiveness of this
Post-Effective Amendment 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 28th day of
March, 1996.
PAINEWEBBER MANAGED INVESTMENTS TRUST
By: /s/ Dianne E. O'Donnell
---------------------------------
Dianne E. O'Donnell
Vice President and 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/ Margo N. Alexander * Trustee and President March 28, 1996
- ------------------------------ (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr.** Trustee and Chairman of March 28, 1996
- ------------------------------ the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Meyer Feldberg *** Trustee March 28, 1996
- ------------------------------
Meyer Feldberg
/s/ George W. Gowen **** Trustee March 28, 1996
- ------------------------------
George W. Gowen
/s/ Frederic V. Malek **** Trustee March 28, 1996
- ------------------------------
Frederic V. Malek
/s/ Judith Davidson Moyers *** Trustee March 28, 1996
- ------------------------------
Judith Davidson Moyers
/s/ Julian F. Sluyters Vice President and March 28, 1996
- ------------------------------ Treasurer (Principal
Julian F. Sluyters Financial and Accounting
Officer)
</TABLE>
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 8, 1995 and incorporated by reference from Post-Effective Amendment No. 34
to the registration statement of PaineWebber America Fund, SEC File No. 2-78626,
filed May 10, 1995.
** 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
No. 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 33-11025, filed July 31, 1991.
**** Signatures affixed by Elinor W. Gammon pursuant to powers 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 29, 1990.
-2-
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
EXHIBIT INDEX
-------------
(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/
--
(l) Amendment to Declaration of Trust effective July 20, 199520/
--
(m) Amendments to Declaration of Trust effective October 20, 1995,
November 10, 1995 and November 29, 199521/
--
(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) Instruments defining the rights of holders of the Registrant's share
of beneficial interest19/
--
(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 Low
Duration U.S. Government Income Fund15/
--
(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 Shares21/
--
(d) Distribution Contract with respect to Class Y Shares21/
--
(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 Shares21/
--
(h) Exclusive Dealer Agreement with respect to Class Y Shares21/
--
(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 LLP , counsel to
the Registrant, with respect to Class A and
<PAGE>
Class B shares of U.S. Government Income Fund, Investment Grade
Income Fund, and High Income Fund8/
-
(b) Opinion and consent of Kirkpatrick & Lockhart LLP , 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 LLP, counsel to the
Registrant, with respect to Class C Shares of the above-
referenced Funds11/
--
(d) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to PaineWebber Low Duration U.S.
Government Income Fund12/
--
(e) Opinion and Consent of Kirkpatrick & Lockhart LLP, counsel to
the Registrant, with respect to Class Y shares of PaineWebber Low
Duration U.S. Government Income Fund20/
--
(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 C Shares12/
--
(d) Distribution Fee Addendum with respect to Class C shares of
PaineWebber Low Duration U.S. Government Income Fund15/
--
(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 Y
shares of U.S. Government Income Fund10/
--
(d) Schedule for Computation of Performance Quotations For Class C
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 C shares of PaineWebber Utility Income Fund16/
--
(f) Schedule for Computation of Performance Quotations for Class A,
Class B, and Class C shares of PaineWebber Low Duration U.S.
Government Income Fund16/
--
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
- ---------------------
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.
<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.
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.
<PAGE>
18/ Incorporated by reference form Post-Effective Amendment No. 34 to the
- -- registration statement, SEC File No. 2-91362, filed January 27, 1995.
19/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- -- Registrant's Declaration of Trust, as amended effective January 28, 1988,
July 1, 1990, March 21, 1991, April 1, 1991, July 1, 1991, February 26,
1992, January 25, 1993, July 30, 1993, November 13, 1993, July 20, 1995,
October 20, 1995, November 10, 1995 and November 29, 1995 and from Articles
II, VII and X of Registrant's By-Laws, as amended March 19, 1993 and
September 28, 1994.
