<PAGE>
As filed with the Securities and Exchange Commission on January 28, 1999
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. 58 [X]
-- -
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
-
Amendment No. 51 [X]
-- -
(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:
ROBERT A. WITTIE, Esq.
ELINOR W. GAMMON, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone: (202)778-9000
Approximate Date of Proposed Public Offering: Effective Date of this Post-
Effective Amendment.
It is proposed that this filing will become effective:
[_] Immediately upon filing pursuant to Rule 485(b)
[_] On______pursuant to Rule 485(b)
[_] 60 days after filing pursuant to Rule 485(a)(1)
[X] On March 31, 1999 pursuant to Rule 485(a)(1)
- --------------
[_] 75 days after filing pursuant to Rule 485(a)(2)
[_] On______pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
PaineWebber U.S. Government
Income Fund
PaineWebber Low Duration
U.S. Government Income Fund
PaineWebber Investment Grade
Income Fund
PaineWebber High Income Fund
PaineWebber Strategic Income Fund
PROSPECTUS March 31, 1999
_______________________________
As with all mutual funds, the Securities and Exchange Commission has not
approved any fund's shares as investments or determined whether this
prospectus is complete or accurate. To state otherwise is a crime.
<PAGE>
Paine Webber U.S. Government Income Fund Investment Grade Income Fund
Low Duration U.S. Government Income High Income Fund
Fund
Strategic Income Fund
- --------------------------------------------------
Contents
THE FUNDS (Page numbers will change)
------------------------------------------------------------
What every investor 3 U.S. Government Income Fund
should know about
the Funds 10 Low Duration U.S. Government Income Fund
16 Investment Grade Income Fund
22 High Income Fund
28 Strategic Income Fund
34 More on Risks and Investment Strategies
YOUR INVESTMENT
------------------------------------------------------------
Information for 36 Managing Your Fund Account
managing your Fund - Flexible Pricing
account - Buying Shares
- Selling Shares
- Exchanging Shares
- Pricing and Valuation
ADDITIONAL INFORMATION
------------------------------------------------------------
Additional important 44 Management
information about
the Funds 47 Dividends and Taxes
48 Financial Highlights
------------------------------------------------------------
Where to learn more
about these and other Back Cover
PaineWebber Funds
---------------------------------
The funds are not complete or
balanced investment programs.
---------------------------------
2
<PAGE>
PaineWebber U.S. Government Income Fund
- ---------------------------------------
PaineWebber U.S. Government Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
Fund Objective:
High current income consistent with the preservation of capital and liquidity.
Principal Investment Strategies:
The fund invests primarily in U.S. government bonds, including bonds that are
backed by mortgages. The fund also invests, to a lesser extent, in non-
government bonds that have the highest credit ratings and that are backed by
mortgages or other assets. Normally, the fund concentrates its investments in
U.S. government and privately issued bonds that are backed by mortgages or
other assets. The fund uses interest rate futures contracts and other
derivatives to help manage its portfolio "duration." "Duration" is a measure
of the fund's exposure to interest rate risk. The fund invests in when-issued
or delayed delivery bonds as a leveraging technique in order to increase its
return.
The fund's investment adviser, Mitchell Hutchins, uses a three step investment
process to find the best relative values for the fund: management of the fund's
portfolio duration; allocation of the fund's assets among its investment
sectors; and selection of specific securities.
Mitchell Hutchins adjusts the fund's portfolio duration based on its
assessment of fundamental economic and technical market conditions. A longer
duration means that changes in market interest rates are likely to have a
larger effect on the value of the fund's assets. Therefore, when Mitchell
Hutchins believes that interest rates are likely to fall, thereby increasing
bond values, it may lengthen the fund's portfolio duration.
Mitchell Hutchins allocates the fund's assets among the various sectors of the
U.S. government and mortgage-backed bond markets (for example, Treasury
obligations, bonds issued or guaranteed by government agencies and government
or non-government mortgage-backed bonds) by deciding which sectors provide the
best relative values under prevailing conditions. For example, mortgage-backed
bonds normally provide a higher yield than comparable Treasury bonds. If the
difference in yields between those two types of bonds is higher than normal,
Mitchell Hutchins may increase the fund's investments in mortgage-backed
bonds.
Mitchell Hutchins selects securities for the fund by analyzing bond
fundamentals. It chooses securities that it believes provide the best
combination of income, liquidity and potential for gain relative to risk of
loss.
Principal Risks:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
. Interest Rate Risk
. Prepayment Risk
. Concentration Risk
. Leverage Risk
. Credit Risk
. Derivatives Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
3
<PAGE>
PaineWebber U.S. Government Income Fund
- ---------------------------------------
Information on the fund's recent investment strategies and holdings can be
found in its current annual/semiannual reports (see back cover for information
on ordering these reports).
4
<PAGE>
PaineWebber U.S. Government Income Fund
- ---------------------------------------
PERFORMANCE
- -----------
Risk/Return Bar Chart and Table:
The following bar chart shows how the fund's performance has varied from year-
to-year. The chart shows Class A shares because they have the longest
performance history of any class of fund shares. The chart does not reflect
the effect of sales charges; if it did, the total returns shown would be
lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total Return on Class A Shares
Calendar Year Percentage
------------- ----------
1989 12.58%
1990 9.67%
1991 14.89%
1992 6.37%
1993 6.48%
1994 -10.51%
1995 17.04%
1996 0.98%
1997 9.44%
1998
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
5
<PAGE>
Average Annual Total Returns
as of December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Class Class A Class B* Class C Class Y Lehman
Brothers
Inception Date 8/31/84 7/1/91 7/2/92 9/11/91 Government
Bond Index
One Year
After deducting maximum
sales charges
Five Years
After deducting maximum
sales charges
Ten Years
After deducting maximum
sales charges
Life of Class
After deducting maximum
sales charges
</TABLE>
* Assumes conversion of Class B shares to Class A after six years.
6
<PAGE>
PaineWebber U.S. Government Income Fund
- ---------------------------------------
EXPENSES AND FEE TABLES
- -----------------------
Fees and Expenses: These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
Shareholder Transaction Expenses (fees paid directly from your investments)
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases
(as a % of offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Class A Class B Class C Class Y
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service
(12b-1) Fees 0.25 1.00 0.75 0.00
Other Expenses _____ _____ _____ ______
Total Annual Fund
Operating Expenses ____% ____% ____% ____%
</TABLE>
7
<PAGE>
PaineWebber U.S. Government Income Fund
- ---------------------------------------
Example:
This example is intended to help you compare the cost of investing in
PaineWebber U.S. Government Income Fund with the cost of investing in other
mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all
shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all
shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
8
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
- -----------------------------------------------------
PaineWebber Low Duration U.S. Government Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
Fund Objective:
The highest level of income that is consistent with the preservation of capital
and low volatility of net asset value.
Principal Investment Strategies:
The fund normally limits its portfolio "duration" to between one and three
years. "Duration" is a measure of the fund's exposure to interest rate risk. A
longer duration means that changes in market interest rates are likely to have a
larger effect on the value of the assets in a portfolio. Because the fund's
normal, one-to-three year portfolio duration is relatively short, the effect of
interest rate changes on the fund's value is expected to be relatively limited.
The fund invests primarily in U.S. government bonds, including those backed by
mortgages. The fund also invests, to a lesser extent, in non-government bonds
that have the highest credit rating and that are backed by mortgages or other
assets. The fund normally concentrates its investments in U.S. government and
privately issued bonds that are backed by mortgages or other assets. The fund
invests in when-issued or delayed delivery bonds as a leveraging technique in
order to increase its return.
Mitchell Hutchins has appointed Pacific Investment Management Company ("PIMCO")
as the fund's sub-adviser. PIMCO, analyzes U.S. economic and market conditions,
as well as other factors, to decide on a portfolio duration and to allocate fund
assets to bonds of different maturities, types and coupon interest rates. PIMCO
selects bonds based on various factors, including economic forecasts,
anticipated interest rate levels and expected prepayment rates on the mortgages
supporting mortgage-backed bonds. PIMCO selects specific bonds by analyzing
their relative value and risk characteristics.
Principal Risks:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
. Interest Rate Risk
. Prepayment Risk
. Concentration Risk
. Leverage Risk
. Credit Risk
. Derivatives Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
Information on the fund's recent investment strategies and holdings can be found
in its current annual/semiannual reports (see back cover for information on
ordering these reports).
9
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
- -----------------------------------------------------
PERFORMANCE
- -----------
Risk/Return Bar Chart and Table:
The following bar chart shows how the fund's performance has varied from
year-to-year. The chart shows Class A shares because they have as long a
performance history as any class of fund shares. The chart does not reflect the
effect of sales charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future. PIMCO became the fund's sub-adviser on October 24, 1994.
Therefore, information for the period before that date may be even less
indicative than information for the period since that date.
Total Return on Class A Shares
Calendar Year Percentage
------------- ----------
1994 -4.39%
1995 10.75%
1996 5.57%
1997 7.05%
1998
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
10
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
- -----------------------------------------------------
Average Annual Total Returns
as of December 31, 1998
<TABLE>
<CAPTION>
Class Class A Class B Class C Class Y Merrill Lynch
1-3 Year
Inception Date 5/3/93 5/3/93 5/3/93 10/20/95 Treasury Index
<S> <C> <C> <C> <C> <C>
One Year
After deducting maximum
sales charges
Five Years
After deducting maximum
sales charges
Life of Class
After deducting maximum
sales charges
</TABLE>
11
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
- -----------------------------------------------------
EXPENSES AND FEE TABLES
- -----------------------
Fees and Expenses: These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
Shareholder Transaction Expenses (fees paid directly from your investments)
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases
(as a % of offering price) 3% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 3% 0.75% None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Class A Class B Class C Class Y
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service
(12b-1) Fees 0.25 1.00 0.75 0.00
Other Expenses ____ _____ ____ ____
Total Annual Fund ____% ____% ____% ____%
Operating Expenses
</TABLE>
12
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
- ----------------------------------------------------
Example:
This example is intended to help you compare the cost of investing in
PaineWebber Low Duration U.S. Government Income Fund with the cost of investing
in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all
shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all
shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
13
<PAGE>
PaineWebber Investment Grade Income Fund
- -----------------------------------------
PaineWebber Investment Grade Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
Fund Objective:
High current income consistent with the preservation of capital and liquidity.
Principal Investment Strategies:
The fund invests primarily in a diversified range of investment grade bonds,
including U.S government bonds, U.S. and foreign corporate bonds, and bonds that
are backed by mortgages. The fund also invests, to a lesser extent, in corporate
bonds that are below investment grade, preferred stocks and bonds that are
convertible into common stocks. The fund uses interest rate futures contracts
and other derivatives to help manage its portfolio "duration." "Duration" is a
measure of the fund's exposure to interest rate risk.
The fund's investment adviser, Mitchell Hutchins, tries to find the best
relative values in the markets in which the fund invests. It does this primarily
through sector and industry allocation and bond selection.
Mitchell Hutchins allocates the fund's assets among bond market sectors and
industries by deciding which sectors and industries provide the best relative
values under prevailing conditions. For example, investment grade corporate
bonds normally provide a higher yield than comparable Treasury bonds. If the
difference in yields between those two types of bonds is higher than normal,
Mitchell Hutchins may increase the fund's investments in investment grade
corporate bonds.
Mitchell Hutchins selects industries and companies within the corporate bond
sector using a proprietary financial forecasting model and by performing
fundamental credit analysis based on cash flows and the ability of the issuer to
make required payments on its debt. Mitchell Hutchins chooses specific
securities that it believes provide the best combination of income, liquidity
and potential for gain relative to risk of loss.
Principal Risks:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
. Interest Rate Risk
. Credit Risk
. Prepayment Risk
. Foreign Securities Risk
. Derivatives Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
Information on the fund's recent investment strategies and holdings can be found
in its current annual/semiannual reports (see back cover for information on
ordering these reports).
14
<PAGE>
PaineWebber Investment Grade Income Fund
- ----------------------------------------
PERFORMANCE
- -----------
Risk/Return Bar Chart and Table:
The following bar chart shows how the fund's performance has varied from
year-to-year. The chart shows Class A shares because they have the longest
performance history of any class of fund shares. The chart does not reflect the
effect of sales charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total Return on Class A Shares
Calendar Year Percentage
------------- ----------
1989 11.98%
1990 6.47%
1991 18.56%
1992 8.87%
1993 13.35%
1994 -5.59%
1995 19.61%
1996 3.98%
1997 11.93%
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
15
<PAGE>
Average Annual Total Returns
as of December 31, 1998
<TABLE>
<CAPTION>
Class Class A Class B* Class C Class Y Lehman
Brothers
Inception Date 8/31/84 7/1/91 7/2/92 2/20/98 Corporate
Bond Index
<S> <C> <C> <C> <C> <C>
One Year
After deducting maximum
sales charges
Five Years
After deducting maximum
sales charges
Ten Years
After deducting maximum
sales charges
Life of Class
After deducting maximum
sales charges
</TABLE>
* Assumes conversion of Class B shares to Class A after six years.
16
<PAGE>
PaineWebber Investment Grade Income Fund
- ------------------------------------------
EXPENSES AND FEE TABLES
- -----------------------
Fees and Expenses: These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
Shareholder Transaction Expenses (fees paid directly from your investments)
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases
(as a % of offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Class A Class B Class C Class Y
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service
(12b-1) Fees 0.25 1.00 0.75 0.00
Other Expenses ____ ____ ____ ____
Total Annual Fund
Operating Expenses ____% ____% ____% ____%
</TABLE>
17
<PAGE>
PaineWebber Investment Grade Income Fund
- ------------------------------------------
Example:
The following example is intended to help you compare the cost of investing in
PaineWebber Investment Grade Income Fund with the cost of investing in other
mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all
shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all
shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
18
<PAGE>
PaineWebber Investment Grade Income Fund
- ------------------------------------------
PaineWebber High Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
Fund Objective:
High income.
Principal Investment Strategies:
The fund invests primarily in a diversified range of high yield U.S. and foreign
corporate bonds (sometimes called "junk bonds"). The fund also invests, to a
lesser extent, in preferred stocks and bonds that are convertible into common
stock and other types of bonds.
The fund's investment adviser, Mitchell Hutchins, uses a three step investment
process to find the best relative values in the bond markets in which the fund
invests: industry selection; company selection and security selection.
Mitchell Hutchins allocates the fund's assets among industry groups by analyzing
economic factors, industry dynamics and yield spreads to determine which
industries provide the most attractive investment opportunities. Mitchell
Hutchins selects companies within these industries using a proprietary financial
forecasting model and by performing fundamental credit analysis based on cash
flows and other factors. Finally, Mitchell Hutchins chooses from among the types
of securities offered by these companies to select those that appear to offer
the best relative values. All aspects of this process rely on Mitchell Hutchins'
economic, credit, quantitative and market research.
Principal Risks:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
. Credit Risk
. Interest Rate Risk
. Foreign Securities Risk
. Emerging Markets Risk
. Equity Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
Information on the fund's recent investment strategies and holdings can be
found in its current annual/semiannual reports (see back cover for information
on ordering these reports).
19
<PAGE>
PaineWebber High Income Fund
- ----------------------------
PERFORMANCE
- -----------
Risk/Return Bar Chart and Table:
The following bar chart shows how the fund's performance has varied from
year-to-year. The chart shows Class A shares because they have the longest
performance history of any class of fund shares. The chart does not reflect the
effect of sales charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total Return on Class A Shares
Calendar Year Percentage
------------- ----------
1989 -1.83%
1990 -8.53%
1991 47.02%
1992 24.06%
1993 27.74%
1994 11.69%
1995 10.96%
1996 17.73%
1997 12.98%
1998
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
20
<PAGE>
PaineWebber High Income Fund
- ----------------------------
Average Annual Total Returns
as of December 31, 1998
<TABLE>
<CAPTION>
Class Class A Class B* Class C Class Y CS First
Boston High
Inception Date 8/31/84 7/1/91 7/2/92 2/20/98 Yield Index
<S> <C> <C> <C> <C> <C>
One Year
After deducting maximum
sales charges
Five Years
After deducting maximum
sales charges
Ten Years
After deducting maximum
sales charges
Life of Class
After deducting maximum
sales charges
</TABLE>
* Assumes conversion of Class B shares to Class A after six years.
21
<PAGE>
PaineWebber High Income Fund
- ----------------------------
EXPENSES AND FEE TABLES
- -----------------------
Fees and Expenses: These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
Shareholder Transaction Expenses (fees paid directly from your investments)
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases
(as a % of offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service(12b-1) 0.25 1.00 0.75 0.00
Fees
Other Expenses ____ ____ ____% ____%
Total Annual Fund
Operating Expenses ____% ____% ____% ____%
</TABLE>
22
<PAGE>
PaineWebber High Income Fund
- ------------------------------
Example:
The following example is intended to help you compare the cost of investing in
PaineWebber High Income Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all
shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all
shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
23
<PAGE>
PaineWebber Strategic Income Fund
- -----------------------------------
PaineWebber Strategic Income Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
Fund Objective:
High level of current income and, secondarily, capital appreciation.
Principal Investment Strategies:
The fund strategically allocates investments among three bond market sectors:
. U.S. government and investment grade bonds;
. U.S. high yield bonds (sometimes called "junk bonds"), including preferred
stock and bonds that are convertible into common stock; and
. Foreign and emerging market bonds.
Each of these sectors generally reacts in different ways or at different times
to changes in interest rates or to particular economic events. This means that
when one sector underperforms the market as a whole, another sector may
outperform the market.
The fund normally invests in each of the three sectors. However, the fund's
investment adviser, Mitchell Hutchins, tries to take advantage of changes in the
relative performance of different sectors by allocating a larger percentage of
the fund's assets to those sectors that it believes are undervalued. Selections
of specific securities are based on market outlook, investment research,
geographic analysis and forecasts of interest rates and currency exchange rates.
The fund sometimes uses forward currency contracts to hedge against foreign
currency risk.
Principal Risks:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
. Credit Risk
. Interest Rate Risk
. Sector Allocation Risk
. Foreign Securities Risk
. Emerging Markets Risk
. Equity Risk
. Non-Diversified Status Risk
. Prepayment Risk
. Derivatives Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
Information on the fund's recent investment strategies and holdings can be found
in its current annual/semiannual reports (see back cover for information on
ordering these reports).
24
<PAGE>
PaineWebber Strategic Income Fund
- -----------------------------------
PERFORMANCE
- -----------
Risk/Return Bar Chart and Table:
The following bar chart shows how the fund's performance has varied from
year-to-year. The chart shows Class A shares because they have as long a
performance history as any class of fund shares. The chart does not reflect the
effect of sales charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total Return on Class A Shares
Calendar Year Percentages
------------- -----------
1995 14.12%
1996 14.00%
1997 10.32%
1998
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
25
<PAGE>
PaineWebber Strategic Income Fund
- -----------------------------------
Average Annual Total Returns
as of December 31, 1998
<TABLE>
<CAPTION>
Class Class A Class B Class C Class Y Lehman
Brothers
Inception Date 2/7/94 2/7/94 2/7/94 2/17/98 Aggregate
Bond Index
<S> <C> <C> <C> <C> <C>
One Year
After deducting maximum
sales charges
Life of Class
After deducting maximum
sales charges
</TABLE>
26
<PAGE>
PaineWebber Strategic Income Fund
- -----------------------------------
EXPENSES AND FEE TABLES
- -----------------------
Fees and Expenses: These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
Shareholder Transaction Expenses (fees paid directly from your investments)
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases
(as a % of offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Management Fees ____% ____% ____% ____%
Distribution and/or Service
(12b-1) Fees 0.25 ____ ____ 0.00
Other Expenses ____ ____ ____ ____
Total Annual Fund
Operating Expenses ____% ____% ____% ____%
</TABLE>
27
<PAGE>
PaineWebber Strategic Income Fund
- -----------------------------------
Example:
This example is intended to help you compare the cost of investing in
PaineWebber Strategic Income Fund with the cost of investing in other mutual
funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all
shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all
shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Income Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ----------------------------------------------------
</TABLE>
MORE ON RISKS AND INVESTMENT STRATEGIES
- ---------------------------------------
Principal Risks
The main risks of investing in one or more of the funds are described below. Not
all of these risks apply to each fund. You can find a list of the main risks
that apply to a particular fund by looking under the "Investment Objective,
Strategies and Risks" heading for that fund.
Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.
Concentration Risk This means that a fund normally invests at least 25% of
its total assets in a single industry group. U.S. Government Income Fund and Low
Duration Fund each normally concentrates its investments in U.S. government and
privately issued bonds that are backed by mortgages or other assets.
Concentration increases a fund's exposure to that industry group and might cause
the fund's net asset value to change more than it otherwise
Credit Risk Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
higher for lower quality bonds. High yield bonds involve high credit risk and
are considered speculative. Some high yield bonds may be in default when
purchased by a fund.
Derivatives Risk The value of "derivatives" so-called because their value
"derives" from the value of an underlying asset, reference rate or index may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options, futures contracts and forward currency contracts are examples of
derivatives. If a fund uses derivatives to adjust or "hedge" the overall risk of
its portfolio, it is possible that the hedge will not succeed. This may happen
for various reasons, including unexpected changes in the value of the
derivatives that are not matched by opposite changes in the value of the rest of
the fund's portfolio.
Interest Rate Risk The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the risk
that interest rates will rise, so that the value of a fund's investments in
bonds will fall. Because interest rate risk is the primary risk presented by
U.S. government and other very high quality bonds, changes in interest rates may
actually have a larger effect on the value of those bonds than on lower quality
bonds.
Emerging Markets Risk Securities of issuers located in emerging market
countries are subject to all of the risks of other foreign securities (see
below). However, the level of those risks often is higher due to the fact that
political, legal and economic systems in emerging market countries may be less
fully developed and less stable than those in developed countries. Emerging
market securities also may be subject to additional risks, such as lower
liquidity and larger changes in value.
Equity Risk The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial
29
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Income Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ----------------------------------------------------
</TABLE>
part, or even all, of its investment in a company's stock.
Foreign Securities Risk Foreign securities involve risks that normally are
not associated with securities of U.S. issuers. These include risks relating to
political, social and economic developments abroad and differences between U.S.
and foreign regulatory requirements and market practices. When securities are
denominated in foreign currencies, they also are subject to foreign currency
risk, which is the risk that the value of the U.S. dollar will fall in relation
to the foreign currency.
Leverage Risk Leverage involves increasing the total assets in which a fund
can invest beyond the level of the fund's net assets. Because leverage increases
the amount of a fund's assets, it can magnify the effect on the fund of changes
in market values. As a result, while leverage can increase a fund's income and
potential for gain, it also can increase expenses and the risk of loss. The U.S.
Government Income Fund and the Low Duration Fund, each of which uses leverage by
investing in when-issued and delayed delivery bonds, attempt to limit the
potential magnifying effect of the leverage by managing its portfolio duration.
Non-Diversified Status Risk This means that a fund may invest more than 5%,
but no more than 25%, of its total assets in securities of a single issuer
(other than the U.S. government). When a fund holds a large position in the
securities of one issuer, changes in the financial condition or in the market's
assessment of that issuer may cause larger changes in the fund's total return
and in the price of its shares than if the fund held only a smaller position.
Prepayment Risk Payments on bonds that are backed by mortgage loans or
similar assets may be received earlier or later than expected due to changes in
the rate at which the underlying loans are prepaid. Faster prepayments often
happen when market interest rates are falling. As a result, a fund may need to
reinvest these early payments at those lower interest rates, thus reducing its
income. Conversely, when interest rates rise, prepayments may happen more
slowly, causing the underlying loans to be outstanding for a longer time. This
can cause the market value of the security to fall because the market may view
its interest rate to be too low for a longer term investment.
Sector Allocation Risk Mitchell Hutchins may not be successful in choosing
the best allocation among market sectors. A fund that allocates its assets among
market sectors is more dependent on Mitchell Hutchins' ability to successfully
assess the relative values in each sector than are funds that do not do so.
Additional Risks
Year 2000 Risk The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds' other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the funds, Mitchell Hutchins is working
to avoid these problems with respect to its own computer systems and to obtain
assurances from service providers that they are taking similar steps.
Similarly, the companies in which the funds invest and trading systems used by
the funds could be adversely affected by this issue. The ability of a company
or trading system to respond successfully to the issue requires both
technological sophistication and diligence, and there can be no assurance that
any steps taken will be sufficient to avoid an adverse impact on the funds.
Additional Investment Strategies
Defensive Positions; Cash Reserves In order to protect itself from adverse
market conditions, a fund may take a defensive position that is different from
30
<PAGE>
<TABLE>
<S> <C> <S>
PaineWebber U.S. Government Income Fund Investment Grade Income Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ----------------------------------------------------
</TABLE>
its normal investment strategy. This means that the fund may temporarily invest
a larger-than-normal part, or even all, of its assets in cash or money market
instruments. Since these investments provide relatively low income, a defensive
position may not be consistent with achieving a fund's investment objective.
However, U.S. Government Income Fund, Low Duration Fund and Strategic Income
Fund each may invest in money market instruments on an unlimited basis as part
of its ordinary investment strategy. Each of the other funds may invest up to
35% of its total assets in cash or money market instruments as a cash reserve
for liquidity or other purposes.
Portfolio Turnover Each fund may engage in frequent trading in order to
achieve its investment objective. Frequent trading may result in a high
portfolio turnover rate and higher fund expenses due to transaction costs.
Frequent trading also may increase the portion of a fund's dividends that
represent short-term capital gains. The federal income tax payable by
shareholders on dividends representing short-term capital gains is the same as
shareholders must pay on dividends representing ordinary income, but it is
higher than a shareholder would pay on dividends representing long-term net
capital gains. Since most of the funds' dividends normally represent ordinary
income, the tax effect of frequent trading by a fund normally will be limited.
31
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Income Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ----------------------------------------------------
</TABLE>
Your Investment
MANAGING YOUR FUND ACCOUNT
- --------------------------
Flexible Pricing
The funds offer four classes of shares Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose the
class that is best for you, based on how much you plan to invest in the funds
and how long you plan to hold your fund investment. Class Y shares are only
available to certain types of investors.
Class A Shares
Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.
The Class A sales charges for each fund are described in the following tables.
Class A Sales Charges for: U.S. Government Income Fund
Investment Grade Income Fund
High Income Fund
Strategic Income Fund
<TABLE>
<CAPTION>
Sales Charge as a Percentage of: Discount to Selected Dealers as
Amount of Investment Offering Price Net Amount Invested Percentage of Offering 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(2)
</TABLE>
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to this 1% charge. Withdrawals under the
funds' Systematic Withdrawal Plan are not subject to this charge. However,
investors may withdraw no more than 12% of the value of the fund account
under that Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
32
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
Class A Sales Charges for: Low Duration Fund
<TABLE>
<CAPTION>
Sales Charge as a Percentage of: Discount to Selected Dealers as
Amount of Investment Offering Price Net Amount Invested Percentage of Offering 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(2)
</TABLE>
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to this 1% charge. Withdrawals under the
funds' Systematic Withdrawal Plan are not subject to this charge. However,
investors may withdraw no more than 12% of the value of the fund account
under that Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
Sales Charge Reductions and Waivers. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber mutual fund. You can combine the
value of Class A shares that you own in other PaineWebber funds and the purchase
amount of the Class A shares of the PaineWebber fund that you are buying.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
. their spouses, parents or children under age 21;
. their Individual Retirement Accounts (IRAs);
. certain employee benefit plans, including 401(k) plans;
. any company controlled by the investor;
. trusts created by the investor;
. Uniform Gifts to Minors Act/Uniform Transfer to Minors Act accounts created
by the investor or by a group of investors for their children; or
. accounts the same adviser.
You may qualify for a complete waiver of the sales charge if you:
. Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;
. Buy these shares through a PaineWebber investment executive who was formerly
employed as an investment executive with a competing brokerage firm that was
registered as a broker-dealer with the SEC; and
. were the investment executive's client at the competing brokerage firm;
. within 90 days of buying shares in a fund, you sell shares of one or
more
33
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
mutual funds that (a) were principally underwritten by the competing
brokerage firm or its affiliates and (b) either paid a sales charge to
buy those shares, paid a contingent deferred sales charge when selling
them or held those shares until the contingent deferred sales charge
was waived; and
. purchase an amount that does not exceed the total amount of money you
received from the sale of the other mutual fund;
. Acquire these shares through the reinvestment of dividends or other
distributions of a PaineWebber unit investment trust;
. Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets; or
. Are a participant in the PaineWebber Members Only Program.(TM) For
investments made pursuant to this waiver, Mitchell Hutchins may make payments
out of its own resources to PaineWebber and to participating membership
organizations in a total amount not to exceed 1% of the amount invested.
Note: See the funds' Statement of Additional Information for some other sales
charge waivers. If you think you qualify for any sales charge reductions or
waivers, you will need to provide documentation to PaineWebber or the fund. For
more information, you should contact your PaineWebber investment executive or
correspondent firm or call 1-800-647-1568. If you want information on the funds'
Systematic Withdrawal Plan, see the Statement of Additional Information or
contact your PaineWebber investment executive or correspondent firm.
Class B Shares
Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Over time, these fees will increase the cost of your investment and may cost you
more than if you paid a front-end sales charge. If you hold your Class B shares
for six years, they will automatically convert to Class A shares, which have
lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:
U.S. Government
Income Fund
Investment Grade
Income Fund
High Income Fund
Strategic Income Fund
Percentage by which
If you sell the shares' net asset
shares within: value is multiplied:
-------------- --------------------
1/st/ year since purchase 5%
2/nd/ year since purchase 4
3/rd/ year since purchase 3
4/th/ year since purchase 2
5/th/ year since purchase 2
6/th/ year since purchase 1
7/th/ year since purchase None
34
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
Low Duration Fund
Percentage by which
If you sell the shares' net asset
shares within: value is multiplied:
- ------------- -------------------
1/st/ year since purchase 3%
2/nd/ year since purchase 2
3/rd/ year since purchase 2
4/th/ year since purchase 1
5/th/ year since purchase None
We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or capital gains distributions or on sales under the
Systematic Withdrawal Plan.
If you exchange Class B shares of Low Duration Fund for shares of other
PaineWebber mutual funds, you will be subject to the contingent deferred sales
charges of the Class B shares that you acquire in the exchange. Usually, these
are higher and are imposed over a longer period. If you exchange Class B shares
of another fund for Class B shares of Low Duration Fund, you will continue to be
subject to the contingent deferred sales charge of the original fund.
To minimize your deferred sales charge, we will assume that you are selling:
. First, Class B shares representing reinvested dividends and capital gains
distributions, and
. Second, Class B shares that you have owned the longest.
Sales Charge Waivers You may qualify for a waiver of the deferred sales
charge on a sale of shares if:
. You participate in the Systematic Withdrawal Plan;
. You are older than 59-1/2 and are selling shares held in certain types of
retirement plans;
. You receive a tax-free return of an excess IRA contribution;
. You receive a tax-qualified retirement plan distribution following
retirement; or
. The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint tenant
with the right of survivorship.
Note: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber investment executive or correspondent firm
or call 1-800-_______. If you want information on the fund's Systematic
Withdrawal Plan, see the Statement of Additional Information or contact your
PaineWebber investment executive or correspondent firm.
Class C Shares
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of
your purchase in fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.50% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Over time these fees will increase the cost of your investment and may cost you
more than if you paid a front-end sales charge. Class C shares do not convert
to another class of shares. This means that
35
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
you will pay the 12b-1 fees for as long as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to
pay the deferred sales charge if you sell your shares within one year of the
date you purchased them. We calculate the deferred sales charge on sales of
Class C shares by multiplying 0.75% by the lesser of the net asset value of the
Class C shares at the time of purchase or the net asset value at the time of
sale. We will not impose the deferred sales charge on Class C shares
representing reinvestment of dividends or capital gains distributions or on
sales under the Systematic Withdrawal Plan.
Note: If you want information on the funds' Systematic Withdrawal Plan, see the
Statement of Additional Information or contact your PaineWebber investment
executive or correspondent firm.
Class Y Shares
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
. Buy shares through PaineWebber's PACE Multi-Advisor Program;
. Buy $10 million or more of PaineWebber fund shares at any one time;
. Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or
. Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.
The trustee of PaineWebber's 401(k) Plus Plan for its employees is also eligible
to purchase Class Y shares.
Class Y shares do not pay ongoing sales or distribution fees or sales charges.
The ongoing expenses for Class Y shares are the lowest for all the classes.
Buying Shares
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your investment executive.
Otherwise, you can invest in the funds through the funds' transfer agent, PFPC
Inc. You can obtain an application by calling 1-800-647-1568. You must
completed and sign the application and mail it, along with a check, to: PFPC
Inc., Attn.: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, DE 19899.
If you wish to invest in other PaineWebber Funds, you can do so by:
. Contacting your investment executive (if you have an account at PaineWebber
or at a PaineWebber correspondent firm);
. Mailing an application with a check; or
. Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional investments
in the same fund.
The funds and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.
Minimum Investments:
To open an account $1,000
36
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
($100 for Low Duration Fund)
To add to an account $ 100
Each fund may waive or reduce these amounts for:
. Employees of PaineWebber or its affiliates; or
. Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.
Selling Shares
You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the
fund will assume that you want to sell shares in the following order: Class A,
then Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent firm, you
can sell shares by contacting your investment executive.
If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:
. Your name and address;
. The fund's name;
. The fund account number;
. The dollar amount or number of shares you want to sell; and
. A guarantee of each registered owner's signature. A signature guarantee may
be obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association that is a participant in a medallion program
recognized by the Securities Transfer Agents Association. The three
recognized medallion programs are Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York
Stock Exchange Medallion Signature Program (MSP). The funds will not accept
signature guarantees that are not a part of these programs.
Mail the letter to: PFPC Inc., Attn.: PaineWebber Mutual Funds, P.O. Box 8950,
Wilmington, DE 19899.
If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
It costs each fund money to maintain shareholder accounts. Therefore, the funds
reserve the right to repurchase all shares in any account that has a net asset
value of less than $500. If a fund elects to do this with your account, it will
notify you that you can increase the amount invested to $500 or more within 60
days. A fund will not repurchase shares in accounts that fall below $500 solely
because of a decrease in the fund's net asset value.
Exchanging Shares
You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.
37
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
You will not pay either a front-end sales charge or a deferred sales charge when
you exchange shares. However, you may have to pay a deferred sales charge if
you later sell the shares you acquired in the exchange. Each fund will use the
date that you purchased the shares in the first fund to determine whether you
must pay a deferred sales charge when you sell the shares in the acquired fund.
Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.
You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.
PaineWebber Clients If you bought your shares through PaineWebber or a
correspondent firm, you may exchange your shares by placing an order with your
PaineWebber investment executive.
Other Investors If you are not a PaineWebber client, you may exchange your
shares by writing to the fund's transfer agent. You must include:
. Your name and address,
. The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy,
. Your account number,
. How much you are exchanging (by dollar amount or by number of shares to be
sold), and
. A guarantee of your signature. (See "Buying Shares for information on
obtaining a signature guarantee.)
Mail the letter to: PFPC Inc., Attn.: PaineWebber Mutual Funds, P.O. Box 8950,
Wilmington, DE 19899.
A fund may modify or terminate the exchange privilege at any time.
Pricing and Valuation
The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. Each fund calculates net asset value on days that the
New York Stock Exchange is open. Calculations are made separately for each class
and are made as of the close of trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the funds do not price their
shares, on national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the fund's net asset value
per share will be calculated as of the time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after your order is accepted by the fund.
If you place your order through PaineWebber, your PaineWebber investment
executive is responsible for making sure that your order is promptly sent to the
fund.
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell or redeem Class B or Class C shares.
Each fund calculates its net asset value based on the current market value for
its portfolio securities. The funds normally obtain market values for their
securities from independent pricing services that use current market quotations
or valuations from computerized "matrix" systems that derive values
38
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
based on comparable securities. If a market value is not available from an
independent pricing service for a particular security, that security is valued
at a fair value determined by or under the direction of the fund's board of
trustees. The funds normally use the amortized cost method to value bonds that
will mature in 60 days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.
The funds calculate the U.S. dollar value of investments that are denominated in
foreign currencies daily, based on current exchange rates. A fund may own
securities, including some securities that trade primarily in foreign markets,
that trade on weekends or other days on which a fund does not calculate net
asset value. You will not be able to sell your shares on those days. A fund
that owns securities that trade principally in foreign markets that close before
the normal close of trading on the NYSE may use fair value methods to reflect
material changes in value resulting from events that occur after the close of
trading in the principal market but before the close of the NYSE. This policy
is intended to assure that the fund's net asset value fairly reflects security
values as of the time of 4:00 p.m., Eastern time.
39
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
MANAGEMENT
- ----------
Investment Advisers.
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 1285 Avenue of the
Americas, New York, New York, 10019, and is a wholly owned asset management
subsidiary of PaineWebber Incorporated, which is wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. On February 28,
1999, Mitchell Hutchins was adviser or sub-adviser of __ investment companies
with __ separate portfolios and aggregate assets of approximately $__.__
billion.
Pacific Investment Management Company ("PIMCO") is the sub-adviser for Low
Duration Fund. It is located at 840 Newport Center Drive, Suite 360, Newport
Beach, California 92660. On February 28, 1998, PIMCO had approximately $___.__
billion in assets under management and was adviser or sub-adviser of __
investment companies with __ portfolios and aggregate assets of approximately
$__ billion.
The funds have applied to the SEC for exemptive relief to permit their boards to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval.
Portfolio Managers
U.S. Government Income Fund Nirmal Singh and Craig M. Varrelman, CFA, 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 senior vice
presidents of Mitchell Hutchins and have served as portfolio managers with
Mitchell Hutchins since 1993 and 1988, respectively.
Low Duration Fund William C. Powers, Managing Director of PIMCO, is
responsible for the day-to-day management of Low Duration 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. Mr. Powers has been
a senior member of the fixed income portfolio management group of PIMCO since
1991.
Investment Grade Income Fund James F. Keegan and Julieanna Berry are
responsible for the day-to-day management of Investment Grade Income Fund's
portfolio. Mr. Keegan is a senior vice president of Mitchell Hutchins. Prior to
joining Mitchell Hutchins in March 1996, Mr. Keegan was a director with Merrion
Group, L.P. Prior to 1994, he was a vice president of global investment
management of Bankers Trust Company. Mrs. Berry has held her responsibilities
with the fund since June 1995. Mrs. Berry is a first vice president of Mitchell
Hutchins, where she has been employed as a portfolio manager since 1989.
High Income Fund Thomas J. Libassi, a senior vice president of Mitchell
Hutchins, has been responsible for the day-to-day management of High Income
Fund's portfolio since May 1994. 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 bonds.
40
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
Strategic Income Fund Dennis L. McCauley, managing director and chief
investment officer of fixed income investments of Mitchell Hutchins, has been
Strategic Income Fund's allocation manager since March 1995. Mr. McCauley has
been employed by Mitchell Hutchins since December 1994 and is responsible for
overseeing all active fixed income investments, including domestic and global
taxable and tax-exempt mutual funds. Prior to joining Mitchell Hutchins, Mr.
McCauley worked for IBM Corporation, where he was director of fixed income
investments responsible for developing and managing investment strategy for all
fixed income and cash management investments of IBM's pension fund and self-
insured medical funds. Mr. McCauley has also served as vice president of IBM
Credit Corporation's mutual funds and as a member of the retirement fund
investment committee.
Mr. Singh and Mr. Varrelman have been responsible for the U.S. government and
investment grade securities sector of Strategic Income Fund since December 1994.
Mr. Keegan also shares responsibility for the day-to-day management for the U.S.
government and investment grade securities sector of Strategic Income Fund. Mr.
Libassi has been the sector manager responsible for the day-to-day management of
Strategic Income Fund's U.S. high yield securities since May 1994. Stuart Waugh,
a managing director of Mitchell Hutchins responsible for global fixed income and
currency trading, is the sector manager responsible for the day-to-day
management of Strategic Income Fund's foreign and emerging market bonds. Mr.
Waugh has been employed by Mitchell Hutchins since 1984.
Other members of Mitchell Hutchins' fixed income and equity investments groups
provide input on market outlook, invest rate forecasts, investment research and
other considerations pertaining to each fund's investments.
