<PAGE>
<PAGE>
As filed with the Securities and Exchange Commission on May 1, 1997
1933 Act Registration No. 2-98149
1940 Act Registration No. 811-4312
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 24 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24
PAINEWEBBER MUTUAL FUND TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
BENJAMIN J. HASKIN, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[ ] On ___________ pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[X] On July 1, 1997 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] On _________________ pursuant to Rule 485(a)(ii)
Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and has filed the notice required by such Rule
for its most recent fiscal year on April 25, 1997.
<PAGE>
<PAGE>
PaineWebber Mutual Fund Trust
-----------------------------
Contents of Registration Statement
----------------------------------
This registration statement consists of the following papers and documents:
Cover Sheet
Table of Contents
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
<PAGE>
PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
--------------------------- -------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Expense Table
3. Condensed Financial Information Financial Highlights; Performance
4. General Description of Registrant The Funds at a Glance; Investment
Objectives & Policies; Investment
Philosophy & Process; The Funds'
Investments; General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Financial Highlights
Performance
6. Capital Stock and Other Securities Cover Page; Flexible Pricing; Dividends &
Taxes; General Information
7. Purchase of Securities Being Offered Flexible Pricing; How to Buy Shares;
Other Services; Determining the Shares'
Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Not Applicable
Proceedings
Part B Item No. and Caption Statement of Additional Information
--------------------------- -----------------------------------
Caption
-------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Investment Policies and Restrictions;
Hedging and Other Strategies Using
Derivative Contracts; Portfolio
Transactions
14. Management of the Fund Trustees and Officers; Principal Holders
of Securities
15. Control Persons and Principal Holders Trustees and Officers; Principal Holders
of Securities of Securities
16. Investment Advisory and Other Services Investment Advisory and Distribution
Arrangements; Other Information
17. Brokerage Allocation Portfolio Transactions
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Part B Item No. and Caption Statement of Additional Information Caption
--------------------------- -------------------------------------------
<S> <C> <C>
18. Capital Stock and Other Securities Conversion of Class B Shares; Other
Information
19. Purchase, Redemption and Pricing of Reduced Sales Charges, Additional
Securities Being Offered Exchange and Redemption Information and
Other Services; Valuation of Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Distribution
Arrangements
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
PaineWebber New York Tax-Free Income Fund
PaineWebber Municipal High Income Fund
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- JULY 1, 1997
- --------------------------------------------------------------------------------
PaineWebber Tax-Free Bond Funds are designed for investors generally seeking
high current income exempt from federal income tax and, in some cases, certain
state personal income taxes. PaineWebber California Tax-Free Income Fund invests
primarily in investment grade bonds issued by the State of California, its
municipalities and public authorities. PaineWebber National Tax-Free Income Fund
invests primarily in investment grade bonds issued by various states,
municipalities and public authorities. PaineWebber Municipal High Income Fund
invests primarily in high yield, high risk, medium and lower grade bonds issued
by various states, municipalities and public authorities. PaineWebber New York
Tax-Free Income Fund invests primarily in investment grade bonds issued by the
State of New York, its municipalities and public authorities.
This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and
retain a copy of this Prospectus for future reference.
A Statement of Additional Information dated July 1, 1997 has been filed with the
Securities and Exchange Commission and is legally part of this Prospectus. The
Statement of Additional Information can be obtained without charge, and further
inquiries can be made, by contacting an individual Fund, your investment
executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.
This Prospectus offers Class A, B, C and Y shares. The Class Y shares are
currently offered only to limited groups of investors. See 'How to Buy Shares.'
- --------------------------------------------------------------------------------
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad categories,
which are presented here. Generally, investors seeking to maximize return must
assume greater risk. California Tax-Free Income Fund, National Tax-Free Income
Fund, Municipal High Income Fund and New York Tax-Free Income Fund are all in
the TAX-FREE BOND category.
[ ] MONEY MARKET FUND for income and stability by investing in high-quality,
short-term investments.
[ ] BOND FUNDS for income by investing mainly in bonds.
[ ] TAX-FREE BOND FUNDS for income exempt from federal income taxes and, in some
cases, state and local income taxes, by investing in municipal bonds.
[ ] ASSET ALLOCATION FUNDS for high total return by investing in stocks and
bonds.
[ ] STOCK FUNDS for long-term growth by investing mainly in equity securities.
[ ] GLOBAL FUNDS for long-term growth by investing mainly in foreign stocks or
high current income by investing mainly in global debt instruments.
A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
- --------------------------------------------------------------------------------
INVESTORS SHOULD RELY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO
PROVIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN
OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR
DISTRIBUTOR MAY NOT LAWFULLY SEE THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PAINEWEBBER MUNICIPAL HIGH INCOME FUND MAY INVEST PREDOMINANTLY, AND EACH OF THE
OTHER FUNDS MAY INVEST UP TO 35% OF ITS ASSETS, IN LOWER RATED MUNICIPAL
OBLIGATIONS, COMMONLY REFERRED TO AS MUNICIPAL 'JUNK BONDS.' MUNICIPAL
OBLIGATIONS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE WITH RESPECT TO THE
PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS SHOULD CAREFULLY ASSESS
THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS.
----------------
- --------------------------------------------------------------------------------
Prospectus Page 1
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Page
-----
The Funds at a Glance............................................................ 3
Expense Table.................................................................... 6
Financial Highlights............................................................. 10
Investment Objectives & Policies................................................. 18
Investment Philosophy & Process.................................................. 19
Performance...................................................................... 20
The Funds' Investments........................................................... 24
Flexible Pricing'sm'............................................................. 30
How to Buy Shares................................................................ 33
How to Sell Shares............................................................... 35
Other Services................................................................... 36
Management....................................................................... 36
Determining the Shares' Net Asset Value.......................................... 39
Dividends & Taxes................................................................ 39
General Information.............................................................. 41
Appendix......................................................................... 43
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 2
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------
The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or diversify
a portfolio. The Funds are not suitable for tax-exempt institutions or qualified
retirement plans because those investors cannot take advantage of the tax-exempt
character of the Funds' dividends. When selling shares, investors should be
aware that they may get more or less for their shares than they originally paid
for them. As with any mutual fund, there is no assurance that the Funds will
achieve their goals.
CALIFORNIA TAX-FREE INCOME FUND
GOAL: Current income that is exempt from federal income tax and California
personal income tax.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax and
California personal income tax, consistent with the preservation of capital and
liquidity within the Fund's quality standards.
WHO SHOULD INVEST: Investors seeking current income that is exempt from federal
income tax and California personal income tax.
SIZE: On May 31, 1997, the Fund had over $[ ] million in assets.
NATIONAL TAX-FREE INCOME FUND
GOAL: Current income that is exempt from federal income tax.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax,
consistent with the preservation of capital and liquidity within the Fund's
quality standards.
WHO SHOULD INVEST: Investors seeking current income that is exempt from federal
income tax.
SIZE: On May 31, 1997, the Fund had over $[ ] million in assets.
MUNICIPAL HIGH INCOME FUND
GOAL: Current income that is exempt from federal income tax by investing
primarily in high yield, high risk medium and lower grade municipal securities.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax.
WHO SHOULD INVEST: Investors seeking high current income that is exempt from
federal income tax and who can assume the risks associated with the types of
securities in which the Fund invests.
SIZE: On May 31, 1997, the Fund had over $[ ] million in assets.
NEW YORK TAX-FREE INCOME FUND
GOAL: Current income that is exempt from federal income tax and New York State
and New York City personal income taxes.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax and
from New York State and New York City personal income taxes.
WHO SHOULD INVEST: Investors seeking current income that is exempt from federal
income tax and New York State and New York City personal income tax.
SIZE: On May 31, 1997, the Fund had over $[ ] million in assets.
RISKS
Investors may lose money by investing in the Funds; your investment is not
guaranteed.
INTEREST RATE RISK. The bonds in which each Fund invests are subject to
interest rate risk, which means that their values and, therefore, the net asset
value of the Fund may be expected to fall when interest rates rise. Each Fund
attempts to reduce this risk through diversification, credit analysis and
attention to interest rate trends and other factors. However, efforts to limit
this risk may not be successful.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOMEFUND
CREDIT RISK. The value of the municipal securities in which each Fund invests
may be affected by many factors, including adverse changes in the issuer's own
financial condition or in economic conditions.
QUALITY RISK. The lower rated municipal securities in which the Municipal
Income Fund may invest without limit are considered predominately speculative
and involve major risk exposure to adverse conditions. California Tax-Free
Income Fund, National Tax-Free Income Fund and New York Tax-Free Income Fund may
each invest up to 35% of its assets in these types of municipal securities. Some
lower-tier investment grade municipal securities also have speculative
characteristics.
MARKET RISK. During periods of market uncertainty, the values of municipal
securities can become volatile.
CALIFORNIA OBLIGATIONS. The concentration of the California Tax-Free Income
Fund's investments in securities issued by the State of California, its
municipalities and public authorities may subject the Fund to greater risks than
a fund that has broad range of investments. The State of California and many of
its agencies and local governments have been experiencing, and continue to
experience, financial difficulties and the credit standings of California and
certain local governments have been, and could be further, reduced.
NEW YORK OBLIGATIONS. The concentration of the New York Tax-Free Income Fund's
investments in securities issued by the State of New York, its municipalities
and public authorities may subject the Fund to greater risks than a fund that
has broad range of investments. The State of New York and many of its agencies
and local governments (including New York City) have been experiencing, and
continue to experience, financial difficulties and the credit standings of
California and certain local governments have been, and could be further,
reduced.
DERIVATIVES. Each Fund may use derivatives, such as options and futures in its
investment activities, each of which involve special risks.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of California Tax-Free Income Fund,
National Tax-Free Income Fund, Municipal High Income Fund and New York Tax-Free
Income Fund (each a 'Fund' and, collectively, the 'Funds').
MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors need
only $100.
HOW TO PURCHASE SHARES OF THE FUNDS
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge (the maximum
sales charge is 4% of the public offering price). Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
'contingent deferred sales charge' and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOMEFUND
have higher ongoing expenses than Class A shares. A contingent deferred sales
charge of 0.75% is charged on shares sold within one year of purchase. Class C
shares never convert to any other class of shares.
CLASS Y SHARES
Eligible investors may purchase Class Y shares of the Funds as follows:
The price is the net asset value calculated after PaineWebber's New York City
headquarters or the Transfer Agent receives the purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares. As a
result, 100% of their purchase is immediately invested. Investors also do not
pay a redemption fee or contingent deferred sales charge when they sell Class Y
shares.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 5
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
EXPENSE TABLE
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in Class A, B, C and Y shares of the Funds.
Expenses shown below represent those incurred for the most recent fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum sales charge on purchases of shares (as a % of offering price)......... 4% None None None
Sales charge on reinvested dividends (as a % of offering price)................ None None None None
Maximum contingent deferred sales charge (as a % of net asset value at the time
of purchase or sale, whichever is less)...................................... None 5% 0.75% None
Exchange fee................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
CALIFORNIA TAX-FREE INCOME FUND
Management fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 fees..................................................................... 0.25 1.00 0.75 0.00
Other expenses.................................................................
------- ------- ------- -------
Total operating expenses....................................................... % % % %
------- ------- ------- -------
------- ------- ------- -------
NATIONAL TAX-FREE INCOME FUND
Management fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 fees..................................................................... 0.25 1.00 0.75 0.00
Other expenses.................................................................
------- ------- ------- -------
Total operating expenses....................................................... % % % %
------- ------- ------- -------
------- ------- ------- -------
MUNICIPAL HIGH INCOME FUND
Management fees................................................................ 0.60% 0.60% 0.60% 0.60%
12b-1 fees..................................................................... 0.25 1.00 0.75 0.00
Other expenses.................................................................
------- ------- ------- -------
Total operating expenses....................................................... % % % %
------- ------- ------- -------
------- ------- ------- -------
NEW YORK TAX-FREE INCOME FUND(1)
Management fees................................................................ 0.60% 0.60% 0.60% 0.60%
12b-1 fees..................................................................... 0.25 1.00 0.75 0.00
Other expenses.................................................................
------- ------- ------- -------
Total operating expenses....................................................... % % % %
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- ------------
(1) All expenses for New York Tax-Free Income Fund are those that would have
been experienced by the Fund for the fiscal year ended February 28, 1997 had
Mitchell Hutchins and PaineWebber not waived a portion of their fees.
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to a sales
charge. However, if such shares are sold within one year after purchase, a
contingent deferred sales charge of 1% is imposed on the net asset value of the
shares at the time of purchase or sale, whichever is less.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: Sales charge waivers are available. If shares are sold within
one year after purchase, a contingent deferred sales charge of 0.75% is imposed
on the net asset value of the shares at the time of purchase or sale, whichever
is less.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees............................................................... 0.25% 0.25% 0.25% None
12b-1 distribution fees.......................................................... 0.00 0.75 0.50 None
</TABLE>
For more information, see 'Management' and 'Flexible Pricing'sm'.'
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the example is required by regulations of the Securities and
Exchange Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would, directly or indirectly, pay the following expenses on a
$1,000 investment in each Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CALIFORNIA TAX-FREE INCOME FUND
EXAMPLE
Class A.................................................................. $ $ $ $
Class B (Assuming sale of all shares at end of period)................... $ $ $ $
Class B (Assuming no sale of shares)..................................... $ $ $ $
Class C (Assuming sale of all shares at end of period)................... $ $ $ $
Class C (Assuming no sale of shares)..................................... $ $ $ $
Class Y.................................................................. $ $ $ $
NATIONAL TAX-FREE INCOME FUND
EXAMPLE
Class A.................................................................. $ $ $ $
Class B (Assuming sale of all shares at end of period)................... $ $ $ $
Class B (Assuming no sale of shares)..................................... $ $ $ $
Class C (Assuming sale of all shares at end of period)................... $ $ $ $
Class C (Assuming no sale of shares)..................................... $ $ $ $
Class Y.................................................................. $ $ $ $
MUNICIPAL HIGH INCOME FUND
EXAMPLE
Class A.................................................................. $ $ $ $
Class B (Assuming sale of all shares at end of period)................... $ $ $ $
Class B (Assuming no sale of shares)..................................... $ $ $ $
Class C (Assuming sale of all shares at end of period)................... $ $ $ $
Class C (Assuming no sale of shares)..................................... $ $ $ $
Class Y.................................................................. $ $ $ $
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 7
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
NEW YORK TAX-FREE INCOME FUND
EXAMPLE
Class A.................................................................. $ $ $ $
Class B (Assuming sale of all shares at end of period)................... $ $ $ $
Class B (Assuming no sale of shares)..................................... $ $ $ $
Class C (Assuming sale of all shares at end of period)................... $ $ $ $
Class C (Assuming no sale of shares)..................................... $ $ $ $
Class Y.................................................................. $ $ $ $
</TABLE>
<TABLE>
<S> <C>
ASSUMPTIONS MADE IN THE EXAMPLES
ALL CLASSES: Reinvestment of all dividends and distributions; percentage amounts listed under 'Annual Fund Operating
Expenses' remain the same for years shown.
CLASS A SHARES: Deduction of the maximum 4% initial sales charge at the time of purchase.
CLASS B SHARES: Deduction of the maximum applicable contingent deferred sales charge at the time of redemption, which
declines over a period of six years. Ten-year figures assume that Class B shares convert to Class A shares at the end
of the sixth year.
CLASS C SHARES: Deduction of a 0.75% contingent deferred sales charge for sales of shares within one year of
purchase.
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 8
<PAGE>
<PAGE>
[This page intentionally left blank]
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
California Tax-Free Income Fund's Annual Report to Shareholders for the fiscal
year ended February 28, 1997, and the report of Ernst & Young LLP, independent
auditors, appearing in the Fund's Annual Report to Shareholders. Both are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below relating to each of the four fiscal years in the period ended
February 28, 1997, the fiscal period ended February 28, 1993 and the fiscal year
ended November 30, 1992 have been audited by Ernst & Young LLP. Further
information about the Fund's performance is included in the Annual Report to
Shareholders, which may be obtained without charge by calling 1-800-647-1568.
The information appearing below for periods prior to the year ended November 30,
1992 also has been audited by Ernst & Young LLP, whose reports thereon were
unqualified.
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------------------------
FOR THE
FOR THE FOR THE FOR THE YEARS THREE
YEAR YEAR ENDED MONTHS
ENDED ENDED FEBRUARY 28, ENDED FOR THE YEARS ENDED NOVEMBER 30,
FEBRUARY 28, FEBRUARY 29, -------------------- FEBRUARY 28, --------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
------------ ------------ -------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............... $ 10.68 $ 11.41 $ 11.80 $ 11.39 11.13 $ 10.94 $ 10.95
------------ ------------ -------- -------- ------------ -------- -------- --------
Net investment
income............... 0.57 0.58 0.60 0.16 0.66 0.71 0.78
Net realized and
unrealized gains
(losses) from
investment
transactions......... 0.34 (0.63) (0.08) 0.58 0.29 0.22 (0.01)
------------ ------------ -------- -------- ------------ -------- -------- --------
Net increase
(decrease) from
investment
operations........... 0.91 (0.05) 0.52 0.74 0.95 0.93 0.77
------------ ------------ -------- -------- ------------ -------- -------- --------
Dividends from net
investment income.... (0.57) (0.58) (0.60) (0.16) (0.66) (0.71) (0.78)
Distributions from net
realized gains from
investment
transactions......... -- (0.10) (0.31) (0.17) (0.03) (0.03) --
------------ ------------ -------- -------- ------------ -------- -------- --------
Total dividends and
distributions to
shareholders......... (0.57) (0.68) (0.91) (0.33) (0.69) (0.74) (0.78)
------------ ------------ -------- -------- ------------ -------- -------- --------
Net asset value, end
of period............ $ 11.02 $ 10.68 $ 11.41 $ 11.80 $ 11.39 $ 11.13 $ 10.94
------------ ------------ -------- -------- ------------ -------- -------- --------
------------ ------------ -------- -------- ------------ -------- -------- --------
Total investment
return (1)........... 8.68% (0.18)% 4.46% 6.52% 8.73% 8.84% 6.89%
------------ ------------ -------- -------- ------------ -------- -------- --------
------------ ------------ -------- -------- ------------ -------- -------- --------
Ratios and
supplemental data:
Net assets, end of
period (000's)... $ 151,684 $178,234 $227,179 $247,025 $239,851 $231,987 $211,701
Expenses to average
net assets....... 0.94% 0.88% 0.90% 0.99%* 0.93% 0.83% 0.68%
Net investment
income to average
net assets....... 5.21% 5.55% 5.10% 5.61%* 5.80% 6.46% 6.78%
Portfolio
turnover......... 32% 11% 37% 3% 25% 2% 23%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
--------------------------------
CLASS A
--------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
--------------------------------
1989 1988 1987
-------- -------- --------
<S> <C> <C> <C>
Net asset value,
beginning of
period............... $ 10.67 $ 10.40 $ 11.23
-------- -------- --------
Net investment
income............... 0.74 0.75 0.75
Net realized and
unrealized gains
(losses) from
investment
transactions......... 0.28 0.27 (0.83)
-------- -------- --------
Net increase
(decrease) from
investment
operations........... 1.02 1.02 (0.08)
-------- -------- --------
Dividends from net
investment income.... (0.74) (0.75) (0.75)
Distributions from net
realized gains from
investment
transactions......... -- -- --
-------- -------- --------
Total dividends and
distributions to
shareholders......... (0.74) (0.75) (0.75)
-------- -------- --------
Net asset value, end
of period............ $ 10.95 $ 10.67 $ 10.40
-------- -------- --------
-------- -------- --------
Total investment
return (1)........... 9.85% 10.02% (0.74)%
-------- -------- --------
-------- -------- --------
Ratios and
supplemental data:
Net assets, end of
period (000's)... $200,398 $163,651 $158,272
Expenses to average
net assets....... 0.76% 0.73% 0.71%
Net investment
income to average
net assets....... 6.82% 6.98% 6.96%
Portfolio
turnover......... 4% 8% 10%
</TABLE>
- ------------
* Annualized
`D' Commencement of issuance of shares
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and capital
gain distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) Formerly Class D shares
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
-----------------------------------------------------------------------------------------------------------
CLASS B CLASS C(2)
-------------------------------------------------------------------------------------------- ------------
FOR THE
FOR THE PERIOD
FOR THE FOR THE FOR THE YEARS THREE FOR THE JULY 1, FOR THE
YEAR YEAR ENDED MONTHS YEAR 1991`D' YEAR
ENDED ENDED FEBRUARY 28, ENDED ENDED THROUGH ENDED
FEBRUARY 28, FEBRUARY 29, ----------------- FEBRUARY 28, NOVEMBER 30, NOVEMBER 30, FEBRUARY 28,
1997 1996 1995 1994 1993 1992 1991 1997
------------ ------------ ------- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14 $ 10.95
------ ------ ------- ------- ------ ------ ------ ------
0.48 0.50 0.51 0.14 0.57 0.25
0.34 (0.62) (0.09) 0.59 0.28 0.19
------ ------ ------- ------- ------ ------ ------ ------
0.82 (0.12) 0.42 0.73 0.85 0.44
------ ------ ------- ------- ------ ------ ------ ------
(0.48) (0.50) (0.51) (0.14) (0.57) (0.25)
-- (0.10) (0.31) (0.17) (0.03) --
------ ------ ------- ------- ------ ------ ------ ------
(0.48) (0.60) (0.82) (0.31) (0.60) (0.25)
------ ------ ------- ------- ------ ------ ------ ------
$ 11.03 $ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14
------ ------ ------- ------- ------ ------ ------ ------
------ ------ ------- ------- ------ ------ ------ ------
7.86% (0.85)% .56% 6.50% 7.80% 3.69%
------ ------ ------- ------- ------ ------ ------ ------
------ ------ ------- ------- ------ ------ ------ ------
$ 27,175 $33,007 $41,979 $ 36,693 $ 30,205 $ 10,743
1.70% 1.64% 1.65% 1.74%* 1.68% 1.62%*
4.45% 4.78% 4.32% 4.81%* 4.91% 5.02%*
32% 11% 37% 3% 25% 2%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
--------------------------------------------------------------
CLASS C(2)
--------------------------------------------------------------
FOR THE
FOR THE FOR THE PERIOD
FOR THE YEARS THREE JULY 2,
YEAR ENDED MONTHS 1992`D'
ENDED FEBRUARY 28, ENDED THROUGH
FEBRUARY 29, ----------------- FEBRUARY 28, NOVEMBER 30,
1996 1995 1994 1993 1992
------------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 10.67 $ 11.40 $ 11.79 $ 11.38 $ 11.41
------ ------- ------- ------ ------
0.51 0.53 0.54 0.14 0.21
0.35 (0.63) (0.08) 0.58 (0.03)
------ ------- ------- ------ ------
0.86 (0.10) 0.46 0.72 0.18
------ ------- ------- ------ ------
(0.51) (0.53) (0.54) (0.14) (0.21)
-- (0.10) (0.31) (0.17) --
------ ------- ------- ------ ------
(0.51) (0.63) (0.85) (0.31) (0.21)
------ ------- ------- ------ ------
$ 11.02 $ 10.67 $ 11.40 $ 11.79 $ 11.38
------ ------- ------- ------ ------
------ ------- ------- ------ ------
8.22% (0.70)% 3.91% 6.49% 1.28%
------ ------- ------- ------ ------
------ ------- ------- ------ ------
$ 22,155 $28,217 $53,874 $ 39,029 $ 30,141
1.46% 1.40% 1.39% 1.48%* 1.39%*
4.69% 5.05% 4.55% 5.06%* 4.79%*
32% 11% 37% 3% 25%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements and accompanying notes
appearing in National Tax-Free Income Fund's Annual Report to Shareholders for
the fiscal year ended February 28, 1997, and the report of Ernst & Young LLP,
independent auditors, appearing in the Fund's Annual Report to Shareholders.
Both are incorporated by reference into the Statement of Additional Information.
The financial statements and notes, as well as the financial information in the
table below relating to each of the four fiscal years in the period ended
February 28, 1997, the fiscal period ended February 28, 1993 and the fiscal year
ended November 30, 1992 have been audited by Ernst & Young LLP. Further
information about the Fund's performance is included in the Annual Report to
Shareholders, which may be obtained without charge by calling 1-800-647-1568.
The information appearing below for periods prior to the year ended November 30,
1992 also has been audited by Ernst & Young LLP, whose reports thereon were
unqualified.
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
----------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------
FOR THE
FOR THE YEARS ENDED THREE
------------------------------------------------------ MONTHS FOR THE YEARS ENDED
FEBRUARY 28 ENDED NOVEMBER 30,
FEBRUARY 28, FEBRUARY 29, -------------------- FEBRUARY 28, --------------------
1997 1996 1995 1994 1993 1992 1991
------------ ------------ -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 11.26 $ 12.00 $ 12.09 $ 11.67 $ 11.40 $ 11.20
------------ ------------ -------- -------- ------------ -------- --------
Net investment income.... 0.58 0.63 0.64 0.17 0.71 0.76
Net realized and
unrealized gains
(losses) from investment
transactions............ 0.39 (0.73) 0.03 0.55 0.31 0.20
------------ ------------ -------- -------- ------------ -------- --------
Net increase (decrease)
from investment
operations.............. 0.97 (0.10) 0.67 0.72 1.02 0.96
------------ ------------ -------- -------- ------------ -------- --------
Dividends from net
investment income....... (0.59) (0.63) (0.64) (0.17) (0.71) (0.76)
Distributions from net
realized gains from
investment
transactions............ -- (0.01) (0.12) (0.13) (0.04) --
------------ ------------ -------- -------- ------------ -------- --------
Total dividends and
distributions to
shareholders............ (0.59) (0.64) (0.76) (0.30) (0.75) (0.76)
------------ ------------ -------- -------- ------------ -------- --------
Net asset value, end of
period.................. $ 11.64 $ 11.26 $ 12.00 $ 12.09 $ 11.67 $ 11.40
------------ ------------ -------- -------- ------------ -------- --------
------------ ------------ -------- -------- ------------ -------- --------
Total investment return
(1)..................... 8.75% (0.63)% 5.65% 6.31% 9.21% 8.85%
------------ ------------ -------- -------- ------------ -------- --------
------------ ------------ -------- -------- ------------ -------- --------
Ratios and supplemental
data:
Net assets, end of
period (000's)....... $315,899 $346,579 $432,825 $419,596 $396,587 $366,300
Expenses to average
net assets........... 0.93%(2) 0.88% 0.89% 0.88%* 0.91% 0.83%
Net investment income
to average net
assets............... 5.06%(2) 5.62% 5.28% 5.86%* 6.13% 6.66%
Portfolio turnover.... 74% 60% 16% 5% 21% 27%
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
----------------------------------------------
CLASS A
----------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
----------------------------------------------
1990 1989 1988 1987
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 11.21 $ 10.98 $ 10.64 $ 11.48
-------- -------- -------- --------
Net investment income.... 0.78 0.81 0.79 0.78
Net realized and
unrealized gains
(losses) from investment
transactions............ (0.01) 0.23 0.34 (0.84)
-------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 0.77 1.04 1.13 (0.06)
-------- -------- -------- --------
Dividends from net
investment income....... (0.78) (0.81) (0.79) (0.78)
Distributions from net
realized gains from
investment
transactions............ -- -- -- --
-------- -------- -------- --------
Total dividends and
distributions to
shareholders............ (0.78) (0.81) (0.79) (0.78)
-------- -------- -------- --------
Net asset value, end of
period.................. $ 11.20 $ 11.21 $ 10.98 $ 10.64
-------- -------- -------- --------
-------- -------- -------- --------
Total investment return
(1)..................... 7.17% 9.77% 10.85% (0.50)%
-------- -------- -------- --------
-------- -------- -------- --------
Ratios and supplemental
data:
Net assets, end of
period (000's)....... $343,539 $333,314 $307,954 $322,325
Expenses to average
net assets........... 0.69% 0.62% 0.75% 0.78%
Net investment income
to average net
assets............... 7.08% 7.32% 7.14% 7.07%
Portfolio turnover.... 24% 11% 1% 16%
</TABLE>
- ------------
* Annualized.