20/ Incorporated by reference from Post-Effective Amendment No. 38 to the
- -- registration statement, SEC File No. 2-91362, filed September 5, 1995.
21/ Incorporated by reference from Post-Effective Amendment No. 39 to the
- -- registration statement, SEC File No. 2-91362, filed February 14, 1996.
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference of our report dated
January 25, 1996 for PaineWebber U.S. Government Income Fund, PaineWebber
Investment Grade Income Fund and PaineWebber High Income Fund and our report
dated January 20, 1996 for PaineWebber Low Duration U.S. Government Income Fund,
in this Registration Statement (Form N-1A No. 2-91362) of PaineWebber Managed
Investments Trust.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
March 26, 1996
<PAGE>
EXHIBIT 18
PAINEWEBBER MANAGED INVESTMENTS TRUST
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
PaineWebber Managed Investments Trust hereby adopts this amended and
restated Multiple Class Plan pursuant to Rule 18f-3 under the Investment Company
Act of 1940, as amended ("1940 Act") on behalf of its current operating series,
PaineWebber U.S. Government Income Fund, PaineWebber Investment Grade Income
Fund, PaineWebber High Income Fund, PaineWebber Low Duration U.S. Government
Income Fund and PaineWebber Utility Income Fund, and any series that may be
established in the future (referred to hereinafter collectively as the "Funds"
and individually as a "Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
-----------------------------------------------
1. CLASS A SHARES. Class A shares of each Fund are sold to the general
public subject to an initial sales charge. The initial sales charge for each
Fund is waived for certain eligible purchasers and reduced or waived for certain
large volume purchases.
The maximum sales charge is 3% of the public offering price for Class A
shares of PaineWebber Low Duration U.S. Government Income Fund.
The maximum sales charge is 4% of the public offering price for Class A
shares of any other Fund that invests primarily in debt securities.
The maximum sales charge is 4.5% of the public offering price for Class A
shares of a Fund that invests primarily in equity securities or a combination of
equity and debt securities.
Class A shares of each Fund are subject to an annual service fee of .25% of
the average daily net assets of the Class A shares of each Fund paid pursuant to
a plan of distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
Class A shares of each Fund will be subject to a contingent deferred sales
charge ("CDSC") on redemptions of shares (i) purchased without an initial sales
charge due to a sales charge waiver for purchases of $1 million or more and (ii)
held less than one year. The Class A CDSC is equal to 1% of the lower of: (i)
the net asset value of the shares at the time of purchase or (ii) the net asset
value of the shares at the time of redemption. Class A shares of each Fund held
one year or longer and Class A shares of each Fund acquired through reinvestment
of dividends or capital gains distributions on shares otherwise subject to a
Class A CDSC are not subject to the CDSC. The CDSC for Class A shares of each
Fund shall not apply to shares purchased prior to November 10, 1995 and will be
waived under certain circumstances.
<PAGE>
PaineWebber Managed Investments Trust
Multiple Class Plan
Page 2
2. CLASS B SHARES. Class B shares of each Fund are sold to the general
public subject to a CDSC, but without imposition of an initial sales charge.
With the exception noted below, the maximum CDSC for Class B shares of
PaineWebber Low Duration U.S. Government Income Fund is equal to 3% of the lower
of: (i) the net asset value of the shares at the time of purchase or (ii) the
net asset value of the shares at the time of redemption. The higher CDSC
described below applies if the shares being redeemed were acquired through an
exchange with a fund that has a higher CDSC.
The maximum CDSC for Class B shares of each other Fund is equal to 5% of
the lower of: (i) the net asset value of the shares at the time of purchase or
(ii) the net asset value of the shares at the time of redemption.
Class B shares of each Fund held six years or longer (four years or longer
for Class B shares of PaineWebber Low Duration U.S. Government Income Fund) and
Class B shares of each Fund acquired through reinvestment of dividends or
capital gains distributions are not subject to the CDSC.