Advisory Fees
The funds paid advisory fees to Mitchell Hutchins for the most recent fiscal
year at the following rates based on average daily net assets:
U.S Government Income 0.50%
Fund
Low Duration U.S 0.50%
Government Income
Fund
Investment Grade 0.50%
Income Fund
High Income Fund 0.50%
Strategic Income Fund 0.75%
41
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
DIVIDENDS AND TAXES
- -------------------
Dividends
Strategic Income Fund normally declares and pays dividends monthly. The other
funds normally declare dividends daily and pay them monthly. Each fund
distributes substantially all of its gains, if any, as part of its last monthly
dividend for its fiscal year.
Classes with higher expenses are expected to have lower dividends. For example,
Class B shares are expected to have the lowest dividends of any class of a
fund's shares, while Class Y shares are expected to have the highest.
You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your investment executive at PaineWebber
or one of its corresponding firms if you prefer to receive dividends in cash.
Taxes
The dividends that you receive from a fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) Plan, dividends on your shares generally will not be subject to
tax.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange any fund's shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the first
fund's shares, and any gain will be subject to federal income tax.
Each fund expects that its dividends will primarily be taxed as ordinary income.
However, a fund's annual distribution of capital gains may be taxed at a lower
rate for capital gains, depending on whether the fund held the assets that
generated the gains for more than 12 months. Your fund will tell you how its
capital gain distributions should be treated.
42
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber U.S. Government Income Fund Investment Grade Fund
Low Duration U.S. Government Income Fund High Income Fund
Strategic Income Fund
- ---------------------------------------------------------
</TABLE>
FINANCIAL HIGHLIGHTS
- --------------------
The financial highlights tables are intended to help you understand the funds'
financial performance for the past 5 years (or, if shorter, since the fund or a
class of fund shares began operations). Certain information reflects financial
results for a single fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in a fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Ernst & Young LLP, independent auditors (or for Strategic Income
Fund, PricewaterhouseCoopers LLP, independent accountants), whose reports, along
with the funds' financial statements, are included in the funds' Annual Reports
to Shareholders. Annual Reports may be obtained without charge by calling 1-800-
647-1568.
43
<PAGE>
PaineWebber U.S. Government Income Fund
- -----------------------------------------
<TABLE>
<CAPTION>
U.S. Government Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income (loss)....................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment income............
Return of capital................................
Total dividends and distributions to
shareholders..................................
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
44
<PAGE>
PaineWebber U.S. Government Income Fund
- -----------------------------------------
<TABLE>
<CAPTION>
U.S. Government Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income (loss)....................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment income............
Return of capital................................
Total dividends and distributions to
shareholders..................................
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
45
<PAGE>
PaineWebber U.S. Government Income Fund
- -----------------------------------------
<TABLE>
<CAPTION>
U.S. Government Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income (loss)....................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment income............
Return of capital................................
Total dividends and distributions to
shareholders..................................
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
46
<PAGE>
PaineWebber U.S. Government Income Fund
- -----------------------------------------
<TABLE>
<CAPTION>
U.S. Government Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income (loss)....................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment income............
Return of capital................................
Total dividends and distributions to
shareholders..................................
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
47
<PAGE>
PaineWebber Low Duration Fund
- -------------------------------
<TABLE>
<CAPTION>
Low Duration Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment
income........................................
Contribution to capital from adviser............
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
48
<PAGE>
PaineWebber Low Duration Fund
- -------------------------------
<TABLE>
<CAPTION>
Low Duration Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment
income........................................
Contribution to capital from adviser............
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
49
<PAGE>
PaineWebber Low Duration Fund
- -------------------------------
<TABLE>
<CAPTION>
Low Duration Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment
income........................................
Contribution to capital from adviser............
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
50
<PAGE>
PaineWebber Low Duration Fund
- -------------------------------
<TABLE>
<CAPTION>
Low Duration Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the Period
October 20, 1995
For the Years Ended November 30, through
-------------------------------- November 30,
1998 1997 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment
income........................................
Contribution to capital from adviser............
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
51
<PAGE>
PaineWebber Investment Grade Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
Investment Grade Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment income............
Return of capital...............................
Total dividends and return of capital...........
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
52
<PAGE>
PaineWebber Investment Grade Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
Investment Grade Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment income............
Return of capital...............................
Total dividends and return of capital...........
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
53
<PAGE>
PaineWebber Investment Grade Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
Investment Grade Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments, futures and options.........
Net increase (decrease) from investment
operations....................................
Dividends from net investment income............
Return of capital...............................
Total dividends and return of capital...........
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
54
<PAGE>
PaineWebber Investment Grade Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
Investment Grade Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
February 20, 1998
through
November 30, 1998
-----------------
<S> <C>
Net asset value, beginning of period...........
Net investment income..........................
Net realized and unrealized gains (losses)
from investments, futures and options........
Net increase (decrease) from investment
operations...................................
Dividends from net investment income...........
Contribution to capital from adviser...........
Net asset value, end of period.................
Total investment return........................
Ratios/Supplemental Data:
Net assets, end of period (000's)............
Expenses to average net assets.................
Net investment income to average net assets....
Portfolio turnover rate........................
</TABLE>
55
<PAGE>
PaineWebber High Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
High Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments..............................
Net increase (decrease) from
investment operations.........................
Dividends from net investment income............
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
56
<PAGE>
PaineWebber High Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
High Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments..............................
Net increase (decrease) from
investment operations.........................
Dividends from net investment income............
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
57
<PAGE>
PaineWebber High Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
High Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30,
--------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............
Net investment income...........................
Net realized and unrealized gains (losses)
from investments..............................
Net increase (decrease) from
investment operations.........................
Dividends from net investment income............
Net asset value, end of period..................
Total investment return.........................
Ratios/Supplemental Data:
Net assets, end of period (000's).............
Expenses to average net assets..................
Net investment income to average net assets.....
Portfolio turnover rate.........................
</TABLE>
58
<PAGE>
PaineWebber High Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
High Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
February 20, 1998
through
November 30, 1998
-----------------
<S> <C>
Net asset value, beginning of period...........
Net investment income..........................
Net realized and unrealized gains (losses)
from investments, futures and options........
Net increase (decrease) from
investment operations........................
Dividends from net investment income...........
Contribution to capital from adviser...........
Net asset value, end of period.................
Total investment return........................
Ratios/Supplemental Data:
Net assets, end of period (000's)............
Expenses to average net assets.................
Net investment income to average net assets....
Portfolio turnover rate........................
</TABLE>
59
<PAGE>
PaineWebber Strategic Income Fund
- ------------------------------------
<TABLE>
<CAPTION>
Strategic Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
For the Period For the Period
For the Year Ended February 1, 1996 February 7, 1994
November 30, through For the Year Ended through
1998 1997 November 30, 1996 January 31, 1996 January 31, 1995
---- ---- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...........................
Net investment income..............
Net realized and unrealized gains
(losses) from investments,
foreign currency and futures.....
Net decrease (increase) from
investment operations............
Dividends from net investment
income...........................
Distributions from net realized
gains from foreign currency
transactions.....................
Total dividends and distributions
to shareholders..................
Net asset value, end of period.....
Total investment return............
Ratios/Supplemental Data:
Net assets, end of period
(000's)..........................
Expenses to average net assets.....
Net investment income to average
net assets.......................
Portfolio turnover rate............
</TABLE>
60
<PAGE>
PaineWebber Strategic Income Fund
- ------------------------------------
<TABLE>
<CAPTION>
Strategic Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
For the Period For the Period
For the Year Ended February 1, 1996 February 7, 1994
November 30, through For the Year Ended through
1998 1997 November 30, 1996 January 31, 1996 January 31, 1995
---- ---- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...........................
Net investment income..............
Net realized and unrealized gains
(losses) from investments,
foreign currency and futures.....
Net decrease (increase) from
investment operations............
Dividends from net investment
income...........................
Distributions from net realized
gains from foreign currency
transactions.....................
Total dividends and distributions
to shareholders..................
Net asset value, end of period.....
Total investment return............
Ratios/Supplemental Data:
Net assets, end of period
(000's)..........................
Expenses to average net assets.....
Net investment income to average
net assets.......................
Portfolio turnover rate............
</TABLE>
61
<PAGE>
PaineWebber Strategic Income Fund
- ------------------------------------
<TABLE>
<CAPTION>
Strategic Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------------------------------
For the Period For the Period
For the Year Ended February 1, 1996 February 7, 1994
November 30, through For the Year Ended through
1998 1997 November 30, 1996 January 31, 1996 January 31, 1995
---- ---- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...........................
Net investment income..............
Net realized and unrealized gains
(losses) from investments,
foreign currency and futures.....
Net decrease (increase) from
investment operations............
Dividends from net investment
income...........................
Distributions from net realized
gains from foreign currency
transactions.....................
Total dividends and distributions
to shareholders..................
Net asset value, end of period.....
Total investment return............
Ratios/Supplemental Data:
Net assets, end of period
(000's)..........................
Expenses to average net assets.....
Net investment income to average
net assets.......................
Portfolio turnover rate............
</TABLE>
62
<PAGE>
PaineWebber Strategic Income Fund
- -----------------------------------
<TABLE>
<CAPTION>
Strategic Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
February 17, 1998
through
November 30, 1998
-----------------
<S> <C>
Net asset value, beginning of period...........
Net investment income..........................
Net realized and unrealized gains (losses)
from investments, futures and options........
Net increase (decrease) from
investment operations........................
Dividends from net investment income...........
Contribution to capital from adviser...........
Net asset value, end of period.................
Total investment return........................
Ratios/Supplemental Data:
Net assets, end of period (000's)............
Expenses to average net assets.................
Net investment income to average net assets....
Portfolio turnover rate........................
</TABLE>
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[BACK COVER]
<TABLE>
<S> <C> <C> <C> <C>
Ticker Symbols: U.S. Government Income Class: A: PUGAX.Q High Income Class: A: PHIAX.Q
B: PUGBX.Q B: PHIBX.Q
C: PWGOX.Q C: PWHDX.Q
Y: _____ Y: _____
Low Duration Income Class: A: PSUAX.Q Strategic Income Class: A: PWSAX.Q
B: PSGBX.Q B: PWSBX.Q
C: PSGDX.Q C: PWSDX.Q
Y: _____ Y: _____
Investment Grade Income Class: A: PIGAX.Q
B: PIGBX.Q
C: PIUDX.Q
Y: _____
</TABLE>
If you want more information about the funds, the following documents are
available free upon request:
Annual/Semiannual Reports
Additional information about the funds' investments is available in the
funds' annual and semiannual reports to shareholders. In the funds' annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the funds' performance during the
last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the funds and is
incorporated by reference into this prospectus.
You may discuss your questions about the funds by contacting your PaineWebber
investment executive. You may obtain free copies of annual and semiannual
reports and the SAI, or request other information, by contacting the funds
directly at 1-800-______.
You may review and copy information about the funds, including annual and
semiannual reports and the SAI, at the Public Reference Room of the Securities
and Exchange Commission. You can get text-only copies of reports and other
information about the funds:
. For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009
Telephone: 1-800-SEC-0330
. Free, from the SEC's Internet website at: http://www.sec.gov
Investment Company Act File Nos.
PaineWebber Managed Investments Trust - 811-4040
PaineWebber Securities Trust - 811-7374
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<PAGE>
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Investment Grade Income Fund
PaineWebber High Income Fund
PaineWebber Strategic Income Fund
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
The five funds named above are series of professionally managed
open-end management investment companies (each a "Trust"). PaineWebber U.S.
Government Income Fund, PaineWebber Low Duration U.S. Government Income Fund
("Low Duration Fund"), PaineWebber Investment Grade Income Fund and PaineWebber
High Income Fund are diversified series of PaineWebber Managed Investments Trust
("Managed Trust"). PaineWebber Strategic Income Fund is a non-diversified series
of PaineWebber Securities Trust ("Securities Trust").
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares. Pacific Investment
Management Company ("PIMCO" or "Sub-Adviser") serves as investment sub-adviser
for Low Duration Fund.
Each fund's Annual Report to Shareholders for its last fiscal year is a
separate document supplied with this Statement of Additional Information, and
the financial statements, accompanying notes and report of independent auditors
or independent accountants appearing therein are incorporated herein by this
reference
This Statement of Additional Information is not a prospectus and should
be read only in conjunction with the funds' current Prospectus, dated March 31,
1999. 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 March 31,
1999.
THE FUNDS AND THEIR INVESTMENT POLICIES
A fund's investment objective may not be changed without approval of
its shareholders. Except where noted, the funds' other investment policies may
be changed by their boards without shareholder approval. As with other mutual
funds, there is no assurance that a fund will achieve its investment objective.
U.S. Government Income Fund and Low Duration Fund. U.S. Government
Income Fund's investment objective is high current income consistent with the
preservation of capital and liquidity. Low Duration Fund's investment objective
is to achieve the highest level of income consistent with the preservation of
capital and low volatility of net asset value.
Low Duration Fund seeks to limit (but not eliminate) the volatility of
net asset value by normally maintaining an overall portfolio duration between
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 and thus is a measure of interest rate risk.
Each fund normally invests at least 65% of its total assets in U.S.
government bonds (including mortgage-backed securities) and repurchase
agreements with respect to them. Each fund may invest up to 35% of its total
assets in privately issued mortgage-backed and asset-backed securities that, at
the time of purchase, are rated in the highest rating category by a nationally
recognized statistical rating agency ("NRSRO"), such as Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P") or Moody's Investors
Service, Inc. ("Moody's") or, if unrated, are considered to be of comparable
quality by Mitchell Hutchins or, for Low Duration Fund, the Sub-Adviser.
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Each fund has a fundamental policy of normally concentrating at least
25% of its total assets in U.S. government and privately issued mortgage- and
asset-backed securities. This policy has the effect of increasing each fund's
exposure to the risks of these securities and might cause a fund's net asset
value to fluctuate more than otherwise would be the case. Some types of
mortgage-backed securities, including "interest only," "principal only" and
inverse floating classes of these securities, can be extremely volatile and may
become illiquid. Low Duration Fund does not invest in these classes of
mortgage-backed securities and does not invest in asset-backed securities.
Each fund normally invests at least 65% of its total assets in income-
producing securities, which may include zero coupon bonds, other original
discount securities and (for U.S. Government Income Fund) principal-only
mortgage backed securities.
U.S. Government Income Fund may invest up to 10% of its net assets in
illiquid securities. Low Duration Fund may invest up to 15% of its net assets in
illiquid securities. Each fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. Each fund may purchase securities on a when-issued or delayed
delivery basis. Each fund may engage in dollar rolls and reverse repurchase
agreements, which are considered borrowings and may not exceed 33-13% of its
total assets. Each fund may also borrow for temporary or emergency purposes, but
not in excess of an additional 5% of its total assets. Each fund may invest up
to 10% of its assets in the securities of other investment companies and may
sell short "against the box."
Investment Grade Income Fund's investment objective is to provide high
current income consistent with the preservation of capital and liquidity. The
fund normally invests at least 65% of its total assets in U.S. government and
investment grade corporate bonds, including mortgage-backed securities. The fund
also may invest up to 35% of its total assets in the following: (1) corporate
bonds that are below investment grade; (2) preferred stocks; (3) convertible
securities; (4) asset-backed securities other than mortgage-backed securities;
(5) commercial paper or variable amount master notes whose issuers, at the time
the security is purchased by the fund, have outstanding either long-term bonds
that are rated investment grade by S&P or Moody's or commercial paper rated in
the highest rating category by S&P or Moody's; and (6) other money market
instruments, including repurchase agreements.
Investment Grade Income Fund's ability to invest in mortgage- and
asset-backed securities is limited. The fund may invest in mortgage-backed
securities only if they are U.S. government issued or guaranteed or if, at the
time of purchase, they are investment grade. The fund may invest in asset-backed
securities only if, at the time of purchase, they are rated in one of the two
highest rating categories by S&P or Moody's. Also, the fund may not invest more
than 10% of its total assets in interest-only and principal-only classes of
mortgage-backed securities.
Up to 20% of Investment Grade Income's net assets may be invested in
certain foreign securities. These are (1) U.S. dollar-denominated securities of
foreign issuers or of foreign branches of U.S. banks that are traded in the U.S.
securities markets; and (2) securities that are U.S. dollar-denominated but
whose value is linked to the value of foreign currencies.
Investment Grade Income Fund normally invests at least 65% of its total
assets in income-producing securities, which may include zero coupon bonds,
other original discount securities, payment-in-kind securities and
principal-only mortgage backed securities. The fund also may invest up to 5% of
its net assets in fixed and floating rate loans through either participations in
or assignments of all or a portion of loans made by banks.
Investment Grade Income Fund may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest up to 10% of its assets in the securities of
other investment companies and may sell short "against the box."
High Income Fund's investment objective is to provide high income. The
fund normally invests at least 65% of its total assets in high yield, income
producing corporate bonds that, at the time of purchase, are rated B or better
by S&P or Moody's, are comparably rated by another nationally recognized rating
agency or, if unrated, are considered to be of comparable quality by Mitchell
Hutchins. The fund may include in this 65% of its total assets any equity
securities (including common stocks and rights and warrants for equity
securities) that are attached to corporate bonds or are part of a unit including
corporate bonds, so long as the corporate bonds meet these quality requirements.
The fund also may invest up to 35% of its total assets in (1) bonds that are
rated below B (and rated as low as D by S&P or C by Moody's) or comparable
unrated bonds; (2) U.S. government bonds; (3) equity securities; and (4) money
market instruments, including repurchase agreements.
2
<PAGE>
Up to 35% of High Income Fund's net assets may be invested in
securities of foreign issuers, including securities that are U.S.
dollar-denominated but whose value is linked to the value of foreign currencies.
However, no more than 10% of the fund's net assets may be invested in securities
of foreign issuers that are denominated and traded in currencies other than the
U.S. dollar.
Up to 25% of High Income Fund's total assets may be invested in bonds
and equity securities that are not paying current income. The fund may purchase
these securities if Mitchell Hutchins believes they have a potential for capital
appreciation.
High Income Fund normally invests at least 65% of its total assets in
income-producing securities, which may include zero coupon bonds, other original
discount securities, payment-in-kind securities and principal-only mortgage
backed securities. The fund also may invest up to 5% of its net assets in fixed
and floating rate loans through either participations in or assignments of all
or a portion of loans made by banks.
High Income Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest up to 10% of its assets in the securities of
other investment companies and may sell short "against the box."
Strategic Income Fund's primary investment objective is to achieve a
high level of current income. As a secondary investment objective, the fund
seeks capital appreciation. The fund strategically allocates its investments
among three distinct bond market categories: (1) U.S. government and investment
grade corporate bonds, including mortgage- and asset-backed securities; (2) U.S.
high yield corporate bonds, including convertible bonds, and preferred stock;
and (3) foreign and emerging market bonds. A portion of the fund's assets
normally is invested in each of these investment sectors. However, the fund has
the flexibility at any time to invest all or substantially all of its
investments in any one sector.
Strategic Income Fund may invest in high yield bonds that are rated as
low as D by S&P or C by Moody's.
The foreign and emerging market bonds in which Strategic Income Fund
may invest include (1) government bonds, including Brady bonds and other
sovereign debt, and bonds issued by multi-national institutions such as the
International Bank for Reconstruction and Development and the International
Monetary Fund; (2) corporate bonds and preferred stock issued by entities
located in foreign countries, or denominated in or indexed to foreign
currencies; (3) interests in foreign loan participations and assignments; and
(4) foreign mortgage-backed securities and other structured foreign investments.
The fund may invest without limit in securities of issuers located in any
country in the world, including both industrialized and emerging market
countries. The fund generally is not restricted in the portion of its assets
that may be invested in a single country or region, but the fund's assets
normally are invested in issuers located in at least three countries. No more
than 25% of the fund's total assets are invested in securities issued or
guaranteed by any single foreign government. The fund may invest in foreign and
emerging market bonds that do not meet any minimum credit rating standard or
that are unrated.
Mitchell Hutchins believes that Strategic Income Fund's strategy of
sector allocation should be less risky than investing in only one sector of the
bond market. Data from the Lehman Aggregate Bond Index, the Salomon Brothers
High Yield Index, the Merrill Lynch High Yield Index and the Salomon Brothers
World Government Bond Index indicate that these sectors are not closely
correlated. If successful, the fund's strategy should enable the fund to achieve
a higher level of investment return than if the fund invested exclusively in any
one investment sector or allocated a fixed proportion of its assets to each
investment sector.