`D' Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends and capital gain distributions at net asset value on the payable
date, and a sale at net asset value on the last day of each period reported.
The figures do not include sales charges; results for each class would be
lower if sales charges were included. Total investment returns for periods
of less than one year have not been annualized.
(2) These ratios include non-recurring acquisition expenses of 0.03% for each
class of shares.
(3) Formerly Class D shares
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C(3)
- ------------------------------------------------------------------------------------------------- ---------------------------
FOR THE
FOR THE PERIOD
FOR THE YEARS ENDED THREE FOR THE JULY 1, FOR THE YEARS ENDED
- ---------------------------------------------------- MONTHS YEAR 1991`D' ---------------------------
FEBRUARY 28, ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, ------------------- FEBRUARY 28, NOVEMBER 30, NOVEMBER 30, FEBRUARY 28, FEBRUARY 29,
1997 1996 1995 1994 1993 1992 1991 1997 1996
- ------------ ------------ ------- ------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 11.26 $ 11.99 $ 12.08 $ 11.67 $ 11.40 $11.19 $ 11.26
- ------ ------ ------- ------- ------ ------ ----- ------ ------
0.49 0.54 0.55 0.15 0.62 0.27 0.52
0.39 (0.72) 0.03 0.54 0.31 0.21 0.39
- ------ ------ ------- ------- ------ ------ ----- ------ ------
0.88 (0.18) 0.58 0.69 0.93 0.48 0.91
- ------ ------ ------- ------- ------ ------ ----- ------ ------
(0.50) (0.54) (0.55) (0.15) (0.62) (0.27) (0.53)
-- (0.01) (0.12) (0.13) (0.04) -- --
- ------ ------ ------- ------- ------ ------ ----- ------ ------
(0.50) (0.55) (0.67) (0.28) (0.66) (0.27) (0.53)
- ------ ------ ------- ------- ------ ------ ----- ------ ------
$ 11.64 $ 11.26 $ 11.99 $ 12.08 $ 11.67 $11.40 $ 11.64
- ------ ------ ------- ------- ------ ------ ----- ------ ------
- ------ ------ ------- ------- ------ ------ ----- ------ ------
7.94% (1.29)% 4.87% 6.02% 8.36% 4.06% 8.19%
- ------ ------ ------- ------- ------ ------ ----- ------ ------
- ------ ------ ------- ------- ------ ------ ----- ------ ------
$ 51,546 $58,958 $70,988 $ 50,064 $ 39,564 $8,620 $ 75,076
1.68%(2) 1.64% 1.63% 1.63%* 1.65% 1.65%* 1.45%(2)
4.31%(2) 4.86% 4.50% 5.08%* 5.16% 5.26%* 4.57%(2)
74% 60% 16% 5% 21% 27% 74%
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------------------------
CLASS C(3) CLASS Y
- ----------------------------------------------------------------- ----------------------------
FOR THE
FOR THE PERIOD FOR THE PERIOD
THREE JULY 2, FOR THE NOVEMBER 3,
MONTHS 1992`D' YEAR 1995`D'
FEBRUARY 28, ENDED THROUGH ENDED THROUGH
FEBRUARY 28, -------------------- FEBRUARY 28, NOVEMBER 30, FEBRUARY 28, FEBRUARY 29,
1997 1995 1994 1993 1992 1997 1996
- ------------ -------- -------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
$ 12.00 $ 12.09 $ 11.67 $ 11.71
- ------ -------- -------- ------ ------ ----- -----
0.57 0.58 0.15 0.23
(0.73) 0.03 0.55 (0.04)
- ------ -------- -------- ------ ------ ----- -----
(0.16) 0.61 0.70 0.19
- ------ -------- -------- ------ ------ ----- -----
(0.57) (0.58) (0.15) (0.23)
(0.01) (0.12) (0.13) --
- ------ -------- -------- ------ ------ ----- -----
(0.58) (0.70) (0.28) (0.23)
- ------ -------- -------- ------ ------ ----- -----
$ 11.26 $ 12.00 $ 12.09 $ 11.67
- ------ -------- -------- ------ ------ ----- -----
- ------ -------- -------- ------ ------ ----- -----
(1.13)% 5.13% 6.18% 1.41%
- ------ -------- -------- ------ ------ ----- -----
- ------ -------- -------- ------ ------ ----- -----
$101,642 $187,778 $138,989 $105,854
1.40% 1.37% 1.37%* 1.42%*
5.13% 4.75% 5.30%* 5.17%*
60% 16% 5% 21%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
MUNICIPAL HIGH INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
Municipal High Income Fund's Annual Report to Shareholders for the fiscal year
ended February 28, 1997, and the report of Ernst & Young LLP, independent
auditors, appearing in the Fund's Annual Report to Shareholders. Both are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below relating to each of the five fiscal years in the period ended
February 28, 1997 have been audited by Ernst & Young LLP. Further information
about the Fund's performance is included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568. The information
appearing below for periods prior to the year ended February 29, 1993 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
--------------------------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
--------------------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28,
FEBRUARY 28, FEBRUARY 29, --------------------------- FEBRUARY 29, -----------------
1997 1996 1995 1994 1993 1992 1991 1990
------------ ------------ ------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ $ 9.92 $ 10.77 $ 10.96 $ 10.29 $ 9.92 $ 10.00 $ 9.91
------------ ------------ ------- ------- ------- ------------ ------- -------
Net investment income.......... 0.62 0.59 0.61 0.67 0.71 0.72 0.74
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.37 (0.82) 0.01 0.81 0.44 (0.08) 0.09
------------ ------------ ------- ------- ------- ------------ ------- -------
Net increase (decrease) from
investment operations......... 0.99 (0.23) 0.62 1.48 1.15 0.64 0.83
------------ ------------ ------- ------- ------- ------------ ------- -------
Dividends from net investment
income........................ (0.62) (0.59) (0.61) (0.67) (0.71) (0.72) (0.74)
Distributions from net realized
gains from investment
transactions.................. -- (0.03) (0.20) (0.14) (0.07) -- --
------------ ------------ ------- ------- ------- ------------ ------- -------
Total dividends and
distributions to
shareholders.................. (0.62) (0.62) (0.81) (0.81) (0.78) (0.72) (0.74)
------------ ------------ ------- ------- ------- ------------ ------- -------
Net asset value, end of
period........................ $ $ 10.29 $ 9.92 $ 10.77 $ 10.96 $ 10.29 $ 9.92 $ 10.00
------------ ------------ ------- ------- ------- ------------ ------- -------
------------ ------------ ------- ------- ------- ------------ ------- -------
Total investment return(1)..... % 10.18% (2.03)% 5.77% 15.05% 11.94% 6.69% 8.74%
------------ ------------ ------- ------- ------- ------------ ------- -------
------------ ------------ ------- ------- ------- ------------ ------- -------
Ratios and supplemental data:
Net assets, end of period
(000's)..................... $ $ 57,280 $63,287 $82,248 $82,251 $ 68,830 $62,559 $61,067
Expenses, net of waivers from
adviser, to average net
assets...................... % 1.10% 1.13% 1.03% 0.87% 0.75% 0.69% 0.65%
Expenses, before waivers from
adviser, to average net
assets...................... % 1.10% 1.13% 1.16% 1.29% 1.25% 1.54% 1.49%
Net investment income, net of
waivers from adviser, to
average net assets.......... % 5.94% 5.96% 5.52% 6.31% 6.99% 7.32% 7.35%
Net investment income, before
waivers from adviser, to
average net assets.......... % 5.94% 5.96% 5.39% 5.89% 6.49% 6.47% 6.51%
Portfolio turnover............ % 48% 28% 23% 10% 45% 20% 17%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
--------------------------------
CLASS A
--------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED JUNE 23, 1987`D'
FEBRUARY 28, TO
1989 FEBRUARY 29, 1988
-------- --------------------
<S> <C> <C>
Net asset value, beginning of
period........................ $ 9.80 $ 9.58
------- -------
Net investment income.......... 0.75 0.50
Net realized and unrealized
gains (losses) from investment
transactions.................. 0.11 0.22
------- -------
Net increase (decrease) from
investment operations......... 0.86 0.72
------- -------
Dividends from net investment
income........................ (0.75) (0.50)
Distributions from net realized
gains from investment
transactions.................. -- --
------- -------
Total dividends and
distributions to
shareholders.................. (0.75) (0.50)
------- -------
Net asset value, end of
period........................ $ 9.91 $ 9.80
------- -------
------- -------
Total investment return(1)..... 9.11% 7.23%
------- -------
------- -------
Ratios and supplemental data:
Net assets, end of period
(000's)..................... $54.512 $48,515
Expenses, net of waivers from
adviser, to average net
assets...................... 0.60% 0.12%*
Expenses, before waivers from
adviser, to average net
assets...................... 1.46% 1.40%*
Net investment income, net of
waivers from adviser, to
average net assets.......... 7.64% 7.63%*
Net investment income, before
waivers from adviser, to
average net assets.......... 6.78% 6.35%*
Portfolio turnover............ 14% 0%
</TABLE>
- ------------
* Annualized.
`D' Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and capital
gain distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) Formerly Class D shares.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
---------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C(2)
----------------------------------------------------------------------------- -------------------------------------
FOR THE PERIOD FOR THE YEARS ENDED
FOR THE YEARS ENDED JULY 1, -------------------------------------
------------------------------------------------------------- 1991`D' FEBRUARY
FEBRUARY 28, THROUGH 28,
FEBRUARY 28, FEBRUARY 29, ------------------------------- FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, -------
1997 1996 1995 1994 1993 1992 1997 1996 1995
------------ ------------ ------- ------- ------- -------------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ $ 9.92 $ 10.76 $ 10.96 $ 10.29 $ 10.05 $ $ 9.92 $ 10.77
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
0.54 0.52 0.52 0.59 0.42 0.56 0.55
0.37 (0.81) -- 0.81 0.31 0.37 (0.82)
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
0.91 (0.29) 0.52 1.40 0.73 0.93 (0.27)
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
(0.54) (0.52) (0.52) (0.59) (0.42) (0.56) (0.55)
-- (0.03) (0.20) (0.14) (0.07) -- (0.03)
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
(0.54) (0.55) (0.72) (0.73) (0.49) (0.56) (0.58)
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
$ $ 10.29 $ 9.92 $ 10.76 $ 10.96 $ 10.29 $ $ 10.29 $ 9.92
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
% 9.36% (2.67)% 4.88% 14.81% 6.89% % 9.64% (2.51)%
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
------------ ------------ ------- ------- ------- ------- ------------ ------------ -------
$ $ 23,868 $25,823 $32,287 $22,922 $ 8,176 $ 20,700 $23,158
% 1.85% 1.87% 1.79% 1.63% 1.50%* % 1.60% 1.63%
% 1.85% 1.87% 1.90% 2.01% 1.98%* % 1.60% 1.63%
% 5.19% 5.21% 4.72% 5.48% 5.80%* % 5.45% 5.48%
% 5.19% 5.21% 4.61% 5.10% 5.32%* % 5.45% 5.48%
% 48% 28% 23% 10% 46% % 48% 28%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
----------------------------
CLASS C(2)
----------------------------
FOR THE PERIOD
JULY 2,
FOR THE 1992`D'
YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1994 1993
------- --------------
<S> <C> <C>
$ 10.96 $ 10.50
------- -------
0.55 0.36
0.01 0.47
------- -------
0.56 0.83
------- -------
(0.55) (0.36)
(0.20) (0.01)
------- -------
(0.75) (0.37)
------- -------
$ 10.77 $ 10.96
------- -------
------- -------
5.24% 7.72%
------- -------
------- -------
$35,872 $ 21,638
1.54% 1.40%*
1.64% 1.69%*
4.95% 5.26%*
4.85% 4.97%*
23% 10%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
NEW YORK TAX-FREE INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in New
York Tax-Free Income Fund's Annual Report to Shareholders for the fiscal year
ended February 28, 1997, and the report of Ernst & Young LLP, independent
auditors, appearing in the Fund's Annual Report to Shareholders. Both are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below relating to each of the five fiscal years in the period ended
February 28, 1997 have been audited by Ernst & Young LLP. Further information
about the Fund's performance is included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568. The information
appearing below for periods prior to the year ended February 29, 1993 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
------------------------------------------------------------------------------------------
FEBRUARY
FEBRUARY 28, 28,
FEBRUARY 28, FEBRUARY 29, ----------------------------- FEBRUARY 29, -------
1997 1996 1995 1994 1993 1992 1991
------------ ------------ ------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................. $ $ 10.27 $ 11.03 $ 10.99 $ 10.12 $ 9.76 $ 9.72
------ ------ ------- ------- ------- ------ -------
Net investment income............... 0.54 0.54 0.57 0.63 0.66 0.67
Net realized and unrealized gains
(losses) from investment
transactions....................... 0.45 (0.66) 0.07 0.87 0.36 0.04
------ ------ ------- ------- ------- ------ -------
Total increase (decrease) from
investment operations.............. 0.99 (0.12) 0.64 1.50 1.02 0.71
------ ------ ------- ------- ------- ------ -------
Dividends from net investment
income............................. (0.55) (0.54) (0.57) (0.63) (0.66) (0.67)
Distributions from net realized
gains from investment
transactions....................... -- (0.10) (0.03) -- -- --
------ ------ ------- ------- ------- ------ -------
Total dividends and distributions to
shareholders....................... (0.55) (0.64) (0.60) (0.63) (0.66) (0.67)
------ ------ ------- ------- ------- ------ -------
Net asset value, end of period...... $ $ 10.71 $ 10.27 $ 11.03 $ 10.99 $ 10.12 $ 9.76
------ ------ ------- ------- ------- ------ -------
------ ------ ------- ------- ------- ------ -------
Total investment return (1)......... % 9.83% (0.83)% 5.89% 15.44% 10.80% 7.59%
------ ------ ------- ------- ------- ------ -------
------ ------ ------- ------- ------- ------ -------
Ratios and supplemental data:
Net assets, end of period (000's)... $ 28,734 $32,475 $45,033 $43,443 $ 35,961 $30,173
Expenses, net of waivers from
adviser, to average net assets..... 1.02% 1.01% 0.75% 0.34% 0.25% 0.21%
Expenses, before waivers from
adviser, to average net assets..... 1.15% 1.26% 1.25% 1.47% 1.53% 1.84%
Net investment income, net of
waivers from adviser, to average
net assets......................... 5.11% 5.38% 5.13% 6.07% 6.65% 6.93%
Net investment income, before
waivers from adviser, to average
net assets......................... 4.98% 5.13% 4.63% 4.94% 5.37% 5.30%
Portfolio turnover.................. 13% 6% 8% 6% 6% 3%
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
----------------------------------
CLASS A
----------------------------------
FOR THE
YEAR ENDED FOR THE PERIOD
FEBRUARY 28, SEPTEMBER 30, 1988`D'
1990 TO FEBRUARY 28, 1989
------- ---------------------
<S> <C> <C>
Net asset value, beginning of
period............................. $ 9.59 $ 9.60
------- ------
Net investment income............... 0.70 0.28
Net realized and unrealized gains
(losses) from investment
transactions....................... 0.13 (0.01)
------- ------
Total increase (decrease) from
investment operations.............. 0.83 0.27
------- ------
Dividends from net investment
income............................. (0.70) (0.28)
Distributions from net realized
gains from investment
transactions....................... -- --
------- ------
Total dividends and distributions to
shareholders....................... (0.70) (0.28)
------- ------
Net asset value, end of period...... $ 9.72 $ 9.59
------- ------
------- ------
Total investment return (1)......... 8.94% 2.25%
------- ------
------- ------
Ratios and supplemental data:
Net assets, end of period (000's)... $21,999 $11,222
Expenses, net of waivers from
adviser, to average net assets..... 0.00% 0.00%*
Expenses, before waivers from
adviser, to average net assets..... 2.20% 3.04%*
Net investment income, net of
waivers from adviser, to average
net assets......................... 7.07% 6.96%*
Net investment income, before
waivers from adviser, to average
net assets......................... 4.87% 3.92%*
Portfolio turnover.................. 0% 0.00%*
</TABLE>
- ------------
* Annualized.
`D' Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends and capital gain distributions at net asset value on the payable
date, and a sale at net asset value on the last day of each period reported.
The figures do not include sales charges; results for each class would be
lower if sales charges were included. Total investment returns for periods
of less than one year have not been annualized.
(2) Formerly Class D shares
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C(2)
- ------------------------------------------------------------------------- --------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEARS ENDED JULY 1, FOR THE YEARS ENDED JULY 2,
FOR THE YEAR FOR THE YEAR ----------------------------- 1991`D' FOR THE YEAR --------------------------- 1992'D'
ENDED ENDED THROUGH ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
- ------------ ------------ ----------------------------- -------------- ------------ --------------------------- -----------
1997 1996 1995 1994 1993 1992 1997 1996 1995 1994 1993
- ------------ ------------ ------- ------- ------- -------------- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ $ 10.27 $ 11.03 $ 10.98 $ 10.12 $ 9.81 $ $ 10.28 $ 11.03 $ 10.99 $ 10.45
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
0.47 0.47 0.49 0.56 0.39 0.49 0.49 0.51 0.36
0.44 (0.66) 0.08 0.86 0.31 0.43 (0.65) 0.07 0.54
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
0.91 (0.19) 0.57 1.42 0.70 0.92 (0.16) 0.58 0.90
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
(0.47) (0.47) (0.49) (0.56) (0.39) (0.49) (0.49) (0.51) (0.36)
-- (0.10) (0.03) -- -- -- (0.10) (0.03) --
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
(0.47) (0.57) (0.52) (0.56) (0.39) (0.49) (0.59) (0.54) (0.36)
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
$ $ 10.71 $ 10.27 $ 11.03 $ 10.98 $10.12 $ $ 10.71 $ 10.28 $ 11.03 $ 10.99
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
% 9.01% (1.57)% 5.19% 14.35% 6.80% % 9.17% (1.20)% 5.35% 8.38%
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
- ------------ ------ ------- ------- ------- ------ ------ ------- ------- ------- -------
$ 11,862 $14,660 $19,193 $13,776 $6,026 $17,849 $21,095 $38,165 $19,553
1.77% 1.76% 1.51% 1.10% 1.00%* 1.52% 1.52% 1.27% 0.90%*
1.89% 2.01% 1.99% 2.19% 2.20%* 1.64% 1.75% 1.72% 1.83%*
4.36% 4.63% 4.34% 5.22% 5.59%* 4.61% 4.89% 4.55% 5.04%*
4.24% 4.83% 3.86% 4.13% 4.39%* 4.50% 4.65% 4.10% 4.11%*
13% 6% 8% 6% 6% 13% 6% 8% 6%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards of trustees.
CALIFORNIA TAX-FREE INCOME FUND
The investment objective of California Tax-Free Income Fund is to provide high
current income exempt from federal income tax and California personal income
tax, consistent with the preservation of capital and liquidity within the Fund's
quality standards. The Fund seeks to invest substantially all of its net assets
in securities issued by the State of California, its municipalities, and public
authorities or by other issuers if such obligations pay interest that is exempt
from federal income tax and California personal income tax ('California
Obligations') and, except under unusual market conditions, the Fund invests at
least 80% of its net assets in California Obligations that pay interest that is
not an item of tax preference for purposes of the federal alternative minimum
tax ('AMT exempt interest').
NATIONAL TAX-FREE INCOME FUND
The investment objective of National Tax-Free Income Fund is to provide high
current income exempt from federal income tax, consistent with the preservation
of capital and liquidity within the Fund's quality standards. The Fund seeks to
invest substantially all of its net assets in municipal securities with varying
maturities. Except under unusual market conditions, the Fund invests at least
80% of its net assets in municipal securities that pay AMT exempt interest.
MUNICIPAL HIGH INCOME FUND
The investment objective of Municipal High Income Fund is to provide high
current income exempt from federal income tax. Except under unusual market
conditions, the Fund invests at least 80% of its assets in municipal securities.
The Fund may invest without limit in municipal securities that pay interest that
is not AMT exempt interest and does so when Mitchell Hutchins believes that such
securities offer attractive yields relative to AMT exempt municipal obligations
with similar credit and market characteristics and risks.
NEW YORK TAX-FREE INCOME FUND
The investment objective of New York Tax-Free Income Fund is to provide high
current income exempt from federal income tax and from New York State and New
York City personal income taxes. The Fund seeks to invest substantially all of
its net assets in securities issued by the State of New York, its municipalities
and public authorities or by other issuers if such obligations pay interest that
is exempt from federal income tax and New York State and New York City personal
income taxes ('New York Obligations') and, except under unusual market
conditions, invests at least 80% of its net assets in New York Obligations that
pay AMT exempt interest.
* * * *
As with any mutual fund, there is no assurance that any of these Funds will
achieve its investment objective. Each Fund's net asset value fluctuates based
upon changes in the value of its portfolio securities.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
In selecting municipal securities for the Funds that will provide investors with
high current income exempt from federal and/or state income tax, Mitchell
Hutchins relies on the expertise of its team of analysts and portfolio managers.
The Municipal Investment Team's investment process for each Fund employs a
'top-down' investment process. This process consists of analyzing three
fundamental factors: to determine duration, sector and security. Duration is set
based on the direction of interest rates and the shape of the yield curve.
Sector is determined by analyzing the spread between the prevailing yields of
municipal and U.S. Treasury securities, investment opportunities within the
municipal market and state tax exemption. Finally, security selection is
established by performing an analysis of both credit quality and structure of
individual issues.
All aspects of the Team's investment process rely on solid research, which is
broken down into four types: economic, credit, quantitative and market. Mitchell
Hutchins' analysts monitor these components on a daily basis. This research
provides the Municipal Investment Team with increased information to assist it
in effectively managing municipal portfolios. The municipal bond market is a
fragmented, inefficient market that, in Mitchell Hutchins' opinion, offers
opportunities for active management. With the information garnered by extensive
research, active management may capitalize on these inefficiencies and
potentially increase portfolio value.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------
These charts show the total returns for the Funds. Sales charges have not been
deducted from total returns. No information is presented for Class Y shares of
California Tax-Free Income Fund, New York Tax-Free Income Fund or Municipal High
Income Fund because there were no Class Y shares outstanding in 1996 or earlier
periods. Returns would be lower if sales charges were deducted. Past results are
not a guarantee of future results.
Total returns both before and after deducting the maximum sales charges are
shown below in the tables that follow the performance charts.
CALIFORNIA TAX-FREE INCOME FUND
[GRAPHIC]
As Class A shares commenced operations on September 16, 1985, the 1985 return
represents the period from September 16, 1985 through December 31, 1985. The
inception date of Class B shares was July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................... 9/16/85 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
FIVE YEARS
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
TEN YEARS (OR LIFE OF CLASS)
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
NATIONAL TAX-FREE INCOME FUND
[GRAPHIC]
As Class A shares commenced operations on December 3, 1984, the 1984 return
represents the period from December 3, 1984 through December 31, 1984. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992. As Class Y shares commenced operations on November 3, 1995,
the 1995 return represents the period from November 3, 1995 through December 31,
1995.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Inception Date........................................... 12/3/84 7/1/91 7/2/92 11/3/95
ONE YEAR
Without deducting maximum sales charges................
After deducting maximum sales charges..................
FIVE YEARS
Without deducting maximum sales charges................
After deducting maximum sales charges..................
TEN YEARS (OR LIFE OF CLASS)
Without deducting maximum sales charges................
After deducting maximum sales charges..................
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND
[GRAPHIC]
As Class A shares commenced operations on June 23, 1987, the 1987 return
represents the period from June 23, 1987 through December 31, 1987. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................... 6/23/87 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
FIVE YEARS
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
LIFE
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
NEW YORK TAX-FREE INCOME FUND
[GRAPHIC]
As Class A shares commenced operations on September 23, 1988, the 1988 return
represents the period from September 23, 1988 through December 31, 1988. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................... 9/23/88 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
FIVE YEARS
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
LIFE
Without deducting maximum sales charges................................
After deducting maximum sales charges..................................
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized return
shows the change in value of an investment in a Fund as a steady compound annual
rate of return. Actual year-by-year returns fluctuate and may be higher or lower
than standardized return. Standardized returns for Class A shares of the Funds
reflect deduction of the Funds' maximum initial sales charge of 4% at the time
of purchase, and standardized returns for the Class B and Class C shares of the
Funds reflect deduction of the applicable contingent deferred sales charge
imposed on the sale of shares held for the period. One-, five- and ten-year
periods will be shown, unless the Fund or Class has been in existence for a
shorter period. If so, returns will be shown for the period since inception.
Total return calculations assume reinvestment of dividends and other
distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
Total return information reflects past performance and does not indicate future
results.
The investment return and principal value of shares of the Funds will fluctuate.
The amount investors receive when selling shares may be more or less than what
they paid. Further information about each Fund's performance is contained in its
Annual Report, which may be obtained without charge by contacting the Fund, your
PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
Each Fund may invest in a variety of municipal securities, as described below:
MUNICIPAL BONDS. Municipal bonds are debt obligations issued to obtain funds for
various public purposes that pay interest that is exempt from federal income tax
in the opinion of bond issuer's counsel, and include general obligation bonds,
revenue bonds and 'moral obligation' issues. Municipal bonds also include
municipal lease obligations, which are issued by state and local governments and
authorities to purchase land and various types of equipment or facilities.
INDUSTRIAL DEVELOPMENT BONDS ('IDBS') AND PRIVATE ACTIVITY BONDS ('PABS'). IDBs
and PABs are issued by or on behalf of public authorities to finance various
privately operated facilities, such as airport or pollution control facilities,
and are considered to be 'municipal bonds' if the interest paid on the bond is
exempt from federal income tax in the opinion of bond issuer's counsel.
FLOATING RATE AND VARIABLE RATE OBLIGATIONS. Floating rate and variable rate
obligations pay interest at rates that are not fixed, but that vary with changes
in specified market rates or indices. These obligations typically permit the
holder to demand payment of principal from the issuer at par value prior to
maturity and may permit the issuer to prepay principal plus accrued interest.
PARTICIPATION INTERESTS. Participation interests are interests in municipal
bonds that are owned by banks, and [typically] carry a demand feature permitting
the holder to sell them back to the bank.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 24
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
TENDER OPTION BONDS. Tender option bonds are long-term municipal securities sold
by a bank subject to a 'tender option' that gives the purchaser the right to
sell them to the bank at par plus accrued interest at designated times.
PUT BONDS. A put bond is a municipal bond that gives the holder the
unconditional right to sell the bond back to the issuer at a specified price and
exercise date, which is typically well in advance of the bond's maturity date.
TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES. Tax-exempt
commercial paper and short-term municipal notes are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements and other revenues.
INVERSE FLOATERS. Inverse floaters are municipal securities on which the rate of
interest varies inversely with interest rates on other municipal obligations or
an index. The interest rate paid to holders of inverse floaters will decrease as
market rates increase and increase as market rates decrease. The market value of
an inverse floater will be more volatile than that of a fixed rate obligation.
Because of the market volatility associated with inverse floaters, no Fund will
invest more than 10% of its total assets in inverse floaters.
RISKS
Under normal circumstances, each Fund invests primarily in municipal securities.