Class B shares of each Fund are subject to an annual service fee of .25% of
average daily net assets and a distribution fee of .75% of average daily net
assets of the Class B shares of each Fund, each paid pursuant to a plan of
distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
Class B shares of each Fund convert to Class A shares approximately six
years after issuance at relative net asset value.
3. CLASS C SHARES. Class C shares of each Fund are sold to the general
public without imposition of a sales charge.
Class C shares of a Fund that invests primarily in debt securities are
subject to an annual service fee of .25% of average daily net assets and a
distribution fee of .50% of average daily net assets of Class C shares of such
Fund, each pursuant to a plan of distribution adopted pursuant to Rule 12b-1
under the 1940 Act.
Class C shares of a Fund that invests primarily in equity securities or a
combination of equity and debt securities are subject to an annual service fee
of .25% of average daily net assets and a distribution fee of .75% of average
daily net assets of Class C shares of such Fund, each pursuant to a plan of
distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
<PAGE>
PaineWebber Managed Investments Trust
Multiple Class Plan
Page 3
Class C shares of a Fund that invests primarily in debt securities will be
subject to a CDSC on redemptions of Class C shares held less than one year equal
to .75% of the lower of: (i) the net asset value of the shares at the time of
purchase or (ii) the net asset value of the shares at the time of redemption;
provided that such CDSC shall not apply to Class C shares purchased prior to
November 10, 1995.
Class C shares of a Fund that invests primarily in equity securities or in
a combination of equity and debt securities will be subject to a CDSC on
redemptions of Class C shares held less than one year equal to 1% of the lower
of: (i) the net asset value of the shares at the time of purchase or (ii) the
net asset value of the shares at the time of redemption; provided that such CDSC
shall not apply to Class C shares purchased prior to November 10, 1995.
Class C shares of each Fund held one year or longer and Class C shares of
each Fund acquired through reinvestment of dividends or capital gains
distributions are not subject to the CDSC. The CDSC for Class C shares of each
Fund will be waived under certain circumstances.
4. CLASS Y SHARES. Class Y shares are sold without imposition of an
initial sales charge or CDSC and are not subject to any service or distribution
fees.
Class Y shares of each Fund are available for purchase only by: (i)
employee benefit and retirement plans, other than individual retirement accounts
and self-employed retirement plans, of Paine Webber Group Inc. and its
affiliates; (ii) certain unit investment trusts sponsored by PaineWebber
Incorporated; (iii) participants in certain wrap fee investment programs that
are currently or in the future sponsored by PaineWebber Incorporated and that
may invest in PaineWebber proprietary funds, provided that shares are purchased
through or in connection with those programs; and (iv) the holders of Class Y
shares of any former Mitchell Hutchins/Kidder Peabody ("MH/KP") mutual fund
provided that such shares are issued in connection with the reorganization of a
MH/KP mutual fund into that Fund.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
---------------------------------
Certain expenses may be attributable to a particular Class of shares of
each Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the following other expenses:
<PAGE>
PaineWebber Managed Investments Trust
Multiple Class Plan
Page 4
(1) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses,
and proxies to current shareholders of a specific Class;
(2) Blue Sky registration fees incurred by a specific Class of
shares;
(3) SEC registration fees incurred by a specific Class of shares;
(4) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(5) Trustees' fees incurred as a result of issues relating to a
specific Class of shares;
(6) litigation expenses or other legal expenses relating to a
specific Class of shares; and
(7) transfer agent fees identified as being attributable to a
specific Class.
C. EXCHANGE PRIVILEGES:
-------------------
Class A, Class B and Class C shares of each Fund may be exchanged for
shares of the corresponding Class of other PaineWebber mutual funds and MH/KP
mutual funds, or may be acquired through an exchange of shares of the
corresponding Class of those funds. Class Y shares of the Funds are not
exchangeable.
These exchange privileges may be modified or terminated by a Fund, and
exchanges may only be made into funds that are legally registered for sale in
the investor's state of residence.