Strategic Income Fund may invest up to 10% of its total assets in
preferred stock of U.S. and foreign issuers. It also may acquire equity
securities when attached to bonds or as part of a unit including bonds or in
connection with a conversion or exchange of bonds. The fund also may invest
without limit in certificates of deposit issued by banks and savings
associations and in bankers' acceptances.
Strategic Income Fund normally invests at least 65% of its total assets
in income-producing securities, which may include zero coupon bonds, other
original discount securities, payment-in-kind securities and principal-only
mortgage backed securities. The fund also may invest in fixed and floating rate
loans through either participations in or assignments of all or a portion of
loans made by banks.
Strategic Income Fund may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may engage in dollar rolls and reverse repurchase
agreements, which are
3
<PAGE>
considered borrowings and may not exceed 33-13% of its total assets. The fund
may also borrow for temporary or emergency purposes, but not in excess of an
additional 5% of its total assets. The fund may invest up to 10% of its assets
in the securities of other investment companies and may sell short "against the
box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or the Statement of Additional
Information, the funds have established no policy limitations on their ability
to use the investments or techniques discussed in these documents.
Bonds are fixed or variable rate debt obligations, including notes,
debentures, and similar instruments and securities. Mortgage- and asset-backed
securities are types of bonds, and certain types of income-producing,
non-convertible preferred stocks may be treated as bonds for investment
purposes. Corporations, governments and other issuers use bonds to borrow money
from investors. The issuer pays the investor a fixed or variable rate of
interest and normally must repay the amount borrowed on or before maturity. Many
preferred stocks and some bonds are "perpetual" in that they have no maturity
date.
Bonds are subject to interest rate risk and credit risk, but to varying
degrees. Interest rate risk is the risk that interest rates will rise and that,
as a result, bond prices will fall, lowering the value of a fund's investments
in bonds. In general, bonds having longer durations are more sensitive to
interest rate changes than are bonds with shorter durations. Credit risk is the
risk that an issuer may be unable or unwilling to pay interest and/or principal
on the bond,, or that a market may become less confident as to the issuer's
ability or willingness to do so. Credit risk can be affected by many factors,
including adverse changes in the issuer's own financial condition or in economic
conditions.
Equity Securities. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,
joint ventures or similar enterprises and depository receipts. Common stocks are
the most familiar type of equity security. They represent an equity (ownership)
interest in a corporation. Preferred stock has certain fixed income features,
like a bond, but is actually equity in a company, like common stock. Convertible
securities include debentures, notes and preferred equity securities, 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. Depository receipts typically are issued by banks or trust
companies and evidence ownership of underlying equity securities. The prices of
equity securities generally fluctuate more than bonds and reflect changes in a
company's financial condition and in overall market and economic conditions.
Common stocks generally represent the riskiest investment in a company. It is
possible that a fund may experience a substantial or complete loss on an
individual equity investment. While this is possible with bonds, it is less
likely.
Credit Ratings; Non-Investment Grade Bonds. Moody's, S&P and other
nationally recognized statistical rating organizations ("NRSROs") are private
services that provide ratings of the credit quality of bonds and certain other
securities. A description of the ratings assigned to corporate bonds by Moody's
and S&P is included in the Appendix to this Statement of Additional Information.
The process by which Moody's and S&P determine ratings for mortgage-backed
securities includes consideration of the likelihood of the receipt by security
holders of all distributions, the nature of the underlying assets, the credit
quality of the guarantor, if any, and the structural, legal and tax aspects
associated with these securities. Not even the highest such ratings represents
an assessment of the likelihood that principal prepayments will be made by
obligors on the underlying assets 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.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a bond's value or its
liquidity and do not guarantee the performance of the issuer. 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. There is a risk that rating agencies may downgrade a
bond's rating. Subsequent to a bond's purchase by a fund, it may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the fund. The funds 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,
bonds with the same maturity, interest rate and rating may have different market
prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or the Sub-Adviser will analyze interest rate trends and developments
that may affect individual issuers, including factors such as liquidity,
profitability and asset quality. The
4
<PAGE>
yields on bonds 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.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another NRSRO or, if unrated,
determined by Mitchell Hutchins or the Sub-Adviser to be of comparable quality.
Moody's considers bonds rated Baa (its lowest investment grade rating) to have
speculative characteristics. This means that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated debt
securities.
High yield bonds (commonly known as "junk bonds") are non-investment
grade bonds. This means they are rated Ba or lower by Moody's, BB or lower by
S&P, comparably rated by another NRSRO or determined by Mitchell Hutchins or the
Sub-Adviser to be of comparable quality. A fund's investments in non-investment
grade bonds entail greater risk than its investments in higher rated bonds.
Non-investment grade bonds are considered predominantly speculative with respect
to the issuer's ability to pay interest and repay principal and may involve
significant risk exposure to adverse conditions. Non-investment grade bonds
generally offer a higher current yield than that available for investment grade
issues; however, they involve higher risks, in that they are especially
sensitive 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. 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 interest and principal 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 by
collateral and will not receive payment until more senior claims are paid in
full.
The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, those higher yields
did not reflect the value of the income stream that holders of such securities
expected. Rather, they reflected the risk that holders of such securities could
lose a substantial portion of their value due to the issuers' financial
restructurings or defaults by the issuers. There can be no assurance that those
declines will not recur.
The market for non-investment grade bonds 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
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade bonds, especially in a thinly traded market.
U.S. Government Securities include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the U.S.
government, its agencies or its instrumentalities. U.S. government securities
include mortgage-backed securities issued or guaranteed by government agencies
or government-sponsored enterprises. Other U.S. government securities may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer or,
in the case of mortgage-backed securities, by pools of assets.
Treasury Inflation-Protection Securities ("TIPS") are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semiannually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds. Any increase in the principal value of TIPS is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase at that time.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets
5
<PAGE>
such as motor vehicle installment sales contracts, other installment sales
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 may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present.
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. government mortgage-backed securities are issued or
guaranteed as to the payment of principal and interest (but not as to market
value) by Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government sponsored enterprises. Other domestic
mortgage-backed securities are sponsored or issued by private entities,
generally originators of an investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purposes 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. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
Mortgage-backed securities may be composed of one or more classes and
may be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time because the underlying
mortgage loans may be prepaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities may be paid off more slowly than originally expected. Changes in the
rate or "speed" of these prepayments can cause the value of mortgage-backed
securities to fluctuate rapidly.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the fund purchased
the security. Prepayments at a slower rate than expected may lengthen the
effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
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.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest-only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
greater than anticipated principal prepayments, then the total amount of
interest payments allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of his or her initial investment, even if the security is
government issued or guaranteed or is rated AAA or the equivalent. Conversely,
PO classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and the yield to investors will be
reduced if principal payments are slower than expected. Some IOs and POs, as
well as other CMO classes, are structured to have special protections against
the effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances. Inverse floating rate
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CMO classes also may be extremely volatile. These classes pay interest at a rate
that decreases when a specified index of market rates increases.
The market for privately issued mortgage-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
CMO classes may be specially structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and especially
during periods of rapid or unanticipated changes in market interest rates, the
attractiveness of some 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. Foreign mortgage-backed securities markets
are substantially smaller than U.S. markets, but have been established in
several countries, including Germany, Denmark, Sweden, Canada and Australia, and
may be developed elsewhere. Foreign mortgage-backed securities generally are
structured differently than domestic mortgage-backed securities, but they
normally present substantially similar investment risks as well as the other
risks normally associated with foreign 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 IO and PO classes of mortgage-backed
securities, can be extremely volatile, and these securities may become illiquid.
Mitchell Hutchins or (for Low Duration Fund) the Sub-Adviser seeks to manage the
funds' investments in mortgage-backed securities so that the volatility of each
fund's portfolio, taken as a whole, is consistent with its investment objective.
Management of portfolio duration is an important part of this. However,
computing the duration of mortgage-backed securities is complex. See, "--
Duration." If Mitchell Hutchins or the Sub-Adviser does not compute the duration
of mortgage-backed securities correctly, the value of the fund's portfolio may
be either more or less sensitive to changes in market interest rates than
intended. In addition, if market interest rates or other factors that affect the
volatility of securities held by a fund change in ways that Mitchell Hutchins or
the Sub-Adviser does not anticipate, the fund's ability to meet its investment
objective may be reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. 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 or the
Sub-Adviser believe 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
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mortgages. These instruments, however, pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The Freddie Mac guarantee
is not backed by the full faith and credit of the U.S. government.
Private Mortgage-Backed Securities--Mortgage-backed securities issued
by Private Mortgage Lenders are structured similarly to 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.
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 the 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 accrued on all classes of a CMO (other
than any principal-only or "PO" class) on a monthly, quarterly or semiannual
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 payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or fraction of the
change in a specified interest rate index, so as to pay at a rate that will be
attractive in certain interest rate environments but not in others. For example,
an inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates-- i.e., the yield may increase as rates increase and decrease as
rates decrease--but may do so more rapidly or to a greater degree. The market
value of such securities generally is more volatile than that of a fixed rate
obligation. Such interest rate formulas may be combined with other CMO
characteristics. For example, a CMO class may be an inverse interest-only ("IO")
class, 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.
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) loss protection. Loss protection
related to 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. Loss protection 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. A fund will not pay any additional fees for such credit enhancement,
although the existence of credit enhancement may increase the price of a
security.
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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.
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, 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 was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield.
Adjustable Rate Mortgage and Floating Rate Mortgage-Backed
Securities--Adjustable Rate Mortgage ("ARM") mortgage-backed securities are
mortgage-backed securities that represent a right to receive interest payments
at a rate that is adjusted to reflect the interest earned on a pool of mortgage
loans bearing variable or adjustable rates of interest (such mortgage loans are
referred to as "ARMs"). Floating rate mortgage-backed securities are classes of
mortgage-backed securities that have been structured to represent the right to
receive interest payments at rates that fluctuate in accordance with an index
but that generally are 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. 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 specify that the borrower's mortgage interest rate may not be adjusted
above
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a specified lifetime maximum rate or, in some cases, below a minimum lifetime
rate. In addition, certain ARMs specify limitations on the maximum amount by
which the mortgage interest rate may adjust for any single adjustment period.
ARMs also may limit 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.
ARMs also may be subject to a greater rate of prepayments in a
declining interest rate environment. For example, during a period of declining
interest rates, prepayments on ARMs could increase because the availability of
fixed mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The 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.
Investing in Foreign Securities. Investing in foreign securities
involves more risks than investing in the United States. The value of foreign
securities is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values.
Investments in foreign securities 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 may include expropriation, confiscatory
taxation, withholding taxes on interest and/or dividends, limitations on the use
of or transfer of fund assets and 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 position. In those European countries that have begun using
the Euro as a common currency unit, individual national economies may be
adversely affected by the inability of national governments to use monetary
policy to address their own economic or political concerns.
Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. From time to
time foreign securities may be difficult to liquidate rapidly without
significantly depressing the price of such securities. Transactions in foreign
securities may be subject to less efficient settlement practices. Foreign
securities trading practices, including those involving securities settlement
where fund assets may be released prior to receipt of payment, may expose a fund
to increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. Legal remedies for defaults and disputes may have to be pursued
in foreign courts, whose procedures differ substantially from those of U.S.
courts. Additionally, the costs of investing outside the United States
frequently are higher than those in the United States. These costs include
relatively higher costs to execute trades and foreign custody expenses.
Securities of foreign issuers may not be registered with the Securities
and Exchange Commission ("SEC"), and the issuers thereof may not be subject to
its reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the 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.
Investment income on certain foreign securities in which the funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may
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reduce or eliminate the amount of foreign taxes to which the funds would be
subject. In addition, substantial limitations may exist in certain countries
with respect to the funds' ability to repatriate investment capital or the
proceeds of sales of securities.
Foreign Currency Risks. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of a fund's foreign
investments. If the value of a foreign currency rises against the value of the
U.S. dollar, the value of a fund's investments that are denominated in, or
linked to, that currency will increase. Conversely, if the value of a foreign
currency declines against the value of the U.S. dollar, the value of such fund
investments will decrease. Such changes may have a significant impact on the
value of fund shares. In some instances, a fund may use derivative strategies to
hedge against changes in foreign currency value. (See "Strategies Using
Derivative Instruments" below.) However, opportunities to hedge against currency
risk may not exist in certain markets, particularly with respect to emerging
market currencies, and even when appropriate hedging opportunities are
available, a fund may choose not to hedge against currency risk.
Generally, currency exchange rates are determined by supply and demand
in the foreign exchange markets and the relative merits of investments in
different countries. In the case of those European countries that use the Euro
as a common currency unit, the relative merits of investments in the common
market in which they participate, rather than the merits of investments in the
individual country, will be a determinant of currency exchange rates. Currency
exchange rates also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.
Each fund values its assets daily in U.S. dollars and does not intend
to convert its holdings of foreign currencies to U.S. dollars on a daily basis.
From time to time a fund's foreign currencies may be held as "foreign currency
call accounts" at foreign branches of foreign or domestic banks. These accounts
bear interest at negotiated rates and are payable upon relatively short demand
periods. If a bank became insolvent, a fund could suffer a loss of some or all
of the amounts deposited. Each fund may convert foreign currency to U.S. dollars
from time to time.
The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, a fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a fund at one rate, while offering a lesser rate of exchange should
a fund desire immediately to resell that currency to the dealer. Each fund
conducts its currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward, futures or options contracts to purchase or sell foreign
currencies.
Special Characteristics of Emerging Market Securities and Sovereign Debt
Emerging Market Investments. The special risks of investing in foreign
securities are heightened when emerging markets are involved. For example, many
emerging market currencies recently have experienced significant devaluations
relative to the U.S. dollar. Emerging market countries typically have economic
and political systems that are less fully developed and can be expected to be
less stable than those of developed countries. Emerging market countries may
have policies that restrict investment by foreigners, and there is a higher risk
of government expropriation or nationalization of private property. The
possibility of low or nonexistent trading volume in the securities of companies
in emerging markets also may result in a lack of liquidity and in price
volatility. Issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A fund could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
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If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income, including
net short-term capital gains and net long-term capital gains within applicable
time periods, the fund could be subject to federal income and excise taxes that
would not otherwise be incurred and could cease to qualify for the favorable tax
treatment afforded to regulated investment companies ("RICs") under the Internal
Revenue Code ("Code"). In such case, it would become subject to federal income
tax on all of its income and net gains.
Social, Political and Economic Factors. Many emerging market countries
may be subject to a greater degree of social, political and economic instability
than is the case in the United States. Any change in the leadership or policies
of these countries may halt the expansion of or reverse any liberalization of
foreign investment policies now occurring. Such instability may result from,
among other things, the following: (i) authoritarian governments or military
involvement in political and economic decision making, and changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection. Such social, political and economic
instability could significantly disrupt the financial markets in those countries
and elsewhere and could adversely affect the value of a fund's assets. In
addition, there may be the possibility of asset expropriations or future
confiscatory levels of taxation affecting a fund.
The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these countries. In addition, the economies of
some countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil.
Financial Information and Legal Standards. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets.
In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations, changes
to existing laws and regulations and preemption of local laws and regulations by
national laws. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
Foreign Sovereign Debt. Sovereign debt includes bonds that are issued
by foreign governments or their agencies, instrumentalities or political
subdivisions or by foreign central banks. Sovereign debt also may be issued by
quasi-governmental entities that are owned by foreign governments but are not
backed by their full faith and credit or general taxing powers. Investment in
sovereign debt involves special risks. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with the
terms of such debt, and the funds may have limited legal recourse in the event
of a default.
Sovereign debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports.
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Such events could diminish a country's trade account surplus, if any, or the
credit standing of a particular local government or agency. Another factor
bearing on the ability of a country to repay sovereign debt is the level of the
country's international reserves. Fluctuations in the level of these reserves
can affect the amount of foreign exchange readily available for external debt
payments and, thus, could have a bearing on the capacity of the country to make
payments on its sovereign debt.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect the funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While Mitchell Hutchins manages a fund's portfolios in a
manner that is intended to minimize the exposure to such risks, there can be no
assurance that adverse political changes will not cause the funds to suffer a
loss of interest or principal on any of its sovereign debt holdings.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. Some emerging market
countries have from time to time declared moratoria on the payment of principal
and interest on external debt.
Some emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of sovereign debt, including the Funds, may be requested to participate
in the rescheduling of such debt and to extend further loans to sovereign
debtors. The interests of holders of sovereign debt could be adversely affected
in the course of restructuring arrangements or by certain other factors referred
to below. Furthermore, some of the participants in the secondary market for
sovereign debt may also be directly involved in negotiating the terms of these
arrangements and may, therefore, have access to information not available to
other market participants. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of certain issuers of sovereign debt. There is no bankruptcy
proceeding by which sovereign debt on which a sovereign has defaulted may be
collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in such sovereign debt and increase the costs and
expenses of a Fund. Certain countries in which a Fund may invest require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment by
foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments the country could impose temporary restrictions on foreign capital
remittances. A Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation of capital, as well
as by the application to the Fund of any restrictions on investments. Investing
in local markets may require a Fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the Fund.
Brady Bonds. Brady Bonds are sovereign debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the IMF. The Brady Plan framework, as it has developed, contemplates the
exchange of commercial bank debt for newly issued Brady Bonds. Brady Bonds may
also be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount.
Brady Bonds have been issued only in recent years, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan to
date are designed to achieve debt and debt-service reduction through specific
options negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of options have
included the exchange of outstanding commercial bank debt for bonds issued at
100% of face value of such debt, which carry a below-market stated rate of
interest (generally known as par bonds), bonds issued at a discount from the
face value of such debt (generally known as discount bonds), bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, a Fund will
purchase Brady Bonds in which the price and yield to the investor reflect market
conditions at the time of purchase.
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Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF, the
World Bank and the debtor nations' reserves. In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent until the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. Interest payments on Brady Bonds may be wholly uncollateralized
or may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments, with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components:
(1) the collateralized repayment of principal, if any, at final maturity, (2)
the collateralized interest payments, if any, (3) the uncollateralized interest
payments and (4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. A Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) repayment of principal
primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds.
Structured Foreign Investments. This term refers to interests in U.S.
and foreign entities organized and operated solely for the purpose of
securitizing or restructuring the investment characteristics of foreign
securities. This type of securitization or restructuring involves the deposit
with or purchase by a U.S. or foreign entity, such as a corporation or trust, of
specified instruments (such as commercial bank loans or Brady Bonds) and the
issuance by that entity of one or more classes of securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
foreign investments to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
foreign investments is dependent on the extent of the cash flow on the
underlying instruments.
Structured foreign investments frequently involve no credit
enhancement. Accordingly, their credit risk generally will be equivalent to that
of the underlying instruments. In addition, classes of structured foreign
investments may be subordinated to the right of payment of another class.
Subordinated structured foreign investments typically have higher yields and
present greater risks that unsubordinated structured foreign investments.
Structured foreign investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
foreign investments.
Currency-Linked Investments. The principal amount of securities that
are indexed to specific foreign currency exchange rates may be adjusted up or
down (but not below zero) at maturity to reflect changes in the exchange rate
between two currencies. A fund may experience loss of principal due to these
adjustments.
Zero Coupon, OID and PIK Securities. Zero coupon securities are
securities that make no periodic interest payments but instead are sold at a
deep discount from their face value. The buyer of these securities receives a
rate of return by the gradual appreciation of the security, which results from
the fact that it will be paid at face value on a specified maturity date. There
are many types of zero coupon securities. Some are issued in zero coupon form,
including Treasury bills, notes and bonds that have been stripped of their
unmatured interest coupons and receipts or certificates representing interests
in such stripped debt obligations and coupons. Others are created by brokerage
firms that strip (separate) the coupons (unmatured interest payments) from
interest-paying debt securities and sell the principal and the coupons
separately.
Other securities are sold with original issue discount ("OID"), a term
that means the securities are issued at a price that is lower than their value
at maturity, even though the securities also may make cash payments of interest
prior to maturity. In addition, payment-in-kind ("PIK") securities pay interest
in additional securities, not in cash. OID and PIK securities usually trade at a
discount from their face value.
Zero coupon securities pay no cash interest to holders prior to
maturity. Accordingly, they are generally more sensitive to changes in interest
rates than debt obligations of comparable maturities that make current interest
payments. This means that when interest rates fall, the value of zero coupon
securities rises more rapidly than securities paying interest on a current
basis. However, when interest rates rise, their value falls more dramatically.