Following is a discussion of certain risks that may affect each Fund:
INTEREST RATE AND CREDIT RISK. Interest rate risk is the risk that interest
rates will rise and that, as a result, municipal security prices will fall,
lowering the value of the Funds' investments. In general, municipal securities
having longer durations are more sensitive to interest rate changes than are
bonds with shorter durations. See 'Duration.'
Credit risk is the risk that the issuer or a guarantor may be unable to pay
interest or repay principal on the bond. This can be affected by many factors,
including adverse changes in the issuer's own financial conditions or in
economic conditions.
CREDIT RATINGS; LOWER RATED MUNICIPAL SECURITIES. Each Fund invests only in
municipal securities that present acceptable credit risks in the judgment of
Mitchell Hutchins. In addition, each Fund other than Municipal High Income Fund
normally invests at least 65% of its total assets in municipal securities that:
have an investment grade rating or an equivalent short-term rating from a
nationally recognized ratings agency, such as Moody's Investor Services, Inc.
('Moody's') or Standard & Poor's, a division of the The McGraw-Hill Companies,
Inc. ('S&P'), or
if unrated, are determined by Mitchell Hutchins to be of comparable quality.
Municipal High Income Fund normally invests at least 65% of its total assets,
and seeks to invest substantially all of its assets, in medium and lower grade
municipal securities.
Investment grade securities are rated in one of the four highest rating
categories by a nationally recognized rating agency, such as S&P or Moody's, or,
if unrated, are considered to be of comparable quality by Mitchell Hutchins.
Medium grade municipal securities are of investment grade quality and:
are rated A, BBB or SP-2 by S&P or A, Baa or MIG-2 by Moody's,
have received an equivalent rating from another nationally recognized ratings
agency, or
if unrated, are considered to be of comparable quality by Mitchell Hutchins.
Moody's considers securities 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 bonds.
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. Ratings agencies
may fail to make timely changes in credit ratings in response to
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 25
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates.
California Tax-Free Income Fund, National Tax-Free Income Fund and New York
Tax-Free Income Fund may invest up to 35% of its total assets in municipal
securities rated below investment grade. Municipal High Income Fund may invest
its entire portfolio in such securities. The lower rated municipal securities in
which the Funds may invest may be rated:
Ba, B, MIG-3 or MIG-4 by Moody's or BB, B or SP-3 by S&P,
have an equivalent rating from another nationally recognized ratings agency, or
if unrated, are determined by Mitchell
Hutchins to be of comparable quality.
There is a risk that rating agencies will downgrade municipal securities.
Mitchell Hutchins is not required to dispose of a security that receives a
credit downgrade. In the event of a downgrade that results in greater than 35%
of the net assets of California Tax-Free Income Fund, National Tax-Free Income
Fund or New York Tax-Free Income Fund being held in securities rated below
investment grade, Mitchell Hutchins will engage in an orderly disposition of
such securities to the extent necessary. The Appendix to this Prospectus
contains further information about Moody's and S&P ratings.
Moody's and S&P consider municipal securities rated below investment grade to be
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
Such securities are commonly referred to as municipal 'junk bonds.' A Fund's
investments in these lower rated securities entail greater risk than its
investments in higher rated bonds. These risks include greater risk of default,
greater volatility and thinner and less active markets.
Lower rated municipal securities generally offer a higher current yield than
higher grade issues but they involve higher risks, since they are especially
subject to adverse changes in general economic conditions, in economic
conditions of the issuer's geographic area and in the industries or activities
in which the issuer is 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, municipal issuers
may experience financial stress which could adversely affect their ability to
make payments of principal and interest and increase the possibility of default.
During the fiscal year ended February 28, 1997, the Funds invested their average
annual net assets as follows:
<TABLE>
<CAPTION>
% OF THE AVERAGE CALIFORNIA MUNICIPAL NATIONAL NEW YORK
ANNUAL NET TAX-FREE HIGH TAX-FREE TAX-FREE
ASSETS INVESTED INCOME INCOME INCOME INCOME
IN FUND FUND FUND FUND
- ----------------- ---------- --------- -------- --------
<S> <C> <C> <C> <C>
Debt securities
rated by S&P or
Moody's
Debt Securities
not so rated
Securities rated
AAA/Aaa
Securities rated
AA/Aa
Securities rated
A/A
Securities rated
BBB/Baa
</TABLE>
Municipal securities that received different ratings from Moody's and S&P were
assigned to the higher rating category. It should be noted that this information
reflects the average composition of the Fund's assets during the fiscal year
ended February 29, 1997, and is not necessarily representative of the Fund's
assets at the end of that fiscal year, in the current fiscal year or at any time
in the future.
Mitchell Hutchins expects that investments in lower grade municipal securities
will include securities that are subject to the federal alternative minimum tax
('AMT'). Each Fund, except under unusual market conditions, will continue to
invest at least 80% of its net assets in municipal securities that are not
subject to AMT.
MARKET RISK. During periods of market uncertainty, the market values of
municipal securities can become volatile.
DURATION. Duration is a measure of the expected life of a bond on a present
value basis. Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 26
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
measure and is one of the fundamental tools used by Mitchell Hutchins in
portfolio selection and yield curve positioning for the Funds.
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 bond, 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 bond with interest
payments occurring prior to the payment of principal, duration is always less
than maturity.
Duration allows Mitchell Hutchins to make certain predictions as to the effect
that changes in the level of interest rates will have on the value of a Fund's
portfolio. For example, when the level of interest rates increases by 1%, a
fixed income security having a positive duration of three years generally will
decrease by approximately 3%. Thus, if Mitchell Hutchins calculates the duration
of the Fund's portfolio 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
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 may vary in relation to interest rates by
a greater or lesser percentage than indicated by the above example.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as 'derivatives,' because their value depends on (or 'derives' from)
the value of an underlying asset, reference rate or index. These instruments
include options, futures contracts and similar instruments that may be used in
hedging strategies. There is only limited consensus as to what constitutes a
'derivative' security. However, in Mitchell Hutchins' view, derivative
securities also include inverse floaters. The market value of derivative
instruments and securities sometimes is more volatile than that of other
investments, and each type of derivative instrument may pose its own special
risks. Mitchell Hutchins takes these risks into account in its management of the
Funds.
CHANGE IN LAWS. New federal, state and local laws, or changes in existing laws,
may adversely affect the tax-exempt status of interest on a Fund's portfolio
securities or of the exempt-interest dividends paid by a Fund, extend the time
for payment of principal or interest or otherwise constrain enforcement of such
obligations.
RELATED SECURITIES. Each Fund may invest more than 25% of its total assets in
municipal securities that are related in such a way that an economic, business
or political development or change affecting one such security also might affect
the other securities, such as securities the interest on which is paid from
revenues of similar types of projects. The Funds may be subject to greater risk
than other funds that do not follow this practice.
In addition to these general risks, investments in each Fund are subject to
special risk considerations:
CALIFORNIA TAX-FREE INCOME FUND
RISKS OF CALIFORNIA OBLIGATIONS. California Tax-Free Income Fund's investment
concentration in California Obligations involves greater risks than if it
invested in the securities of a broader range of issuers. The Fund's yield and
net asset value per share can be affected by political and economic developments
within California, and by the financial condition of California, its public
authorities and political subdivisions. California suffered a severe recession
between 1990-1993, resulting in significant revenue shortfalls for both the
State and local government, and increased social service expenses. However,
since the start of 1994, California's economy has rebounded strongly, with
corresponding improvements in tax revenues. Further, in the past California
voters have passed amendments to the California Constitution and other measures
that limit the taxing and spending authority of California governmental
entities, and future voter initiatives could
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 27
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
result in adverse consequences affecting California Obligations. A more detailed
discussion of the risks of investing in California Obligations is included in
the Statement of Additional Information.
NEW YORK TAX-FREE INCOME FUND
RISKS OF NEW YORK OBLIGATIONS. New York Tax-Free Income Fund's investment
concentration in New York Obligations involves greater risks than if it invested
in the securities of a broader range of issuers. The Fund's yield and net asset
value per share can be affected by political and economic developments within
the State of New York, its public authorities and political subdivisions,
particularly New York City. Although New York State reduced its accumulated
general fund deficits and experienced operating surpluses in fiscal years
1991-92 through 1993-94, it continues to experience substantial financial
difficulties related to the recent recession, and an estimated budget gap of
approximately $___ billion is projected for fiscal year _______ unless numerous
and substantial corrective measures are successfully implemented. New York City
and most suburban county governments are also experiencing serious fiscal
problems related to the sluggish performance of the regional economy, which has
caused substantial, broad-based and recurring revenue shortfalls. The credit
standings of New York State and New York City have been, and could be further,
reduced, and their ability to provide assistance to its public authorities and
political subdivisions has been, and could be further, impaired. A more detailed
discussion of the risks of investing in New York Obligations is included in the
Statement of Additional Information.
NON-DIVERSIFIED STATUS. New York Tax-Free Income Fund is a 'non-diversified,'
'regulated investment company' for purposes of the federal securities laws and
federal income tax laws. This means, in general, that more than 5% of the Fund's
total assets may be invested in the securities of one issuer, but only if, at
the close of each quarter of the Fund's taxable year, the aggregate amount of
such holdings does not exceed 50% of the value of its total assets and no more
than 25% of the value of its total assets is invested in the securities of a
single issuer. Although Mitchell Hutchins anticipates that the Fund's portfolio
normally will include the securities of a number of different issuers, the Fund
may be subject to greater risk with respect to its portfolio securities than a
'diversified' investment company, because changes in the financial condition or
market assessment of a single issuer may cause greater fluctuation in the Fund's
yield and the net asset value of Fund shares.
MUNICIPAL HIGH INCOME FUND
Although Mitchell Hutchins will attempt to minimize the speculative risks
associated with investments in lower rated securities through credit analysis
and monitoring and attention to current trends in interest rates and other
factors, investors should carefully review the Municipal High Income Fund's
investment objective and policies and consider their ability to assume the
investment risks involved before making an investment.
NON-DIVERSIFIED STATUS. The Fund is a 'non-diversified,' 'regulated investment
company' for purposes of the federal securities and income tax laws. This means,
in general, that more than 5% of the Fund's total assets may be invested in the
securities of one issuer, but only if, at the close of each quarter of the
Fund's taxable year, the aggregate amount of such holdings does not exceed 50%
of the value of its total assets and no more than 25% of the value of its total
assets is invested in the securities of a single issuer. Although Mitchell
Hutchins anticipates that the Fund's portfolio normally will include the
securities of a number of different issuers, the Fund may be subject to greater
risk with respect to its portfolio securities than a 'diversified' investment
company, because changes in the financial condition or market assessment of a
single issuer may cause greater fluctuation in the Fund's yield and the net
asset value of Fund shares.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND STRATEGIES USING DERIVATIVE CONTRACTS. Each Fund may use options
(both exchange-traded and over-the-counter) and futures contracts to attempt to
enhance income and to reduce the overall risk of its investments
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 28
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
('hedge'). The use of derivative instruments may generate taxable income. In
addition, new financial products and risk management techniques continue to be
developed and may be used if consistent with a Fund's investment objective and
policies. A Fund's ability to use these instruments and strategies may be
limited by market conditions, regulatory limits and tax considerations. The use
of options and futures solely to enhance income may be considered a form of
speculation. The Statement of Additional Information for the Funds contains
further information on these derivative contracts and related hedging
strategies.
The Funds might not use any derivative contract or hedging strategy, and there
can be no assurance that any hedging strategy will succeed. If Mitchell Hutchins
is incorrect in its judgment on market values, interest rates or other economic
factors in using a hedging strategy, a Fund may have lower net income and a net
loss on the investment. Each of these strategies involves certain risks, which
include:
the fact that the skills needed to use hedging instruments are different from
those needed to select securities for the Funds;
the possibility of imperfect correlation, or even no correlation, between price
movements of derivative instruments used in hedging strategies and price
movements of the securities being hedged;
possible constraints placed on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
'cover' or to segregate securities; and
the possibility that a Fund is unable to close out or liquidate its hedged
position.
TEMPORARY OR DEFENSIVE POSITIONS. During unusual market conditions, including
when, in the opinion of Mitchell Hutchins, there are not enough suitable
municipal obligations available for investment, each Fund may hold cash and
invest in money market instruments that pay taxable interest, including
repurchase agreements, for temporary or defensive purposes and without
percentage limit. If a Fund held cash, the cash would not earn income and would
reduce the Fund's yield. In addition, for temporary or defensive purposes, each
of California Tax-Free Income Fund, National Tax-Free Income Fund and New York
Tax-Free Income Fund may invest more than 20% of its net assets in municipal
obligations that pay interest that is exempt from federal income tax but is
subject to California personal income tax (in the case of California Tax-Free
Income Fund), New York personal income tax (in the case of New York Tax-Free
Income Fund) or is not AMT exempt interest.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. These include, among other things, municipal lease
obligations (including certificates of participation), other than those Mitchell
Hutchins has determined are liquid pursuant to guidelines established by each
Fund's board.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 331/3% of the
Fund's total assets taken at market value. Lending securities enables a Fund to
earn additional income, but could result in a loss or delay in recovering
securities. Because the income generated by securities lending activities is
taxable, the Funds do not expect to engage in securities lending except under
unusual circumstances.
OTHER INFORMATION. Each Fund may purchase bonds on a when-issued basis or may
purchase or sell securities for delayed delivery. A Fund generally would not pay
for such securities or start earning interest on them until they are delivered,
but it would immediately assume the risks of ownership, including the risk of
price fluctuation. Each Fund may borrow money for temporary or emergency
purposes, but not in excess of 10% of its total assets.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 29
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FLEXIBLE PRICING'sm'
- --------------------------------------------------------------------------------
Each Fund offers through this Prospectus four classes of shares that differ in
terms of sales charges and expenses. An investor can select the class that is
best suited to his or her investment needs, based upon the holding period and
the amount of investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum is 4% of the public offering price) next calculated
after PaineWebber's New York City headquarters or PFPC Inc., the Funds' transfer
agent ('Transfer Agent'), receives the purchase order. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares. Class A
shares sales charges are calculated as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
----------------------- DISCOUNT TO
NET SELECTED DEALERS
OFFERING AMOUNT AS PERCENTAGE
AMOUNT OF INVESTMENT PRICE INVESTED 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' net asset value at
the time of their purchase or their sale, whichever is less, is charged on
sales of shares made within one year of the purchase date. However, Class A
shares representing reinvestment of any dividends or other distributions are
not subject to the 1% charge. Withdrawals under the Systematic Withdrawal
Plan are not subject to this charge. However, investors may not withdraw
annually more than 12% of the value of the Fund account under the Plan in
the first year after purchase. This charge does not apply to Class A shares
bought before November 10, 1995.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors who are purchasing Class A shares in more than one PaineWebber mutual
fund may combine those purchases to get a reduced sales charge. Investors who
already own Class A shares in one or more PaineWebber mutual funds may combine
the amount they are currently purchasing with the value of such previously owned
shares to qualify for a reduced sales charge. To determine the sales charge
reduction in either case, please refer to the chart above.
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 Transfers to Minors Act accounts created by
the investor or group of investors for the benefit of the investors' children;
or
accounts with the same adviser.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 30
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
is an employee, director, trustee or officer of PaineWebber, its affiliates or
any PaineWebber mutual fund;
is the spouse, parent or child of any of the above, or advisory clients of
Mitchell Hutchins;
buys these shares through a PaineWebber investment executive who was formerly
employed as a broker with a competing brokerage firm that was registered as a
broker-dealer with the SEC and
the investor was the investment executive's client at the competing
brokerage firm;
within 90 days of buying Class A shares in a Fund, the investor sells shares
of one or more mutual funds that (a) were principally underwritten by the
competing brokerage firm or its affiliates and (b) the investor either paid
a sales charge to buy those shares, paid a sales charge when selling them or
held those shares until the contingent deferred sales charge was waived; and
the amount that the investor purchases does not exceed the total amount of
money the investor received from the sale of the other mutual fund;
is a certificate holder of unit investment trusts sponsored by PaineWebber and
has elected to have dividends and other distributions from that investment
automatically invested in Class A shares;
is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k) or 403(b)
of the Internal Revenue Code. (This waiver is subject to minimum requirements,
with respect to the number of employees and investment amount, established by
Mitchell Hutchins.) Currently, a plan must have 100 or more eligible employees
or the amount invested or to be invested in a Fund or any other PaineWebber
mutual fund must total at least $1 million during the subsequent 13-month
period; or
acquires Class A shares in connection with a reorganization pursuant to which a
Fund acquires substantially all of the assets and liabilities of another
investment company in exchange solely for shares of the Fund.
For more information on how to get a reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Fund investment, investors may have to pay
a sales charge when they sell their Fund shares. This sales charge is called a
'contingent deferred sales charge.' The amount of the charge depends on how long
the investor owned the shares. The sales charge is calculated by multiplying the
net asset value of the shares at the time of sale or purchase, whichever is
less, by the percentage shown on the following table. Investors who own shares
for more than six years do not have to pay a sales charge when selling those
shares.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 31
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
ASSET
IF THE INVESTOR VALUE IS
SELLS SHARES WITHIN: MULTIPLIED:
- --------------------------------- -------------------
<S> <C>
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming the investors are
selling:
First, Class B shares owned through reinvested dividends and capital gain
distributions; and
Second, Class B shares held in the portfolio the longest.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
sales of shares under the Fund's 'Systematic Withdrawal Plan' (investors may
not withdraw annually more than 12% of the value of the Fund account under the
Plan);
a distribution from an IRA, a self-employed individual retirement plan ('Keogh
Plan') or a custodial account under Section 403(b) of the Internal Revenue Code
(after the investor reaches age 591/2);
a tax-free return of an excess IRA contribution;
a tax-qualified retirement plan distribution following retirement; or
Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
An investor must provide satisfactory information to PaineWebber or the Fund if
the investor seeks any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value
next calculated after PaineWebber's New York City headquarters or the Transfer
Agent receives the purchase order. Investors do not pay an initial sales charge
when they buy Class C shares, but the ongoing expenses of Class C shares are
higher than those of Class A shares. Class C shares never convert to any other
Class of shares.
A contingent deferred sales charge of 0.75% of the offering price (net asset
value at the time of the purchase) or the net asset value of the shares 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. Other PaineWebber mutual funds
may impose a different contingent deferred sales charge on Class C shares sold
within one year of the purchase date. A sale of Class C shares acquired through
an exchange and held less than one year will be subject to the same contingent
deferred sales charge that would have been imposed on the Class C shares of the
PaineWebber mutual fund originally purchased. Class C shares representing
reinvestment of any dividends or capital gains distributions are not subject to
the 0.75% charge. Withdrawals under
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 32
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
the Systematic Withdrawal Plan also are not subject to this charge. However, an
investor may not withdraw 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
C shares, during the first year under the Plan. This charge does not apply to
Class C shares bought before November 10, 1995.
CLASS Y SHARES
HOW PRICE IS CALCULATED. Class Y shares are sold to eligible investors at the
net asset value next determined after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do not pay
an initial sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. The ongoing expenses for Class Y shares are lower than for
the other classes because Class Y shares are not subject to rule 12b-1
distribution or service fees.
LIMITED GROUPS OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
a participant in INSIGHT when Class Y shares are purchased through that
program;
an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing'sm' System;
an employee benefit plan qualified under section 401 (including a salary
reduction plan, qualified under section 401(k)) or 403(b) of the Internal
Revenue Code that has either 5,000 or more eligible employees or $50 million or
more in assets; and
an investment company advised by PaineWebber or an affiliate of PaineWebber.
INSIGHT. An investor who purchases $50,000 or more of shares of the mutual funds
that are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing'sm' System and certain other specified mutual
funds) may take part in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase Class Y shares.
INSIGHT offers comprehensive investment services, including a personalized asset
allocation investment strategy using an appropriate combination of funds,
monitoring of investment performance and comprehensive quarterly reports that
cover market trends, portfolio summaries and personalized account information.
Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.5% of assets held through the program (generally
charged quarterly in advance), which covers all INSIGHT investment advisory
services and program administration fees. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Prices are calculated for each class of a Fund's shares once each Business Day,
at the close of regular trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time). A 'Business Day' is any day, Monday through Friday, on
which the New York Stock Exchange is open for business. Shares are purchased at
the next share price calculated after the purchase order is received.
The Funds and Mitchell Hutchins reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 33
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or an individual Fund that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms. Payment is due on the third Business Day after PaineWebber's New York
City headquarters office receives the purchase order.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up an
account through the Transfer Agent by completing an account application, which
may be obtained by calling 1-800-647-1568. The application and check must be
mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
DE 19899.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
mail an application with a check; or
open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in a Fund.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account............................. $1,000
To add to an account........................... $ 100
</TABLE>
A Fund may waive or reduce these minimums for:
employees of PaineWebber or its affiliates; or
participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plan.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of other PaineWebber mutual fund shares. For classes
of shares where no initial sales charge is imposed, a contingent deferred sales
charge may apply if the investor sells the shares acquired through the exchange.
Class Y shares are not exchangeable.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or wire.
Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a 'letter of instruction' to the Transfer Agent. The letter of
instruction must include:
the investor's name and address;
the Fund's name;
the Fund account number;
the dollar amount or number of shares to be sold; and
a guarantee of each registered owner's signature by an eligible institution,
such as a commercial bank, trust company or stock exchange member.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 34
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when shares are exchanged for the
corresponding class of shares of other PaineWebber mutual funds. A Fund will use
the purchase date of the initial investment to determine any contingent deferred
sales charge due when the acquired shares are sold. Fund shares may be exchanged
only after the settlement date has passed and payment for the shares has been
made. The exchange privilege is available only in those jurisdictions where the
sale of the fund shares to be acquired is authorized. This exchange privilege
may be modified or terminated at any time and, when required by SEC rules, upon
60 days' notice. See the back cover of this prospectus for a listing of other
PaineWebber mutual funds.
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated after the order is received and accepted
(less any applicable contingent deferred sales charge). Share prices are
normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).
Investors who own more than one class of shares should specify which class they
are selling. If they do not, the Fund will assume they are first selling their
Class A shares, then Class C, and last, Class B.
If a shareholder wants to sell shares which were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the case
of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through PFPC Inc., the Fund's Transfer Agent, may sell shares by writing a
'letter of instruction,' as detailed in 'How to Exchange Shares.'
Because the Funds incur certain fixed costs in maintaining shareholder accounts,
each Fund reserves the right to purchase back all of its shares in any
shareholder account with a net asset value of less than $500. If the Fund elects
to do so, it will notify the shareholder of the opportunity to increase the
amount invested to $500 or more within 60 days of the notice. A Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive at
PaineWebber or one of its correspondent firms at the time of purchase.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 35
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
OTHER SERVICES
- --------------------------------------------------------------------------------
Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Funds' Class A, Class B and C shares:
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of $1,000 through which a Fund will deduct $50 or more each month
from the investor's bank account to invest directly in the Fund. In addition to
providing a convenient and disciplined manner of investing, participation in the
Automatic Investment Plan enables the investor to use the technique of 'dollar
cost averaging.'
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December) or semiannual (June and 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 is $5,000; minimum
withdrawals of $100.
CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly and semiannual withdrawals of $200, $400 and $600, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may not withdraw 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 C shares, during the first year under the
Plan. Shareholders who elect to receive dividends or other distributions in cash
may not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-Directed IRAs are available though 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.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Funds are governed by the board of trustees, which oversees their
operations. Each Fund has appointed Mitchell Hutchins as investment adviser and
administrator responsible for that Fund's operations (subject to the authority
of the board). As investment adviser and administrator, Mitchell Hutchins
supervises all aspects of each Fund's operations and makes and implements all
investment decisions for that Fund.
The board of trustees, as part of its overall management responsibility,
oversees various organizations responsible for the day-to-day management of each
Fund.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 36
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
The boards have determined that brokerage transactions for the Funds may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On May 31, 1997, Mitchell Hutchins was adviser or sub-adviser
of [31] investment companies with [65] separate portfolios and aggregate assets
of approximately $[30.4] billion.
Personnel of Mitchell Hutchins may engage in securities transactions for their
own accounts pursuant to Mitchell Hutchins' code of ethics that establishes
procedures for personal investing and restricts certain transactions.
Dennis L. McCauley is a managing director and chief investment officer of fixed
income of Mitchell Hutchins responsible for overseeing all active fixed income
investments, including domestic and global taxable and tax-exempt mutual funds.
Prior to joining Mitchell Hutchins in 1994, 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.
Elbridge (Ebby) T. Gerry III, a senior vice president of Mitchell Hutchins, is
the co-portfolio manager and has day-to-day responsibility for New York Tax-Free
Income Fund, California Tax-Free Income Fund and National Tax-Free Income Fund.
Mr. Gerry is also a portfolio manager for Municipal High Income Fund. In the
case of California Tax-Free Income Fund, Cynthia N. Bow, a vice president of
Mitchell Hutchins, is the co-portfolio manager and also has day-to-day
responsibility for the Fund. In the case of New York Tax-Free Income Fund and
National Tax-Free Income Fund, Richard S. Murphy, a senior vice president of
Mitchell Hutchins, is the co-portfolio manager and also has day-to-day
responsibility for the Funds. In the case of Municipal High Income Fund, William
W. Veronda, a senior vice president of Mitchell Hutchins, is a portfolio manager
and has day-to-day responsibility for the Fund. Mr. Gerry has held his Fund
responsibilities since January 1996. Ms. Bow and Mr. Veronda have held their
Fund responsibilities since April 1993 and September 1995, respectively. Mr.
Murphy has held his Fund responsibilities since July 1994 and January 1996 for
National Tax-Free Income Fund and New York Tax-Free Income Fund, respectively.
Mr. Gerry has portfolio management responsibility for over $[4 billion] in
municipal assets at Mitchell Hutchins, including municipal bond and money funds
and private accounts. Mr. Gerry has been with Mitchell Hutchins since January
1996. Prior to January 1996, Mr. Gerry had been associated with J.P. Morgan
Private Banking since 1981, where he was responsible for managing municipal
assets, including several municipal bond funds. Ms. Bow has been with Mitchell
Hutchins since 1982. Mr. Murphy has been with Mitchell Hutchins since April
1994. From 1990 to March 1994, he was a vice president at American International
Group, where he managed the municipal bond portfolio. Mr. Veronda has been with
Mitchell Hutchins since September 1995. From 1984 to August 1995, he was a
senior vice president and general manager at Invesco Funds Group, where he
managed municipal bond and high yield corporate bond portfolios.
Other members of Mitchell Hutchins' municipal investments group provide input on
market outlook, interest rate forecasts, and other considerations pertaining to
municipal investments. This group, together with the municipal portfolio
managers, comprise the Municipal Investment Team that sets the strategy for the
management of PaineWebber municipal bond funds. The Municipal Investment Term is
complemented by
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 37
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
a team of research analysts specializing in economic, credit, quantitative and
market research.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. For the fiscal
year ended February 29, 1996, Mitchell Hutchins received a monthly fee for these
services from each of California Tax-Free Income Fund and National Tax-Free
Income Fund at the annual rate of 0.50% of each Fund's average daily net assets
and from each of Municipal High Income Fund and New York Tax-Free Income Fund at
the annual rate of 0.60% of that Fund's average daily net assets.
Each Fund pays PaineWebber an annual fee of $4.00 per active shareholder account
held at PaineWebber for services not provided by the Transfer Agent.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribution plan with respect to the Funds' Class Y shares. Under distribution
plans for Class A, Class B and Class C shares ('Class A Plan,' 'Class B Plan'
and 'Class C Plan,' collectively, 'Plans'), each Fund pays Mitchell Hutchins:
Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
Monthly distribution fees at the annual rate of 0.75% of the average daily net
assets of Class B shares and 0.50% of the average daily net assets of the Class
C Shares.