D. CLASS DESIGNATION:
-----------------
Subject to approval by the Board of Trustees of PaineWebber Managed
Investments Trust, a Fund may alter the nomenclature for the designations of one
or more of its classes of shares.
E. ADDITIONAL INFORMATION:
----------------------
This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for the applicable Classes; provided, however, that none
of the terms set forth in
<PAGE>
PaineWebber Managed Investments Trust
Multiple Class Plan
Page 5
any such prospectus shall be inconsistent with the terms of the Classes
contained in this Plan. The prospectus for each Fund contains additional
information about the Classes and each Fund's multiple class structure.
F. DATE OF EFFECTIVENESS:
---------------------
This Multiple Class Plan is effective as of the date hereof, provided that
this Plan shall not become effective with respect to any Fund unless such action
has first been approved by the vote of a majority of the Board and by vote of a
majority of those trustees of the Fund who are not interested persons of
PaineWebber Managed Investments Trust.
February 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 101
<NAME> PAINEWEBBER US GOVERNMENT INCOME FUND CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 412760
<INVESTMENTS-AT-VALUE> 426717
<RECEIVABLES> 6570
<ASSETS-OTHER> 224
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 433511
<PAYABLE-FOR-SECURITIES> 60
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3166
<TOTAL-LIABILITIES> 3226
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 626565
<SHARES-COMMON-STOCK> 47185
<SHARES-COMMON-PRIOR> 50464
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1104)
<ACCUMULATED-NET-GAINS> (209160)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13984
<NET-ASSETS> 430285
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 31028
<OTHER-INCOME> 0
<EXPENSES-NET> (4173)
<NET-INVESTMENT-INCOME> 26855
<REALIZED-GAINS-CURRENT> (923)
<APPREC-INCREASE-CURRENT> 30439
<NET-CHANGE-FROM-OPS> 56371
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26986)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 6478
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<SHARES-REINVESTED> 1554
<NET-CHANGE-IN-ASSETS> (3392)
<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 8.50
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<PER-SHARE-DIVIDEND> (0.58)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 102
<NAME> PAINEWEBBER US GOVERNMENT INCOME FUND CLASS B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
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<INVESTMENTS-AT-VALUE> 81785
<RECEIVABLES> 1259
<ASSETS-OTHER> 43
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 83087
<PAYABLE-FOR-SECURITIES> 12
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<OTHER-ITEMS-LIABILITIES> 607
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<PAID-IN-CAPITAL-COMMON> 120088
<SHARES-COMMON-STOCK> 9043
<SHARES-COMMON-PRIOR> 11720
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<OVERDISTRIBUTION-NII> (212)
<ACCUMULATED-NET-GAINS> (40088)
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<NET-INVESTMENT-INCOME> 5281
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<DISTRIBUTIONS-OF-INCOME> (5310)
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<NET-CHANGE-IN-ASSETS> (2565)
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<GROSS-EXPENSE> 1628
<AVERAGE-NET-ASSETS> 89779
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 103
<NAME> PAINEWEBBER US GOVERNMENT INCOME FUND CLASS C
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1995
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<TOTAL-ASSETS> 54235
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<PAID-IN-CAPITAL-COMMON> 78387
<SHARES-COMMON-STOCK> 5909
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<OVERDISTRIBUTION-NII> (138)
<ACCUMULATED-NET-GAINS> (26167)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1750
<NET-ASSETS> 53831
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<EXPENSES-NET> (898)
<NET-INVESTMENT-INCOME> 3573
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 104
<NAME> PAINEWEBBER US GOVERNMENT INCOME FUND CLASS Y
<MULTIPLIER> 1000
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<NET-INVESTMENT-INCOME> 356
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 181