Other OID securities also are subject to greater fluctuations in market value in
response to changing interest rates than debt securities of comparable
maturities that make current distributions of interest in cash.
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Federal tax law requires that the holder of a zero coupon security or
other OID security include in gross income each year the original issue discount
that accrues on the security for the year, even though the holder receives no
interest payment on the security during the year. Accordingly, to continue to
qualify as a regulated investment company and to avoid a federal excise tax, a
fund may be required to distribute as dividends amounts that are greater than
the total amount of cash it actually receives. Similarly, while PIK securities
may pay interest in the form of additional securities rather than cash, that
interest must be included in a fund's annual income. These distributions must be
made from the fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. A fund will not be able to purchase additional securities
with cash used to make such distributions and its current income and the value
of its shares may ultimately be reduced as a result.
Certain zero coupon securities 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 staff of the SEC 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. This technique is
frequently used with U.S. Treasury bonds to create CATS (Certificate of Accrual
Treasury Securities), TIGRs (Treasury Income Growth Receipts) and similar
securities. As long as the SEC takes this position, CATS and TIGRs, which are
not issued through the U.S. Treasury, will not be counted as U.S. government
securities for purposes of the 65% investment requirement applicable to U.S.
Government Income Fund and Low Duration Fund.
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 or dividends until the
convertible security matures or is redeemed, converted or exchanged. Convertible
securities have unique investment characteristics in that they generally (1)
have higher yields than common stocks, but lower yields than comparable
non-convertible securities, (2) are less subject to fluctuation in value than
the underlying stock because they have fixed income characteristics and (3)
provide the potential for capital appreciation if the market price of the
underlying common stock increases. While no securities investment is without
some risk, investments in convertible securities generally entail less risk than
the issuer's common stock. However, the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
Before conversion, convertible securities have characteristics similar
to non-convertible 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
non-convertible securities. 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. 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.
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 a 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. 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. The other funds that may invest in
convertible securities may hold any equity securities they acquire upon
conversion subject only to their limitations on holding equity securities.
Loan Participations and Assignments. Investments in secured or
unsecured fixed or floating rate loans ("Loans") arranged through private
negotiations between a borrowing corporation, government or other entity and one
or more financial institutions ("Lenders") may be in the form of participations
("Participations") in Loans or assignments ("Assignments") of all or a portion
of Loans from third parties. Participations typically result in the fund's
having a contractual relationship only with the Lender, not with the borrower. A
fund has 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
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purchasing Participations, a fund generally has 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 a fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, a fund assumes the credit risk of both
the borrower and the Lender that is selling the Participation. In the event of
the insolvency of the selling Lender, the fund may be treated as a general
creditor of that Lender and may not benefit from any set-off between the Lender
and the borrower. A fund will acquire Participations only if Mitchell Hutchins
determines that the selling Lender is creditworthy.
When a fund purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. In an Assignment, the fund is entitled
to receive payments directly from the borrower and, therefore, does not depend
on the selling bank to pass these payments onto the fund. However, because
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the 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
Securities Act of 1933 ("1933 Act") and thus may be subject to a fund's
limitation on investment in illiquid securities. Because there may be no liquid
market for such securities, such securities may be sold only to a limited number
of institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on a fund's ability to
dispose of particular Assignments or Participations when necessary to meet the
fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower.
Temporary and Defensive Investments; Money Market Investments. Each
fund may invest in money market investments for temporary or defensive purposes
or as part of its normal investment program.. Such investments include, among
other things, (1) securities issued or guaranteed by the U.S. government or one
of its agencies or instrumentalities, (2) commercial paper rated at least A-1 by
S&P or P-1 by Moody's (Low Duration Fund and Investment Grade Income Fund) or
without regard to rating (High Income Fund and Strategic Income Fund); (3) bank
certificates of deposit, bankers' acceptances; and (4) repurchase agreements
secured by any of the foregoing. The money market instruments of U.S. Government
Income Fund will be limited to obligations of the U.S. government, its agencies
or instrumentalities or repurchase agreements secured by such obligations.
Warrants. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
Illiquid Securities. The term "illiquid securities" for purposes of the
Prospectus and Statement of Additional Information 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 OTC options, repurchase agreements maturing in
more than seven days and restricted securities other than those Mitchell
Hutchins or (for Low Duration Fund) the Sub-Adviser has determined are liquid
pursuant to guidelines established by each fund's board. The assets used as
cover for OTC options written by the funds will be considered illiquid unless
the OTC options are sold to qualified dealers who agree that the funds may
repurchase any OTC options they write at a maximum price to be calculated by a
formula set forth in the option agreements. 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. Under current SEC guidelines, IO and PO classes of mortgage-backed
securities generally 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 or the Sub-Adviser has determined that they are liquid pursuant to
guidelines established by each fund's board. To the extent a fund invests in
illiquid securities, it may not be able to readily liquidate such investments
and may have to sell other investments if necessary to raise cash to meet its
obligations. The lack of a liquid secondary market for illiquid securities may
make it more difficult for a fund to assign a value to those securities for
purposes of valuing its portfolio and calculating its net asset value.
Restricted securities are not registered under the 1933 Act and may be
sold only in privately negotiated or other exempted transactions or after a 1933
Act registration statement has become effective. 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 a fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a fund might obtain a less favorable price than prevailed when it decided to
sell.
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However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradeable in the country in which they are
principally traded, they generally are not considered illiquid, even if they are
restricted in the United States. A large institutional market has developed for
many U.S. and foreign securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as
a result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
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.
Each board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins or the Sub-Adviser, as
applicable, pursuant to guidelines approved by the board. Mitchell Hutchins or
the Sub-Adviser takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the 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 the Sub-Adviser monitors the
liquidity of restricted securities in each fund's portfolio and reports
periodically on such decisions to the applicable board.
Repurchase Agreements. Repurchase agreements are transactions in which
a fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased obligations. A fund maintains custody of the underlying obligations
prior to their repurchase, either through its regular custodian or through a
special "tri-party" custodian or sub-custodian that maintains separate accounts
for both the fund and its counterparty. Thus, the obligation of the counterparty
to pay the repurchase price on the date agreed to or upon demand is, in effect,
secured by such obligations. Repurchase agreements carry certain risks not
associated with direct investments in securities, including a possible decline
in the market value of the underlying obligations. Repurchase agreements
involving obligations other than U.S. government securities (such as commercial
paper and corporate bonds) may be subject to special risks and may not have the
benefit of certain protections in the event of the counterparty's insolvency. If
the seller or guarantor becomes insolvent, the fund may suffer delays, costs and
possible losses in connection with the disposition of collateral. If their value
becomes less than the repurchase price, plus any agreed-upon additional amount,
the counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the obligations and the price that was paid by a fund upon
acquisition is accrued as interest and included in its net investment income.
Each fund intends to enter into repurchase agreements only with counterparties
in transactions believed by Mitchell Hutchins or the Sub-Adviser to present
minimum credit risks in accordance with guidelines established by the fund's
board.
Reverse Repurchase Agreements. Reverse repurchase agreements involve
the sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to each
fund's limitation on borrowings and may not exceed 33-1/3% of its total assets.
While a reverse repurchase agreement is outstanding, a fund will maintain, in a
segregated account with its custodian, cash or liquid securities, marked to
market daily, in an amount at least equal to its obligations under the reverse
repurchase agreement.
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce that fund's obligation to repurchase the securities, and the fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
Dollar Rolls. In a dollar roll, a fund sells mortgage-backed or other
securities for delivery on the next regular settlement date for those securities
and, simultaneously, contracts to purchase substantially similar securities for
delivery on a later settlement date. Dollar rolls also are subject to a fund's
limitation on borrowings.
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When-Issued and Delayed Delivery Securities. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, i.e., for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield. A fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when a fund undertakes a when-issued or
delayed-delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a fund on a when-issued or delayed-delivery basis may
result in the fund's incurring or missing an 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 that fund, exceeds its net assets.
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 commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "Investment Policies and
Restrictions--Segregated Accounts." A fund purchases when-issued securities only
with the intention of taking delivery, but may sell the right to acquire the
security prior to delivery if Mitchell Hutchins or the Sub-Adviser, as
applicable, deems it advantageous to do so, which may result in a gain or loss
to the fund.
Duration. Duration is a measure of the expected life of a debt security
on a present value basis. Duration incorporates the debt security's yield,
coupon interest payments, final maturity and call features into one measures and
is one of the fundamental tools used by Mitchell Hutchins and (for Low Duration
Fund) the Sub-Adviser in portfolio selection and yield curve positioning a
fund's investments in debt securities. Duration was developed as a more precise
alternative to the concept "term to maturity." 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 takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable debt security, expected to be made, and weights them by
the present values of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on 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.
Duration allows Mitchell Hutchins and the Sub-Adviser 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 of debt securities. For example, when
the level of interest rates increases by 1%, a debt security having a positive
duration of three years generally will decrease by approximately 3%. Thus, if
Mitchell Hutchins calculates the duration of a fund's portfolio of debt
securities as 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 a fund's portfolio of debt securities may
vary in relation to interest rates by a greater or lesser percentage than
indicated by the above example.
Futures, options and options on futures have durations that, in
general, are closely related to the duration of the securities that underlie
them. Holding long futures or call option positions will lengthen portfolio
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
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situations, Mitchell Hutchins and the Sub-Adviser 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.
Lending of Portfolio Securities. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with that fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. Each fund will retain authority to terminate any of its loans at any
time. Each fund may pay reasonable fees in connection with a loan and may pay
the borrower or placing broker a negotiated portion of the interest earned on
the reinvestment of cash held as collateral. A fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. Each fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the boards governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
Short Sales "Against the Box." Each fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a fund, and that fund is
obligated to replace the securities borrowed at a date in the future. When a
fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the fund
maintains, in a segregated account with its custodian, the securities that could
be used to cover the short sale. Each fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales "against the box."
A fund might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or a Sub-Adviser believes that the
price of a security may decline, thereby causing a decline in the value of a
security owned by the fund or a security convertible into or exchangeable for a
security owned by the fund. In such case, any loss in the fund's long position
after the short sale should be reduced by a corresponding gain in the short
position. Conversely, any gain in the long position after the short sale should
be reduced by a corresponding loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of the securities a fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
Segregated Accounts. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, or reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
and swaps.
Investment Limitations of the Funds
Fundamental Limitations. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
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Each fund will not:
(1) purchase any security if, as a result of that purchase, 25% or
more of the fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except that
this limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities, and
except that U.S. Government Income Fund and Low Duration 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.
(2) issue senior securities or borrow money, except as permitted
under the Investment Company Act of 1940 ("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.
(3) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this restriction,
the acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other
issuers, except to the extent that the fund might be considered an underwriter
under the federal securities laws in connection with its disposition of
portfolio securities.
(5) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in mortgage-
backed securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except that the
fund may exercise rights under agreements relating to such securities, including
the right to enforce security interests and to hold real estate acquired by
reason of such enforcement until that real estate can be liquidated in an
orderly manner.
(6) purchase or sell physical commodities unless acquired as a
result of owning securities or other instruments, but the fund may purchase,
sell or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
In addition, U.S. Government Income Fund, Low Duration Fund, Investment
Grade Income Fund and High Income Fund will not:
(7) purchase securities of any one issuer if, as a result, more than
5% of the fund's total assets would be invested in securities of that issuer or
the fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
Non-Fundamental Limitations. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval.
Each fund will not:
(1) invest more than 10% of its net assets (15% of net assets for
Low Duration Fund and Strategic Income Fund) in illiquid securities;
(2) purchase portfolio securities while borrowings in excess of 5%
of its total assets are outstanding;
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(3) 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;
(4) 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; or
(5) 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 (and except that a fund
will not purchase securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act).
STRATEGIES USING DERIVATIVE INSTRUMENTS
General Description of Derivative Instruments. Mitchell Hutchins and
(for Low Duration Fund) the Sub-Adviser may use a variety of financial
instruments ("Derivative Instruments"), including certain options, futures
contracts (sometimes referred to as "futures"), options on futures contracts to
attempt to hedge each fund's portfolio and also to attempt to enhance income or
realize gains and to manage the duration of its portfolio. Each fund also may
enter into interest rate swap transactions. High Income Fund and Strategic
Income Fund may use forward currency contracts for hedging purposes. A fund may
enter into transactions involving one or more types of Derivative Instruments
under which the full value of its portfolio is at risk. Under normal
circumstances, however, each fund's use of these instruments will place at risk
a much smaller portion of its assets. In particular, each fund may use the
Derivative Instruments described below.
The funds might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If the
Sub-Adviser or Mitchell Hutchins, as applicable, is incorrect in its judgment on
market values, interest rates or other economic factors in using a derivative
instrument or strategy, a fund may have lower net income and a net loss on the
investment.
Options on 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 or at specified
times or at the expiration of the option, depending on the type of option
involved. 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 that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term or at specified times or at the expiration of the option,
depending on the type of option involved. 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 Securities Indices--A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities 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 securities
index.
Securities Index Futures Contracts--A securities 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 securities 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 and Foreign Currency Futures Contracts--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
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Options on Futures Contracts--Options on futures contracts are similar
to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, 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 or currency, 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 a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will assume
a short position in the case of a call and a long position in the case of a put.
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.
General Description of Strategies Using Derivative Instruments. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative 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
Derivative 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, a 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, a 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 Derivative
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 Derivative 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, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transactions costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or indices
of 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 equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins or the Sub-Adviser
believes it likely that the prices of the securities 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 equal to the exercise price of the call. A fund
might enter into a short straddle when Mitchell Hutchins or the Sub-Adviser
believes it unlikely that the prices of the securities will be as volatile
during the term of the option as the option pricing implies.
Derivative 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. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad equity
market sectors in which a fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Gain strategies may
include using Derivative Instruments to increase or decrease a fund's exposure
to different asset classes without buying or selling the underlying instruments.
A fund also may use derivatives to simulate full investment by the fund while
maintaining a cash balance for fund management purposes (such as to provide
liquidity to meet anticipated shareholder sales of fund shares and for fund
operating expenses).
The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and
in the Prospectus, Mitchell Hutchins and the Sub-Adviser may discover additional
opportunities in connection with Derivative Instruments and with hedging, income
and gain strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins or the Sub-Adviser
may utilize these opportunities for a
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fund to the extent that they are consistent with the fund's investment objective
and permitted by its 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 Strategies Using Derivative Instruments. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the
ability of Mitchell Hutchins or the Sub-Adviser to predict movements of the
overall securities, interest rate or currency exchange markets, which requires
different skills than predicting changes in the prices of individual securities.
While Mitchell Hutchins and the Sub-Adviser are experienced in the use of
Derivative Instruments, there can be no assurance that any particular strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
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 affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(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 a Sub-Adviser projected a decline in the
price of a security in that 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 Derivative Instrument. Moreover, if the
price of the Derivative 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 Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions 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 portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative 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 counterparty 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 Strategies Using Derivative Instruments. Transactions using
Derivative Instruments, other than purchased options, expose the funds 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 or other options or futures contracts or (2) cash or liquid
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 such transactions and will, if
the guidelines so require, set aside cash or liquid 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 Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of a fund's assets to cover positions or to 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 or call options on securities in which they invest and related
indices and (for High Income Fund and Strategic Income Fund) on foreign
currencies. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. A fund may also use options
to attempt to realize gains by increasing or reducing its exposure to an asset
class without purchasing or selling the underlying securities. 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. 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
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exercise price of the call option, it can be expected that the option will be
exercised and the affected fund will be obligated to sell the security at less
than its market value. 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
security depreciates to a price lower than the exercise price of the put option,
it can be expected that the put option will be exercised and the fund will be
obligated to purchase the security at more 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 bonds are European-style
options. This means that the option can only be exercised immediately prior to
its expiration. This is in contract to American-style options that may be
exercised at any time. There are also other types of options that may be
exercised on certain specified dates before expiration. 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 and 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 a fund and its counterparty (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 counterparty to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.
The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The funds
intend 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 counterparty, or by a
transaction in the secondary market if any such market exists. Although the
funds will enter into OTC options only with counterparties that are expected to
be capable of entering into closing transactions with the funds, there is no
assurance that a 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
counterparty, a 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 put or call
option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund may purchase and write put and call options on indices 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 a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.
Limitations on the Use of Options. The use of options is governed by
the following guidelines, which can be changed by each fund's board without
shareholder vote:
(1) A fund may purchase a put or call option, including any straddle
or spread, only if the value of its premium, when aggregated with the premiums
on all other options held by the fund, does not exceed 5% of its total assets.
(2) The aggregate value of securities underlying put options written
by a fund, determined as of the date the put options are written, will not
exceed 50% of its net assets.
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(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.
Futures. The funds may purchase and sell securities index futures
contracts, interest rate futures contracts, debt security index futures
contracts and foreign currency futures contracts. A 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 options on securities or indices. In addition, a fund
may purchase or sell futures contracts or purchase options thereon to increase
or reduce its exposure to an asset class without purchasing or selling the
underlying securities.
Futures strategies also can be used to manage the average duration of a
fund's portfolio. If Mitchell Hutchins or (for Low Duration Fund) the
Sub-Adviser wishes to shorten the average duration of a fund's portfolio, 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 the Sub-Adviser wishes
to lengthen the average duration of the fund's portfolio, the fund may buy a
futures contract or a call option thereon, or sell a put option thereon.
A fund may also write put options on 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 a 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, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, 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 futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each 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 call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The funds intend 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 related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. A fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, a 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.
25
<PAGE>
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
Limitations on the Use of Futures and Related Options. The use of
futures and related options is governed by the following guidelines, which can
be changed by a fund's board without shareholder vote:
(1) To the extent a 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
its net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by each fund that are held at any time will not exceed 20%
of its net assets.
(3) The aggregate margin deposits on all futures contracts and
options thereon held at any time by each fund will not exceed 5% of its total
assets.
Foreign Currency Hedging Strategies--Special Considerations. High
Income Fund and Strategic Income Fund may use options and futures 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 the fund's securities are denominated. Such currency hedges can protect
against price movements in a security a 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.
A fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the fund may
hedge against price movements in that currency by entering into transactions
using Derivative 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. In addition, a fund may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if a 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 Derivative Instrument will
not correlate or will correlate unfavorably with the foreign currency being
hedged.
The value of Derivative 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 Derivative
Instruments, a fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, the funds might be required to accept or make delivery of the underlying
foreign currency in
26
<PAGE>
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 and Strategic 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, a 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 contract transactions may also serve as short hedges--for example, a
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.
The cost to a 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 a fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that a 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, a 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 foreign
currency contract has been established. Thus, a 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
and Strategic 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
segregates with its custodian cash or liquid securities 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.
Swap Transactions. Swap transactions include swaps, caps, floors and
collars. Interest rate swaps involve an agreement between two parties to
exchange payments that are based, for example, 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 contra party 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 level on
predetermined dates or during a specified time period.
A fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. A fund may only use these transactions as a hedge
and not as a speculative investment. Interest rate swap transactions are subject
to risks comparable to those described above with respect to other hedging
strategies.
A fund may enter into interest rate swaps, caps, floors and collars 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 a fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate swap transactions are entered into for
good faith hedging purposes, and inasmuch as segregated accounts will be
established with respect to such transactions, Mitchell Hutchins and the
Sub-Adviser (if applicable) believe such obligations do not
27
<PAGE>
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 swaps
that are not entered into on a net basis and with respect to any caps, floors
and collars that are written by the fund.
A fund will enter into swap transactions only with banks and recognized
securities dealers believed by Mitchell Hutchins or, (for Low Duration Fund) the
Sub-Adviser to present minimal credit risk in accordance with guidelines
established by the fund's board. 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.
ORGANIZATION OF TRUSTS; TRUSTEES AND OFFICERS and PRINCIPAL HOLDERS OF
SECURITIES
Managed Trust was formed on November 21, 1986 as a business trust under
the laws of the Commonwealth of Massachusetts and has seven operating series.
Securities Trust was formed on December 3, 1992 as a business trust under the
laws of the Commonwealth of Massachusetts and has two operating series. Each
Trust is governed by a board of trustees, which is authorized to establish
additional series and to issue an unlimited number of shares of beneficial
interest of each existing or future series, par value $0.001 per share. The
applicable board oversees each fund's operations.