Mitchell Hutchins primarily uses the service fees under the Plans for Class A, B
and C shares 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:
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 each class of shares
('Distribution Contracts') 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.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 38
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
DETERMINING THE SHARES' NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of a Fund's shares fluctuates and is determined separately
for each class as of the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time) each Business Day. Each Fund's net asset
value per share is determined by dividing the value of the securities held by
the Fund, plus any cash or other assets, minus all liabilities, by the total
number of Fund shares outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available, assets
are valued at fair value as determined in good faith by or under the direction
of its board. The amortized cost method of valuation generally is used to value
debt obligations with 60 days or less remaining to maturity, unless the board
determines that this does not represent fair value.
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Dividends from each Fund's net investment income are declared daily and paid
monthly.
California Tax-Free Income Fund pays dividends about the fifth day of each
month.
National Tax-Free Income Fund pays dividends about the fifteenth day of each
month.
Municipal High Income Fund and New York Tax-Free Income Fund pay dividends on
or about the first Wednesday of each month.
Net investment income includes accrued interest and discount, less amortization
of premium and accrued expenses, with respect to municipal securities. Each Fund
distributes annually substantially all of its net capital gain (the excess of
net long-term capital gain over net short-term capital loss), if any, together
with any other taxable income (including any net short-term capital gain). A
Fund may make additional distributions if necessary to avoid a 4% excise tax on
certain undistributed income and capital gain.
Dividends and other distributions paid on each class of shares of each Fund are
calculated at the same time and in the same manner. Dividends on Class A, B and
C shares of a Fund are expected to be lower than those on its Class Y shares
because the other shares have higher expenses resulting from their service fees
and, in the case of Class B and Class C shares, their distribution fees.
Dividends on Class B and Class C shares of a Fund are expected to be lower than
those on its Class A shares because Class B and Class C shares have higher
expenses resulting from their distribution fees. Dividends on each class might
be affected differently by the allocation of other class-specific expenses. See
'General Information.'
The Funds' dividends and other distributions are paid in additional Fund shares
of the same class at net asset value, unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and other distributions in
cash, either mailed to the shareholder by check or credited to their PaineWebber
accounts, should contact their investment executives at PaineWebber or one of
its correspondent firms or complete the appropriate section of the account
application.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 39
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company ('RIC') under the Internal Revenue Code ('Code') so that it will not
have to pay federal income tax on the part of its investment company taxable
income (generally consisting of taxable net investment income and net short-term
capital gain) and net capital gain that it distributes to its shareholders.
Fund shareholders generally may exclude from gross income for federal income tax
purposes distributions by a Fund that it designates as 'exempt-interest
dividends.' In order to pay exempt-interest dividends to its shareholders, a
Fund must (and each Fund intends to continue to) satisfy the requirement that,
at the close of each quarter of its taxable year, at least 50% of the value of
its total assets consists of municipal securities. Corporate shareholders must
include all of their exempt-interest dividends in calculating their liability
for that tax.
If a Fund realizes capital gains as a result of market transactions, any
distribution of those gains is taxable to its shareholders.
Shareholders may not deduct interest on indebtedness they incur or continue in
order to purchase or carry Fund shares. If a Fund invests in certain private
activity bonds, shareholders must include a portion of their exempt-interest
dividends from that Fund in calculating their liability for the federal
alternative minimum tax.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the amounts of dividends and capital gain distributions paid (or deemed paid)
for that year and any portion of those dividends that qualifies for special
treatment.
WITHHOLDING REQUIREMENTS
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 with a correct taxpayer
identification number. Withholding at that rate is also required from dividends
and capital gain distributions is also required for 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 shareholders receive more or less than their
adjusted basis for the shares (which normally takes into account 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 that 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 RULES 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, 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.
CALIFORNIA TAXES
If California Tax-Free Income Fund continues to qualify as a RIC under the Code
and at the end of each quarter of its taxable year at least 50% of the value of
its total assets consists of California Obligations, the exempt-interest
dividends it pays that are derived from interest on qualifying California
Obligations will be exempt from California personal income tax ('California
exempt-
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 40
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
interest dividends'), but not California franchise tax. Dividends and other
distributions derived from interest on other municipal securities, taxable
income and capital gains are taxable under California law at ordinary income
rates. Shareholders may not deduct interest on indebtedness they incur to
purchase or carry shares of the Fund for California personal income tax
purposes. Shareholders receive annual notification of the portion of the Fund's
tax-exempt income attributable to issuers in California and other states.
California exempt-interest dividends may affect the calculation of certain
adjustments to alternative minimum taxable income for corporate shareholders.
The Fund itself will not be subject to California franchise or corporate income
tax on interest income or net capital gain distributed to its shareholders.
NEW YORK STATE AND NEW YORK CITY TAXES
If New York Tax-Free Income Fund continues to qualify as a RIC under the Code
and at the end of each quarter of its taxable year at least 50% of the value of
its total assets consists of New York Obligations, the exempt-interest dividends
it pays that are derived from interest on qualifying New York Obligations will
be exempt from New York State and New York City personal income taxes, but not
corporate franchise taxes. Dividends and other distributions derived from
taxable income and capital gains are not exempt from New York State and New York
City taxes. Shareholders may not deduct interest on indebtedness they incur or
continue in order to purchase or carry shares of the Fund for New York State or
New York City personal income tax purposes. Shareholders receive annual
notification of the portion of the Fund's tax-exempt income attributable to
issuers in New York State and other states. The Fund's interest income that is
distributed to shareholders will generally not be taxable to the Fund for
purposes of the New York State corporation franchise tax or the New York City
general corporation tax.
* * * *
Because the foregoing only summarizes some of the important federal income tax
and California, New York State and New York City personal income tax
considerations generally affecting each Fund and its shareholders, the Statement
of Additional Information contains more details. There may be other federal,
state or local tax considerations applicable to a particular investor.
Prospective shareholders are urged to consult their tax advisers.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION
California Tax-Free Income Fund and National Tax-Free Income Fund are series of
PaineWebber Mutual Fund Trust and PaineWebber Municipal High Income Fund and
PaineWebber New York Tax-Free Income Fund are series of PaineWebber Municipal
Series (each a 'Trust').
Both PaineWebber Municipal Series and PaineWebber Mutual Fund Trust are business
trusts under the laws of the Commonwealth of Massachusetts which are registered
with the SEC as open-end management investment companies. PaineWebber Municipal
Series was organized under a Declaration of Trust dated January 28, 1987 and
PaineWebber Mutual Fund Trust was organized under a Declaration of Trust dated
November 21, 1986. The trustees of each Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, with a par
value of $0.001 per share.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 41
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
SHARES
The shares of each Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. Each class represents an identical interest in
the respective 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. 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 each 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 on Class A, B and C shares are
likely to be lower than for Class Y shares, which bear the lowest expenses, and
dividends on Class B and Class C shares are likely to be lower than for Class A
shares.
Although each Trust is offering only the shares of its Funds, it is possible
that a Trust could become liable for misstatement in this Prospectus about a
Fund of the other Trust. The trustees of each Trust have considered this factor
in approving the use of a combined Prospectus.
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 any Fund (or
Trust if there is more than one series) may elect all of the trustees of that
Fund. The shares of the Funds will be voted separately except when an aggregate
vote of all series in a Trust is required by law and except that only the
shareholders of a particular class of a Fund are required to vote on matters
affecting only that class, such as the terms of a Plan as it relates to the
class.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of a
Trust may remove a trustee 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 trustee at the written request of holders of
10% of the outstanding shares of the Trust.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semi-annual
reports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of
Additional Information is available to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for the
Funds. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds' transfer
and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 42
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
Municipal bonds are rated by Moody's and S&P. Moody's and S&P also publish
separate ratings for municipal notes and tax-exempt commercial paper.
Descriptions of these ratings are set forth below.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa. Bonds 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 edge.'
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 rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A. Bonds 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 rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds 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 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 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 rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C. Bonds 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.
DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 43
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
BB, B, CCC, CC AND C. Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB. Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B. Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC. Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC. The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C. The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments 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 if debt service payments are jeopardized.
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
categories.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS:
Moody's ratings for state and municipal notes and other short-term loans are
designated 'Moody's Investment Grade' ('MIG' or, for variable or floating rate
obligations, 'VMIG'). Such ratings recognize the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
and short-term cyclical elements are critical in short-term ratings. Symbols
used will be as follows:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG-3/VMIG-3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG-4/VMIG-4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS:
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 44
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
SP-1. Very strong or strong capacity to pay principal and interest. Those
issues determined to possess very strong characteristics are given a plus (+)
designation.
SP-2. Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3. Speculative capacity to pay principal and interest.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 by Moody's (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt and ample
asset protection.
Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
Well established access to a range of financial markets and assured sources of
alternate liquidity.
Commercial paper rated A by S&P have the following characteristics.
A-1. This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the 'relative' degree of safety is not as high as for
issues designated 'A-1'.
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse side effects of
changes in circumstances than obligations carrying the higher designations.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 45
<PAGE>
<PAGE>
[This page intentionally left blank]
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
------------------------------
PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
PaineWebber New York Tax-Free Income Fund
PaineWebber Municipal High Income Fund
PROSPECTUS -- JULY 1, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[ ] PAINEWEBBER BOND FUNDS [ ] PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund
[ ] PAINEWEBBER TAX-FREE BOND FUNDS [ ] PAINEWEBBER GLOBAL FUNDS
California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund
[ ] PAINEWEBBER ASSET ALLOCATION [ ] PAINEWEBBER MONEY MARKET FUND
FUNDS
Balanced Fund
Tactical Allocation Fund
</TABLE>
A prospectus containing more complete information for any
of these funds, including charges and expenses, can be
obtained from a PaineWebber investment executive or
correspondent firm. Please read it carefully before
investing. It is important you have all the information
you need to make a sound investment decision.
'c'1997 PaineWebber Incorporated
----------------
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND
PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
PAINEWEBBER NEW YORK TAX-FREE INCOME FUND
PAINEWEBBER MUNICIPAL HIGH INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above (each a 'Fund' and, collectively, 'Funds') are
series of either PaineWebber Mutual Fund Trust or PaineWebber Municipal Series
(each a 'Trust'), professionally managed mutual funds. PaineWebber California
Tax-Free Income Fund ('California Tax-Free Income Fund') seeks high current
income exempt from federal income tax and California personal income tax,
consistent with the preservation of capital and liquidity within the Fund's
quality standards. PaineWebber National Tax-Free Income Fund ('National Tax-Free
Income Fund') seeks high current income exempt from federal income tax,
consistent with the preservation of capital and liquidity within the Fund's
quality standards. PaineWebber Municipal High Income Fund ('Municipal High
Income Fund') seeks high current income exempt from federal income tax.
PaineWebber New York Tax-Free Income Fund ('New York Tax-Free Income Fund')
seeks high current income exempt from federal income tax and from New York State
and New York City personal income taxes.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned
subsidiary of PaineWebber Incorporated ('PaineWebber'). As distributor for the
Funds, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive
dealer for the sale of Fund shares.
This Statement of Additional Information ('SAI') is not a prospectus and
should be read only in conjunction with the Funds' current Prospectus, dated
July 1, 1997. 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 July 1, 1997.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELD FACTORS AND RATINGS. The yield of a municipal security depends on a
variety of factors, including general municipal and fixed-income security market
conditions, the financial condition of the issuer, the size of the particular
offering, the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Each Fund may invest in municipal securities
with a broad range of maturities, based on Mitchell Hutchins' judgment of
current and future market conditions as well as other factors, such as the
Fund's liquidity needs. Generally, the longer the maturity of a municipal
security, the higher the rate of interest paid and the greater the volatility.
Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's, a division of
The McGraw Hill Companies, Inc. ('S&P') and other nationally recognized
statistical rating organizations ('NRSROs') are private services that provide
ratings of the credit quality of debt obligations, including issues of municipal
securities. A description of the range of ratings assigned to municipal
securities by Moody's and S&P is included in the Appendix to the Funds'
Prospectus. 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, municipal
securities with the same maturity, interest rate and rating may have different
market prices. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates. Subsequent to its
<PAGE>
<PAGE>
purchase by a Fund, an issue of municipal securities may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Fund.
Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax (and also, when available,
from the federal alternative minimum tax) and (where applicable) California
personal income tax and New York State and New York City personal income taxes
are rendered by bond counsel to the respective issuing authorities at the time
of issuance. Neither the Funds nor Mitchell Hutchins will review the proceedings
relating to the issuance of municipal securities or the basis for such opinions.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors (such as the federal bankruptcy laws) and federal, state
and local laws that may be enacted that adversely affect the tax-exempt status
of interest on the municipal securities held by a Fund or of the exempt-interest
dividends received by a Fund's shareholders, extend the time for payment of
principal or interest, or both, or impose other constraints upon enforcement of
such obligations. There is also the possibility that, as a result of litigation
or other conditions, the power or ability of issuers to meet their obligations
for the payment of principal of and interest on their municipal securities may
be materially and adversely affected.
TYPES OF MUNICIPAL SECURITIES. Each Fund may invest in a variety of
municipal securities, as described below:
Municipal Bonds. Municipal bonds are debt obligations issued to obtain
funds for various public purposes that pay interest that is exempt from federal
income tax in the opinion of issuer's counsel. The two principal classifications
of municipal bonds are 'general obligation' and 'revenue' bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
The term 'municipal bonds' also includes 'moral obligation' issues, which are
normally issued by special purpose authorities. In the case of such issues, an
express or implied 'moral obligation' of a related government unit is pledged to
the payment of the debt service, but is usually subject to annual budget
appropriations.
Municipal Lease Obligations. The term 'municipal bonds' also includes
municipal lease obligations, such as leases, installment purchase contracts and
conditional sales contracts, and certificates of participation therein.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment or facilities and may
be subject to annual budget appropriations. The Funds generally invest in
municipal lease obligations through certificates of participation.
Although municipal lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain municipal lease obligations, however, provide that lease payments are
subject to partial or full abatement if, because of material damage or
destruction of the leased property, there is substantial interference with the
lessee's use or occupancy of such property. This 'abatement risk' may be reduced
by the existence of insurance covering the leased property, the maintenance by
the lessee of reserve funds or the provision of credit enhancements such as
letters of credit.
Certain municipal lease obligations contain 'non-appropriation' clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Some municipal lease obligations of this type
are insured as to timely payment of principal and interest, even in the event of
a failure by the municipality to appropriate sufficient funds to make payments
under the lease. However, in the case of an uninsured municipal lease
obligation, a Fund's ability to recover under the lease in the event of a
non-appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove difficult.
No Fund intends to invest more than 5% of its total assets in such uninsured
2
<PAGE>
<PAGE>
'non-appropriation' municipal lease obligations. There is no percentage
limitation on the Funds' ability to invest in other municipal lease obligations.
Industrial Development Bonds ('IDBs') and Private Activity Bonds
('PABs'). IDBs and PABs are issued by or on behalf of public authorities to
finance various privately operated facilities, such as airport or pollution
control facilities. These obligations are included within the term 'municipal
bonds' if the interest paid thereon is exempt from federal income tax in the
opinion of the bond issuer's counsel. IDBs and PABs are in most cases revenue
bonds and thus are not payable from the unrestricted revenues of the issuer. The
credit quality of IDBs and PABs is usually directly related to the credit
standing of the user of the facilities being financed. IDBs issued after August
15, 1986 generally are considered PABs, and to the extent a Fund invests in such
PABs, shareholders generally will be required to include a portion of their
exempt-interest dividends from that Fund in calculating their liability for the
alternative minimum tax ('AMT'). See 'Dividends and Taxes' in the Prospectus.
Each Fund is authorized to invest more than 25% of its net assets in IDBs and
PABs.
Floating Rate and Variable Rate Obligations. Floating rate and variable
rate obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or capital
depreciation is less than for fixed rate obligations. Floating rate or variable
rate obligations typically permit the holder to demand payment of principal from
the issuer or remarketing agent at par value prior to maturity and may permit
the issuer to prepay principal, plus accrued interest, at its discretion after a
specified notice period. Frequently, floating rate or variable rate obligations
and/or the demand features thereon are secured by letters of credit or other
credit support arrangements provided by banks, the credit standing of which
affects the credit quality of the obligations.
A demand feature gives the Fund the right to sell the securities to a
specified party, usually a remarketing agent, on a specified date. A demand
feature is often backed by a letter of credit or guarantee from a bank. As
discussed under 'Participation Interests,' to the extent that payment of an
obligation is backed by a bank's letter of credit or guarantee, such payment may
be subject to the bank's ability to satisfy that commitment. The interest rate
on floating rate or variable rate securities ordinarily is readjusted on the
basis of the prime rate of the bank that originated the financing or some other
index or published rate, such as the 90-day U.S. Treasury Bill rate. Generally,
these interest rate adjustments cause the market value of floating rate and
variable rate municipal securities to fluctuate less than the market value of
fixed rate obligations. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation or capital depreciation is less than for
fixed rate obligations.
Participation Interests. Participation interests are interests in
municipal bonds, including IDBs and PABs, and floating and variable rate
obligations that are owned by banks. These interests carry a demand feature
permitting the holder to tender them back to the bank, which demand feature
generally is backed by an irrevocable letter of credit or guarantee of the bank.
The credit standing of such bank affects the credit quality of the participation
interests.
A participation interest gives a Fund an undivided interest in a municipal
bond owned by a bank. The Fund has the right to sell the instrument back to the
bank. Such right generally is backed by the bank's irrevocable letter of credit
or guarantee and permits the Fund to draw on the letter of credit on demand,
after specified notice, for all or any part of the principal amount of the
Fund's participation interest plus accrued interest. Generally, each Fund
intends to exercise the demand under the letters of credit or other guarantees
only (1) upon a default under the terms of the underlying bond, (2) to maintain
the Fund's portfolio in accordance with its investment objective and policies or
(3) as needed to provide liquidity to the Fund in order to meet redemption
requests. The ability of a bank to fulfill its obligations under a letter of
credit or guarantee might be affected by possible financial difficulties of its
borrowers, adverse interest rate or economic conditions, regulatory limitations
or other factors. Mitchell Hutchins will monitor the pricing, quality and
liquidity of the participation interests held by a Fund, and the credit standing
of banks issuing letters of credit or guarantees supporting such participation
interests on the basis of published financial information reports of rating
services and bank analytical services.
Tender Option Bonds. Tender option bonds are long-term municipal
securities sold by a bank subject to a 'tender option' that gives the purchaser
the right to tender them to the bank at par plus
3
<PAGE>
<PAGE>
accrued interest at designated times (the 'tender option'). The tender option
may be excercisable at intervals ranging from bi-weekly to semi-annually, and
the interest rate on the bonds is typically reset at the end of the applicable
interval in an attempt to cause the bonds to have a market value that
approximates their par value. The tender option generally would not be
exercisable in the event of a default on, or significant downgrading of, the
underlying municipal securities. Therefore, a Fund's ability to exercise the
tender option will be affected by the credit standing of both the bank involved
and the issuer of the underlying securities.
Put Bonds. A put bond is a municipal bond which gives the holder the
unconditional right to sell the bond back to the issuer or a remarketing agent
at a specified price and exercise date, which is typically well in advance of
the bond's maturity date. The obligation to purchase the bond on the exercise
date may be supported by a letter of credit or other credit support arrangement
from a bank, insurance company or other financial institution, the credit
standing of which affects the credit quality of the obligation.
If the put is a 'one time only' put, the Fund ordinarily will either sell
the bond or put the bond, depending upon the more favorable price. If the bond
has a series of puts after the first put, the bond will be held as long as, in
the judgment of Mitchell Hutchins, it is in the best interest of the Fund to do
so. There is no assurance that the issuer of a put bond acquired by a Fund will
be able to repurchase the bond upon the exercise date, if the Fund chooses to
exercise its right to put the bond back to the issuer.
Tax-Exempt Commercial Paper and Short-Term Municipal Notes. Tax-exempt
commercial paper and short-term municipal notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements and
other revenues.
Inverse Floaters. Each Fund may invest in municipal obligations on which
the rate of interest varies inversely with interest rates on other municipal
obligations or an index. Such obligations include components of securities on
which interest is paid in two separate parts -- an auction component, which pays
interest at a market rate that is set periodically through an auction process or
other method, and a residual component, or 'inverse floater,' which pays
interest at a rate equal to the difference between the rate that the issuer
would have paid on a fixed-rate obligation at the time of issuance and the rate
paid on the auction component. The market value of an inverse floater will be
more volatile than that of a fixed-rate obligation and, like most debt
obligations, will vary inversely with changes in interest rates.
Because the interest rate paid to holders of inverse floaters is generally
determined by subtracting the interest rate paid to the holders of auction
components from a fixed amount, the interest rate paid to holders of inverse
floaters will decrease as market rates increase and increase as market rates
decrease. Moreover, the extent of the increases and decreases in the market
value of inverse floaters may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal obligation having
similar credit quality redemption provisions and maturity. In a declining
interest rate environment, inverse floaters can provide a Fund with a means of
increasing or maintaining the level of tax-exempt interest paid to shareholders.
However, because of the market volatility associated with inverse floaters, no
Fund will invest more than 10% of its total assets in inverse floaters.
Mortgage Subsidy Bonds. The Funds also may purchase mortgage subsidy bonds
that are normally issued by special purpose public authorities. In some cases
the repayment of such bonds depends upon annual legislative appropriations; in
other cases repayment is a legal obligation of the issuer and, if the issuer is
unable to meet its obligations, repayment becomes a moral commitment of a
related government unit (subject, however, to such appropriations). The types of
municipal securities identified above and in the Prospectus may include
obligations of issuers whose revenues are primarily derived from mortgage loans
on housing projects for moderate to low income families.
LOWER RATED MUNICIPAL SECURITIES. Medium and lower grade municipal
securities are frequently traded only in markets where the number of potential
purchasers and sellers, if any, is limited. This factor may limit the Fund's
ability to acquire such securities and also may limit its ability to sell such
4
<PAGE>
<PAGE>
securities at their fair value in response to changes in the economy or the
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
lower rated securities, especially in thinly traded markets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Fund may purchase securities on a 'when-issued' or delayed delivery basis. A
security purchased on a when-issued or delayed delivery basis is recorded as an
asset on the commitment date and is subject to changes in market value,
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When 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.' The Funds purchase when-issued securities
only with the intention of taking delivery, but may sell the right to acquire
the security prior to delivery if Mitchell Hutchins deems it advantageous to do
so, which may result in capital gain or loss to a Fund.
STAND-BY COMMITMENTS. Each Fund may acquire stand-by commitments pursuant
to which a bank or other municipal bond dealer agrees to purchase securities
that are held in the Fund's portfolio or that are being purchased by the Fund,
at a price equal to (1) the acquisition cost (excluding any accrued interest
paid on acquisition), less any amortized market premium or plus any accrued
market or original issue discount, plus (2) all interest accrued on the
securities since the last interest payment date or the date the securities were
purchased by the Fund, whichever is later. Although the Funds do not currently
intend to acquire stand-by commitments with respect to municipal securities held
in their portfolios, each Fund may acquire such commitments under unusual market
conditions to facilitate portfolio liquidity.
A Fund would enter into stand-by commitments only with those banks or other
dealers that, in the opinion of Mitchell Hutchins, present minimal credit risk.
A Fund's right to exercise stand-by commitments would be unconditional and
unqualified. A stand-by commitment would not be transferable by a Fund, although
the Fund could sell the underlying securities to a third party at any time. A
Fund may pay for stand-by commitments either separately in cash or by paying a
higher price for the securities that are acquired subject to such a commitment
(thus reducing the yield to maturity otherwise available for the same
securities). The acquisition of a stand-by commitment would not ordinarily
affect the valuation or maturity of the underlying municipal securities.
Stand-by commitments acquired by a Fund would be valued at zero in determining
net asset value. Whether the Fund paid directly or indirectly for a stand-by
commitment, its cost would be treated as unrealized depreciation and would be
amortized over the period the commitment is held by the Fund.
REPURCHASE AGREEMENTS. The Funds do not intend to enter into repurchase
agreements except as a temporary measure and under unusual circumstances,
because repurchase agreements are transactions that generate taxable income.
Each Fund is, however, authorized to enter into repurchase agreements with U.S.
banks and dealers with respect to any obligation issued or guaranteed by the
U.S. government, its agencies or instrumentalities and also with respect to
commercial paper, bank certificates of deposit and bankers' acceptances.
Repurchase agreements are transactions in which a Fund purchases securities from
a bank or recognized securities dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed-upon date and price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. The Fund maintains custody of the underlying securities
prior to their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price which was paid by the Fund upon acquisition is accrued
as interest and included in the Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
a repurchase agreement becomes insolvent. Each Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to
5
<PAGE>
<PAGE>
present minimal credit risks in accordance with guidelines established by the
appropriate Trust's board of trustees. Mitchell Hutchins will review and monitor
the creditworthiness of those institutions under the board's general
supervision.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term 'illiquid securities' for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and municipal lease obligations (including certificates of
participation) other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the appropriate Trust's board of trustees.
Each Trust's board of trustees has delegated the function of making
day-to-day determinations of liquidity to Mitchell Hutchins, pursuant to
guidelines approved by the board. Mitchell Hutchins takes into account a number
of factors in reaching liquidity decisions, including (1) the frequency of
trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of securities in each Fund's portfolio and
reports periodically on liquidity decisions to each Trust's board of trustees.
In making determinations as to the liquidity of municipal lease
obligations, Mitchell Hutchins will distinguish between direct investments in
municipal lease obligations (or participations therein) and investments in
securities that may be supported by municipal lease obligations or certificates
of participation therein. Since these municipal lease obligation-backed
securities are based on a well-established means of securitization, Mitchell
Hutchins does not believe that investing in such securities presents the same
liquidity issues as direct investments in municipal lease obligations. The
assets used as cover for any over-the-counter ('OTC') options written by a Fund
would be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure will be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES. The Funds do not intend to lend their
portfolio securities, except under unusual circumstances, because securities
loans are transactions that generate taxable income. As indicated in the
Prospectus, however, each Fund is authorized to lend up to 331/3% of its total
assets to broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains acceptable collateral with the
Fund's custodian, marked to market daily, in an amount at least equal to the
market value of the securities loaned, plus accrued interest and dividends.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each will retain
authority to terminate any loan at any time. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. A Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Fund will retain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.
SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, the Fund will
maintain with an approved custodian in a segregated account cash or other 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
'Hedging and Related Income
6
<PAGE>
<PAGE>
Strategies,' segregated accounts may also be required in connection with certain
transactions involving options or futures contracts.
DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept 'term
to maturity.' Traditionally, a dept 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.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a Treasury note with a
remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining stated
maturity and the duration is likely to be much greater.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Fund's duration by approximately the
same amount as would holding an equivalent amount of the underlying securities.
Short futures or put options have durations roughly equal to the negative
duration of the securities that underlie these positions, and have the effect of
reducing portfolio duration by approximately the same amount as would selling an
equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. In this and other similar situations, Mitchell Hutchins 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.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
The financial condition of the State of California, its public authorities
and local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of, a Fund, or
result in the default of existing obligations, including obligations which may
be held by the Fund. The following section provides only a brief summary of the
complex factors affecting the financial condition of California, and is based on
information obtained from the State of California, as publicly available on the
date of this Statement of Additional Information. The information contained in
such publicly available documents has not been independently verified. It should
be noted that the creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness of California, and that there is no obligation
on the part of California to make payment on such local obligations in the event
of default in the absence of a specific guarantee or pledge provided by the
State of California.
The State of California has experienced significant financial difficulties
because of the 1990-93 recession, which reduced its credit standing. However,
since the start of 1994, California's economy has rebounded strongly, with
corresponding improvements in tax revenues. The ratings of certain related debt
of other issuers for which California has an outstanding lease purchase,
guarantee or other contractual obligation (such as for State-insured hospital
bonds) are generally linked directly to California's rating. Should the
financial condition of California deteriorate again, its credit ratings could be
further reduced, and the market value and marketability of all outstanding notes
and bonds issued by California, its public authorities or local governments
could be adversely affected.
