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
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION DATED MARCH 31, 2000
October 10, 2000
Dear Investor,
The board of trustees for each of PaineWebber U.S. Government Income Fund,
PaineWebber Investment Grade Income Fund, PaineWebber High Income Fund and
PaineWebber Strategic Income Fund has approved new investment management
arrangements for the fund and related investment strategy changes that became
effective on October 10, 2000 pursuant to a new Interim Investment Management
and Administration Agreement between each fund and Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins") and Interim Sub-Advisory Contracts between
Mitchell Hutchins and unaffiliated sub-advisers.
As a result of these new investment management arrangements, the funds'
Statement of Additional Information ("SAI") is revised as follows:
THE SECOND PARAGRAPH OF THE COVER PAGE IS REPLACED IN ITS ENTIRETY
BY THE FOLLOWING:
Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), a wholly owned asset management subsidiary
of PaineWebber Incorporated ("PaineWebber") serves as
the investment manager (or investment adviser) and
administrator for each fund. As distributor for the
funds, Mitchell Hutchins has appointed PaineWebber to
serve as dealer for the sale of fund shares. Mitchell
Hutchins has appointed unaffiliated investment
advisers to serve as sub-advisers for each fund's
investments (each a "sub-adviser"). Pacific Investment
Management Company LLC ("PIMCO") serves as sub-adviser
for U.S. Government Income Fund, Low Duration Fund and
Strategic Income Fund. Metropolitan West Asset
Management, LLC ("MWAM") serves as sub-adviser for
Investment Grade Income Fund. Massachusetts Financial
Services Company ("MFS") serves as sub-adviser for
High Income Fund.
THE NAME "MITCHELL HUTCHINS" AND THE PHRASE "MITCHELL HUTCHINS (FOR LOW DURATION
FUND THE SUB-ADVISER)" IN THE SECTIONS CAPTIONED "THE FUNDS AND THEIR INVESTMENT
POLICIES," "THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS," "STRATEGIES
USING DERIVATIVE INSTRUMENTS" AND "PORTFOLIO TRANSACTIONS" IS REPLACED BY THE
PHRASE "THE SUB-ADVISER" OR "THE APPLICABLE SUB-ADVISER," AS THE CONTEXT
REQUIRES, EXCEPT IN THE SECTION CAPTIONED "LENDING OF PORTFOLIO SECURITIES" ON
P. 22.
THE FIRST PARAGRAPH IN THE SECTION CAPTIONED "INVESTMENT ADVISORY,
ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS -- INVESTMENT ADVISORY AND
ADMINISTRATION ARRANGEMENTS" ON P. 44 IS REPLACED IN ITS ENTIRETY BY THE
FOLLOWING:
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS.
Mitchell Hutchins acts as the investment adviser and
administrator for Low Duration Fund and as the
investment manager and administrator for each of the
other four funds pursuant to separate contracts (each
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an "Advisory Contract") with each Trust. Under the
applicable Advisory Contracts, Strategic Income Fund
pays Mitchell Hutchins an annual fee of 0.75% of its
average daily net assets, and 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 THIRD PARAGRAPH IN THE SECTION CAPTIONED "INVESTMENT ADVISORY,
ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS -- INVESTMENT ADVISORY AND
ADMINISTRATION ARRANGEMENTS" ON P. 44 IS REPLACED IN ITS ENTIRETY BY THE
FOLLOWING:
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.
The Advisory Contract for Low Duration Fund terminates
automatically upon assignment and is terminable at any
time without penalty by the board or by vote of a
majority of the fund's outstanding voting securities
on 60 days' written notice to Mitchell Hutchins, or by
Mitchell Hutchins on 60 days' written notice to the
Trust. The current Advisory Contract for each of the
other four funds is an Interim Investment Management
and Administration Contract that may be terminated
without penalty on 10 days' written notice to Mitchell
Hutchins by the board of the fund or by vote of a
majority of the outstanding voting securities of the
fund and will terminate 150 days after October 10,
2000 (on March 9, 2001) unless it has by then been
approved by a majority of the outstanding voting
securities of the fund.