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Name and Address*; Age Position with Each Trust Business Experience; Other Directorships
- ---------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Margo N. Alexander**;52 Trustee and President Mrs. Alexander is president, chief executive officer and a
director of Mitchell Hutchins (since January 1995), and an
executive vice president and a director of PaineWebber (since
March 1984). Mrs. Alexander is president and a director or trustee
of 32 investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as investment adviser.
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and principal of R.Q.A. Enterprises
One Old Church Road (management consulting firm) (since April 1991 and principal
Unit #6 occupation since March 1995). Mr. Armstrong was chairman of the
Greenwich, CT 06830 board, chief executive officer and co-owner of Adirondack
Beverages (producer and distributor of soft drinks and
sparkling/still waters) (October 1993-March 1995). He was a
partner of The New England Consulting Group (management consulting
firm) (December 1992-September 1993). He was managing director of
LVMH U.S. Corporation (U.S. subsidiary of the French luxury goods
conglomerate, Louis Vuitton Moet Hennessey Corporation) (1987-
1991) and chairman of its wine and spirits subsidiary, Schieffelin
& Somerset Company (1987-1991). Mr. Armstrong is a director or
trustee of 31 investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as investment adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name and Address*; Age Position with Each Trust Business Experience; Other Directorships
---------------------- ------------------------ ----------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 72 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber Group Inc. ("PW Group")
Board of Trustees (holding company of PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW Group. Prior to 1988, he
was chairman of the board, president and chief executive officer
of American Bakeries Company. Mr. Bewkes is a director of
Interstate Bakeries Corporation. Mr. Bewkes is a director or
trustee of 34 investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as investment adviser.
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc. (international
1275 Pennsylvania Ave, N.W. investments and consulting firm) (since March 1994) and a partner
Washington, DC 20004 of McKinsey & Company (management consulting firm) (since 1991).
He is also a director of Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co. (publishing), Homestake
Mining Corp., Powerhouse Technologies Inc. and Wierton Steel Corp.
He was the chief negotiator in the Strategic Arms Reduction Talks
with the former Soviet Union (1989-1991) and the U.S. Ambassador
to the Federal Republic of Germany (1985-1989). Mr. Burt is a
director or trustee of 31 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve as investment
adviser.
Mary C. Farrell**; 49 Trustee Ms. Farrell is a managing director, senior investment strategist
and member of the Investment Policy Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982. She is a member of the of the
Financial Women's Association and Women's Economic Roundtable and
appears as a regular panelist on Wall Street Week with Louis
Rukeyser. She also serves on the Board of Overseers of New York
University's Stern School of Business. Ms. Farrell is a director
or trustee of 31 investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as investment adviser.
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of Management of the Graduate
Columbia University School of Business, Columbia University. Prior to 1989, he was
101 Uris Hall president of the Illinois Institute of Technology. Dean Feldberg
New York, NY 10027 is also a director of Primedia, Inc., Federated Department Stores,
Inc. and Revlon, Inc. Dean Feldberg is a director or trustee of 33
investment companies for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
George W. Gowen; 69 Trustee Mr. Gowen is a partner in the law firm of Dunnington, Bartholow &
666 Third Avenue Miller. Prior to May 1994, he was a partner in the law firm of
New York, NY 10017 Fryer, Ross & Gowen. Mr. Gowen is a director or trustee of 31
investment companies for which Mitchell Hutchins, Paine Webber or
their affiliates serve as investment adviser.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Name and Address*; Age Position with Each Trust Business Experience; Other Directorships
---------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital Partners (merchant bank).
1455 Pennsylvania Ave, N.W. From January 1992 to November 1992, he was campaign manager of
Suite 350 Bush-Quayle '92. From 1990 to 1992, he was vice chairman and, from
Washington, DC 20004 1989 to 1990, he was president of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of NWA Inc.). Prior to 1989, he was
employed by the Marriott Corporation (hotels, restaurants, airline
catering and contract feeding), where he most recently was an
executive vice president and president of Marriott Hotels and
Resorts. Mr. Malek is also a director of American Management
Systems, Inc. (management consulting and computer related
services), Automatic Data Processing, Inc., CB Commercial Group,
Inc. (real estate services), Choice Hotels International (hotel
and hotel franchising), FPL Group, Inc. (electric services), Manor
Care, Inc. (health care) and Northwest Airlines Inc. Mr. Malek is
a director or trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their affiliates serve as
investment adviser.
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic Foundation (charitable
66 Witherspoon Street, #1100 foundation supporting mainly oceanographic exploration and
Princeton, NJ 08542 research). He is a director of Base Ten Systems, Inc. (software),
Roadway Express, Inc. (trucking), The Guardian Group of Mutual
Funds, the Harding, Loevner Funds, Evans Systems, Inc. (motor
fuels, convenience store and diversified company), Electronic
Clearing House, Inc., (financial transactions processing),
Frontier Oil Corporation and Nutraceutix, Inc. (biotechnology
company). Prior to January 1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes Medical Institute. Mr.
Schafer is a director or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or their affiliates serve as
investment adviser.
Julieanna Berry; 35 Vice President Ms. Berry is a first vice president and a portfolio manager of
(Managed Trust only) Mitchell Hutchins. Ms. Berry is a vice president of two investment
companies for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Lawrence Chinsky; 30 Vice President and Mr. Chinsky is an assistant vice president and investment
Assistant Treasurer monitoring officer of the mutual fund finance department of
Mitchell Hutchins. Prior to August 1997, he was a securities
compliance examiner with the Office of Compliance, Inspections and
Examinations in the New York Regional Office of the SEC. Mr.
Chinsky is vice president and assistant treasurer of 32 investment
companies for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Donald R. Jones; 38 Vice President Mr. Jones is a senior vice president and a portfolio manager of
(Securities Trust only) Mitchell Hutchins. Prior to February 1996, he was a vice president
in the asset management group of First Fidelity Bancorporation.
Mr. Jones is a vice president of two investment companies for
which Mitchell Hutchins, PaineWebber or their affiliates serve as
investment adviser.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Name and Address*; Age Position with Each Trust Business Experience; Other Directorships
---------------------- ------------------------ ----------------------------------------
<S> <C> <C>
James F. Keegan; 38 Vice President Mr. Keegan is a senior vice president and a portfolio manager of
(Managed Trust only) Mitchell Hutchins. Prior to March 1996, he was director of fixed
income strategy and research of Merrion Group, L.P. From 1987 to
1994, he was a vice president of global investment management of
Bankers Trust. Mr. Keegan is a vice president of three investment
companies for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of the mutual fund
Assistant Treasurer finance department of Mitchell Hutchins. Prior to September 1997,
he was an audit manager in the financial services practice of
Ernst & Young LLP. Mr. Lee is a vice president and assistant
treasurer of 32 investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as an investment adviser.
Thomas J. Libassi; 40 Vice President Mr. Libassi is a senior vice president and 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 a vice president of six investment
companies for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and chief investment
officer-fixed income of Mitchell Hutchins. Prior to December 1994,
he was director of fixed income investments of IBM Corporation.
Mr. McCauley is a vice president of 22 investment companies for
which Mitchell Hutchins, PaineWebber or their affiliates serve as
investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of the mutual fund
Assistant Treasurer finance department of Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or their affiliates serve as
investment adviser.
Dianne E. O'Donnell; 46 Vice President and Secretary Ms. O'Donnell is a senior vice president and deputy general
counsel of Mitchell Hutchins. Ms. O'Donnell is a vice president
and secretary of 31 investment companies and a vice president and
assistant secretary of one investment company for which Mitchell
Hutchins, PaineWebber or their affiliates serve as investment
adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president and director of operations
and control for Mitchell Hutchins. Mr. Polito is a vice president
of 32 investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as investment adviser.
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and general counsel of
Mitchell Hutchins (since May 1994) and a senior vice president of
PaineWebber (since July 1995). Prior to May 1994, she was a
partner in the law firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 31 investment companies and a vice president and
secretary of one investment company for which Mitchell Hutchins,
PaineWebber or their affiliates serve as investment adviser.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Name and Address*; Age Position with Each Trust Business Experience; Other Directorships
---------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Paul H. Schubert; 36 Vice President and Treasurer Mr. Schubert is a senior vice president and director of the mutual
fund finance department of Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president at BlackRock Financial
Management L.P. Mr. Schubert is a vice president and treasurer of
32 investment companies for which Mitchell Hutchins, PaineWebber
or their affiliates serve as investment adviser.
Nirmal Singh; 42 Vice President Mr. Singh is a senior vice president and a portfolio manager of
Mitchell Hutchins. Mr. Singh is a vice president of four
investment companies for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president and a manager of the mutual
Assistant Treasurer fund finance department of Mitchell Hutchins. Prior to February
1995, he was a manager of the mutual fund finance division of
Kidder Peabody Asset Management, Inc. Mr. Taglialatela is a vice
president and assistant treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or their affiliates serve as
investment adviser.
Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and chief investment officer-
equities of Mitchell Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds management and equity
research areas of Chase Manhattan Private Bank. Mr. Tincher is a
vice president of 13 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve as investment
adviser.
Craig M. Varrelman; 40 Vice President Mr. Varrelman is a senior vice president and a portfolio manager
of Mitchell Hutchins. Mr. Varrelman is a vice president of four
investment companies for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
Stuart Waugh; 43 Vice President Mr. Waugh is a managing director and a portfolio manager of
(Securities Trust only) Mitchell Hutchins responsible for global fixed income investments
and currency trading. Mr. Waugh is a vice president of five
investment companies for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and associate general counsel
Assistant Secretary of Mitchell Hutchins. Prior to May 1995, he was an attorney in
private practice. Mr. Weller is a vice president and assistant
secretary of 31 investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as investment adviser.
</TABLE>
- ------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of each
fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber, and/or PW Group.
Board members are compensated as follows:
. Managed Trust has seven operating series and pays each trustee
who is not an "interested person" of the Trust $1,000 annually
for each series. Therefore, Managed Trust pays each such
trustee $7,000 annually, plus any additional amounts due for
board or committee meetings.
32
<PAGE>
. Securities Trust has two operating series and pays each board
member who is not an "interested person" of the Trust $1,000
annually for Strategic Income Fund and an additional $1,500
annually for its second series. Therefore, Securities Trust
pays each such board member $2,500 annually, plus any
additional amounts due for board or committee meetings.
In addition, each Trust pays up to $150 per series for each board
meeting and each separate meeting of a board committee. Each chairman of the
audit and contract review committees of individual funds within the PaineWebber
fund complex receives additional compensation, aggregating $15,000 annually,
from the relevant funds. All board members are reimbursed for any expenses
incurred in attending meetings. Board members and officers own in the aggregate
less than 1% of the outstanding shares of any class of each fund. Because
PaineWebber, Mitchell Hutchins and, as applicable, the Sub-Adviser perform
substantially all the services necessary for the operation of the Trusts and
each fund, the Trusts require no employees. No officer, director or employee of
Mitchell Hutchins or PaineWebber presently receives any compensation from the
Trust for acting as a board member or officer.
The table below includes certain information relating to the
compensation of the current board members who held office with the Trusts or
with other PaineWebber funds during the funds' fiscal years ended November 30,
1998.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
Aggregate Aggregate
--------- ---------
Compensation Compensation Total Compensation
------------ ------------ ------------------
from Managed from Securities from the Trusts and
------------ --------------- -------------------
Name of Person, Position Trust* Trust* the Fund Complex
------------------------ ------ ------ ----------------
<S> <C> <C> <C>
Richard Q. Armstrong,
Trustee
Richard R. Burt,
Trustee
Meyer Feldberg,
Trustee
George W. Gowen,
Trustee
Frederic V. Malek,
Trustee
Carl W. Schafer,
Trustee
- --------------------
</TABLE>
+ Only independent board members are compensated by the Trusts and identified
above; board members who are "interested persons," as defined by the 1940
Act, do not receive compensation.
* Represents fees paid to each Trustee from the Trust indicated for the fiscal
year ended November 30, 1998.
** Represents total compensation paid to each board member during the calendar
year ended December 31, 1998; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
Principal Holders of Securities
The following shareholder is shown in the funds' records as owning 5% or
more of any class of its shares:
Number and Percentage of Shares
Beneficially Owned as of March 1999
Name and Address*
- ---------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
33
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
Investment Advisory Arrangements. Mitchell Hutchins acts as the
investment adviser and administrator to each fund pursuant to a separate
contract (each an "Advisory Contract") with each Trust. The Advisory Contract
for Managed Trust is dated April 21, 1988 and supplemented by a separate fee
agreement dated March 26, 1993 with respect to Low Duration Fund. The Advisory
Contract for Securities Trust is dated January 29, 1993 and supplemented by a
separate fee agreement dated January 28, 1994 with respect to Strategic Income
Fund. Under the applicable Advisory Contract, Strategic Income Fund pays
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.75% of its average daily net assets. Each of the other four funds pays
Mitchell Hutchins an annual fee of 0.50% of its average daily net assets. All
fees paid under the Advisory Contracts are computed daily and paid monthly. The
funds have applied for exemptive relief to the SEC to permit their boards to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval.
During each of the periods indicated, Mitchell Hutchins earned (or
accrued) advisory fees in the amounts set forth below:
Fiscal Years Ended November 30,
-------------------------------
1998 1997 1996
---- ---- ----
U.S. Government Income Fund $1,979,329 $2,517,534
Low Duration Fund $ 819,616 $1,272,455
Investment Grade Income Fund $1,464,164 $1,685,067
High Income Fund $2,918,855 $2,656,610
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Ten Months Fiscal Year
Ended Ended Ended Ended
November 30, 1998 November 30, 1997 November 30, 1996 January 31, 1996
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Strategic Income Fund $ 520,540* $ 407,534 $ 546,119
</TABLE>
- ------------------
* After fee waiver of $13,206
The Advisory Contracts authorizes Mitchell Hutchins to retain one or
more sub-advisers but do 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 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. For
the fiscal years ended November 30, 1998, November 30, 1997 and November 30,
1996, Mitchell Hutchins paid or accrued sub-advisory fees to PIMCO of $______,
$409,808 and $636,228, respectively.
Prior to August 1, 1997, PaineWebber provided certain services to each
fund not otherwise provided by its transfer agent. Pursuant to a separate
agreement between PaineWebber and each Trust relating to those services,
PaineWebber earned (or accrued) the amounts set forth below during each of the
periods indicated:
Eight Months Ended Fiscal Year Ended
July 31, 1997 November 30, 1996
------------- -----------------
U.S. Government Income Fund $73,833 $2,517,534
Low Duration Fund $36,963 $1,272,455
Investment Grade Income Fund $48,036 $1,685,067
High Income Fund $81,517 $2,656,610
34
<PAGE>
Eight Months Ten Months Fiscal Year
Ended Ended Ended
July 31, 1997 November 30, 1996 January 31, 1996
------------- ----------------- ----------------
Strategic Income Fund $10,503 $14,226* $19,823
Subsequent to July 31, 1997, PFPC (not the funds) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to PaineWebber.
Under the terms of the Advisory Contracts, each fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members and officers who are not interested persons (as defined
in the 1940 Act) of the applicable Trust or Mitchell Hutchins; (6) all expenses
incurred in connection with the board members' services, including travel
expenses; (7) taxes (including any income or franchise taxes) and governmental
fees; (8) costs of any liability, uncollectible items of deposit and other
insurance or fidelity bonds; (9) any costs, expenses or losses arising out of a
liability of or claim for damages or other relief asserted against the
applicable Trust or fund for violation of any law; (10) legal, accounting and
auditing expenses, including legal fees of special counsel for the independent
board members; (11) charges of custodians, transfer agents and other agents;
(12) costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to shareholders; (14) any extraordinary expenses
(including fees and disbursements of counsel) incurred by 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 board members and officers; and (18) costs of mailing, stationery
and communications equipment.
Under each 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 Advisory Contract, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Each Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the applicable board or by vote of the holders of a majority of the
fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Trust.
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 Managed Investments
Trust, Low Duration Fund, its shareholders or Mitchell Hutchins in connection
with the Sub-Advisory Contract, except any liability to any of them to which
PIMCO would otherwise be subject by reason of willful misfeasance, bad faith or
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 Sub-Advisory Contract terminates automatically upon its assignment or the
termination of the Advisory Contract and is terminable at any time without
penalty by Managed Investment Trust's board or by vote of the holders of a
majority of Low Duration 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 also may 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) upon 120 days' notice to PIMCO.
During the fiscal years ended November 30, 1998 and November 30, 1997,
the indicated fund paid (or accrued) the following fees to PaineWebber for its
services as securities lending agent:
Fund Fiscal Year Ended November 30,
---- ------------------------------
1998 1997
---- ----
U.S. Government Income Fund
Low Duration Fund
35
<PAGE>
Fund Fiscal Year Ended November 30,
---- ------------------------------
1998 1997
---- ----
Investment Grade Income Fund
High Income Fund
Strategic Income Fund
Net Assets. The following table shows the approximate net assets as of
February 28, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
Net Assets
Investment Category ($mil)
------------------- ------
Domestic (excluding Money Market)...................... $
Global.................................................
Equity/Balanced........................................
Fixed Income (excluding Money Market)..................
Taxable Fixed Income..........................
Tax-Free Fixed Income.........................
Money Market Funds.....................................
Personal Trading Policies. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber 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 Funds and other Mitchell Hutchins advisory clients. Personnel of the
Sub-Adviser may also invest in securities for their own accounts pursuant to
comparable codes of ethics.
Distribution Arrangements. Mitchell Hutchins acts as the distributor of
each class of shares of each fund under separate distribution contracts with
each Trust (collectively, "Distribution Contracts"). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable fund. Shares of each fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the funds
(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 each fund adopted by each Trust in the manner prescribed
under Rule 12b-1 under the 1940 Act (each, respectively, a "Class A Plan,"
"Class B Plan" and "Class C Plan," and 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 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.
There is no distribution plan with respect to the funds' Class Y shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B
and C shares primarily to pay PaineWebber for shareholder servicing, currently
at the annual rate of 0.25% of the aggregate investment amounts maintained in
each fund by PaineWebber clients. PaineWebber then compensates its investment
executives for shareholder servicing that they perform and offsets its own
expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and
Class C Plans to:
36
<PAGE>
. Offset the commissions it pays to PaineWebber for selling
each fund's Class B and Class C shares, respectively.
. Offset each fund's marketing costs attributable to such
classes, such as preparation, printing and distribution of
sales literature, advertising and prospectuses to prospective
investors and related overhead expenses, such as employee
salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors at
the time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge
paid when Class A shares are bought and of the contingent deferred sales charge
paid upon sales of shares. These proceeds may be used to cover distribution
expenses.
The Plans and the related Distribution Contracts for Class A, Class B
and Class C shares specify that each fund must pay service and distribution fees
to Mitchell Hutchins for its activities, not as reimbursement for specific
expenses incurred. Therefore, even if Mitchell Hutchins' expenses exceed the
service or distribution fees it receives, the funds will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. Expenses in
excess of service and distribution fees received or accrued through the
termination date of any Plan will be Mitchell Hutchins' sole responsibility and
not that of the funds. Annually, the board of each fund reviews the Plans and
Mitchell Hutchins' corresponding expenses for each class separately from the
Plans and expenses of the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment thereto
is approved, by the applicable board, including those board members 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 board
members who are not "interested persons" of the Trust shall be committed to the
discretion of the board members who are not "interested persons" of that Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of
each fund's shares to such class based on the ratio of sales of shares of such
class to the sales of all three classes of shares. The fees paid by one class of
a fund's shares will not be used to subsidize the sale of any other class of
fund shares.
The funds paid (or accrued) the following fees to Mitchell Hutchins
under the Class A, Class B and Class C Plans during the fiscal year ended
November 30, 1998:
<TABLE>
<CAPTION>
High Income Strategic Income
U.S. Government Low Duration Investment Grade ----------- ----------------
Income Fund Fund Income Fund Fund Fund
----------- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C>
Class A...................
Class B...................
Class C...................
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each fund during the fiscal year
ended November 30, 1998:
<TABLE>
<CAPTION>
High Income Strategic
U.S Government Low Duration Investment Grade ----------- ---------
Income Fund Fund Income Fund Fund Income Fund
----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
Class A
Marketing and advertising...............
Amortization of commissions.............
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
High Income Strategic
U.S Government Low Duration Investment Grade ----------- ---------
Income Fund Fund Income Fund Fund Income Fund
----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
Printing of prospectuses and statements of
additional information..................