ECONOMIC FACTORS. California's economy is the largest among the 50 states
and one of the largest in the world. The State's population of over 32 million
represents over 12% of the total United States population. While the State's
substantial population growth during the 1980s stimulated local economic growth
and diversification, it also increased demands on State services. Total personal
income in the
7
<PAGE>
<PAGE>
State, at an estimated $703 billion in 1994, accounts for more than 12% of all
personal income in the nation.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Job losses were the
worst of any post-war recession. Employment levels stabilized by late 1993 and
steady growth has occurred since the start of 1994. Pre-recession job levels are
expected to be reached in 1996. Unemployment, while remaining higher than the
national average, has come down significantly from the January 1994 peak of 10%.
Economic indicators show a steady recovery underway in California since the
start of 1994, although the residential housing sector is weaker than in past
recoveries. However, any delay or reversal of the recovery will exacerbate
shortfalls in State revenue.
STATE DEBT. Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund after support
of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of the State
increased from $9.4 billion at June 30, 1988 to $ billion at
. State agencies and authorities had approximately $
billion of revenue bonds and notes outstanding at for which
the State General Fund has no liability.
STATE FINANCES. Throughout the 1980's, State spending increased rapidly as
the State population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained by
Article XIIIA of the California Constitution (commonly known as 'Proposition
13') and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (commonly known as Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature and
the Governor) guarantees local school districts and community college districts
a minimum share of State General Fund revenues (currently about 35%).
Since the start of the fiscal year ('FY') 1990-91 until , the
State faced adverse economic, fiscal, and budget conditions. The economic
recession seriously affected State tax revenues. It also caused increased
expenditures for health and welfare programs. The State is also facing a
structural imbalance in its budget with the largest programs supported by the
General Fund (education, health, welfare and corrections) growing at rates
significantly higher than the growth rates for the principal revenue sources of
the General Fund.
These structural concerns will continue in future years with the expected
need to increase capital and operating costs of the correctional system in
response to a 'Three Strikes' law enacted in 1994 which mandates life
imprisonment for certain felony offenders.
Recent Budgets. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of budget imbalance, with
expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the Special
Fund for Economic Uncertainties ('SFEU') approaching $2.8 billion at its peak at
June 30, 1993. Starting in the 1990-91 Fiscal Year and for each year thereafter,
each budget required multibillion dollar actions to bring projected revenues and
expenditures into balance and to close large 'budget gaps' which were
identified. The Legislature and Governor eventually agreed on a number of
different steps to produce Budget Acts in the years 1991-92 to 1995-96,
including:
significant cuts in health and welfare program expenditures;
transfers of program responsibilities and funding from the State to local
governments, coupled with some reduction in mandates on local government;
transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
reduction in growth of support for higher education programs, coupled with
increases in student fees;
8
<PAGE>
<PAGE>
revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration has requested); and
various one-time adjustments and accounting changes.
Despite these budget actions, the effects of the recession led to large,
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY1992-93 (following two years of excess expenditures over
revenues), the General Fund had positive operating results in FY1993-94, 1994-95
and 1995-96, which are expected to reduce the accumulated budget deficit to less
than $100 million as of June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts 'borrowed' from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller was forced to issue registered warrants ('IOUs')
to pay a variety of obligations representing prior years' or continuing
appropriations, and mandates from court orders.
The State's cash condition became so serious that from late spring 1992
until 1995, the State had to rely on issuance of short term notes which matured
in a subsequent fiscal year to finance its ongoing deficit, and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowings during a fiscal
year.
Current Budget. For the first time in four years, the State entered the
fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased cut in
personal income and business taxes, was rejected by the Legislature.
In its regular budget update in , the Department of Finance
indicated that, with the strengthening economy, State General Fund revenues for
would be about $ billion, some $2 billion higher than originally
estimated. Because of mandated spending for public schools, the failure to
receive expected federal aid for illegal immigrants, and the failure of Congress
to enact welfare reform which the Administration had expected would reduce State
costs, expenditures for 1995-96 were also increased, to about $45.4 billion. As
a result, the Department estimated that the accumulated budget deficit would be
reduced to about $ million as of .
As a result of the improved revenues, the State's cash position has
substantially recovered. Only $ of cash flow borrowing was needed during
, and only about $ is projected for , with no external
borrowing over the end of the fiscal year.
The Governor's proposed budget for projects $ billion of
revenues and transfers, and $ of expenditures, resulting in a budget
reserve at of about $ . A number of issues relating to
the budget still have to be resolved, including the Governor's tax
reduction proposals, and his proposals for further health and welfare cuts.
9
<PAGE>
<PAGE>
There can be no assurance that the State will not face budget gaps in
future years. Certain major budgetary considerations affecting the State are
outlined below.
REVENUE BASE. The recession seriously affected the State's tax revenue,
which basically mirrors general economic conditions. These revenues have
rebounded strongly as the economy has improved since 1994. The principal sources
of General Fund revenues are economically sensitive, and include the California
personal income tax (43% of total FY1994-95 revenues), the sales tax (34%), bank
and corporation taxes (13%), and the gross premium tax on insurance (3%).
Personal income tax receipts are generated disproportionately by relatively few
taxpayers (the top 4% of taxpayers paid 49% of the total tax in 1990), and
capital gains are a significant component of such collections. Auto sales and
building materials are significant components of retail sales tax collections.
Tax rates are relatively high, and may impose political and economic constraints
on the ability of the State to further increase its taxes. In November 1993, the
voters approved a constitutional amendment to permanently extend 0.5 percent of
the sales tax for local law enforcement and thus not available as General Fund
revenues.
BUDGETARY FLEXIBILITY. Article XIIIB of the California Constitution,
adopted by voter initiative, established an 'Appropriations Limit' for the State
and local governments; excess state revenues are to be divided equally between
transfers to K-14 districts and refunds to taxpayers. A taxpayer refund has not
been required since FY1986-87.
Proposition 98 established a minimum expenditure base for State aid to K-14
districts, currently requiring allocation of over 34% of General Fund revenues
to such districts.
For many years starting in the early 1980s, the State maintained the SFEU
as a budget reserve in case of unexpected changes in revenues or expenditures
during a fiscal year. Since the start of the recession in 1990, the SFEU has
been in a negative balance, as the State accumulated sizable budget deficits.
The Department of Finance projects elimination of virtually all the accumulated
budget deficits with a small negative balance
.
LABOR COSTS. The State government workforce is mostly unionized, subject
to the law which authorizes collective bargaining and prohibits strikes and work
slowdowns. All of the State's collective bargaining agreements expired June 30,
1995. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund policies to reduce
current contribution requirements. If the investment assumptions used in
determining required State contributions are not sustained by actual results,
additional State contributions would be required in future years.
PUBLIC ASSISTANCE. California has the largest number of persons receiving
public assistance (Aid to Families with Dependent Children ('AFDC') and General
Relief) of any state. AFDC costs are shared among the federal government, the
State and its counties by statutory formula. Caseloads tend to rise
significantly during economic downturns, but are also significantly affected by
changing demographic and social trends which may impede the reduction of
caseloads during an economic recovery. The State has reduced AFDC payments to
meet budget pressures in recent years.
MEDI-CAL. California participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides certain of the eligible program costs, with the remainder
shared by the State and its counties. Basic program eligibility and benefits are
determined by federal guidelines, but the State currently provides a number of
optional benefits and expanded eligibility. Program costs have increased
substantially in recent years, and account for a large share of the State
budget. The State has cut optional Medi-Cal services in recent years to reduce
expenditures. Proposed changes in the federal Medicare/Medicaid program may lead
to major restructuring of these programs in California. Federal law requires the
State to adopt reimbursement rates for hospitals and nursing homes that are
reasonable and adequate to meet the costs that must be incurred by efficiently
and economically operated facilities in providing patient care.
LITIGATION. The State is involved in certain legal proceedings (described
in the State's recent financial statements) that, if decided against the State,
may require the State to make significant future expenditures or may
substantially impair revenues.
STATE ASSISTANCE TO LOCALITIES. Property tax revenues received by local
governments declined more than 50% following voter approval of Proposition 13 in
1978. Subsequently, the California Legislature
10
<PAGE>
<PAGE>
enacted measures to provide for the redistribution of the State's General Fund
surplus to local agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by the State to
assist municipal issuers to raise revenues. In response to the State's current
fiscal difficulties, the State has reduced its financial assistance to counties
and cities, and adopted measures to transfer certain governmental functions to
its counties, accompanied by new funding sources. The FY1993-94 Budget Act
eliminated the remaining Proposition 13 assistance to all local government
entities other than K-14 education districts. Such actions have compounded the
serious fiscal constraints already experienced by many local governments,
several of which have been compelled to seek special assistance from the State.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives are introduced and/or
implemented from time to time which may result in adverse fiscal or economic
effects.
The fiscal condition of local governments in California (58 counties, 480
cities and thousands of education, utility and other special districts) has been
constrained since the enactment of 'Proposition 13' in 1978, which reduced and
limited the future growth of property taxes, and limited the ability of local
governments to impose other taxes. Counties, in particular, have had fewer
options to raise revenues than many other local government entities, and have
been required to maintain many basic public services. A 1986 initiative statute,
called 'Proposition 62,' imposed additional limits on local governments,
essentially requiring either majority or 2/3 voter approval for any tax increase
(other than property taxes). Later court decisions had struck down most of
Proposition 62, and many local governments, particularly cities, had enacted or
raised local taxes without voter approval. In September 1995, the California
Supreme Court overruled the prior cases, and upheld the constitutionality of
Proposition 62. Many aspects of this decision remain unclear (such as its impact
on charter cities, and whether it will have retroactive effect), but its future
effect will be to further limit the fiscal flexibility of many local
governments.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated the remnants of this post-Proposition 13 aid, although it has also
provided additional funding sources (such as sales taxes) and reduced mandates
for local services. Nonetheless, many counties, in particular, continue to be
under severe fiscal stress. While such stress has in recent years most often
been experienced by smaller, rural counties, larger urban counties have also
been affected.
Los Angeles County, the largest in the State, has reported severe fiscal
problems. To balance its FY1995-96 budget, the county has imposed severe cuts in
services, particularly for health care. Both Moody's and S&P have reduced Los
Angeles County's debt ratings in August 1995 (to 'A' and 'A-'), respectively.
Orange County, which recently emerged from federal Bankruptcy, has substantially
reduced services and personnel in order to live within much reduced means.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
The financial condition of the State of New York ('New York State' or the
'State'), its public authorities and public benefit corporations (the
'Authorities') and its local governments, particularly The City of New York (the
'City'), could affect the market values and marketability of, and therefore the
net asset value per share and the interest income of a Fund, or result in the
default of existing obligations, including obligations which may be held by the
Fund. The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from New York State, certain of its Authorities, the City and certain
other localities, as publicly available on the date of this Statement of
Additional Information. The information contained in such publicly available
documents has not been independently verified. Such information is subject to
change upon the adoption by the State Legislature of the State's final budget
for fiscal year , which has not been enacted as of the date of this
Statement of Additional Information. Further, the adoption of a final State
budget may cause changes to the City budget for the City's fiscal year
. There
can be no assurance that such changes may not have adverse effects on the City's
cash flow, expenditures or revenues. It
11
<PAGE>
<PAGE>
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of New York State, and that there is no
obligation on the part of New York State to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by New York State.
New York State and the City are each facing serious financial difficulties
and have each experienced recent declines in their credit standings. S&P and
Moody's have each assigned ratings for New York State's general obligation bonds
that are among the three lowest of those states with rated general obligation
bonds. The ratings of certain related debt of other issuers for which New York
State has an outstanding moral obligation, lease purchase, guarantee or other
contractual obligation are generally linked directly to the State's rating. S&P
and Moody's have each assigned ratings for the City's obligations that are among
the four lowest of those cities with rated general obligation bonds. Should the
financial condition of New York State, its Authorities or its local governments
deteriorate, their respective credit ratings could be further reduced, and the
market value and marketability of their outstanding notes and bonds could be
adversely affected, and their respective access to the public credit markets
jeopardized.
ECONOMIC FACTORS. New York is the third most populous state, and has a
relatively high level of personal wealth; however, the State economy has grown
more slowly than that of the nation as a whole, resulting in the gradual erosion
of its relative economic affluence (due to such factors such as relative costs
for taxes, labor and energy). The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. New York has a declining proportion of its
workforce engaged in manufacturing and increasing proportion engaged in service
industries. The State, therefore, is likely to be less affected than the nation
as a whole during an economic recession concentrated in construction and
manufacturing sectors of the economy, but likely to be more affected during a
recession concentrated in the service-producing sector. The State's
manufacturing and maritime base have been seriously eroded, as illustrated by
the decline of the steel industry in the Buffalo area and of the apparel and
textile industries in the City. In addition, the City experienced substantial
socio-economic changes, as a large segment of its population and a significant
share of corporate headquarters and other businesses relocated (many
out-of-state).
Both the State and the City experienced substantial revenue increases in
the mid-1980s attributable directly (corporate income and financial corporations
taxes) and indirectly (personal income and a variety of other taxes) to growth
in new jobs, rising profits and capital appreciation derived from the finance
sector of the City's economy. From 1977 to its 1988 peak, the finance, insurance
and real estate sectors rose 55%, to account in 1988 for 23% of total earnings
in the City and 14% statewide (compared to 7% nationwide). The finance sector's
growth was a catalyst for the New York metropolitan region's related business
and professional services, retail trade and residential and commercial real
estate markets. The then rising real estate market contributed to City revenues,
as higher property values and new construction added to collections from
property taxes, mortgage recording and transfer taxes and sales taxes on
building materials. The boom on Wall Street more than compensated for the
continued erosion of the State's (and the City's) manufacturing and maritime
base, since average wages in the finance, insurance and real estate sector and
related business and professional services were substantially higher (thereby
providing a net increase of higher incomes, taxed at even higher marginal
rates).
During the calendar years 1984 through 1991, the State's rate of economic
expansion was somewhat slower than that of the nation as a whole. In the
1990-1991 national recession, the economy of the Northeast region in general and
the State in particular was more heavily damaged than that of the rest of the
nation and has been slower to recover.
Although the national economy began to expand in 1991, the State economy
remained in recession until 1993, when employment growth resumed. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility and defense industries. Personal
income increased substantially in 1992 and 1993. The State's economy entered
into the third year of a slow recovery in 1995. Most of the growth occurred in
the trade, construction and service industries, with business, social services
and health sectors accounting for most
12
<PAGE>
<PAGE>
of the service industry growth. According to assumptions contained in the State
financial plan for FY1995-96 issued on June 20, 1995 (the '1995-96 State
Financial Plan'), employment was projected to grow slightly during 1995,
although the rate of increase was expected to be below the rate experienced in
1994, due to cutbacks in governmental spending and employment at all levels, as
well as continued corporate downsizing. The Third Quarterly Update to the
1995-96 State Financial Plan issued on January 30, 1996 (the 'Third Quarterly
Update') contained a marginally weaker economic forecast than that contained in
the initial 1995-96 State Financial Plan, and predicts a significant slowing of
state employment growth during calendar year 1996, due to the forecasted,
slackening pace of national economic growth, industry consolidation and
shrinking governmental employment. The State financial plan for 1996-97 (the
'1996-97 State Financial Plan') contained in the proposed Governor's Executive
Budget initially presented on December 15, 1995 and amended on March 15, 1996
(the '1996-97 Executive Budget') continues to predict a slowing of State
employment growth in the public sector during calendar year 1996, but forecasts
slow growth in the private sector during the same time period. The forecast
reflects a continuation of the slower growth for the State of New York than for
the nation as a whole.
Notwithstanding the State budget for which enacted significant
tax and program reductions, and the Executive Budget (which has not been
adopted into law) which proposes further program reductions, the State can
expect structural deficits to occur in future years. Both the Financial
Plan and the Financial Plan reflect actions or measures which provide
non-recurring resources (sometimes referred to as 'one shots') estimated to
provide approximately $ billion savings in and approximately $
billion of savings in . Additionally, the three-year plan to reduce
State personal income taxes, as discussed below briefly, will decrease State tax
receipts by an estimated $ billion in . Similarly, other actions
taken to reduce disbursements in the State's , such as reductions in
the State workforce and Medicaid and welfare expenditures, are expected to
provide greater reductions in future fiscal years. The net impact of these and
other factors is expected to produce a potential imbalance in receipts and
disbursements for State's and future fiscal years. Additionally,
uncertainties with regard to both the economy and potential decisions to be made
at the federal level add further pressure on the balanced budget outlook for
and beyond. For example, various proposals relating to federal tax
and spending policies may have a significant impact on the State's financial
condition in and future fiscal years.
Further, there can be no assurance that the State economy will not
experience worse-than-predicted results in with corresponding
material and adverse effects on the State's projections of receipts and
disbursements. Although the Third Quarter Update reflects a continued balance in
the State Financial Plan, certain receipts collected through
varied from the estimates contained in earlier updates to the
State Financial Plan. The effects of such changes in receipts is still
under review, consequently the predictive nature of such forecasts is difficult
to ascertain. In any case, as all State Financial Plans are based upon forecasts
of national and State economic activity it should be noted that many
uncertainties exist in such forecasts, including federal financial and monetary
policies, the availability of credit and the condition of the world economy. In
addition, the economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
complex, may vary from year to year and are frequently the results of actions
taken not only by the State and its agencies and instrumentalities, but also by
other entities, such as the federal government, that are not under the control
of the State.
The fiscal health of the State may also be impacted by the fiscal health of
the City. Although the City has had a balanced budget since 1981, estimates of
the City's future revenues and expenditures are subject to various
uncertainties. For example, the effects of the October 1987 stock market crash
and the 1990-92 national recession have had a disproportionately adverse impact
on the New York City metropolitan region, as private sector job losses since
1989 have offset all the prior employment gains of the 1980s. Declines in both
employment and earnings in the finance sector contributed to declines in retail
sales and real estate values. In addition, a number of widely publicized
bankruptcies among highly leveraged retailing and brokerage companies occurred.
The effects of the recession have extended to banking, insurance, business
services (such as law, accounting and advertising), publishing and
communications. Factors which may inhibit the City's economic recovery include
(i) credit restraints
13
<PAGE>
<PAGE>
imposed by the weak financial condition of several major money center banks
located in the City; (ii) increases in combined State and local tax burdens, if
uncompetitive tax rates are imposed; (iii) perceived declines in the quality of
life attributable to service reductions and the deterioration of the City's
infrastructure; (iv) additional employment losses in the City's banking sector
or corporate headquarters complex due to further corporate relocations or
restructurings; or (v) increased expenditures for public assistance and health
care. The City's future economic condition will also likely be affected by its
competitive position as a world financial center (compared to London, Tokyo,
Frankfurt and competing regional U.S. centers). Investors should note that the
budget for the City contained provisions to close a projected $
billion budget gap and the City Budget, contain similar provisions to
address a budget gap of approximately $ billion. Many of such budget-gap
closing initiatives may be implemented only with the cooperation of the City's
municipal unions, or the State or Federal governments. No assurance can be given
that such initiatives will be successfully undertaken.
While the State's economy is broader-based than that of the City,
particular industries are concentrated in and have a disproportionate impact on
certain areas, such as heavy industry in Buffalo, photographic and optical
equipment in Rochester, machinery and transportation equipment in Syracuse and
Utica-Rome, computers in Binghamton and in the Mid-Hudson Valley and electrical
equipment in the Albany-Troy-Schenectady area. Constraints on economic growth,
taxpayer resistance to proposed substantial increases in local tax rates, and
reductions in State aid in regions apart from the City have contributed to
financial difficulties for several county and other local governments.
THE STATE. As noted above, the financial condition of the State is
affected by several factors, including the strength of the State and its
regional economies, actions of the federal government, and State actions
affecting the level of receipts and disbursements. Owing to these and other
factors, the State may, in future years, face substantial potential budget gaps
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the future costs of maintaining State programs
at current levels.
The State has been experiencing and continues to experience substantial
financial difficulties with General Fund (the principal operating account)
deficits incurred during FY1989-90 through FY1991-92. The State's accumulated
General Fund deficit (on a GAAP basis) grew 91% from FY1986-87 to FY1990-91, and
reached a then-record $6.265 billion (audited) by March 31, 1991. An accumulated
General Fund deficit at March 31, 1992 was restated to be $4.616 billion and at
March 31, 1993 was $2.551 billion. The State ended FY1993-94 with a negative
General Fund balance of $1.637 billion. This represented an improvement over
prior fiscal years, primarily due to an improving national and State economy
resulting in higher-than-expected receipts from personal income tax and various
business taxes and the relative success of the New York Local Government
Assistance Corporation ('LGAC'). The General Fund showed an operating surplus of
$914 million (on a GAAP basis). The State's budget for FY1994-95 was adopted on
June 8, 1994, more than two months after the beginning of the State's fiscal
year and has made all of the required quarterly revisions thereto as of the date
hereof. The State ended its FY1994-95 reporting a General Fund operating deficit
of $1.426 billion, primarily due to change in accounting methodologies used by
the State Comptroller and the use of $1.026 billion of the FY1993-94
cash-surplus to fund operating expenses in FY1994-95. These factors were offset
by net proceeds of $315 million of bonds issued by LGAC. Actual receipts
reported fell short of original projections, primarily in the categories of
business taxes. These shortfalls were offset by better than expected performance
in the remaining taxes, principally the user taxes and fees. Total expenditures
for FY1994-95 increased $2.083 billion, or 6.7% over the prior fiscal year.
On June 7, 1995, the New York State Legislature passed the final
legislation regarding the State's FY1995-96 budget, again adopting such budget
more than two months after the beginning to the State's fiscal year. Both the
enacted budget bills and the State Financial Plan for FY1995-96 included the
reductions in the actual level of spending from that which occurred in FY1994-95
and projected reductions in Medicaid and State Authority operating costs. The
FY1995-96 budget also projected an approximate increase of 3% in all
governmental funds over the amounts received in FY1994-95 and includes the
phase-in of a three-year reduction in the State's personal income tax. The
Executive Budget projects a $ budget gap, which it proposes to
close largely by Medicaid cost
14
<PAGE>
<PAGE>
containment measures (approximately $ billion), welfare reform (approximately
$[240] million) and restructuring of the state healthcare delivery system
(approximately $ million). The phased reduction of the State's personal income
tax is continued in the 1996-97 Executive Budget. Although as stated above, the
Governor released his [1996-97] Executive Budget on and
issued amendments thereto on March 15, 1996, the New York State Legislature, as
of the date of this Statement of Additional Information, has not passed final
legislation adopting a budget for . There can be no assurances that
the Legislature will enact the Executive Budget or that the actual
budget for adopted by the Legislature will not differ materially from
the brief description of the Executive Budget contained herein.
Further, the actual budget adopted by the Legislature for may be
materially adversely impacted by future changes to federal entitlement programs
either not foreseen or inaccurately forecast at the time such budget legislation
is actually enacted. The amendments made in to the
Executive Budget contained a contingency plan intended to address the failure of
the federal government to adopt entitlement changes which were assumed initially
in the Executive Budget. Uncertainties
at the federal level continue to represent significant risk to the efficacy of
any budget adopted for .
There can be no assurance that the State will not face budget gaps in
future years, resulting from a disparity between tax revenues projected from a
lower recurring-receipts base and the spending required to maintain State
programs at current levels. Furthermore, the State is a party to numerous
lawsuits in which an adverse decision could require extraordinary expenditures.
Certain major budgetary considerations affecting the State are outlined below.
REVENUE BASE. The State's principal revenue sources are economically
sensitive, and include the
personal income tax
, user taxes and fees
and business taxes
General Fund tax receipts, respectively). Uncertainties in taxpayer behavior as
a result of actual and proposed changes in Federal tax law also may have an
adverse impact on State tax receipts. One-fourth of the 4% State sales tax has
been dedicated to pay debt service of LGAC, and has correspondingly reduced
General Fund receipts. To the extent those moneys are not necessary for payment
to LGAC, they are transferred from the LGAC Tax Fund to the General Fund and
reported as a transfer from other funds rather than as a sales and use tax
receipts. During FY1991-1992, 1992-93, 1993-94 and 1994-95, moneys were so
transferred. Capital gains are a significant component of income tax
collections. Auto sales and building materials are significant components of
retail sales tax collections. Tax rates are relatively high and may impose
political and economic constraints on the ability of the State to further
increase its taxes. In 1995, the State enacted a tax-reduction program designed
to reduce, by 20 percent over three years, receipts from the personal income
tax. The tax had remained unchanged since 1989 as a result of annual deferrals
of tax reductions originally enacted in 1987. The tax-reduction program is
estimated to reduce receipts by $ , million in ,
$ and to produce further significant reductions in
FY1997-98. In addition to such reductions in overall tax rates, the
tax-reduction program also includes other modifications to the tax laws which
will have the effect of lowering the amount of tax revenues to be received by
the State. In the absence of countervailing economic growth or expenditure cuts
the tax cuts could make the achievement of a balanced State budget more
difficult in future years. A significant risk to the 1996-97 State Financial
Plan arises from proposed tax legislation in the U.S. Congress. Changes to the
federal tax treatment of capital gains, if made, are likely to flow
automatically to the State personal income tax. Such changes, depending upon
their precise character and timing, as well as taxpayer response, could produce
revenue loss during FY1996-97.
STATE DEBT. New York has the heaviest debt burden of any state (with
approximately $ billion of general obligation, $ billion of LGAC debt and
$ of lease-purchase or other contractual debt outstanding as of
), and debt service costs absorb a large share of the State's
budget. As of , the State is also obligated with respect to
approximately $ for statutory moral obligations for nine of its
Authorities and for guarantees of $ of other Authority debt.
Historically, the State has had one of the largest seasonal financing
requirements of any municipal issuer, and was required each spring to borrow
substantial sums in the credit markets to
15
<PAGE>
<PAGE>
finance its accumulated general fund deficit and its scheduled payments of aid
to local governments and school districts. In an effort to reduce such seasonal
borrowings, the State created LGAC as a financing vehicle to finance the State's
local assistance payments by issuing long-term debt, payable over 30 years from
a portion of the State sales tax (as discussed above). The State budget for
and the State Financial Plan each proposed to utilize the
remainder of authorized but yet unissued LGAC bonds. As of , LGAC had
issued bonds and notes to provide net proceeds of $[4.7 billion], thus
completing the LGAC program. The impact of LGAC's borrowing is that the State
was able to meet its cash flow needs in the first quarter of without
relying on short-term seasonal borrowings. Neither the State Financial
plan nor the State Financial Plan included a spring borrowing, the first
time in years that there was no short-term borrowing. Investors should note
that the enabling legislation for LGAC contains a covenant restricting the
amount of the State's spring borrowing, which may reduce the State's fiscal
flexibility in future years.
BUDGETARY FLEXIBILITY. A significant portion of the State's General Fund
budget is accounted for by contractually required expenses (such as pension and
debt service costs) and by federally mandated programs (such as AFDC and
Medicaid). In addition, State aid for school districts comprises a major share
of the budget, and total appropriations and distribution of such aid is
especially contentious politically. Furthermore, the State's ability to respond
to unanticipated developments in the future may have been impaired since the
State has utilized a substantial range of actions of a non-recurring nature in
recent years to finance its General Fund operations, including tapping excess
monies in special funds, refinancing outstanding debt to reduce reserve fund
requirements and current (but not long-term) debt service costs, recalculating
pension fund contributions, selling State assets, reimbursing past General Fund
expenditures by the issuance of authority debt and deferring payment for
expenditures to future fiscal years. The 1995-96 State Financial Plan contains
actions of a non-recurring nature including mergers of certain authorities,
payments from the sale of certain State assets and payments associated with the
resolution of certain court cases, totalling approximately $ .