THE SECTION CAPTIONED "INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION
ARRANGEMENTS -- INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS" ON P. 45 IS
REVISED BY REPLACING THE SECOND FULL PARAGRAPH IN ITS ENTIRETY WITH THE
FOLLOWING:
The Advisory Contract for Low Duration Fund authorizes
Mitchell Hutchins to retain one or more sub-advisers
but does not require Mitchell Hutchins to do so.
Mitchell Hutchins has entered into a separate
sub-advisory contract with PIMCO ("Sub-Advisory
Contract") pursuant to which PIMCO serves as
sub-adviser for Low Duration Fund. Under the
Sub-Advisory Contract, Mitchell Hutchins (not the
fund) pays PIMCO a fee at the annual rate of 0.25% of
the fund's average daily net assets. For the fiscal
years ended November 30, 1999, November 30, 1998 and
November 30, 1997, Mitchell Hutchins paid or accrued
sub-advisory fees to PIMCO of $341,583, $354,120 and
409,808, respectively.
PIMCO, a Delaware limited liability company, is a
subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors").
PIMCO Advisors was organized as a limited partnership
under Delaware law in 1987. PIMCO Advisors' sole
general partner is Pacific-Allianz Partners LLC.
Pacific-Allianz Partners LLC is a Delaware limited
liability company with two members, Allianz GP Sub
LLC, a Delaware limited liability company, and Pacific
Asset Management LLC, a Delaware limited liability
company. Allianz GP Sub LLC is a wholly owned
subsidiary of Allianz of America, Inc., which is
wholly owned by Allianz AG. Pacific Asset Management
LLC is a wholly owned subsidiary of Pacific Life
Insurance Company, which is a wholly owned subsidiary
of Pacific Mutual Holding Company.
On May 5, 2000, the general partners of PIMCO Advisors
closed the transactions contemplated by the
Implementation and Merger Agreement dated as of
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October 31, 1999 ("Implementation Agreement"), as
amended March 3, 2000 with Allianz of America, Inc.,
Pacific Asset Management LLC, PIMCO Partners, LLC,
PIMCO Holding LLC, PIMCO Partners G.P., and other
parties to the Implementation Agreement. As a result
of completing these transactions, PIMCO Advisors is
now majority-owned indirectly by Allianz AG, with
subsidiaries of Pacific Life Insurance Company
retaining a significant minority interest. Allianz AG
is a German based insurer. Pacific Life Insurance
Company is a Newport Beach, California based insurer.
In connection with the closing, Allianz of America
entered into a put/call arrangement for the possible
disposition of Pacific Life's indirect interest in
PIMCO Advisors. The put option held by Pacific Life
will allow it to require Allianz of America, on the
last business day of each calendar quarter following
the closing, to purchase at a formula-based price all
of the PIMCO Advisors' units owned directly or
indirectly by Pacific Life. The call option held by
Allianz of America will allow it, beginning January
31, 2003 or upon a change in control of Pacific Life,
to require Pacific Life to sell or cause to be sold to
Allianz of America, at the same formula-based price,
all of the PIMCO Advisors' units owned directly or
indirectly by Pacific Life.
Allianz AG, the parent of Allianz of America, is a
publicly traded German company which, together with
its subsidiaries, comprises the world's second largest
insurance company as measured by premium income.
Allianz AG's address is Koniginstrasse 28, D-80802,
Munich, Germany. Allianz AG is a leading provider of
financial services, particularly in Europe, and is
represented in 68 countries world-wide through
subsidiaries, branch and representative offices, and
other affiliated entities. As of June 30, 2000, the
Allianz Group (including PIMCO) had assets under
management of more than $650 billion, and in its last
fiscal year wrote approximately $50 billion in gross
insurance premiums.