Branch network costs allocated and interest
expense.................................
Service fees paid to PaineWebber investment
executives..............................
Class B
Marketing and advertising...............
Amortization of commissions.............
Printing of prospectuses and statements of
additional information..................
Branch network costs allocated and interest
expense.................................
Service fees paid to PaineWebber investment
executives..............................
Class C
Marketing and advertising...............
Amortization of commissions.............
Printing of prospectuses and statements of
additional information..................
Branch network costs allocated and interest
expense.................................
Service fees paid to PaineWebber investment
executives..............................
</TABLE>
"Marketing and advertising" includes various internal costs allocated
by Mitchell Hutchins to its efforts at distributing the funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the funds' shares, including the PaineWebber retail branch system.
In approving each fund's overall Flexible Pricing(SM) system of
distribution, the applicable board 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 fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, each board 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, the board of each fund considered all
the features of the distribution system, including (1) the conditions under
which contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment
38
<PAGE>
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 board members 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, each board considered all the features
of the distribution system, including (1) the advantage to investors in having
no initial sales charges deducted from fund 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 board members 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, within one
year after purchase was conditioned upon its expectation of being compensated
under the Class C Plan.
With respect to each Plan, the boards 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 boards 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 a fund, which
fees would increase if the Plan were successful and the fund attained and
maintained significant asset levels.
Under the Distribution Contract between each Trust and Mitchell
Hutchins for the Class A shares for the fiscal years (or periods) set forth
below, Mitchell Hutchins earned the following approximate amounts of sales
charges and retained the following approximate amounts, net of concessions to
PaineWebber as exclusive dealer.
Fiscal Year Ended November 30,
1998 1997 1996
---- ---- ----
U.S. Government Income Fund
Earned....................... $ 13,156 $ 28,937
Retained.................... 1,562 2,595
Low Duration Fund
Earned....................... 14,824 3,734
Retained.................... 261 211
Investment Grade Income Fund
Earned....................... 51,469 36,783
Retained.................... 4,100 2,873
High Income Fund
Earned....................... 506,732 220,619
Retained.................... 36,405 16,318
39
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
------------------------------ Ten Months Ended Fiscal Year Ended
November 30, 1996 January 31, 1996
1998 1997 ----------------- ----------------
---- ----
Strategic Income Fund
<S> <C> <C> <C> <C>
Earned...................... $ 157,647 $ 16,799 $ 7,392
Retained.................... 11,028 1,119 415
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
November 30, 1998:
<TABLE>
<CAPTION>
U.S. Government Low Duration Investment Grade High Income Strategic Income
Income Fund Fund Income Fund Fund Fund
----------- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C>
Class A.................
Class B.................
Class C.................
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins or
(for Low Duration Fund) the Sub-Adviser is responsible for the execution of each
fund's portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins or the Sub-Adviser seeks to
obtain the best net results for a 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 accounts and not through
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 the time. While Mitchell
Hutchins and the Sub-Adviser generally seek reasonably competitive commission
rates, payment of the lowest commission is not necessarily consistent with
obtaining the best net results.
During the fiscal years or periods indicated, the funds paid the
brokerage commissions set forth below:
Fiscal Years Ended November 30,
1998 1997 1996
---- ---- ----
U.S. Government Income Fund $ 105,150 $ 0
Low Duration Fund 00 0
Investment Grade Income Fund 2,400 2,400
High Income Fund 2,9639 32,596
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Ten Months Ended Fiscal Year Ended
November 30, 1998 November 30, 1997 November 30, 1996 January 31, 1996
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Strategic Income Fund $ 0 $ 0 $ 0
</TABLE>
The funds have no 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, or
40
<PAGE>
brokerage affiliates of the Sub-Adviser. Each board has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to PaineWebber or brokerage affiliates of the Sub-Adviser are
reasonable and fair. Specific provisions in the Advisory Contracts and the Sub-
Advisory Contract authorize Mitchell Hutchins and the Sub-Adviser, respectively,
and any of their affiliates that is a member of a national securities exchange
to effect portfolio transactions for the applicable fund on such exchange and to
retain compensation in connection with such transactions. Any such transactions
will be effected and related compensation paid only in accordance with
applicable SEC regulations. During the fiscal year ended November 30, 1998, the
funds paid brokerage commissions to PaineWebber or, as applicable, brokerage
affiliates of the Sub-Adviser as follows:
These brokerage commissions represented for each fund the percentages
of total brokerage commissions paid and of the dollar amount representing the
fund's transactions involving the payment of brokerage commissions set forth
below.
None of the funds paid brokerage commissions to PaineWebber or (for Low
Duration Fund) the Sub-Adviser's affiliates during its last two prior fiscal
years or periods.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"), who receive brokerage commissions for their
services. The funds' procedures in selecting FCMs to execute their transactions
in futures contracts, including procedures permitting the use of Mitchell
Hutchins and its affiliates or brokerage affiliates of the Sub-Adviser, are
similar to those in effect with respect to brokerage transactions in securities.
Consistent with the interests of the funds and subject to the review of
each board, Mitchell Hutchins or the Sub-Adviser may cause a fund to purchase
and sell portfolio securities through brokers who provide Mitchell Hutchins or
the Sub-Adviser with research, analysis, advice and similar services. The funds
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins or the Sub-Adviser determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins or the
Sub-Adviser, as applicable, 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. For the fiscal year ended November 30,
1998, the funds directed the portfolio transactions indicated below to brokers
chosen because they provide research, analysis, advice and similar services, for
which the funds paid the brokerage commissions indicated below:
<TABLE>
<CAPTION>
Fund Amount of Portfolio Transactions Brokerage Commissions Paid
- ---- -------------------------------- --------------------------
<S> <C> <C>
U.S. Government Income Fund
Low Duration Fund
Investment Grade Income Fund
High Income Fund
Strategic Income Fund
</TABLE>
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or the Sub-Adviser, as applicable, seeks best execution.
Although Mitchell Hutchins or the Sub-Adviser may receive certain research or
execution services in connection with these transactions, Mitchell Hutchins and
the Sub-Adviser will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins and the Sub-Adviser will not enter into any explicit soft dollar
arrangements relating to principal transactions and will not receive in
principal transactions the types of services that could be purchased for hard
dollars. Mitchell Hutchins or the Sub-Adviser may engage in agency transactions
in OTC 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 the
Sub-Adviser receiving multiple quotes from dealers before executing the
transactions on an agency basis.
41
<PAGE>
Information and research services furnished by brokers or dealers
through which or with which the funds effect securities transactions may be used
by Mitchell Hutchins or the Sub-Adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or the Sub-Adviser
by brokers or dealers in connection with other funds or accounts that either of
them advises may be used in advising the funds. Information and research
received from 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
Contracts or the Sub-Advisers under the Sub-Advisory Contract.
Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins or by the Sub-Adviser 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 that fund and such other account(s) as to amount according to a formula
deemed equitable to the fund and such account(s). While in some cases this
practice could have a detrimental effect upon the price or value of the security
as far as the funds are concerned, or upon their ability to complete their
entire order, in other cases it is believed that coordination and the ability to
participate in volume transactions will be beneficial to the funds.
The funds will not purchase securities that are offered in
underwritings in which PaineWebber or (for Low Duration Fund) an affiliate of
the Sub-Adviser is a member of the underwriting or selling group, except
pursuant to procedures adopted by each board pursuant to Rule 10f-3 under the
1940 Act. Among other things, these procedures require that the spread or
commission paid in connection with such a purchase be reasonable and fair, the
purchase be at not more than the public offering price prior to the end of the
first business day after the date of the public offering and that PaineWebber or
any affiliate thereof or an affiliate of the Sub-Adviser not participate in or
benefit from the sale to the fund.
As of November 30, 1998, the funds owned securities issued by the
following companies which are regular broker-dealers for the funds: [_].
Portfolio Turnover. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they 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 securities in the portfolio during the year.
The funds' respective portfolio turnover rates for the fiscal periods
shown were:
U.S. Government Income Fund
Fiscal Year ended November 30, 1998
Fiscal Year ended November 30, 1997 322%
Low Duration Fund*
Fiscal Year ended November 30, 1998
Fiscal Year ended November 30, 1997 359%
Investment Grade Income Fund
Fiscal Year ended November 30, 1998
Fiscal Year ended November 30, 1997 109%
High Income Fund
Fiscal Year ended November 30, 1998
Fiscal Year ended November 30, 1997 160%
Strategic Income Fund
Fiscal Year ended November 30, 1998
Fiscal Year ended November 30, 1997 140%
42
<PAGE>
- ---------------
* Portfolio turnover was significantly higher for the fiscal year
ended November 30, 1997 due to an increased number of transactions
in mortgage-backed securities on a forward commitment basis and in
mortgage dollar rolls and more frequent rebalancing of the fund's
portfolio to meet higher inflows of cash as well as redemptions.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
Waivers of Sales Charges/Contingent Deferred Sales Charges -- Class A
Shares. The following additional sales charge waivers are available for Class A
shares if you:
. Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell
Hutchins may make payments out of its own resources to PaineWebber
and to the variable annuity's sponsor, adviser or distributor in a
total amount not to exceed l% of the amount invested;
. Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a
fee for program services, provided that the program sponsor has
entered into a written agreement with PaineWebber permitting the
sale of shares at net asset value to that program. For investments
made pursuant to this waiver, Mitchell Hutchins may make a payment
to PaineWebber out of its own resources in an amount not to exceed
1% of the amount invested. For subsequent investments or exchanges
made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also
waived;
. Acquire shares in connection with a reorganization pursuant to which
a fund acquires substantially all of the assets and liabilities of
another fund in exchange solely for shares of the acquiring fund; or
. Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus
In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A shares purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed.
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 indicated in
the tables of sales charges for Class A shares 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;
43
<PAGE>
(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;
(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); or
(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.
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.
Reinstatement Privilege -- Class A Shares. Shareholders who have
redeemed Class A shares of a fund may reinstate their account without a sales
charge 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 reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to the
shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal income
tax purposes by the amount of any sales charge paid on Class A shares, under the
circumstances and to the extent described in "Taxes" in the Statement of
Additional Information.
Waivers of Contingent Deferred Sales Charges -- Class B Shares. The
maximum 5% contingent deferred sales charge (3% for Low Duration Fund) applies
to sales of shares during the first year after purchase. The charge generally
declines by 1% annually, reaching zero after six years (four years for Low
Duration Fund). 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.
Purchases of Class Y Shares Through the PACE Multi-Advisor Program. An
investor who participates in the PACE Multi-Advisor Program is eligible to
purchase Class Y shares. The PACE Multi-Advisor Program is an advisory program
sponsored by PaineWebber that provides comprehensive investment services,
including investor profiling, a personalized asset allocation strategy using an
appropriate combination of funds, and a quarterly investment performance review.
Participation in the PACE Multi-Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee. Please
contact your PaineWebber investment executive or PaineWebber's correspondent
firms for more information concerning mutual funds that are available through
the PACE Multi-Advisor Program.
Purchases and Sales of Class Y Shares for Participants in PW 401(k)
Plus Plan. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds to implement
the investment choices of individual plan participants with respect to their PW
401(k) Plus Plan contributions. Individual plan participants should consult the
Summary Plan Description and other plan material of the PW 401(k) Plus Plan
(collectively, "Plan Documents") for a description of the procedures and
limitations applicable to making and changing investment choices. Copies of the
Plan Documents are available from the Benefits Connection, 100 Halfday Road,
Lincolnshire, IL 60069 or by calling 1-888-Pwebber (1-000-793-2237). As
described in the Plan Documents, the price at which Class Y shares are bought
and sold by the trustee of PW 401(k) Plus Plan might be more or less than the
price per share at the time the participants made their investment choices.
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. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except
44
<PAGE>
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 that 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. Each fund has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
it is obligated to redeem shares solely in cash up to the lesser of $250,000 or
1% of its net asset value during any 90-day period for one shareholder. This
election is irrevocable unless the SEC permits its withdrawal.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange ("NYSE") is
closed or trading on the NYSE is restricted as determined by the SEC, (2) when
an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for 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.
Service Organizations. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
Automatic Investment Plan. PaineWebber offers an Automatic Investment
Plan with a minimum initial investment of $1,000 through which a fund will
deduct $50 or more on a monthly, quarterly, semiannual or annual basis from the
investor's bank account to invest directly in the fund. Participation in the
Automatic Investment Plan enables an investor to use the technique of "dollar
cost averaging." When an investor invests the same dollar amount each month
under the Plan, the investor 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, an investor's average purchase price per share over
any given period will be lower than if the investor 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, because 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 both low and
high price levels.
Systematic Withdrawal Plan. The Systematic Withdrawal Plan allows
investors to set up monthly, quarterly (March, June, September and December),
semiannual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
. Class A and Class C shares. Minimum value of fund shares in $5,000;
minimum withdrawals of $100.
. Class B shares. Minimum value of fund shares is $20,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $200,
$400, $600 and $800, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to
a contingent deferred sales charge. An investor may withdraw no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this Plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan) less aggregate redemptions made other than pursuant
to the systematic withdrawal plan is less than the minimum values specified
above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semiannual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days
45
<PAGE>
(defined under "Valuation of Shares") after the redemption date. Withdrawal
payments should not be considered dividends, but redemption proceeds. If
periodic withdrawals continually exceed reinvested dividends and other
distributions, 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.
Individual Retirement Accounts. Self-directed IRAs are available
through PaineWebber in which purchases of PaineWebber mutual funds and other
investments may be made. Investors considering establishing an IRA should review
applicable tax laws and should consult their tax advisers.
Transfer of Accounts. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with the Transfer Agent. However, if
the other firm has entered into a selected dealer agreement with Mitchell
Hutchins relating to the fund, the shareholder may be able to hold fund shares
in an account with the other firm.
PaineWebber RMA Resource Accumulation Plan(SM);
PaineWebber Resource Management Account(R) (RMA)(R)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder,
must have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
Periodic Investing and Dollar Cost Averaging. Periodic investing in the
PW Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PaineWebber's Resource Management Account. In order to enroll in the
Plan, an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
46
<PAGE>
. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(Registered) transactions during the period, and provide unrealized
and realized gain and loss estimates for most securities held in the account;
. 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 RMA accountholder's choice of
one of the six RMA money market funds-RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money Fund,
RMA New Jersey Municipal Money Fund and RMA New York Municipal Money Fund. An
investment in a money market fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although a
money market fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in a money market fund.
. 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 $100 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 your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a fund will automatically convert to Class A shares of that
fund, based on the relative net asset values per share of the two classes, as of
the close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversary of the initial issuance of
such Class B shares occurs. For the purpose of calculating the holding period
required for conversion of Class B shares, the date of initial issuance shall
mean (i) the date on which such Class B shares were issued, or (ii) for Class B
shares obtained through an exchange, or a series of exchanges, the date on which
the original Class B shares were 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 will be held in a separate sub-
account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A shares, a pro rata
portion of the Class B shares in the sub-account will also convert to Class A
shares. The portion will be determined by the ratio that the shareholder's Class
B shares converting to Class A shares bears to the shareholder's total Class B
shares not acquired through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Code and that the conversion of shares does
not constitute a taxable event. If the conversion feature ceased to be
available, the Class B shares would not be converted and would continue to be
subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not continue to be
met.
47
<PAGE>
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each class
of shares, normally as of the close of regular trading (usually 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. Prices will be calculated earlier when the
NYSE closes early because trading has been halted for the day. Currently the
NYSE is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges normally are
valued at the last sale price on the day the securities are valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by Mitchell Hutchins or (for Low Duration
Fund) the Sub-Adviser as the primary market. Securities traded in the OTC market
and listed on the Nasdaq Stock Market ("Nasdaq") normally are valued at the last
available sale price on Nasdaq prior to valuation; other OTC securities are
valued at the last bid price available prior to valuation (other than short-term
investments that mature in 60 days or less which are valued as described further
below).
Where market quotations are readily available, portfolio securities are
valued based upon market quotations, provided those quotations adequately
reflect, in the judgment of Mitchell Hutchins or the Sub-Adviser, the fair value
of the security. Where those 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. All other securities and other assets
are valued at fair value as determined in good faith by or under the direction
of the applicable board.
It should be recognized that judgment often plays a greater role in valuing
thinly traded securities and lower rated bonds than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining until maturity,
unless the applicable board determines that this does not represent fair value.
All investments of High Income Fund and Strategic Income Fund quoted in
foreign currency will be valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time such valuation is
determined by a fund's custodian. Foreign currency exchange rates are generally
determined prior to the close of regular 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 would not be reflected in the computation of a 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 as determined in good faith by or
under the direction of the applicable board. The foreign currency exchange
transactions of the funds 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. Under normal market conditions this rate differs from the
prevailing exchange rate by less than one-tenth of one percent due to the costs
of converting from one currency to another.
PERFORMANCE INFORMATION
The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Total Return Calculations. Average annual total return quotes ("Standardized
Return") used in each fund's Performance Advertisements are calculated according
to the following formula:
P(1 + T)/n/ = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.0% sales charge (3.0% for Low Duration
48
<PAGE>
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 or Class C shares held for the period is deducted. All dividends and
other distributions are assumed to have been reinvested at net asset value.
The funds 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 funds calculate 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 those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following tables show performance information for each class of the
funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average return.
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended November 30, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
Five Years ended November 30, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
Ten Years ended November 30, 1998
Standardized Return*..................................
Non-Standardized Return...............................
Inception** to November 30, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
</TABLE>
LOW DURATION FUND
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended November 30, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
Five Years ended November 30, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
Inception** to October 31, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
</TABLE>
49
<PAGE>
INVESTMENT GRADE INCOME FUND
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
Five years ended November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
Ten years ended November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
Inception** to November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
</TABLE>
HIGH INCOME FUND
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
Five years ended November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
Ten years ended November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
Inception** to November 30, 1998:
Standardized Return*.....................................
Non-Standardized Return..................................
</TABLE>
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended November 30, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
Inception** to November 30, 1998:
Standardized Return*..................................
Non-Standardized Return...............................
</TABLE>
- --------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.0% (3.0% for Low Duration 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. Class Y shares do not impose an initial or
contingent deferred sales charge; therefore, the performance information is
the same for both standardized return and non-standardized return for the
periods indicated.
** The inception date for each Class of shares is as follows:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Government Income Fund 08/31/84 07/01/91 07/02/92 09/11/91
Low Duration Fund 05/03/93 05/03/93 05/03/93 10/20/95
Investment Grade Income Fund 08/31/84 07/01/91 07/02/92 02/20/98
High Income Fund 08/31/84 07/01/91 07/02/92 02/20/98
Strategic Income Fund 02/07/94 02/07/94 02/07/94 02/17/98
</TABLE>
50
<PAGE>
Yield. Yields used in each fund's Performance Advertisements are calculated
by dividing the fund's interest income attributable to a Class of shares for a
30-day period ("Period"), net of expenses attributable to such Class, by the
average number of shares of such Class entitled to receive dividends during the
Period and expressing the result as an annualized percentage (assuming semi-
annual compounding) of the maximum offering price per share (in the case of
Class A shares) or the net asset value per share (in the case of Class B 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 a 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 interest 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 totaling the interest
earned on all debt obligations. For purposes of these calculations, the maturity
of an obligation with one or more call provisions is assumed to be the next date
on which the obligation reasonably can be expected to be called or, if none, the
maturity date. With respect to Class A shares, in calculating the maximum
offering price per share at the end of the Period (variable "d" in the above
formula) the fund's current maximum 4% initial sales charge on Class A shares is
included.
The following table shows the yield for each class of shares of each fund for
the 30-day period ended November 30, 1998:
<TABLE>
<CAPTION>
U.S. Government Low Duration Investment Grade Strategic Income
Income Fund Fund Income Fund High Income Fund Fund
----------- ---- ----------- ---------------- ----
<S> <C> <C> <C> <C> <C>
Class A
Class B
Class C
Class Y
</TABLE>
Other Information. In Performance Advertisements, the funds may compare their
Standardized Return and/or their Non-Standardized Return with data published by
Lipper Inc. ("Lipper") for U.S. government funds (U.S. Government Income Fund
and Low Duration Fund), corporate bond (BBB) funds (Investment Grade Income
Fund) and high yield funds (High Income Fund), CDA Investment Technologies, Inc.