The Executive Budget contains actions of a non-recurring nature to the
extent of approximately $ billion.
LABOR COSTS. The State government workforce is mostly unionized, subject
to the Taylor Law which authorizes collective bargaining and prohibits (but has
not, historically, prevented) strikes and work slowdowns. Costs for employee
health benefits have increased substantially, and can be expected to further
increase. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund investment return
assumptions to reduce current contribution requirements. If such investment
earnings assumptions are not sustained by actual results, additional State
contributions will be required in future years to meet the State's contractual
obligations. The State's change in actuarial method from the aggregate cost
method to a modified projected unit credit in FY1990-91 created a substantial
surplus that was amortized and applied to offset the State's contribution
through FY1993-94. This change in actuarial method was ruled unconstitutional by
the State's highest court and the State has returned to the aggregate cost
method in FY1994-95 using a four-year phase-in. Employer contributions,
including the State's, are expected to increase over the next five to ten years.
PUBLIC ASSISTANCE. New York has the second largest number of persons
receiving public assistance (AFDC and Home Relief) of any state. AFDC costs are
shared among the federal government, the State and its counties (including the
City) by statutory formula. Caseloads tend to rise significantly during economic
downturns, but have fallen only in the later stages of past economic recoveries.
MEDICAID. New York participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides a substantial portion of eligible program costs, with the
remainder shared by the State and its counties (including the City). Basic
program eligibility and benefits are determined by federal guidelines, but the
State provides a number of optional benefits and expanded eligibility. Program
costs have increased substantially in recent years, and account for a rising
share of the State budget. Federal law requires that the State adopt
reimbursement rates for hospitals and nursing homes that are reasonable and
adequate to meet the costs that must be incurred by efficiently and economically
operated facilities in providing patient care, a standard that has led to past
litigation by hospitals and nursing homes seeking higher
16
<PAGE>
<PAGE>
reimbursement from the State. The budget adopted for FY1995-96 and, in
particular, the 1996-97 Executive Budget includes reductions in spending for
Medicaid. Cutbacks in State spending for Medicaid may adversely affect the
financial condition of hospitals and health care institutions that are the
obligors of bonds that may be held by the Fund.
THE STATE AUTHORITIES. The State's Authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself, and may issue bonds and notes within the amounts of, and as otherwise
restricted by, their legislative authorization. The New York State Public
Authorities Control Board approves the issuance of debt and major contracts by
10 of the Authorities. As of ,
there were Authorities that had outstanding debt of $ or
more, the aggregate debt of which (including refunding bonds and moral
obligation, lease-purchase, contractual obligation or State-guaranteed debt)
then totaled approximately $ . As of ,
aggregate public authority debt outstanding as State-supported debt was
$ and State-related debt was $ . In recent
years, the State has provided financial assistance through appropriations, in
some cases of a recurring nature, to certain Authorities for operating and other
expenses and (from 1976 to 1987) in fulfillment of its commitments on moral
obligation indebtedness or otherwise, for debt service. The State budgeted
operating assistance of approximately $ for the Metropolitan
Transportation Authority ('MTA') during and estimated total
State assistance in to be approximately $ .
This assistance is expected to continue to be required (and may increase) in
future years. Failure by the State to appropriate necessary amounts or to take
other action to permit the Authorities to meet their obligations could adversely
affect the ability of the State and the Authorities to obtain financing in the
public credit markets and the market price of the State's outstanding bonds and
notes.
The MTA, whose credit rating was recently reduced, oversees the operation
of the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the 'TA'). MTA subsidiaries operate certain commuter rail and bus
lines in the New York metropolitan area. An affiliated agency, the Triborough
Bridge and Tunnel Authority ('TBTA'), operates certain intrastate toll bridges
and tunnels. To maintain its facilities and equipment, which deteriorated
significantly in the late 1970s due to deferred maintenance, the MTA prepares a
five year capital program subject to approval by the MTA Capital Program Review
Board. In April 1993, the State Legislature authorized the funding of a portion
of a five year $9.56 billion capital plan for the MTA for 1992 through 1996.
MTA's five year capital program for 1992-96 was approved by the State Capital
Program Review Board in December 1993. There can be no assurance that all
governmental actions for the 1992-96 Capital Program will be taken, that funding
sources currently identified will not be decreased or eliminated, or that the
Capital Program will not be delayed or reduced. If the Capital Program is
delayed or reduced, ridership and fare revenues may decline, which could impair
the MTA's ability to meet its operating expenses without additional State
assistance. In addition, because fares are not sufficient to finance its mass
transit operations, the MTA has depended and will continue to depend for
operating support upon a system of State, local government and TBTA support,
and, to the extent available, Federal assistance (including loans, grants and
operating subsidies). There can be no assurance that any such assistance will
continue at any particular level or in any fixed relationship to the operating
costs and capital needs of the MTA.
THE CITY. The City has required, and continues to require significant
financial assistance from the State. The City depends on the State to enable the
City to balance its budget and meet its cash requirements. In the early 1970s,
the City incurred substantial operating deficits, and its financial controls,
accounting practices and disclosure policies were widely criticized. In 1975,
the City encountered severe financial difficulties and lost access to the public
credit markets. The State Legislature responded in 1975 by creating the
Municipal Assistance Corporation For The City of New York ('MAC') to provide
financing assistance for the City and the Financial Control Board to exercise
certain oversight and review functions with respect to the City's finances. The
Financial Control Board's powers over the City were suspended in June 1986, but
would be reinstated (under current law) if the City experiences certain adverse
financial circumstances. At the time of the fiscal crisis the State provided
substantial financial assistance to the City, the Federal government provided
the City with direct seasonal loans and guarantees on the City's long-term debt
and the City's labor unions accepted
17
<PAGE>
<PAGE>
deferrals of wage increases and approved purchases of City bonds by the pension
funds. No assurance can be given that similar assistance would again be made
available if needed, particularly given the current budgetary constraints faced
by both the Federal and State governments.
The City provides services usually undertaken by counties, school districts
or special districts in other large urban areas, including the provision of
social services such as day care, foster care, health care, family planning,
services for the elderly and special employment services for needy individuals
and families who qualify for such assistance. State law requires the City to
allocate a large portion of its total budget to Board of Education operations,
and mandates that the City assume the local share of public assistance and
Medicaid costs. While the City has had GAAP operating surpluses in recent fiscal
years, the City has experienced growing financial difficulties, primarily
related to the impact of the recession on the local economy (reducing revenues
from most major taxes and increasing public assistance and Medicaid caseloads),
rising health care costs for City employees and for Medicaid and rising
inflation and interest rates. In response, the City implemented gap-closing
programs, which initially relied primarily on actions of a non-recurring nature,
but included substantial property tax rate increases and a personal income tax
surcharge imposed in FY1991 and selected service cutbacks. Reductions in State
aid, larger than budgeted labor settlements and increased police expenditures
added to the adverse budgetary impact of the local recession, confronting the
City with a potential $3.5 billion imbalance during FY1992 budget negotiations.
This initial budget gap was closed by adoption of a budget providing for various
tax increases and significant service reductions. Aid to nonprofit cultural
institutions in the City was significantly reduced (as was State aid to such
institutions), including certain institutions that are obligors of bonds that
may be held by a Fund.
The City's budget for FY1993-94 identified measures to close a $300 million
budget gap, which was the result of shortfalls in federal and State aid from
previously projected levels. The City achieved balanced operating results as
reported in accordance with GAAP for FY1993-94. For FY1994-95, the City adopted
a budget which halted the trend in recent years of substantial increases in
City-funded spending from one year to the next. The City budget adopted for
reduces City-funded spending for the second consecutive year and
the City Budget calls for reduction of City-funded spending for the
third consecutive year. Pursuant to State law, the City prepares a four-year
annual financial plan, which is reviewed and revised on a quarterly basis and
includes the City's capital, revenue and expense projections and outlines
proposed budget gap-closing programs for those years with projected budget gaps.
The Mayor is responsible for preparing the City's four-year financial plan
including the City's current financial plan for the
. The
City's projections set forth in the 1997-2000 Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly effect the City's
ability to balance its budget and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the timing and pace of
a regional and local economic recovery, increases in tax revenues, employment
growth, the ability to implement proposed reductions in City personnel and other
cost reduction initiatives which may require in certain cases the cooperation of
the City's municipal unions, the ability of New York City Health and Hospitals
Corporation and the Board of Education to take actions to offset reduced
revenues, the ability to complete revenue generating transactions, provision of
State and federal aid and mandate relief, and the impact on City revenues of
proposals for federal and State welfare reform. No assurance can be given that
the assumptions used by the City in the 1997-2000 Financial Plan will be
realized. Due to the uncertainty existing on the federal and state levels, the
ultimate adoption of the State budget for may result in substantial
reductions in projected expenditures for social spending programs.
Cost-containment assumptions contained in the 1997-2000 Financial Plan and the
City Budget may therefore be significantly adversely affected upon
the final adoption of the State budget for . Furthermore, actions
taken in recent fiscal years to avert deficits may have reduced the City's
flexibility in responding to future budgetary imbalances, and have deferred
certain expenditures to later fiscal years.
The City's original budget for FY1994-95 reflected proposed actions to
eliminate a $2.3 billion budget gap. The City submitted on July 21, 1995 a
fourth quarter modification to the City's financial plan for FY1994-95 which
projects a balanced budget in accordance with GAAP for the City's FY1994-95. On
July 11, 1995, the City submitted the 1996-1999 Financial Plan, which is based
on the City's expense
18
<PAGE>
<PAGE>
and capital budgets for the City's FY1995-96 adopted on June 14, 1995 (the '1996
City Budget'). The 1996 City Budget set forth proposed actions by the City for
FY1995-96 to close a substantial
resulting from lower than projected tax receipts
and other revenues and greater then projected expenditures. Proposed actions in
the 1996-1999 Financial Plan for the City's included a reduction of
approximately $ million primarily affecting public assistance and Medicaid
payments by the City, expenditure reductions in agencies totalling approximately
$ and transitional labor savings of approximately $ .
These and other proposed actions were contained in the 1996-1999 Financial Plan
as well as the City Budget.
The City Budget identifies a $ billion budget gap which it
attempts to close by implementing a variety of actions, including an approximate
$ billion reduction in City spending for a variety of services and programs,
a renewal of the % personal income tax surcharge, and the use of
non-recurring measures estimated to provide approximately $ billion in
one-time savings. The City Budget has been the subject of
substantial criticism questioning, among other things, the capacity of the City
to generate future revenues sufficient to meet expected expenditure increases
and to provide necessary municipal services. Such criticism has also noted the
City's reliance on non-recurring resources to close budget gaps and has charged
that the City has made no progress in achieving structural balance.
The City Budget, like all City budgets, is subject to the
ability of the City to implement the reductions in expenditures, personal
services and personnel, which are substantial and may be difficult to implement.
For example, one of the key items contained in the City Budget is the
sale of the City's water system for approximately $ . This plan has
been hotly contested since it was announced, has been the the focus of several
lawsuits and has been ruled illegal by the lower court and the appeals court. It
is unclear whether a final appeal will be made. Further, the City FY
Budget and the 1997-2000 Financial Plan reflect the costs of tentative
settlements with a coalition of municipal unions which together represent
approximately 2/3 of its workforce. There can be no assurance that such proposed
settlement will be ratified. In addition, certain proposals may be offset by
various State and federal legislation which could mandate levels of City funding
inconsistent with either the City FY Budget or the 1997-2000 Financial
Plan. In addition, the 1997-2000 Financial Plan anticipates the receipt of
substantial amounts of Federal aid. Certain proposed State and federal actions
are subject to legislative, the governor's and the president's approvals, as
applicable. Both federal and State actions are uncertain. Certain legislative
proposals contemplate significant reductions in federal spending, including
proposed federal welfare reform which could result in caps on, or block grants
of, federal programs. Further, no assurance can be given that either such
actions will in fact be taken or that the projected savings will result even if
such actions are taken.
The City derives its revenues from a variety of local taxes, user charges,
miscellaneous revenues and federal and State unrestricted and categorical
grants. The City projects that local revenues will provide approximately %
of total revenues in while federal aid, including categorical
grants, will provide % in and State aid, including
unrestricted aid and categorical grants, will provide % in .
As a proportion of total revenues, State aid has remained relatively constant
over the period from 1980 to , while federal aid was sharply reduced
(having provided nearly 20% of total fiscal year 1980 revenues). The largest
source of the City's revenues is the real estate tax (approximately 21.5% of
total revenues projected for , at rates levied by the City council
(subject to certain State constitutional limits). The City derives the remainder
of its tax revenues from a variety of other economically sensitive local taxes
(subject to authorization by the legislature), including: a local sales and
compensating use tax (primarily dedicated to MAC debt service) imposed in
addition to the State's retail sales tax; the personal income tax on City
residents and the earnings tax on non-residents; a general corporation tax; and
a financial corporation tax. High tax burdens in the City impose political and
economic constraints on the ability of the City to increase local tax rates. The
City's four-year financial plans have been the subject of extensive public
comment and criticism, principally questioning the reasonableness of assumptions
that the City will have the capacity to generate sufficient revenues in the
future to provide the level of services contained in such City financial plans.
On July 10, 1995, S&P lowered the City's credit rating from A- to BBB+, among
the lowest ratings of any major city in the country. The rating agency cited
specifically the City budget's reliance on 'one-shot'
19
<PAGE>
<PAGE>
measures to balance the budget for FY1995-96 without rectifying the underlying
structural problems, its continued optimistic projections of State and federal
aid, and continued high debt levels.
The City is the largest municipal debt issuer in the nation, and has more
than doubled its debt load since the end of FY1987-88, in large measure to
rehabilitate its extensive, aging physical plant. The City's seasonal borrowing
needs increased significantly during FY1989-90 and FY1990-91, largely due to
delayed State aid payments, and totalled $2.25 billion in FY1991-92, $1.40
billion in FY1992-93, $1.75 billion in FY1993-94, $2.2 billion in FY1994-95,
$2.4 billion in FY1995-96 and $ billion in FY1996-1997. The City's current
capital financing program reflects major reductions (approximately $
) in the size of the capital program to be implemented cumulatively
through which is intended to reduce future debt service
requirements. The reduced program was implemented to meet the constraint of the
forecast level of the State constitutional limits on the City's power to incur
debt. Such reductions may adversely affect the condition of the City's aging and
deteriorating infrastructure and physical assets, such as sewers, streets,
bridges and tunnels, and mass transit facilities. It is not certain that such
proceeds will become available for capital improvements, because, as discussed
above, the legality of the sale of the water system has been challenged.
In November 1993, the voters approved a proposed charter whereby Staten
Island would secede from the City. Staten Island is one of five
counties/boroughs, comprising % of the City's population and 19% of its land
area. State law provides a complex mechanism for such secession.
OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems which, if significant, could lead to requests for additional
State assistance during the State's [FY1995-96] and thereafter. Fiscal
difficulties experienced by the City of Yonkers, for example, could result in
State actions to allocate State resources in amounts that cannot yet be
determined. In the recent past, the State provided substantial financial
assistance to its political subdivisions, totaling approximately 68% of General
Fund disbursements in the State's FY1992-93, 69% for FY1993-94, 70% for
FY1994-95 % for FY1995-96 and estimated to account for % of General Fund
disbursements in FY1996-97, primarily for aid to elementary, secondary and
higher education and Medicaid and income maintenance and local transportation
programs. The Legislature enacted substantial reductions from previously
budgeted levels of State aid since December 1990. To the extent the State is
constrained by its financial condition, State assistance to localities may be
further reduced, compounding the serious fiscal constraints already experienced
by many local governments. Localities also face anticipated and potential
problems resulting from pending litigation (including challenges to local
property tax assessments), judicial decisions and socioeconomic trends.
The total indebtedness of all localities in the State, other than New York
City, was approximately $ billion as of the localities' fiscal years ending
during (the date of the latest data available). A small portion
(approximately $ million) of this indebtedness represented borrowing to
finance budgetary deficits issued pursuant to enabling State legislation
(requiring budgetary review by the State Comptroller). Subsequently, certain
counties and other local governments have encountered significant financial
difficulties including the counties of Nassau, Suffolk, Monroe and Westchester
and the City of Buffalo. The State has imposed financial control on the City
from 1977 to 1986 and on the City of Yonkers since 1984 under an appointed
control board in response to fiscal crises encountered by such municipalities.
The Legislature imposed certain limited fiscal restraints on Nassau and Suffolk
counties, and authorized their issuance of deficit bonds to finance over several
years their respective 1992 operating deficits.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for the Funds without the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the applicable Fund or (2) 67% or more of
the shares 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 the amount of total assets will not be considered a
violation of any of the following limitations.
20
<PAGE>
<PAGE>
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.
(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.
(7) In addition, each of the Funds has a fundamental limitation
requiring it to invest, except for temporary defensive purposes or
under unusual market conditions, at least 80% of its net assets:
(a) in the case of California Tax-Free Income Fund, in debt
obligations issued by the State of California, its
municipalities and public authorities or by other issuers if
such obligations pay interest that is exempt from federal
income tax and California personal income tax and is not an
item of tax preference for purposes of the federal alternative
minimum tax ('AMT exempt interest');
(b) in the case of National Tax-Free Income Fund, in debt
obligations issued by states, municipalities and public
authorities and other issuers that pay interest that is exempt
from federal income tax ('municipal obligations') and that
also is AMT exempt interest;
(c) in the case of Municipal High Income Fund, in municipal
obligations; and
(d) in the case of New York Tax-Free Income Fund, in debt
obligations issued by the State of New York, its
municipalities and public authorities or by other issuers if
such obligations pay interest that is exempt from federal
income tax as well as New York State and New York City
personal income taxes and is AMT exempt interest.
In addition, California Tax-Free Income Fund and National Tax-Free Income
Fund each will not:
(8) 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
21
<PAGE>
<PAGE>
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,
fundamental restriction (8): Each state (including the District of
Columbia and Puerto Rico), territory and possession of the United
States, each political subdivision, agency, instrumentality and
authority thereof, and each multi-state agency of which a state is
a member is a separate 'issuer.' When the assets and revenues of
an agency, authority, instrumentality or other political
subdivision are separate from the government creating the
subdivision and the security is backed only by the assets and
revenues of the subdivision, such subdivision would be deemed to
be the sole issuer. Similarly, in the case of an IDB or PAB, if
that bond is backed only by the assets and revenues of the
non-governmental user, then that non-governmental user would be
deemed to be the sole issuer. However, if the creating government
or another entity guarantees a security, then to the extent that
the value of all securities issued or guaranteed by that
government or entity and owned by the Fund exceeds 10% of the
Fund's total assets, the guarantee would be considered a separate
security and would be treated as issued by that government or
entity.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by each Trust's board of trustees without shareholder approval.
Each Fund will not:
(1) invest more than 10% of its net assets in illiquid securities, a
term which means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities and includes,
among other things, repurchase agreements maturing in more than
seven days.
(2) 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.
(3) 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.
(4) 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.
(5) purchase securities while borrowings in excess of 5% of its total
assets are outstanding.
It is possible that one or more of the Funds from time to time will invest
more than 25% of its total assets in a particular segment of the municipal
securities market, such as hospital revenue bonds, housing agency bonds, IDBs,
PABs or airport bonds or in securities the interest upon which is paid from
revenues of a similar type of project. In such circumstances, economic,
business, political or other changes affecting one bond might also affect other
bonds in the same segment, thereby potentially increasing market risk.
22
<PAGE>
<PAGE>
HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ('Derivative Instruments'), including certain options,
futures contracts (sometimes referred to as 'futures') and options on futures
contracts, to attempt to hedge the Funds' portfolios or to attempt to enhance
the Funds' income. A Fund may enter into transactions using one or more types of
Derivative Instruments, under which the full value of its portfolio is at risk.
Under normal circumstances, however, a Fund's use of those instruments will
place at risk a much smaller portion of its assets. In particular, each Fund may
use the Derivative Instruments described below:
OPTIONS ON DEBT SECURITIES -- A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise during the option term, to buy the underlying security
at the exercise price. Options on debt securities are traded primarily in the
OTC market rather than on any of the several options exchanges. At present, only
options on U.S. Treasury securities are listed for trading on any recognized
exchange.
OPTIONS ON INDEXES OF DEBT SECURITIES -- An index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payments and do not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize and the writer will pay an amount
based on the difference between the exercise price and the closing price of the
index. Currently, options on indexes of debt securities do not exist.
MUNICIPAL BOND INDEX FUTURES CONTRACTS -- A municipal bond index futures
contract is a bilateral agreement pursuant to which one party agrees to accept
and the other party agrees to make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the bonds comprising the index is
made; generally contracts are closed out prior to the expiration date of the
contract.
MUNICIPAL DEBT AND INTEREST RATE FUTURES CONTRACTS -- A municipal debt or
interest rate futures contract is a bilateral agreement pursuant to which one
party agrees to accept and the other party agrees to make delivery of the
specific type of debt security called for in the contract 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, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Currently there is no public market for municipal debt futures
contracts.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance, which 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.
GENERAL DESCRIPTION OF HEDGING STRATEGIES. 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 to partially or fully
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
23
<PAGE>
<PAGE>
example, a Fund might purchase a put option on a security to hedge against a
potential decline in the value of that security. If the price of the security
declined below the exercise price of the put, the Fund could exercise the put
and thus limit its loss below the exercise price to the premium paid plus
transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, the
Fund might be able to close out the put option and realize a gain to offset the
decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a 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, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Fund might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Fund owns or
intends to acquire. Derivative Instruments on debt securities may be used to
hedge either individual securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
Securities and Exchange Commission ('SEC'), the several options and futures
exchanges upon which they are traded and the Commodity Futures Trading
Commission ('CFTC'). In addition, a Fund's ability to use Derivative Instruments
will be limited by tax considerations. See 'Taxes.'
In addition to the products and strategies described below, Mitchell
Hutchins expects to discover additional opportunities in connection with
options, futures contracts and other derivative contracts and hedging
techniques. These new opportunities may become available as Mitchell Hutchins
develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new options, futures contracts or other techniques
are developed. Mitchell Hutchins may utilize these opportunities to the extent
that they are consistent with the Funds' investment objectives and permitted by
the Funds' investment limitations and applicable regulatory authorities. The
Funds' Prospectus or SAI 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 CONTRACTS. 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 Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Derivative Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments 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 unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which
Derivative Instruments are traded. 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 projected a decline in the price of a security
in the Fund's portfolio, and the price of
24
<PAGE>
<PAGE>
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 Hedging Instruments involving obligations to third parties (i.e.,
Derivative Instruments other than purchased options). If a Fund were 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
position expired or matured. These requirements might impair a Fund's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that a Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a 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 contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose a Fund to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ('covered') position in securities or
other options or futures contracts or (2) cash 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 hedging 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, the commitment of a large portion of
a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put and call options, on debt securities. The purchase of call options
serves as a long hedge, and the purchase of put options serves as a short hedge.
Writing covered put or call options can enable a Fund to enhance income by
reason of the premiums paid by the purchasers of such options. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options serves as a limited
short hedge, because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security at less than its market value. If the covered
call option is an OTC option, the securities or other assets used as cover would
be considered illiquid to the extent described under 'Investment Policies and
Restrictions -- Illiquid Securities.'
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, OTC options on debt securities are European
style options. This means that the option is only exercisable immediately prior
to its expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option. Options that
expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an
25
<PAGE>
<PAGE>
identical put or call option; this is known as a closing sale transaction.
Closing transactions permit a Fund to realize profits or limit losses on an
option position prior to its exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
However, exchange-traded or liquid OTC options on municipal debt securities are
not currently available. Exchange markets for options on debt securities exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction. The Funds will enter into OTC option transactions only with contra
parties that have a net worth of at least $20 million.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
In the event that options on indices of municipal and non-municipal debt
securities become available, a Fund may purchase and write put and call options
on such indices in much the same manner as the more traditional options
discussed above, except that index options may serve as a hedge against overall
fluctuations in the debt securities markets (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
GUIDELINES FOR OPTIONS. A Fund's use of options is governed by the
following guidelines, which can be changed by each Trust's board of trustees
without shareholder vote:
1. A Fund may purchase a put or call option, including any straddles
or spreads, only if the value of its premium, when aggregated with the
premiums on all other options held by the Fund, does not exceed 5% of the
Fund's total assets.
2. The aggregate value of securities underlying put options written by
any Fund determined as of the date the put options are written will not
exceed 50% of the Fund's net assets.
3. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by the Fund that are held at any time will not exceed 20% of the
Fund's net assets.
FUTURES. The Funds may purchase and sell municipal bond index futures
contracts, municipal debt futures contracts and interest rate futures contracts.
The Funds also may purchase put and call options, and write covered put and call
options, on such futures contracts. The purchase of futures or call options
thereon can serve as a long hedge, and the sale of futures or the purchase of
put options thereon can serve as a short hedge. Writing covered call options on
futures contracts can serve as a limited short hedge, and writing covered put
options on futures contracts can serve as a limited long hedge, using a strategy
similar to that used for writing covered call options on securities or indices.
26
<PAGE>
<PAGE>
Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
a Fund, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If Mitchell Hutchins wishes to
lengthen the average duration of a Fund's portfolio, the Fund may buy a futures
contract or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature of
a performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of the 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 or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities
27
<PAGE>
<PAGE>
markets involving arbitrage, 'program trading' and other investment strategies
might result in temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS. A Fund's use of futures and
related options is governed by the following guidelines, which can be changed by
each Trust's board of trustees 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 the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by any Fund that are held at any time will not exceed 20% of the
Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's total
assets.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 50 Trustee and Mrs. Alexander is president, chief executive officer
President and a director of Mitchell Hutchins (since January
1995) and an executive vice president and director
of PaineWebber. Mrs. Alexander is president and a
director or trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 61 Trustee Mr. Armstrong is chairman and principal of RQA
78 West Brother Drive Enterprises (management consulting firm) (since
Greenwich, CT 06830 April 1991 and principal occupation since March
1995). Mr. Armstrong is also a director of Hi Lo
Automotive, Inc. He was chairman of the 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, Luis
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 28
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
</TABLE>
28
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 70 Trustee and Mr. Bewkes is a director of Paine Webber Group Inc.
Chairman of the ('PW Group') (holding company of PaineWebber and
Board of Mitchell Hutchins). Prior to December 1995, he was
Trustees a consultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief
executive officer of American Bakeries Company.
Mr. Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeutics,
Inc. Mr. Bewkes is a director or trustee of 29
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of International Equity
1101 Connecticut Avenue, N.W. Partners (international investments and consulting
Washington, D.C. 20036 firm) (since March 1994) and a partner of McKinsey
& Company (management consulting firm) (since
1991). He is also a director of American
Publishing Company and Archer-Daniels -- Midland
Co. (agricultural commodities). 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
28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Mary C. Farrell**; 47 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
Financial Women's Association and Women's Economic
Roundtable, and is employed as a regular panelist
on Wall $treet 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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
29
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of the
New York, New York 10027 Illinois Institute of Technology. Dean Feldberg is
also a director of K-III Communications
Corporation, Federated Department Stores, Inc. and
Revlon, Inc. Dean Feldberg is a director or
trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
George W. Gowen; 67 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May 1994,
New York, New York 10017 he was a partner in the law firm of Fryer, Ross &
Gowen. Mr. Gowen is a director of Columbia Real
Estate Investments, Inc. Mr. Gowen is a director
or trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Avenue N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle '92.