<NAME> PAINEWEBBER LOW DURATION US GOV'T INCOME FUND CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
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<TOTAL-ASSETS> 255832
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<SENIOR-EQUITY> 0
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<SHARES-COMMON-PRIOR> 222718
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (297)
<ACCUMULATED-NET-GAINS> (48819)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1378
<NET-ASSETS> 127961
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10379
<OTHER-INCOME> 0
<EXPENSES-NET> (1754)
<NET-INVESTMENT-INCOME> 8625
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<NET-CHANGE-FROM-OPS> 5681
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<DISTRIBUTIONS-OF-INCOME> (7944)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-REDEEMED> (29452)
<SHARES-REINVESTED> 1076
<NET-CHANGE-IN-ASSETS> (29640)
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 1754
<AVERAGE-NET-ASSETS> 134644
<PER-SHARE-NAV-BEGIN> 2.25
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<PER-SHARE-DISTRIBUTIONS> 0
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 182
<NAME> PAINEWEBBER LOW DURATION US GOV'T INCOME FUND CLASS B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
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<INVESTMENTS-AT-VALUE> 11536
<RECEIVABLES> 6745
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18288
<PAYABLE-FOR-SECURITIES> 9066
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75
<TOTAL-LIABILITIES> 9141
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12560
<SHARES-COMMON-STOCK> 3908
<SHARES-COMMON-PRIOR> 12808
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (21)
<ACCUMULATED-NET-GAINS> (3490)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 98
<NET-ASSETS> 9147
<DIVIDEND-INCOME> 742
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (208)
<NET-INVESTMENT-INCOME> 534
<REALIZED-GAINS-CURRENT> 70
<APPREC-INCREASE-CURRENT> 336
<NET-CHANGE-FROM-OPS> 940
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (531)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 917
<NUMBER-OF-SHARES-REDEEMED> (3100)
<SHARES-REINVESTED> 150
<NET-CHANGE-IN-ASSETS> (4225)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (321)
<GROSS-ADVISORY-FEES> 53
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 208
<AVERAGE-NET-ASSETS> 10572
<PER-SHARE-NAV-BEGIN> 2.25
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 0.09
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 2.34
<EXPENSE-RATIO> 2.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 183
<NAME> PAINEWEBBER LOW DURATION US GOV'T INCOME FUND CLASS C
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 225273
<INVESTMENTS-AT-VALUE> 227213
<RECEIVABLES> 132856
<ASSETS-OTHER> 140
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 360209
<PAYABLE-FOR-SECURITIES> 178576
<SENIOR-LONG-TERM-DEBT> 1465
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 180041
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 247383
<SHARES-COMMON-STOCK> 77008
<SHARES-COMMON-PRIOR> 497587
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (418)
<ACCUMULATED-NET-GAINS> (68737)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1940
<NET-ASSETS> 180168
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14614
<OTHER-INCOME> 0
<EXPENSES-NET> (3640)
<NET-INVESTMENT-INCOME> 10974
<REALIZED-GAINS-CURRENT> 1376
<APPREC-INCREASE-CURRENT> 6622
<NET-CHANGE-FROM-OPS> 18972
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11679)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5571
<NUMBER-OF-SHARES-REDEEMED> (63802)
<SHARES-REINVESTED> 3681
<NET-CHANGE-IN-ASSETS> (117166)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (12010)
<GROSS-ADVISORY-FEES> 1044
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3640
<AVERAGE-NET-ASSETS> 219808
<PER-SHARE-NAV-BEGIN> 2.25
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 0.09
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 2.34
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 121
<NAME> PAINEWEBBER INVESTMENT GRADE INCOME FUND CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 242660
<INVESTMENTS-AT-VALUE> 255302
<RECEIVABLES> 8100
<ASSETS-OTHER> 33
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 263435