("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"), Investment
Company Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), or with
the performance of U.S. Treasury securities of various maturities, recognized
stock, bond and other indices, including the Salomon Brothers Bond Index, First
Boston High Yield Index, Merrill Lynch High Yield Indices, Lehman Bond Index,
Lehman Government/Corporate Bond Index, the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. These
comparisons also may include economic data and statistics published by the U.S.
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 these materials to
mutual fund
51
<PAGE>
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 THE WALL
STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST
and THE KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in
graphic form.
The funds 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 in
additional fund shares, any future income or capital appreciation of a 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 a fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(Registered) Money Markets. In comparing the
funds' performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank CD
yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the funds are not insured or guaranteed by
the U.S. government and returns and net asset values will fluctuate. The debt
securities held by the funds generally have longer maturities than most CDs and
may reflect interest rate fluctuations for longer term debt securities. An
investment in any fund involves greater risks than an investment in either a
money market fund or a CD.
TAXES
Backup Withholding. Each fund is required to withhold 31% of all dividends,
capital gain distributions and redemption proceeds payable to individuals and
certain other non-corporate shareholders who do not provide the fund or
PaineWebber with a correct taxpayer identification number. Withholding at that
rate also is required from dividends and capital gain distributions payable to
those shareholders who otherwise are subject to backup withholding.
Taxes on the Sale or Exchange of Fund Shares. A shareholder's sale
(redemption) of shares may result in a taxable gain or loss. This depends upon
whether the shareholder receives more or less than his or her adjusted basis for
the shares (which normally includes any initial sales charge paid on Class A
shares). An exchange of any fund's shares for shares of another PaineWebber
mutual fund generally will have similar tax consequences. In addition, if a
fund's shares are bought within 30 days before or after selling other shares of
the fund (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.
Special Tax Rule For Class A Shareholders. Special tax rules apply when a
shareholder sells or exchanges Class A shares within 90 days of purchase and
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 sale or exchange of the original
Class A shares would be increased, or any loss would be decreased, by the amount
of the sales charge paid when those shares were bought, and that amount will
increase the basis of the PaineWebber mutual fund shares subsequently acquired.
Conversion of Class B Shares. No gains or loss will be recognized by a
shareholder as a result of a conversion from Class B shares into Class A shares.
Qualification as a Regulated Investment Company. In order to continue to
qualify for treatment as a RIC under the Code, each fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gains and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
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 contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) at the close of each quarter of the fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with these
other securities 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 that does not
represent more than 10% of the issuer's outstanding voting securities; and (3)
at the close of each quarter of the fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or
52
<PAGE>
the securities of other RICs) of any one issuer. If a fund failed to qualify for
treatment as a RIC for any taxable year, it would be taxed as an ordinary
corporation on its taxable income for that year (even if that income was
distributed to its shareholders) and all distributions out of its earnings and
profits would be taxable to its shareholders, as dividends (that is, ordinary
income).
Other Information. 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 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. 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 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 is eligible for the
dividends-received deduction allowed to corporations. Although Investment Grade
Income Fund, High Income Fund and Strategic Income Fund are authorized to hold
equity securities, it is expected that any dividend income received by these
funds will be minimal.
If shares of a fund 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 strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses a fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
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.
If a fund has an "appreciated financial position"--generally, an interest
(including an interest through an option, futures or forward currency contract
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis--and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or a futures or forward currency contract entered into by a
fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale, or granting an option to buy
substantially identical stock or securities).
A fund may acquire zero coupon or other securities issued with original issue
discount or Treasury Inflation-Protection Securities ("TIPS"), on which
principal is adjusted based on changes in the Consumer Price Index. A fund must
include in its gross income the portion of the original issue discount
(including the amount of any principal increases on TIPS) that accrues on such
securities during the taxable year, even if the fund receives no corresponding
payment on them during the year. Because a fund annually must distribute
substantially all of its investment company taxable income, including any
accrued original issue discount, to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax, it 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 and/or net capital gain.
53
<PAGE>
OTHER INFORMATION
Massachusetts Business Trusts. Each Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
of a fund could, under certain circumstances, be held personally liable for the
obligations of the fund or its Trust. However, each 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 board
members or by any officers or officer by or on behalf of the Trust or the fund,
the board members or any of them in connection with the Trust. Each Declaration
of Trust provides for indemnification from the relevant 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 incurring financial
loss on account of shareholder liability is limited to circumstances in which
the fund itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the relevant fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.
Classes of Shares. A share of each class of a fund represents an identical
interest in that fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege, if any. The different sales charges and other
expenses applicable to the different classes of shares of the funds will affect
the performance of those classes. Each share of a fund is entitled to
participate equally in dividends, other distributions and the proceeds of any
liquidation of that fund. However, due to the differing expenses of the classes,
dividends and liquidation proceeds on Class A, B, C and Y shares will differ.
Voting Rights. Shareholders of each fund are entitled to one vote for each
full share held and fractional votes for fractional shares held. Voting rights
are not cumulative and, as a result, the holders of more than 50% of all the
shares of a Trust may elect all of the board members of that Trust. The shares
of a fund will be voted together, except that only the shareholders of a
particular class of a fund may vote on matters affecting only that class, such
as the terms of a Plan as it relates to the class. The shares of each series of
Managed Investments Trust and Securities Trust will be voted separately, except
when an aggregate vote of all the series is required by law.
The funds do not hold annual meetings. Shareholders of record of no less than
two-thirds of the outstanding shares of a Trust may remove a board member
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called to vote on the removal
of a board member at the written request of holders of 10% of the outstanding
shares of a Trust.
Class-Specific Expenses. Each fund may determine to allocate certain of its
expenses (in addition to service and distribution fees) to the specific classes
of its shares to which those expenses are attributable. For example, Class B and
Class C shares bear higher transfer agency fees per shareholder account than
those borne by Class A or Class Y shares. The higher fee is imposed due to the
higher costs incurred by the Transfer Agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the applicable
charge. Although the transfer agency fee will differ on a per account basis as
stated above, the specific extent to which the transfer agency fees will differ
between the classes as a percentage of net assets is not certain, because the
fee as a percentage of net assets will be affected by the number of shareholder
accounts in each class and the relative amounts of net assets in each class.
Prior Names. Prior to October 20, 1995, Low Duration Fund was known as
"PaineWebber Short-Term U.S. Government Income Fund." Prior to November 10,
1995, the Class C shares of all the funds were called "Class D" shares. Prior to
November 10, 1995, the Class Y shares of U.S. Government Income Fund and Low
Duration Fund were called "Class C" shares.
Custodian and Recordkeeping Agent; Transfer and Dividend Agent. State Street
Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund
and employs foreign sub-custodians approved by the respective boards in
accordance with applicable requirements under the 1940 Act to provide custody of
the funds' foreign assets. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as
each fund's transfer and dividend disbursing agent. It is located at 400
Bellevue Parkway, Wilmington, DE 19809.
Combined Prospectus. Although each fund is offering only its own shares, it
is possible that a fund might become liable for a misstatement in the Prospectus
about another fund. The board of each fund has considered this factor in
approving the use of a single, combined Prospectus.
54
<PAGE>
Counsel. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for U.S. Government Income Fund, Low Duration
Fund, Investment Grade Income Fund and High Income Fund. PricewaterhouseCoopers
LLP, 1177 Avenue of the Americas, New York, New York 10036, serves as
independent accountants for Strategic Income Fund.
55
<PAGE>
[This page intentionally left blank]
<PAGE>
APPENDIX
RATINGS INFORMATION
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 risk 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 payment 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 applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category, the modifier 2 indicates
a mid-range ranking, and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Description of S&P Corporate Debt Ratings
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
57
<PAGE>
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
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.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
You should rely only on the information contained or referred to in the
Prospectus and this Statement of Additional Information. The Funds and their
distributor have not authorized anyone to provide you with information that is
different. The Prospectus and this Statement of Additional Information is not an
offer to sell shares of the Funds in any jurisdiction where the Funds or their
distributor may not lawfully sell those shares.
------------
TABLE OF CONTENTS
Page
----
The Funds and Their Investment Policies................ 1
The Funds' Investments, Related Risks and Limitations.. 4
Strategies Using Derivative Instruments................ 21
Organization of the Trust; Trustees and Officers and
Principal Holders of Securities................... 28
Investment Advisory and Distribution
Arrangements........................................ 34
Portfolio Transactions................................. 40
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services........... 43
Conversion of Class B Shares........................... 47
Valuation of Shares.................................... 48
Performance Information................................ 48
Taxes.................................................. 52
Other Information...................................... 54
Appendix............................................... A-1
(C)1999 PaineWebber Incorporated
PaineWebber
U.S. Government Income Fund
PaineWebber
Low Duration U.S. Government Income Fund
PaineWebber
Investment Grade Income Fund
PaineWebber
High Income Fund
PaineWebber
Strategic Income Fund
------------------------------------------------
Statement of Additional Information
March 31, 1999
------------------------------------------------
PaineWebber
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits
--------
(1) (a) Amended and Restated Declaration of Trust 1/
(b) Amendment to Declaration of Trust effective April 8, 1998 2/
-
(c) Amendment to Declaration of Trust effective July 9, 1998 2/
-
(d) Amendment to Declaration of Trust effective August 19, 1998
(to be filed)
(2) Restated By-Laws 1/
-
(3) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 3/
-
(4) (a) Investment Advisory and Administration Contract 1/
-
(b) Investment Advisory and Administration Contract with respect to
PaineWebber Tax-Managed Equity Fund (to be filed)
(c) Investment Advisory Fee Agreement with respect to PaineWebber
Utility Income Fund 1/
-
(d) Investment Advisory Fee Agreement with respect to PaineWebber Low
Duration U.S. Government Income Fund 1/
-
(e) Investment Advisory Fee Agreement with respect to PaineWebber
Asia Pacific Growth Fund 4/
-
(f) Sub-Investment Advisory Contract with respect to PaineWebber
Low Duration U.S. Government Income Fund 5/
-
(g) Sub-Advisory Contract with respect to PaineWebber Asia Pacific
Growth Fund 4/
-
(5) (a) Distribution Contract with respect to Class A Shares 1/
-
(b) Distribution Contract with respect to Class B Shares 1/
-
(c) Distribution Contract with respect to Class C Shares 6/
-
(d) Distribution Contract with respect to Class Y Shares 6/
-
(e) Exclusive Dealer Agreement with respect to Class A Shares 1/
-
(f) Exclusive Dealer Agreement with respect to Class B Shares 1/
-
(g) Exclusive Dealer Agreement with respect to Class C Shares 6/
-
(h) Exclusive Dealer Agreement with respect to Class Y Shares 6/
-
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 1/
-
(8) Transfer Agency Agreement 7/
-
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent
(to be filed)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent 1/
-
C-1
<PAGE>
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares (to be filed)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares (to be filed)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
C Shares (to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan pursuant to Rule 18f-3 9/
-
_________________
1/ Incorporated by reference from Post-Effective Amendment No. 52 to the
- -
registration statement, SEC File No. 2-91362, filed February 27, 1998.
2 Incorporated by reference from Post-Effective Amendment No. 54 to the
- -
registration statement, SEC File No. 2-91362, filed July 21, 1998.
3/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- -
Registrant's Amended and Restated Declaration of Trust and from Articles
II, VII and X of Registrant's Restated By-Laws.
4/ Incorporated by reference from Post Effective Amendment No. 50 to the
- -
registration statement, SEC File No. 2-91362, filed July 7, 1997.
5/ Incorporated by reference from Post-Effective Amendment No. 37 to the
- -
registration statement, SEC File No. 2-91362, filed March 31, 1995.
6/ Incorporated by reference from Post-Effective Amendment No. 39 to the
- -
registration statement, SEC File No. 2-91362, filed February 14, 1996.
7/ Incorporated by reference from Post-Effective Amendment No. 53 to the
- -
registration statement, SEC File No. 2-91362, filed March 31, 1998.
8/ Incorporated by reference from Post-Effective Amendment No. 43 to the
- -
registration statement, SEC File No. 2-91362, filed July 31, 1996.
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
None.
Item 25. 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
C-2
<PAGE>
belief that their actions are in the best interest of the Registrant, the
trustees and officers shall not be liable for neglect or wrongdoing by them or
any officer, agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X, the
trustees shall not be liable for errors of judgment or mistakes of fact or law,
or for any act or omission in accordance with advice of counsel or other
experts, or failing to follow such advice, with respect to the meaning and
operation of the Declaration of Trust.
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 each Investment Advisory and Administration Contract
("Advisory 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 Advisory 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 Advisory
Contract. The sub-advisory contracts with respect to PaineWebber Low Duration
U.S. Government Income Fund and PaineWebber Asia Pacific Growth Fund contain
similar provisions with respect to those sub-advisers. Section 10 of the
Advisory Contract provides that the trustees shall not be liable for any
obligations of the Trust under the Advisory Contract and that Mitchell Hutchins
shall look only to the assets and property of the Trust in settlement of such
right or claim and not to the assets and property of the trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors or controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with each Distribution Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Section 10 of each Distribution Contract contains 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
C-3
<PAGE>
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 26. 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.
Pacific Investment Management Company ("PIMCO") serves as sub-adviser for
PaineWebber Low Duration U.S. Government Income Fund. PIMCO, a Delaware general
partnership, is a registered investment adviser and a subsidiary partnership of
PIMCO Advisors L.P. ("PIMCO Advisors"). The general partners of PIMCO Advisors
are PIMCO Advisors Holding L.P., a publicly traded company listed on the New
York Stock Exchange under the symbol "PA" and PIMCO Partners, G.P., a a general
partnership between Pacific Life Insurance Company and PIMCO Partners, LLC., 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.
Schroder Capital Management International Inc. ("Schroder Capital") serves
as investment sub-adviser for PaineWebber Asia Pacific Growth Fund. Schroder
Capital, a New York corporation, is a registered investment adviser and a wholly
owned subsidiary of Schroders Incorporated, the wholly owned U.S. holding
company subsidiary of Schroders plc. Schroder Capital is primarily engaged in
the investment advisory business. Information as to the officers and directors
of Schroder Capital is included on its Form ADV, as filed with the Securities
and Exchange Commission (registration number 801-15834), and is incorporated
herein by reference.
Item 27. 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.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS INSTITUTIONAL SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
C-4
<PAGE>
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, 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 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. Unless otherwise indicated, the
principal business address of each person named is 1285 Avenue of the Americas,
New York, NY 10019.
<TABLE>
<CAPTION>
Position and Offices with
Name Position With Registrant Underwriter or Exclusive Dealer
---- ------------------------------------- ------------------------------------------
<S> <C> <C>
Margo N. Alexander President and Trustee President, Chief Executive Officer and a
Director of Mitchell Hutchins and
Executive Vice President and a Director
of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment
Strategist and member of Investment
Policy Committee of PaineWebber
Julianna Berry Vice President First Vice President and a Portfolio
Manager of Mitchell Hutchins
Lawrence Chinsky Vice President and Assistant Assistant Vice President and Investment
Treasurer Monitoring Officer of the Mutual Fund
Finance Department of Mitchell Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
Karen L. Finkel Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
James F. Keegan Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
John J. Lee Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Thomas J. Libassi Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief Investment
Officer - Fixed Income of Mitchell
Hutchins
</TABLE>
C-5
<PAGE>
<TABLE>
Name Position With Registrant Underwriter or Exclusive Dealer
---- ------------------------------------- ------------------------------------------
<S> <C> <C>
Ann E. Moran Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of
Operations and Control of Mitchell
Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of
Mitchell Hutchins
Paul H. Schubert Vice President and Treasurer Senior Vice President and Director of the
Mutual Fund Finance Department of
Mitchell Hutchins
Nirmal Singh Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Mark A. Tincher Vice President Managing Director and Chief Investment
Officer - U.S. Equity Investments of
Mitchell Hutchins
Craig M. Varrelman Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Keith A. Weller Vice President and Assistant First Vice President and Associate
Secretary General Counsel of Mitchell Hutchins
</TABLE>
(c) None.
Item 28. 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 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
None.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York, on the 28th day of January, 1999.
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
- -------------------------- President and Trustee January 28, 1999
Margo N. Alexander * (Chief Executive Officer)
/s/ E. Garrett Bewkes, Jr.
- -------------------------- Trustee and Chairman January 28, 1999
E. Garrett Bewkes, Jr. * of the Board of Trustees
/s/ Richard Q. Armstrong
- -------------------------- Trustee January 28, 1999
Richard Q. Armstrong *
/s/ Richard R. Burt
- -------------------------- Trustee January 28, 1999
Richard R. Burt *
/s/ Mary C. Farrell
- -------------------------- Trustee January 28, 1999
Mary C. Farrell *
/s/ Meyer Feldberg
- -------------------------- Trustee January 28, 1999
Meyer Feldberg *
/s/ George W. Gowen
- -------------------------- Trustee January 28, 1999
George W. Gowen *
/s/ Frederic V. Malek
- -------------------------- Trustee January 28, 1999
Frederic V. Malek *
/s/ Carl W. Schafer
- -------------------------- Trustee January 28, 1999
Carl W. Schafer *
Paul H. Schubert Vice President and Treasurer (Chief January 28, 1999
- -------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File 2-89016, filed June 27, 1996.
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
EXHIBIT INDEX
-------------
Exhibit
Number
- --------
(1) (a) Amended and Restated Declaration of Trust 1/
-
(b) Amendment to Declaration of Trust effective April 8, 1998 2/
-
(c) Amendment to Declaration of Trust effective July 9, 1998 2/
-
(d) Amendment to Declaration of Trust effective August 19, 1998 (to be
filed)
(2) Restated By-Laws 1/
-
(3) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 3/
-
(4) (a) Investment Advisory and Administration Contract 1/
-
(b) Investment Advisory and Administration Contract with respect to
PaineWebber Tax-Managed Equity Fund (to be filed)
(c) Investment Advisory Fee Agreement with respect to PaineWebber
Utility Income Fund 1/
-
(d) Investment Advisory Fee Agreement with respect to PaineWebber Low
Duration U.S. Government Income Fund 1/
-
(e) Investment Advisory Fee Agreement with respect to PaineWebber Asia
Pacific Growth Fund 4/
-
(f) Sub-Investment Advisory Contract with respect to PaineWebber Low
Duration U.S. Government Income Fund 5/
-
(g) Sub-Advisory Contract with respect to PaineWebber Asia Pacific Growth
Fund 4/
-
(5) (a) Distribution Contract with respect to Class A Shares 1/
-
(b) Distribution Contract with respect to Class B Shares 1/
-
(c) Distribution Contract with respect to Class C Shares 6/
-
(d) Distribution Contract with respect to Class Y Shares 6/
-
(e) Exclusive Dealer Agreement with respect to Class A Shares 1/
-
(f) Exclusive Dealer Agreement with respect to Class B Shares 1/
-
(g) Exclusive Dealer Agreement with respect to Class C Shares 6/
-
(h) Exclusive Dealer Agreement with respect to Class Y Shares 6/
-
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 1/
-
(8) Transfer Agency Agreement 7/
-
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent
(to be filed)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent 1/
-
<PAGE>
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares (to be filed)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares (to be filed)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
C Shares (to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan pursuant to Rule 18f-3 9/
-
_________________
1/ Incorporated by reference from Post-Effective Amendment No. 52 to the
- -
registration statement, SEC File No. 2-91362, filed February 27, 1998.
2 Incorporated by reference from Post-Effective Amendment No. 54 to the
- -
registration statement, SEC File No. 2-91362, filed July 21, 1998.
3/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- -
Registrant's Amended and Restated Declaration of Trust and from Articles
II, VII and X of Registrant's Restated By-Laws.
4/ Incorporated by reference from Post Effective Amendment No. 50 to the
- -
registration statement, SEC File No. 2-91362, filed July 7, 1997.
5/ Incorporated by reference from Post-Effective Amendment No. 37 to the
- -
registration statement, SEC File No. 2-91362, filed March 31, 1995.
6/ Incorporated by reference from Post-Effective Amendment No. 39 to the
- -
registration statement, SEC File No. 2-91362, filed February 14, 1996.
7/ Incorporated by reference from Post-Effective Amendment No. 53 to the
- -
registration statement, SEC File No. 2-91362, filed March 31, 1998.
8/ Incorporated by reference from Post-Effective Amendment No. 43 to the
- -
registration statement, SEC File No. 2-91362, filed July 31, 1996.