Washington, D.C. 20004 From 1990 to 1992, he was vice chairman and, from
1989 to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.). Prior to 1989, he
was employed by the Marriott Corporation (hotels,
restaurants, airline catering and contract
feeding), where he most recently was an executive
vice president and president of Marriott Hotels
and Resorts. Mr. Malek is also a director of
American 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), Integra, Inc.
(bio-med), Manor Care, Inc. (health care),
National Education Corporation and Northwest
Airlines Inc. Mr. Malek is a director or trustee
of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
30
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Carl W. Schafer; 61 Trustee Mr. Schafer is president of the Atlantic Foundation
P.O. Box 1164 (charitable foundation supporting mainly
Princeton, New Jersey 08542 oceanographic exploration and research). He is a
director of Roadway Express, Inc. (trucking), The
Guardian Group of Mutual Funds, Evans Systems,
Inc. (motor fuels, convenience store and
diversified company), Electronic Clearing House,
Inc. (financial transactions processing), Wainoco
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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Cynthia N. Bow; 38 Vice President Ms. Bow is a vice president and portfolio manager of
(PW Mutual Fund Mitchell Hutchins. Ms. Bow has been with Mitchell
Trust only) Hutchins since 1982. Ms. Bow is a vice president
of four investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Elbridge T. Gerry III; 40 Vice President Mr. Gerry is a senior vice president and a portfolio
manager of Mitchell Hutchins. Prior to January
1996, he was with JP Morgan Private Banking where
he was responsible for managing municipal assets,
including several municipal bond funds. Mr. Gerry
is a vice president of five investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
C. William Maher; 35 Vice President Mr. Maher is a first vice president and a senior
and Assistant manager of the mutual fund finance division of
Treasurer Mitchell Hutchins. Mr. Maher is a vice president
and assistant treasurer of 29 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Dennis McCauley; 50 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 19 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
31
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Ann E. Moran; 39 Vice President Ms. Moran is a vice president of Mitchell Hutchins.
and Assistant Ms. Moran is a vice president and assistant
Treasurer treasurer of 29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Richard S. Murphy; 42 Vice President Mr. Murphy is a senior vice president and a
(PW Mutual Fund portfolio manager of Mitchell Hutchins. Prior to
Trust only) March 1994 Mr. Murphy was a vice president at
American International Group. Mr. Murphy is a vice
president of two investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a senior vice president and deputy
and Secretary general counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president of 29 investment
companies and secretary of 28 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice president and director
of operations and control for Mitchell Hutchins.
From March 1991 to September 1993 he was director
of the Mutual Funds Sales Support and Service
Center for Mitchell Hutchins and PaineWebber. Mr.
Polito is also a vice president of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. Prior to May 1994,
she was a partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice president of 29
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Paul H. Schubert; 34 Vice President Mr. Schubert is a first vice president and a senior
and Assistant manager of the mutual fund finance division of
Treasurer Mitchell Hutchins. From August 1992 to August
1994, he was a vice president at BlackRock
Financial Management Inc. Prior to August 1992, he
was an audit manager with Ernst & Young LLP. Mr.
Schubert is a vice president and assistant
treasurer of 29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
32
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Julian F. Sluyters; 36 Vice President Mr. Sluyters is a senior vice president and the
and Treasurer director of the mutual fund finance division of
Mitchell Hutchins. Mr. Sluyters is a vice
president and treasurer of 29 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
William W. Veronda; 51 Vice President Mr. Veronda is a senior vice president of Mitchell
(PW Municipal Hutchins. Prior to September 1995, he was a senior
Series only) vice president and general manager at Invesco
Funds Group. Mr. Veronda is vice president of one
investment company for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Keith A. Weller; 35 Vice President Mr. Weller is a first vice president and associate
and Assistant general counsel of Mitchell Hutchins. Prior to May
Secretary 1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary
of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Teresa M. West; 38 Vice President Ms. West is a first vice president of Mitchell
Hutchins. Prior to November 1993, she was
Compliance Manager of Hyperion Capital Management,
Inc., an investment advisory firm. Prior to April
1993, Ms. West was
a vice president and manager -- legal
administration of Mitchell Hutchins. Ms. West is a
vice president of 29 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Trusts as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
Each Trust pays trustees who are not 'interested persons' of the Trust
('disinterested trustees') $1,000 annually for each series and $150 for each
board meeting and each meeting of a board committee (other than committee
meetings held on the same day as a board meeting). Each Trust presently has two
series and thus pays each such trustee $2,000 annually, plus any additional
annual amounts due for board or committee meetings. 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 Trustees are reimbursed for any expenses incurred in
attending meetings. Trustees and officers of the Trusts own in the aggregate
less than 1% of the shares of each Fund. Because Mitchell Hutchins and
PaineWebber perform substantially all of the services necessary for the
operation of the Trusts and the Funds, neither Trust requires any employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trusts for acting as a trustee or officer.
33
<PAGE>
<PAGE>
The table below includes certain information relating to the compensation
of each Trust's current trustees who held office with that Trust or with other
PaineWebber funds during the fiscal year ended February 28, 1997.
COMPENSATION TABLE`D'
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM PAINEWEBBER FROM PAINEWEBBER MUTUAL THE TRUSTS AND THE FUND
NAME OF PERSON, POSITION MUNICIPAL SERIES* FUND TRUST* 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>
- ------------------
`D'Only independent members of the board are compensated by the Trusts and
identified above; trustees who are 'interested persons,' as defined by the
1940 Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended February
28, 1997.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
As of , 1997, the Trusts' records did not indicate
that any shareholder owned more than 5% of a Trust's shares.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of California Tax-Free Income Fund and National
Tax-Free Income Fund pursuant to a contract dated April 21, 1988 with
PaineWebber Mutual Fund Trust, as supplemented by a Fee Agreement dated June 30,
1992 with respect to National Tax-Free Income Fund, and of Municipal High Income
Fund and New York Tax-Free Income Fund pursuant to a contract with PaineWebber
Municipal Series dated July 1, 1989 (each an 'Advisory Contract' and,
collectively, the 'Advisory Contracts'). Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.50% of average daily net assets in the case of California Tax-Free
Income Fund and National Tax-Free Income Fund and 0.60% of average daily net
assets in the case of Municipal High Income Fund and New York Tax-Free Income
Fund.
Pursuant to their Advisory Contract, for the fiscal years ended February
28, 1997, February 29, 1996 and February 28, 1995, California Tax-Free Income
Fund paid (or accrued) to Mitchell Hutchins the amounts of $ ,
$1,116,442 and $1,340,491, respectively, and National Tax-Free Income Fund paid
(or accrued) to Mitchell Hutchins the amounts of $ , $2,388,482 and
$2,891,059, respectively. Pursuant to their Advisory Contract, for the fiscal
years ended February 28, 1997, February 29, 1996 and February 28, 1995,
Municipal High Income Fund paid (or accrued) to Mitchell Hutchins the amounts of
$ , $647,537 and $768,555, respectively, and New York Tax-Free Income
Fund paid (or accrued) to Mitchell Hutchins the amounts of $ ,
$380,993 and $481,509 (of which $10,398 was waived), respectively.
34
<PAGE>
<PAGE>
Under a Service Agreement with each Trust that is reviewed by each Trust's
board of trustees annually, PaineWebber provides certain services to the Funds
not otherwise provided by the Fund's transfer agent. Pursuant to the Service
Agreement with PaineWebber Mutual Fund Trust, during the fiscal years ended
February 28, 1997, February 29, 1996 and February 28, 1995, California Tax-Free
Income Fund paid (or accrued) the amounts of $ ,
$19,943 and $24,838, respectively, and National Tax-Free Income Fund paid (or
accrued) the amounts of $ , $52,513 and $64,620, respectively.
Pursuant to the Service Agreement with PaineWebber Municipal Series, during the
fiscal years ended February 28, 1997, February 29, 1996 and February 28, 1995,
Municipal High Income Fund paid (or accrued) the amounts of $ ,
$15,997 and $19,534, respectively, and New York Tax-Free Income Fund paid (or
accrued) the amounts of $ , $9,267 and $10,747 (of which $3,734 was
waived), respectively.
Under the terms of the applicable Advisory Contract, each Fund bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated between the appropriate Funds by or under the
direction of the board of trustees in such manner as the board deems fair and
equitable. Expenses borne by each Fund include the following: (1) the cost
(including brokerage commissions, if any) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons of the Fund or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and 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 Fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent trustees;
(11) charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates; (13) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders and
costs of mailing such materials to existing shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Fund;
(15) fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to trustees and officers; and (18) costs of mailing,
stationery and communications equipment.
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 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 its assignment and is terminable at any time without penalty
by the board of trustees or by vote of the holders of a majority of a Fund's
outstanding voting securities, on 60 days' written notice to Mitchell Hutchins
or by Mitchell Hutchins on 60 days' written notice to a Fund.
35
<PAGE>
<PAGE>
The following table shows the approximate net assets as of , sorted
by category of investment objective, of the investment companies as to which
Mitchell Hutchins serves as adviser or sub-adviser. An investment company may
fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($MIL)
- -------------------------------------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)............................................... $
Global..........................................................................
Equity/Balanced.................................................................
Fixed Income (excluding Money Market)...........................................
Taxable Fixed Income............................................................
Tax-Free Fixed Income...........................................................
Money Market Funds..............................................................
</TABLE>
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber mutual funds and other Mitchell Hutchins'
advisory accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber mutual funds and other
Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class A, Class B, Class C and Class Y shares of the Funds 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 Funds.
Shares of the Funds are offered continuously. Under separate exclusive dealer
agreements between Mitchell Hutchins and PaineWebber, relating to the Class A,
Class B, Class C and Class Y shares of each Fund (collectively, 'Exclusive
Dealer Agreements'), PaineWebber and its correspondent firms sell each Fund's
shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of the Funds adopted by the Trusts in the manner prescribed under
Rule 12b-1 under the 1940 Act ('Class A Plan,' 'Class B Plan' and 'Class C
Plan,' collectively, 'Plans'), each Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of shares. Under the Class B Plan, each Fund also
pays Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at
the annual rate of 0.75% of the average daily net assets of the Class B shares.
Under the Class C Plan, each Fund pays Mitchell Hutchins a distribution fee,
accrued daily and payable monthly, at the annual rate of 0.50% of the average
daily net assets of the Class C shares. There is no distribution plan with
respect to the Funds' Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the Trust's board of trustees at least quarterly, and the trustees
will review, reports regarding all amounts expended under the Plan and the
purposes for which such expenditures were made, (2) the Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the Trust's board of trustees, including those
trustees who are not 'interested persons' of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to the Plan, acting in person at a meeting called for that purpose, (3)
payments by a Fund under the Plan shall not be materially increased without the
affirmative vote of the holders of a majority of the outstanding shares of the
relevant Class of that Fund and (4) while the Plan remains in effect, the
selection and nomination of trustees who are not 'interested persons' of the
Trust shall be committed to the discretion of the trustees who are not
interested persons of the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
shares to such Class based on the ratio of sales of the shares of such Class to
the sales of all three Classes of shares. The fees paid by one Class of Fund
shares will not be used to subsidize the sale of any other Class of Fund shares.
36
<PAGE>
<PAGE>
Under prior plans of distribution substantially similar to the Class A
Plan, each Fund paid Mitchell Hutchins a monthly distribution fee computed at
the same rate and in the same manner as the service fees under the Class A Plan.
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 February 28,
1997:
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND*
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Class A............................................. $ $ $ $
Class B.............................................
Class C.............................................
</TABLE>
- ------------
* During the fiscal year shown above, Mitchell Hutchins waived all or a portion
of its distribution fees. If such waivers had not been made, for the Class A,
Class B and Class C shares, the actual fees that would have been paid by the
Fund would have been $ , $ and $ , respectively.
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the Funds during the fiscal year
ended February 28, 1997:
CLASS A
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Marketing and advertising........................... $ $ $ $
Amortization of commissions......................... N/A N/A N/A N/A
Printing of prospectuses and statements of
additional information............................
Branch network costs allocated and interest
expense...........................................
Service fees paid to PaineWebber investment
executives........................................
</TABLE>
CLASS B
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <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>
CLASS C
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <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>
37
<PAGE>
<PAGE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. 'Branch network costs
allocated and interest expense' consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of each Fund's
shares, including the PaineWebber retail branch system.
In approving each Fund's overall Flexible Pricing'sm' system of
distribution, the Trust's board of trustees considered several factors,
including that implementation of Flexible Pricing would (1) enable investors
to choose the purchasing option best suited to their individual situation,
thereby encouraging current shareholders to make additional investments in the
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 for each Fund, the trustees considered all
the features of the distribution system, including (1) the conditions under
which initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the case,
(3) the advantages to the shareholders of economies of scale resulting from
growth in the Fund's assets and potential continued growth, (4) the services
provided to the Fund and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.
In approving the Class B Plan for each Fund, the trustees considered all
the features of the distribution system, including (1) the conditions under
which contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from 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 executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their entire
purchase payments immediately in Class B shares would prove attractive to the
investment executives and correspondent firms, resulting in greater growth of
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class C Plan for each Fund, the trustees considered all
the features of the distribution system, including (1) the advantage to
investors in having no initial sales charges deducted from the Fund's purchase
payments and instead having the entire amount of their purchase payments
immediately invested in Fund shares, (2) the advantage to investors in being
free from contingent deferred sales charges upon redemption for shares held more
than one year and paying for distribution on an ongoing basis, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales compensation for their sales of Class C
shares on an ongoing basis, along with continuing service fees, while their
customers invest their entire purchase payments immediately in Class C shares
and do not face contingent deferred sales charges, would prove attractive to the
investment executives and correspondent firms, resulting in greater growth to
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service-and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt
38
<PAGE>
<PAGE>
by Mitchell Hutchins of initial sales charges or contingent deferred sales
charges upon redemption, was conditioned upon its expectation of being
compensated under the Class C Plan.
With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of 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 and similar prior distribution contracts, for the fiscal
years and the fiscal period 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:
CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Earned.................................................................. $ $ 57,198 $ 88,183
Retained................................................................ 1,224 6,470
</TABLE>
NATIONAL TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Earned.................................................................. $ $ 66,206 $195,108
Retained................................................................ 1,026 14,852
</TABLE>
MUNICIPAL HIGH INCOME FUND
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Earned.................................................................. $ $ 52,683 $ 59,937
Retained................................................................ 964 4,449
</TABLE>
NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Earned.................................................................. $ $ 14,417 $ 38,348
Retained................................................................ 1,034 2,923
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
February 28, 1997:
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL MUNICIPAL NEW YORK
TAX-FREE TAX-FREE HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Class A............................ $ 0 $ 0 $ 0 $ 0
Class B............................
Class C............................
Class Y............................
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each Trust's board of trustees, Mitchell
Hutchins is responsible for the execution of each Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for a Fund,
39
<PAGE>
<PAGE>
taking into account such factors as the price (including the applicable dealer
spread or brokerage commission), size of order, difficulty of execution and
operational facilities of the firm involved. Each Fund effects its portfolio
transactions with municipal bond dealers. Municipal securities are traded on the
OTC market on a 'net' basis without a stated commission through dealers acting
for their own account and not as brokers. Prices paid to dealers in principal
transactions generally include a 'spread,' which is the difference between the
prices at which the dealer is willing to purchase and sell a specific security
at that time. Since inception, the Funds have not paid any brokerage
commissions.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with those transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins' receiving multiple quotes from dealers before executing the
transactions on an agency basis.
Information and research services furnished by dealers or brokers with or
through which the Funds effect securities transactions may be used by Mitchell
Hutchins in advising other funds or accounts and, conversely, research services
furnished to Mitchell Hutchins by dealers or brokers in connection with other
funds or accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in
advising the Funds. Information and research received from such brokers or
dealers will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contracts.
Investment decisions for the Funds and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a Fund and one or more such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the Fund involved and such other
account(s) as to amount according to a formula deemed equitable to the Fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as a Fund is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
No Fund will purchase securities that are offered in underwritings in which
Mitchell Hutchins or any of its affiliates is a member of the underwriting or
selling group, except pursuant to procedures adopted by each Trust's board of
trustees pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the commission or spread paid in connection with such a
purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the date
of the public offering and that Mitchell Hutchins or any affiliate thereof not
participate in or benefit from the sale to a Fund.
PORTFOLIO TURNOVER. Each Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. For the fiscal years ended
February 28, 1997 and February 29, 1996, respectively, the portfolio turnover
rates for the Funds were: California Tax-Free Income Fund -- % and 32%;
National Tax-Free Income Fund -- % and 74%; Municipal High Income Fund -- %
and 48%; and New York Tax-Free Income Fund -- % and 13%.
40
<PAGE>
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges for Class A shares
indicated in the table of sales charges in the Prospectus. The sales charge
payable on the purchase of shares of Class A shares of the Funds and Class A
shares of such other funds will be at the rates applicable to the total amount
of the combined concurrent purchases.
An 'eligible group of related Fund investors' can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
or
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer).
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts.
The registered investment adviser must communicate at least quarterly
through a newsletter or investment update establishing a relationship with
all of the accounts.
RIGHTS OF ACCUMULATION-CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount equal
to the then-current net asset value of the purchaser's combined holdings of
Class A Fund shares and Class A shares of any other PaineWebber mutual fund. The
purchaser must provide sufficient information to permit confirmation of his or
her holdings, and the acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time.
WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing System
on July 1, 1991 ('CDSC Funds'). The contingent deferred sales charge is waived
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 by officers, directors (trustees) or employees of the CDSC Funds,
Mitchell Hutchins or their affiliates (or their spouses and children under age
21). In addition, the contingent deferred sales charge will be reduced by 50%
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 with a net asset value at the time of purchase of at least $1
million. If Class B shares of a CDSC Fund purchased prior to July 1, 1991 are
exchanged for Class B shares of a Fund, any waiver or reduction of the
contingent deferred sales charge that applied to the
41
<PAGE>
<PAGE>
Class B shares of the CDSC Fund will apply to the Class B shares of the Fund
acquired through the exchange.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of each Fund may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce the exchange fee, and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or a Fund temporarily delays or ceases the sales
of its shares because it is unable to invest amounts effectively in accordance
with the Fund's investment objectives, 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 Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which a
Fund is obligated to redeem shares solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
A Fund may suspend redemption privileges or postpone the date of payment during
any period (1) when the NYSE is closed or trading on the NYSE is restricted as
determined by the SEC, (2) when an emergency exists, as defined by the SEC, that
makes it not reasonably practicable for the 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.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of 'dollar cost averaging.' When the
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 low price levels.
SYSTEMATIC WITHDRAWAL 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 $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional Fund shares concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, initial sales charges. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or
semi-annual plans, PaineWebber will arrange for redemption by a Fund of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Funds' systematic withdrawal plan. The payment generally is
mailed approximately three Business Days (defined under 'Valuation of Shares')
after the redemption date. Withdrawal payments should not be considered
dividends but redemption proceeds, with the tax consequences described under
'Dividends and Taxes' in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends, a shareholder's investment may be correspondingly
reduced. A shareholder may change the amount of the systematic withdrawal or
terminate participation in the systematic withdrawal plan at any time without
charge or penalty by written instructions with signatures guaranteed to
PaineWebber or PFPC Inc. ('Transfer Agent'). Instructions to participate in the
plan, change the withdrawal amount or terminate participation in the plan will
not be effective until five days after written instructions with signatures
guaranteed are received by the Transfer Agent. Shareholders
42
<PAGE>
<PAGE>
may request the forms needed to establish a systematic withdrawal plan from
their PaineWebber investment executives, correspondent firms or the Transfer
Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
without a sales charge. Shareholders may exercise the reinstatement privilege by
notifying the Transfer Agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
redemption, and an adjustment will be made to the shareholder's tax basis for
the shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described below under 'Taxes'.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN'sm';
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT'r' (RMA'r')
Shares of the PaineWebber mutual funds (each a 'PW Fund' and, collectively,
the 'PW Funds') are available for purchase by customers of PaineWebber and its
correspondent firms who maintain Resource Management Accounts ('RMA
Accountholders') through the RMA Resource Accumulation Plan ('Plan'). The Plan
allows an RMA accountholder to continually invest in one or 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 anytime, but may take up to two weeks to become
effective.
The terms of the Plan or an RMA accountholder's participation in the Plan
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of 'dollar cost
averaging.' By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of low share
prices. However, over time, dollar cost averaging generally results in a lower
average original investment cost than if an investor invested a larger dollar
amount in a mutual fund at one time.
43
<PAGE>
<PAGE>
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard'r' transactions during the period, and provide 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 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. Each money market fund attempts to maintain a stable price per share
of $1.00, although there can be no assurance that it will be able to do
so. Investments in the money market funds are not insured or guaranteed by
the U.S. government;
check writing, with no per-check usage charge, no minimum amount on checks
and no maximum number of checks that can be written. RMA accountholders
can code their checks to classify expenditures. All canceled checks are
returned each month;
Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
expanded account protection to $25 million in the event of the liquidation
of PaineWebber. This protection does not apply to shares of the RMA money
market funds or the PW Funds because those shares are held at the transfer
agent and not through PaineWebber; and
automatic direct deposit of checks into 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 each Fund will automatically convert to Class A shares of
that Fund, based on the relative net asset value per share of each of the two
Classes, as of the close of business on the first Business Day (as defined 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 (1) the date on which such Class B shares were
issued, or (2) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. If a
shareholder acquired Class B shares of a Fund through an exchange of Class B
shares of a CDSC Fund that were acquired prior to July 1, 1991, the
shareholder's holding period for purposes of conversion is determined based on
the date the CDSC Fund shares were initially issued. For purposes of conversion
to Class A shares, Class B shares purchased through the reinvestment of
dividends and other distributions paid in respect of Class B shares 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 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 bears to the shareholder's
total Class B shares not acquired through dividends and other distributions.
Under normal circumstances, the net asset values per share of the two
Classes of each Fund will be the same. However, if a Fund's accrued expenses on
any Business Day were to exceed the Fund's
44
<PAGE>
<PAGE>
accrued income for that Business Day, the net asset value per share of the Class
B shares could be lower than that of the Class A shares because of the higher
ongoing expenses borne by the Class B shares. If such a divergence existed on a
conversion date, a shareholder would receive fewer Class A shares than the
number of Class B shares converted, although the dollar value would be the same.
Mitchell Hutchins considers the possibility of such an occurrence to be remote.
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 Internal Revenue Code and 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 be met.
VALUATION OF SHARES
Each Fund determines the net asset value per share separately for each
Class of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently, the NYSE is closed on the observance of
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on exchanges are valued at the last sale price
on the day the securities are being 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 as the primary market. Securities traded in the OTC market and
listed on The Nasdaq Stock Market are valued at the last available sale price on
The Nasdaq Stock Market at 4:00 p.m., Eastern time; other OTC securities are
valued at the last bid price available prior to valuation.
Where market quotations are readily available, portfolio securities are
valued based upon market quotations, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the security.
Where such market quotations are not readily available, securities are valued
based upon appraisals received from a pricing service using a computerized
matrix system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. The amortized cost method of valuation generally is used with
respect to debt obligations with 60 days or less remaining to maturity unless
the Trust's board of trustees determines that this does not represent fair
value. All other assets will be valued at fair value as determined in good faith
by or under the direction of each Trust's board of trustees.
PERFORMANCE INFORMATION
Each Fund's performance data quoted in advertising and other promotional
materials ('Performance Advertisements') represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
('Standardized Return') used in a Fund's Performance Advertisements are
calculated according to the following formula:
<TABLE>
<CAPTION>
P(1 + T)n = ERV
<S> <C> <C>
where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of that
period.
</TABLE>
45
<PAGE>
<PAGE>
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% initial sales charge 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.
Each Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). A Fund calculates Non-Standardized Return for
specified periods of time by assuming an investment of $1,000 in Fund shares and
assuming the reinvestment of all dividends and other distributions. The rate of
return is determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the initial value. Neither initial
nor contingent deferred sales charges are taken into account in calculating
Non-Standardized Return; the inclusion of those charges would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B,
Class C (formerly Class D) and Class Y shares of the Funds for the periods
indicated. All returns for periods of more than one year are expressed as an
average annual return.
<TABLE>
<CAPTION>
MUNICIPAL
HIGH
CALIFORNIA TAX-FREE NATIONAL TAX-FREE INCOME
INCOME FUND INCOME FUND FUND
------------------------------------------- ------------------------------------------- -------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y CLASS A
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One year ended
February 28,
1997:
Standardized
Return*...... % % % % % % % % %
Non-Standardized
Return....... % % % % % % % % %
Five years ended
February 28,
1997:
Standardized
Return*...... % N/A N/A % % N/A N/A % %
Non-Standardized
Return....... % N/A N/A % % N/A N/A % %
Ten years or
since
inception** to
February 28,
1997:
Standardized
Return*...... % % % % % % % % %
Non-Standardized
Return....... % % % % % % % % %
<CAPTION>
MUNICIPAL HIGH NEW YORK TAX-FREE
INCOME FUND INCOME FUND
------------------------------- -------------------------------------------
CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
One year ended
February 28,
1997:
Standardized
Return*...... % % % % % % %
Non-Standardized
Return....... % % % % % % %
Five years ended
February 28,
1997:
Standardized
Return*...... N/A N/A % % N/A N/A %
Non-Standardized
Return....... N/A N/A % % N/A N/A %
Ten years or
since
inception** to
February 28,
1997:
Standardized
Return*...... % % % % % % %
Non-Standardized
Return....... % % % % % % %
</TABLE>
- ------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for Class
B 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, Non-Standardized Return is identical to Standardized Return.
** The inception dates for the Class A shares of the Funds are as follows:
California Tax-Free Income Fund -- September 16, 1985; National Tax-Free
Income Fund -- December 3, 1984; Municipal High Income Fund -- June 23, 1987;
and New York Tax-Free Income Fund -- September 23, 1988. The inception dates
for the Class B shares and Class C shares (formerly Class D shares) of each
Fund are July 1, 1991 and July 2, 1992, respectively. The inception date for
the Class Y shares of each Fund
(footnotes continued on next page)
46
<PAGE>
<PAGE>
(footnotes continued from previous page)
are , 1996, November 3, 1995, , 1996,
and , 1996, respectively.
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, Class C shares (formerly Class D shares), and Class Y shares)
at the end of the Period. Yield quotations are calculated according to the
following formula:
a-b
YIELD = 2 [(-----)'pp'6-1]
cd
<TABLE>
<S> <C> <C>
Where: a = interest earned during the Period attributable to a Class of shares
b = expenses accrued for the Period attributable to a Class of shares (net of reimbursements)
c = the average daily number of shares of the Class outstanding during the Period that were entitled
to receive dividends
d = the maximum offering price per share (in the case of Class A shares) or the net asset value per
share (in the case of Class B and Class C shares) on the last day of the Period.
</TABLE>
Except as noted below, in determining net investment income earned during
the Period (variable 'a' in the above formula), a 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 a Fund, interest
earned during the Period is then determined by totalling the interest earned on
all debt obligations. For purposes of these calculations, the maturity of an
obligation with one or more call provisions is assumed to be the next date on
which the obligation reasonably can be expected to be called or, if none, the
maturity date. With respect to Class A shares, in calculating the maximum
offering price per share at the end of the Period (variable 'd' in the above
formula), a Fund's current maximum 4% initial sales charge on Class A shares is
included. The Funds had the following yields for the 30-day period ended
February 28, 1997:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
California Tax-Free Income Fund................................. % % % %
National Tax-Free Income Fund...................................
Municipal High Income Fund......................................
New York Tax-Free Income Fund...................................