Significant institutional shareholders of Allianz AG
currently include Dresdner Bank AG, Deutsche Bank AG,
Munich Reinsurance and HypoVereingsbank. BNP Paribas,
Credit Lyonnais, Munich Reinsurance, HypoVereingsbank,
Dresdner Bank AG and Deutsche Bank AG, as well as
certain broker-dealers that might be owned or
controlled by or affiliated with these entities, such
as DB Alex. Brown LLC, Deutsche Bank Securities, Inc.
and Dresdner Kleinwort Benson North America LLC
(collectively, the "Affiliated Brokers"), may be
considered to be affiliated persons of PIMCO. Absent
an SEC exemptive order or other relief, the funds
sub-advised by PIMCO (Low Duration Fund, U.S.
Government Fund and Strategic Income Fund) are
precluded from effecting principal transactions with
the Affiliated Brokers and their ability to purchase
securities being underwritten by an Affiliated Broker
or to utilize the Affiliated Brokers for agency
transactions is subject to restrictions. PIMCO does
not believe that the restrictions on transactions with
the Affiliated Brokers described above materially
adversely affect its ability to provide services to
the funds, the funds' ability to take advantage of
market opportunities, or the funds' overall
performance.
THE SECTION CAPTIONED "INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION
ARRANGEMENTS-- INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS" ON PP. 44-46
IS REVISED BY ADDING THE FOLLOWING NEW PARAGRAPHS AT THE END:
The Advisory Contracts for each of the other four
funds also authorize Mitchell Hutchins to retain one
or more sub-advisers for the management of the fund's
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investment portfolio. Mitchell Hutchins has entered
into interim sub-advisory contracts, effective October
10, 2000 (each an "Interim Sub-Advisory Contract"),
under which sub-advisers manage each fund's assets.
Prior to October 10, 2000, Mitchell Hutchins managed
each fund's assets.
Pursuant to separate Interim Sub-Advisory Contracts,
PIMCO serves as sub-adviser to each of U.S. Government
Income Fund and Strategic Income Fund. Under these
Interim Sub-Advisory Contracts, Mitchell Hutchins (not
the funds) is obligated to pay PIMCO for its services
a fee at the annual rate of 0.225% of the average
daily net assets of U.S. Government Income Fund and
0.25% of the average daily net assets of Strategic
Income Fund. Information about controlling persons of
PIMCO and related matters is set forth above in
connection with the sub-advisory contract between
Mitchell Hutchins and PIMCO with respect to Low
Duration Fund.
Pursuant to an Interim Sub-Advisory Contract, MWAM
serves as sub-adviser to Investment Grade Income Fund,
and Mitchell Hutchins (not the fund) is obligated to
pay MWAM for its services a fee at the annual rate of
0.20% of the fund's average daily net assets up to and
including $200 million and 0.12% of the fund's average
daily net assets above $200 million. MWAM is
majority-owned by its key employees, with an
approximately 40% minority ownership held by
Metropolitan West Financial, Inc., a registered
investment adviser.
Pursuant to an Interim Sub-Advisory Contract, MFS
serves as sub-adviser to High Income Fund, and
Mitchell Hutchins (not the fund) is obligated to pay
MFS for its services a fee at the annual rate of 0.45%
of the fund's average daily net assets. MFS is a
subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which in turn is an indirect
wholly-owned subsidiary of Sun Life Financial Services
of Canada, Inc.
Under an Interim Sub-Advisory Contract, the
sub-adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by
the applicable Trust or fund, its shareholders or
Mitchell Hutchins in connection with the Interim
Sub-Advisory Contract, except any loss resulting from
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 Interim Sub-Advisory Contract.
Each Interim Sub-Advisory Contract terminates
automatically 150 days after October 10, 2000 (on
March 9, 2001) and is terminable at any time without
penalty on 10 days' written notice by the board of the
applicable Trust or by vote of a majority of the
applicable fund's outstanding voting securities and by
the sub-adviser on 60 days' written notice to Mitchell
Hutchins. An Interim Sub-Advisory Contract may be
terminated by Mitchell Hutchins (1) upon material
breach by the sub-adviser of its representations and
warranties, which breach shall not be cured within a
20 day period after notice of such breach; or (2) if
the sub-adviser becomes unable to discharge its duties
and obligations under the Interim Sub-Advisory
Contract.
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