<PAYABLE-FOR-SECURITIES> 2245
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2293
<TOTAL-LIABILITIES> 4538
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 289809
<SHARES-COMMON-STOCK> 24251
<SHARES-COMMON-PRIOR> 28076
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (378)
<ACCUMULATED-NET-GAINS> (43175)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12642
<NET-ASSETS> 258898
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22193
<OTHER-INCOME> 0
<EXPENSES-NET> (2570)
<NET-INVESTMENT-INCOME> 19623
<REALIZED-GAINS-CURRENT> 4012
<APPREC-INCREASE-CURRENT> 22092
<NET-CHANGE-FROM-OPS> 45727
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 19623
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 27730
<NUMBER-OF-SHARES-REDEEMED> (75594)
<SHARES-REINVESTED> 9871
<NET-CHANGE-IN-ASSETS> (11889)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (47320)
<OVERDISTRIB-NII-PRIOR> (380)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1377
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2570
<AVERAGE-NET-ASSETS> 264398
<PER-SHARE-NAV-BEGIN> 9.67
<PER-SHARE-NII> .76
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> (.76)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.68
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 122
<NAME> PAINEWEBBER INVESTMENT GRADE INCOME FUND CLASS B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 66896
<INVESTMENTS-AT-VALUE> 70381
<RECEIVABLES> 2233
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72623
<PAYABLE-FOR-SECURITIES> 619
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 632
<TOTAL-LIABILITIES> 1251
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79894
<SHARES-COMMON-STOCK> 6687
<SHARES-COMMON-PRIOR> 7173
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (104)
<ACCUMULATED-NET-GAINS> (11903)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3485
<NET-ASSETS> 71372
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6118
<OTHER-INCOME> 0
<EXPENSES-NET> (1300)
<NET-INVESTMENT-INCOME> 4818
<REALIZED-GAINS-CURRENT> 1106
<APPREC-INCREASE-CURRENT> 6090
<NET-CHANGE-FROM-OPS> 12014
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4818
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7644
<NUMBER-OF-SHARES-REDEEMED> (20840)
<SHARES-REINVESTED> 2721
<NET-CHANGE-IN-ASSETS> (37278)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (12086)
<OVERDISTRIB-NII-PRIOR> (97)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 431
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1300
<AVERAGE-NET-ASSETS> 72222
<PER-SHARE-NAV-BEGIN> 9.67
<PER-SHARE-NII> .68
<PER-SHARE-GAIN-APPREC> 1.00
<PER-SHARE-DIVIDEND> (.68)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.67
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 123
<NAME> PAINEWEBBER INVESTMENT GRADE INCOME FUND CLASS C
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 36695
<INVESTMENTS-AT-VALUE> 38606
<RECEIVABLES> 1225
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39836
<PAYABLE-FOR-SECURITIES> 339
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 347
<TOTAL-LIABILITIES> 686
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43825
<SHARES-COMMON-STOCK> 3667
<SHARES-COMMON-PRIOR> 4702
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (57)
<ACCUMULATED-NET-GAINS> (6529)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1911
<NET-ASSETS> 39150
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3356
<OTHER-INCOME> 0
<EXPENSES-NET> (473)
<NET-INVESTMENT-INCOME> 2883
<REALIZED-GAINS-CURRENT> 607
<APPREC-INCREASE-CURRENT> 3341
<NET-CHANGE-FROM-OPS> 6830
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2883)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4193
<NUMBER-OF-SHARES-REDEEMED> (11431)
<SHARES-REINVESTED> 1493
<NET-CHANGE-IN-ASSETS> 1798
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (7924)
<OVERDISTRIB-NII-PRIOR> (64)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 82
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 473
<AVERAGE-NET-ASSETS> 41460
<PER-SHARE-NAV-BEGIN> 9.67
<PER-SHARE-NII> .70
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> (.70)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.68
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 141
<NAME> PAINEWEBBER HIGH INCOME FUND CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 268264
<INVESTMENTS-AT-VALUE> 242831
<RECEIVABLES> 15008
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 257841
<PAYABLE-FOR-SECURITIES> 4142
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5080
<TOTAL-LIABILITIES> 9222
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 387784
<SHARES-COMMON-STOCK> 35739
<SHARES-COMMON-PRIOR> 37587
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 825
<ACCUMULATED-NET-GAINS> (112907)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (25433)
<NET-ASSETS> 248619
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 31859
<OTHER-INCOME> 0
<EXPENSES-NET> (2453)
<NET-INVESTMENT-INCOME> 29406
<REALIZED-GAINS-CURRENT> (16262)
<APPREC-INCREASE-CURRENT> 9509
<NET-CHANGE-FROM-OPS> 22653
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29458
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4459
<NUMBER-OF-SHARES-REDEEMED> (8121)
<SHARES-REINVESTED> 1814
<NET-CHANGE-IN-ASSETS> (1848)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (755)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1316
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2453
<AVERAGE-NET-ASSETS> 263221
<PER-SHARE-NAV-BEGIN> 7.14
<PER-SHARE-NII> 0.79
<PER-SHARE-GAIN-APPREC> (0.17)
<PER-SHARE-DIVIDEND> (0.80)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.96
<EXPENSE-RATIO> 0.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 142
<NAME> PAINEWEBBER HIGH INCOME FUND CLASS B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 229772
<INVESTMENTS-AT-VALUE> 207988
<RECEIVABLES> 12855
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 220845
<PAYABLE-FOR-SECURITIES> 3547
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4352
<TOTAL-LIABILITIES> 7899
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 332143
<SHARES-COMMON-STOCK> 30630
<SHARES-COMMON-PRIOR> 32996
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 706
<ACCUMULATED-NET-GAINS> (96707)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (21784)
<NET-ASSETS> 212946
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 28273
<OTHER-INCOME> 0
<EXPENSES-NET> (3928)
<NET-INVESTMENT-INCOME> 24345
<REALIZED-GAINS-CURRENT> (13929)
<APPREC-INCREASE-CURRENT> 8144
<NET-CHANGE-FROM-OPS> 18560
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 24399
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10325
<NUMBER-OF-SHARES-REDEEMED> (13938)
<SHARES-REINVESTED> 1247
<NET-CHANGE-IN-ASSETS> (2366)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (662)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1169
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3928)
<AVERAGE-NET-ASSETS> 233692
<PER-SHARE-NAV-BEGIN> 7.14
<PER-SHARE-NII> 0.74
<PER-SHARE-GAIN-APPREC> (0.18)
<PER-SHARE-DIVIDEND> (0.75)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.95
<EXPENSE-RATIO> 1.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 143
<NAME> PAINEWEBBER HIGH INCOME FUND CLASS C
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 112121
<INVESTMENTS-AT-VALUE> 101492
<RECEIVABLES> 6273
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107765
<PAYABLE-FOR-SECURITIES> 1731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2123
<TOTAL-LIABILITIES> 3854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 162075
<SHARES-COMMON-STOCK> 14915
<SHARES-COMMON-PRIOR> 16107
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 344
<ACCUMULATED-NET-GAINS> (47190)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10630)
<NET-ASSETS> 103911
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13659
<OTHER-INCOME> 0
<EXPENSES-NET> (1631)
<NET-INVESTMENT-INCOME> 12028
<REALIZED-GAINS-CURRENT> (6797)
<APPREC-INCREASE-CURRENT> 3974
<NET-CHANGE-FROM-OPS> 9205
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12058)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8405
<NUMBER-OF-SHARES-REDEEMED> (10509)
<SHARES-REINVESTED> 912
<NET-CHANGE-IN-ASSETS> (1192)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (324)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 565
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1631
<AVERAGE-NET-ASSETS> 113126
<PER-SHARE-NAV-BEGIN> 7.15
<PER-SHARE-NII> 0.76
<PER-SHARE-GAIN-APPREC> (0.18)
<PER-SHARE-DIVIDEND> (0.76)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.97
<EXPENSE-RATIO> 1.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