</TABLE>
Tax-exempt yield is calculated according to the same formula except that
variable 'a' equals interest exempt from federal income tax earned during the
Period. This tax-exempt yield is then translated into tax-equivalent yield
according to the following formula:
E
TAX EQUIVALENT YIELD = (-----)+ t
l-p
<TABLE>
<CAPTION>
<S> <C> <C>
E = tax-exempt yield of a Class of shares
p = stated income tax rate
t = taxable yield of a Class of shares
</TABLE>
The tax-equivalent yield of California Tax-Free Income Fund assumes a
46.24% combined effective California and federal tax rate. The tax-equivalent
yield of New York Tax-Free Income Fund assumes a 46.88% effective New York
State, New York City and federal tax rate. The tax-equivalent yield of each of
47
<PAGE>
<PAGE>
National Tax-Free Income Fund and Municipal High Income Fund assumes a 39.6%
effective federal tax rate.
The Funds had the following tax-equivalent yields for the 30-day period
ended February 28, 1997:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
California Tax-Free Income Fund................................... % % % %
National Tax-Free Income Fund.....................................
Municipal High Income Fund........................................
New York Tax-Free Income Fund.....................................
</TABLE>
OTHER INFORMATION. In Performance Advertisements, each Fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Analytical Services, Inc. ('Lipper'), 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 recognized stock, bond and other
indexes, including (but not limited to) the Municipal Bond Buyers Indices,
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, Merrill Lynch Municipal Bond Indices, the Morgan
Stanley Capital International World Index, the Lehman Brothers Treasury Bond
Index, Lehman Brothers Government/Corporate Bond Index, the Salomon Brothers
World Government Bond Index and changes in the Consumer Price Index as published
by the U.S. Department of Commerce. Each Fund also may refer in such materials
to mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of a Fund
and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, 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.
Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on an investment in a Fund are
reinvested by being paid 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 the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
Each Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index and
the averages of yields of CDs of major banks published by Banxquote'r' Money
Markets. In comparing the Fund's performance to CD performance, investors should
keep in mind that bank CDs are insured in whole or in part by an agency of the
U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Fund shares are not
insured or guaranteed by the U.S. government and returns and net asset value
will fluctuate. The securities held by the Fund generally have longer maturities
than most CDs and may reflect interest rate fluctuations for longer term
securities. An investment in a Fund involves greater risks than an investment in
either a money market fund or a CD.
TAXES
FEDERAL TAXES. In order to continue to qualify for treatment as a
regulated investment company ('RIC') under the Internal Revenue Code, each Fund
must distribute to its shareholders for each taxable year at least 90% of the
sum of its net interest income excludable from gross income under section 103(a)
of the Internal Revenue Code plus its investment company taxable income
(consisting generally of taxable net investment income plus net short-term
capital gain) 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
48
<PAGE>
<PAGE>
to securities loans and gains from the sale or other disposition of securities,
or other income (including gains from options or futures) derived with respect
to its business of investing in securities ('Income Requirement'); (2) the Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options or futures held for less than three
months ('Short-Short Limitation'); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its total assets may be invested in securities (other than
U.S. government securities or the securities of other RICs) of any one issuer.
Entities or persons who are 'substantial users' (or persons related to
'substantial users') of facilities financed by IDBs or PABs should consult their
tax advisers before purchasing Fund shares because, for users of certain of
these facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, 'substantial user' is defined to include a 'non-exempt
person' who regularly uses in a trade or business a part of a facility financed
from the proceeds of IDBs or PABs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as a Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from a Fund still are
tax-exempt to the extent described in the Prospectus; they are only included in
the calculation of whether a recipient's income exceeds the established amounts.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any loss not disallowed will be treated as
long-term, instead of short-term, capital loss to the extent of any capital gain
distributions received thereon. Investors also should be aware that if shares
are purchased shortly before the record date for a capital gain distribution,
the shareholder will pay full price for the shares and receive some portion of
the price back as a taxable distribution.
Special tax rules apply when a shareholder (1) disposes of Class A shares
through a redemption or exchange within 90 days of purchase and subsequently
acquires Class A shares of a PaineWebber fund without paying a sales charge due
to the 365-day reinstatement privilege or exchange privilege. See 'Reduced Sales
Charges -- Reinstatement Privilege -- Class A shares' above and 'Exchanges' in
the Prospectus. In these cases, any gain on the disposition of the Class A
shares would be increased, or loss decreased, by the amount of the sales charge
paid when the shares were acquired, and that amount will increase the basis of
the PaineWebber fund shares subsequently acquired. In addition, if shares of a
Fund are purchased within 30 days before or after redeeming that Fund's shares
(regardless of Class) at a loss, that loss will not be deductible to the extent
the redemption proceeds are reinvested and will increase the basis of the newly
purchased shares.
If a Fund invests in instruments that generate taxable interest income,
under the circumstances described in the Prospectus and in the discussion of
municipal market discount bonds below, the portion of any Fund dividend
attributable to the interest earned thereon will be taxable to the Fund's
shareholders as ordinary income to the extent of the Fund's earnings and
profits, and only the remaining portion will qualify as an 'exempt-interest
dividend' (as described in the Prospectus). The respective portions will be
determined by the 'actual earned' method, under which the portion of any
dividend that qualifies as exempt-interest may vary, depending on the relative
proportions of tax-exempt and taxable interest earned during the dividend
period. Moreover, if a Fund realizes capital gain as a result of market
transactions, any distributions of the gain will be taxable to its shareholders.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Each Fund also is required to withhold 31% of
all taxable dividends and capital gain distributions payable to those
shareholders who otherwise are subject to backup withholding.
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the
49
<PAGE>
<PAGE>
distributions are paid by the Fund during the following January. Each Fund
invests exclusively in debt securities and receives no dividend income;
accordingly, no portion of the dividends or other distributions paid by any Fund
is eligible for the dividends-received deduction allowed to corporations.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary (taxable) income for the calendar year and capital gain net income for
the one-year period ending on October 31 of that year, plus certain other
amounts.
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains and
losses a Fund realizes in connection therewith. Income from transactions in
options and futures derived by a Fund with respect to its business of investing
in securities will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures will be subject to
the Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not qualify for this treatment,
it may be forced to defer the closing out of certain options and futures beyond
the time when it otherwise would be advantageous to do so, in order for the Fund
to continue to qualify as a RIC.
Each Fund may invest in municipal bonds that are purchased, generally not
on their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with
original issue discount, a price less than the amount of the issue price plus
accrued original issue discount) ('municipal market discount bonds'). If a
bond's market discount is less than the product of (1) 0.25% of the redemption
price at maturity times (2) the number of complete years to maturity after the
taxpayer acquired the bond, then no market discount is considered to exist. Gain
on the disposition of a municipal market discount bond purchased by a Fund after
April 30, 1993 (other than a bond with a fixed maturity date within one year
from its issuance) generally is treated as ordinary (taxable) income, rather
than capital gain, to the extent of the bond's accrued market discount at the
time of disposition. Market discount on such a bond generally is accrued
ratably, on a daily basis, over the period from the acquisition date to the date
of maturity. In lieu of treating the disposition gain as above, a Fund may elect
to include market discount in its gross income currently, for each taxable year
to which it is attributable.
CALIFORNIA TAXES. Individual shareholders of California Tax-Free Income
Fund who reside in California will not be subject to California personal income
tax on distributions received from the Fund to the extent such distributions are
attributable to interest on tax-exempt obligations issued by the State of
California or a California local government (or interest earned on obligations
of U.S. possessions or territories) ('exempt-interest dividends'), provided that
the Fund qualifies as a RIC under the Internal Revenue Code and satisfies the
requirement of California law that at least 50% of its assets at the close of
each quarter of its taxable year be invested in obligations the interest on
which is exempt from personal income taxation under the laws or Constitution of
California or the laws of the United States. Distributions from the Fund which
are attributable to sources other than those described in the preceding sentence
will generally be taxable to such shareholders as ordinary income. However,
distributions by California Tax-Free Income Fund, if any, that are derived from
interest on obligations of the U.S. government may also be designated by the
Fund and treated by its shareholders as exempt from California personal income
tax, provided that the foregoing 50% requirement is satisfied. Moreover, under
California legislation incorporating certain portions of the provisions of the
Internal Revenue Code applicable to RICs, amounts treated as capital gain
distributions for federal income tax purposes generally will be treated as
long-term capital gains for California personal income tax
50
<PAGE>
<PAGE>
purposes. In addition, distributions to shareholders other than exempt-interest
dividends are includable in income subject to the California alternative minimum
tax.
Distributions of investment income and long-term and short-term capital
gains will not be excluded from taxable income in determining the California
corporate franchise tax for corporate shareholders. In addition, such
distributions may be includable in income subject to the California alternative
minimum tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of California Tax-Free Income Fund will not be deductible for California
personal income tax purposes.
Shares of California Tax-Free Income Fund will not be subject to the
California property tax.
NEW YORK TAXES. Individual shareholders of New York Tax-Free Income Fund
will not be required to include in their gross income for New York State
purposes any portion of distributions received from the Fund to the extent such
distributions are directly attributable to interest earned on tax-exempt
obligations issued by New York State or any political subdivisions thereof
(including the City) or interest earned on obligations of U.S. possessions or
territories to the extent interest on such obligations is exempt from state
taxation pursuant to federal law, provided that the Fund qualifies as a RIC
under the Internal Revenue Code and satisfies the requirements that at least 50%
of its assets at the close of each quarter of its taxable year constitute
obligations which are tax-exempt for federal income tax purposes. Distributions
from the Fund which are attributable to sources other than those described in
the preceding sentence (including interest on obligations of other states and
their political subdivisions) will generally be taxable to such individual
shareholders as ordinary income. However, distributions by the Fund, if any,
that are derived from interest earned on obligations of the U.S. government may
also be designated by the Fund and treated by its shareholders as exempt from
personal income taxation for New York State and City purposes, provided that at
least 50% of the value of its total assets at the close of each quarter of its
taxable year is invested in such federal obligations. Distributions to
individual shareholders by the Fund which represent long-term capital gains for
federal income tax purposes will be treated as long-term capital gains for New
York State and City personal income tax purposes.
Shareholders of New York Tax-Free Income Fund that are subject to the New
York State corporation franchise tax or the City general corporation tax will be
required to include exempt-interest dividends paid by the Fund in their 'entire
net income' for purposes of such taxes and will be required to include their
shares of the Fund in their investment capital for purposes of such taxes.
Shareholders of New York Tax-Free Income Fund will not be subject to the
unincorporated business taxation imposed by the City solely by reason of their
ownership of shares in the Fund. If a shareholder is subject to the
unincorporated business tax, income and gains distributed by the Fund will be
subject to such tax except to the extent such distributions are directly
attributable to interest earned on tax-exempt obligations issued by New York
State or any political subdivision thereof (including the City).
Shares of New York Tax-Free Income Fund will not be subject to property
taxes imposed by New York State or the City.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the New York Tax-Free Income Fund generally will not be deductible for
New York State personal income tax purposes.
Interest income of New York Tax-Free Income Fund which is distributed to
shareholders will generally not be taxable to the Fund for purposes of the New
York State corporation franchise tax or the New York City general corporation
tax.
The foregoing is a general summary of certain provisions of federal,
California and New York State and City tax laws currently in effect as they
directly govern the taxation of shareholders of the Funds. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to Fund transactions. Shareholders are advised
to consult with their own tax advisers for more detailed information concerning
tax matters.
51
<PAGE>
<PAGE>
TAX-FREE INCOME VS. TAXABLE INCOME-NATIONAL TAX-FREE INCOME FUND AND
MUNICIPAL HIGH INCOME FUND. Table I below illustrates approximate equivalent
taxable and tax-free yields at the 1996 federal individual income tax rates. For
example, a couple with taxable income of [$90,000] in 1996, or single
individuals with taxable income of [$55,000] in 1996, whose investments earn a
[6]% tax-free yield, would have had to earn approximately an % taxable yield
to receive the same benefit.
TABLE I. 1996 FEDERAL TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
- -------------------------------------- ---------------------------------------------
SINGLE JOINT FEDERAL TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN RETURN BRACKET ----- ----- ----- ----- ------
- ----------------- ----------------- ----------- IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ % % % % % %
</TABLE>
- ------------
* See note following Table III.
TAX-FREE INCOME VS. TAXABLE INCOMEN-CALIFORNIA TAX-FREE INCOME FUND. Table
II below illustrates approximate equivalent taxable and tax-free yields at the
1996 individual federal and 1997 California personal income tax rates. For
example, a California couple with taxable income of [$90,000,] or a single
California individual with taxable income of [$55,000,] whose investments earn a
[6]% tax-free yield, would have had to earn a % taxable yield to receive the
same benefit.
TABLE II. 1996 FEDERAL AND 1997 CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*
(See notes 1-4 below)
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF EFFECTIVE
TAXABLE INCOME (000'S) CALIFORNIA ---------------------------------------------
- ----------------------------------------- AND 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------------ ------------------ ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ % % % % % %
</TABLE>
1. Net amount subject to federal income tax after deductions and exemptions.
Assumes that all income is ordinary income.
2. The income ranges shown for 1997 reflect federal and California income
brackets for 1996. Inflation adjusted income brackets for 1997 are not yet
available.
3. The rates shown reflect federal and California rates for 1997 in effect as of
the date hereof. Those rates are still subject to change with retroactive
effect for 1997.
4. Excludes the impact of the phase out of personal exemptions, limitations on
itemized deductions and other credits, exclusions and adjustments which may
increase a taxpayer's marginal tax rate as well as the effect of certain
levels of income (including tax exempt income) on the taxability of social
security payments.
- ------------
* See note following Table III.
TAX-FREE INCOME VS. TAXABLE INCOME-NEW YORK TAX-FREE INCOME FUND. Table
III below illustrates approximate equivalent taxable and tax-free yields at the
1996 federal individual, and New York State
52
<PAGE>
<PAGE>
and New York City personal, income tax rates. For example, a New York City
couple with taxable income of $[90,000] in 1996, whose investments earn a %
tax-free yield, would have had to earn a % taxable yield to receive the same
benefit. A couple who lives in New York State outside of New York City with
taxable income of $[90,000] in 1996 would have had to earn a % taxable yield
to realize a % tax-free yield.
Single taxpayers may also take advantage of high tax-free income. For
example, a single individual with taxable income of $[55,000] in 1996, who lives
in New York City and whose investments earn a % tax-free yield, would have had
to earn a % taxable yield to receive the same benefit. A single individual
with taxable income of $[55,000] in 1996, who lives in New York State outside of
New York City, would have had to earn a % taxable yield to realize a %
tax-free yield.
TABLE III. 1996 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
COMBINED A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) FEDERAL/ ---------------------------------------------
- ----------------------------------------- NYSE/NYC 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------------ ------------------ ------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ % % % % % %
</TABLE>
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) ---------------------------------------------
- ----------------------------------------- COMBINED 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL/NYS ----- ----- ----- ----- -----
RETURN RETURN TAX BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------------ ------------------ ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ % % % % % %
</TABLE>
- ------------
* Single rate assumes no dependents; joint rate assumes two dependents. The
yields listed are for illustration only and are not necessarily
representative of a Fund's yield. Each Fund invests primarily in obligations
the interest on which is exempt from federal income tax and, in the case of
California Tax-Free Income Fund, from California personal income tax and, in
the case of New York Tax-Free Income Fund, from New York State and New York
City personal income taxes; however, some of a Fund's investments may
generate taxable income. Effective tax rates shown are those in effect on the
date of this Statement of Additional Information; such rates might change
after that date. The effective rates reflect the highest tax bracket within
each range of income listed. However, a California or New York taxpayer
within the lowest income ranges shown may fall within a lower effective tax
bracket. The figures set forth above do not reflect the federal alternative
minimum tax, limitations on federal or state itemized deductions and personal
exemptions or any state or local taxes payable on Fund distributions (other
than California, New York State and New York City personal income taxes in
the case of Tables II and III).
53
<PAGE>
<PAGE>
OTHER INFORMATION
The names of the Trusts are PaineWebber Mutual Fund Trust and PaineWebber
Municipal Series. Prior to April 6, 1992, the name of PaineWebber Mutual Fund
Trust was PaineWebber California Tax-Free Income Fund and its sole operating
series was designated as 'Initial Series.' Prior to June 30, 1992, National
Tax-Free Income Fund was a series of a different Massachusetts business trust,
PaineWebber Managed Municipal Trust. Prior to November 10, 1995, the Funds'
Class C shares were known as 'Class D' shares.
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust or a
Fund. However, the Declaration of Trust disclaims shareholder liability for the
obligations of the Trust or a Fund and requires that notice of such disclaimer
be given in each note, bond, contract, instrument, certificate or undertaking
made or issued by the Trust's trustees or by any officers or officer by or on
behalf of a Fund, the trustees or any of them in connection with the Fund. The
Declaration of Trust provides for indemnification from a Fund's property for all
losses and expenses of any Fund shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability will be entitled to
reimbursement from the general assets of a Fund. The trustees intend to conduct
the operations of each Fund in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Fund.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those borne
by Class A or Class C shares. The higher fee is imposed due to the higher costs
incurred by the transfer agent in tracking shares subject to a contingent
deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the applicable
charge. Moreover, the tracking and calculations required by the automatic
conversion feature of the Class B shares will cause the transfer agent to incur
additional costs. Although the transfer agency fee will differ on a per account
basis as stated above, the specific extent to which the transfer agency fees
will differ between the classes as a percentage of net assets is not certain,
because the fee as a percentage of net assets will be affected by the number of
shareholder accounts in each class and the relative amounts of net assets in
each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C., 20036-1800, counsel to the Funds, has passed
upon the legality of the shares offered by the Funds' Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to Mitchell Hutchins and PaineWebber in
connection with other matters. The law firm of Orrick, Herrington & Sutcliffe,
400 Sansome Street, San Francisco, CA 94111, serves as counsel to California
Tax-Free Income Fund with respect to California law. The law firm of Orrick,
Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10103, serves as
counsel to New York Tax-Free Income Fund with respect to New York law.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Funds.
FINANCIAL STATEMENTS
The Funds' Annual Report to Shareholders for the fiscal year ended February
28, 1997 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
54
<PAGE>
<PAGE>
[This page intentionally left blank]
55
<PAGE>
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY A FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY ANY
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions......... 1
Hedging and Related Income Strategies........ 23
Trustees and Officers; Principal Holders of
Securities................................. 28
Investment Advisory and Distribution
Arrangements............................... 34
Portfolio Transactions....................... 39
Reduced Sales Charges, Additional Exchange
and Redemption Information and Other
Services................................... 41
Conversion of Class B Shares................. 44
Valuation of Shares.......................... 45
Performance Information...................... 45
Taxes........................................ 48
Other Information............................ 54
Financial Statements......................... 54
</TABLE>
'c'1997 PaineWebber Incorporated
PaineWebber California
Tax-Free Income Fund
PaineWebber National
Tax-Free Income Fund
PaineWebber New York
Tax-Free Income Fund
PaineWebber Municipal
High Income Fund
- ------------------------------------------------------------
Statement of Additional Information
July 1, 1997
- ------------------------------------------------------------
PAINEWEBBER
<PAGE>
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: (to be filed)
PaineWebber California Tax-Free Income Fund
Included in Part A of this Registration Statement:
Financial Highlights for one Class A share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993, and for each of the six
years in the period ended November 30, 1992.
Financial Highlights for one Class B share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993, for the year ended November
30, 1992 and for the period July 1, 1991 (commencement of
offering) to November 30, 1991.
Financial Highlights for one Class C share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993 and for the period July 2,
1992 (commencement of offering) to November 30, 1992.
Included in Part B of this Registration Statement through incorporation
by reference from the Annual Report to Shareholders (previously filed
with the Securities and Exchange Commission through EDGAR on May , 1997,
Accession No.: )
Portfolio of Investments at February 28, 1997.
Statement of Assets and Liabilities at February 28, 1997.
Statement of Operations for the year ended February 28, 1997.
Statement of Changes in Net Assets for the two years in the
period ended February 28, 1997.
Notes to Financial Statements
Financial Highlights for one Class A share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993 and for the year ended
November 30, 1992.
Financial Highlights for one Class B share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993, and for the year ended
November 30, 1992.
Financial Highlights for one Class C share of the Fund for each
of the four years ended February 28, 1997, for the three months
ended February 28, 1993 and for the period July 2, 1992
(commencement of offering) to November 30, 1992.
Report of Ernst & Young LLP, Independent Auditors, dated April ,
1997 relating to PaineWebber Mutual Fund Trust (comprised of
PaineWebber California Tax-Free Income Fund and PaineWebber
National Tax-Free Income Fund).
<PAGE>
<PAGE>
PaineWebber National Tax-Free Income Fund
Included in Part A of this Registration Statement:
Financial Highlights for one Class A share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993, and for each of the six
years in the period ended November 30, 1992.
Financial Highlights for one Class B share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993, for the year ended November
30, 1992 and for the period July 1, 1991 (commencement of
offering) to November 30, 1991.
Financial Highlights for one Class C share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993 and for the period July 2,
1992 (commencement of offering) to November 30, 1992.
Financial Highlights for one Class Y share of the Fund for the
year ended February 28, 1997 and for the period November 3, 1995
(commencement of offering) to February 29, 1996.
Included in Part B of this Registration Statement through incorporation
by reference from the Annual Report to Shareholders (previously filed
with the Securities and Exchange Commission through Edgar on May , 1997,
Accession No.: )
Portfolio of Investments at February 28, 1997.
Statement of Assets and Liabilities at February 28, 1997.
Statement of Operations for the year ended February 28, 1997.
Statement of Changes in Net Assets for the two years in the
period ended February 28, 1997.
Notes to Financial Statements
Financial Highlights for one Class A share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993 and for the year ended
November 30, 1992.
Financial Highlights for one Class B share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993, and for the year ended
November 30, 1992.
Financial Highlights for one Class C share of the Fund for each
of the four years in the period ended February 28, 1997, for the
three months ended February 28, 1993 and for the period July 2,
1992 (commencement of offering) to November 30, 1992.
Financial Highlights for one Class Y share of the Fund for the
year ended February 28, 1997 and for the period November 3, 1995
(commencement of offering) to February 29, 1996.
Report of Ernst & Young LLP, Independent Auditors, dated April ,
1997 relating to PaineWebber Mutual Fund Trust (comprised of
PaineWebber California Tax-Free Income Fund and PaineWebber
National Tax-Free Income Fund).
<PAGE>
<PAGE>
b) Exhibits:
(1) (a) Declaration of Trust 1/
(b) Amendment effective January 28, 1988 to Declaration of Trust 2/
(c) Amendment effective March 21, 1991 to Declaration of Trust 9/
(d) Amendment effective July 1, 1991 to Declaration of Trust 11/
(e) Amendment effective April 6, 1992 to Declaration of Trust 14/
(f) Amendment effective June 30, 1992 to Declaration of Trust 15/
(g) Amendment effective July 20, 1995 to Declaration of Trust 19/
(h) Amendment effective November 10, 1995 to Declaration of
Trust 21/
(2) (a) By-Laws 1/
(b) Amendment dated March 19, 1991 to By-Laws 9/
(c) Amendment dated September 28, 1994 to By-Laws 18/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's
shares of beneficial interest 17/
(5) Investment Advisory and Administration Contract 6/
(6) (a) Distribution Contract (Class A Shares) 16/
(b) Distribution Contract (Class B Shares) 16/
(c) Distribution Contract (Class C Shares) 21/
(d) Distribution Contract (Class Y Shares) 21/
(e) Exclusive Dealer Agreement (Class A Shares) 16/
(f) Exclusive Dealer Agreement (Class B Shares) 16/
(g) Exclusive Dealer Agreement (Class C Shares) 21/
(h) Exclusive Dealer Agreement (Class Y Shares) 21/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
(9) (a) Transfer Agency and Service Contract 8/
(b) Service Contract 7/
(10)(a) Opinion and consent of Kirkpatrick & Lockhart LLP with
respect to Class A, B and C shares 14/
(b) Opinion and consent of Kirkpatrick & Lockhart LLP with
respect to Class Y shares of PaineWebber National Tax-Free
Income Fund 19/
(c) Opinion and consent of Kirkpatrick & Lockhart LLP with
respect to Class Y shares of PaineWebber California
Tax-Free Income Fund 21/
(11)(a) Independent Auditor's Consent (to be filed)
(b) Consent of Special Counsel with respect to California law (to
be filed)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent 4/
(14) Prototype Retirement Plan 5/
(15)(a) Plan of Distribution pursuant to Rule 12b-1 (Class A Shares) 11/
(b) Plan of Distribution pursuant to Rule 12b-1 (Class B Shares) 11/
(c) Plan of Distribution pursuant to rule 12b-1 (Class C
Shares) 15/
(16)(a) Schedule for Computation of Performance Quotations for
Class A shares of PaineWebber California Tax-Free Income
Fund 9/
(b) Schedule for Computation of Performance Quotations for Class B
shares of PaineWebber California Tax-Free Income Fund 11/
(c) Schedule for Computation of Performance Quotations for Class A
shares of PaineWebber National Tax-Free Income Fund 12/
(d) Schedule for Computation of Performance Quotations for Class
<PAGE>
<PAGE>
B shares of PaineWebber National Tax-Free Income Fund 13/
(e) Schedule for Computation of Performance Quotations for Class C
shares of PaineWebber California Tax-Free Income Fund 15/
(f) Schedule for Computation of Performance Quotations for Class C
shares of PaineWebber National Tax-Free Income Fund 15/
(g) Schedule for Computation of Performance Quotations for Class Y
shares of PaineWebber National Tax-Free Income Fund 21/
(17) and (27) Financial Data Schedule (to be filed)
(18) Plan pursuant to Rule 18f-3 22/
- -----------------------
<TABLE>
<S> <C>
1/ Incorporated by reference from Post-Effective Amendment No. 3 to registration
statement, SEC File No. 2-98149, filed January 30, 1987.
2/ Incorporated by reference from Post-Effective Amendment No. 6 to registration
statement, SEC File No. 2-98149, filed March 31, 1988.
3/ Incorporated by reference from Post-Effective Amendment No. 5 to registration
statement, SEC File No. 2-98149, filed February 1, 1988.
4/ Incorporated by reference from Post-Effective Amendment No. 2 to registration
statement, SEC File No. 2-98149, filed August 30, 1985.
5/ Incorporated by reference from Post-Effective Amendment No. 20 of PaineWebber
Managed Investments Trust, SEC File No. 2-91362, filed April 1, 1992.
6/ Incorporated by reference from Post-Effective Amendment No. 7 to registration
statement, SEC File No. 2-98149, filed March 31, 1989.
7/ Incorporated by reference from Post-Effective Amendment No. 8 to registration
statement, SEC File No. 2-98149, filed March 30, 1990.
8/ Incorporated by reference from Post-Effective Amendment No. 9 to registration
statement, SEC File No. 2-98149, filed February 1, 1991.
9/ Incorporated by reference from Post-Effective Amendment No. 10 to registration
statement, SEC File No. 2-98149, filed March 28, 1991.
10/ Incorporated by reference from Post-Effective Amendment No. 11 to registration
statement, SEC File No. 2-98149, filed April 29, 1991.
11/ Incorporated by reference from Post-Effective Amendment No. 12 to registration
statement, SEC File No. 2-98149, filed March 31, 1992.
12/ Incorporated by reference from Post-Effective Amendment No. 20 to registration
statement of PaineWebber Managed Municipal Trust, SEC File No. 2-89016, filed
March 28, 1991.
13/ Incorporated by reference from Post-Effective Amendment No. 23 to registration
statement of PaineWebber Managed Municipal Trust, SEC File No. 2-89016, filed
March 31, 1992.
14/ Incorporated by reference from Post-Effective Amendment No. 13 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed April 29,
1992.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C>
15/ Incorporated by reference from Post-Effective Amendment No. 14 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed April 1, 1993.
16/ Incorporated by reference from Post-Effective Amendment No. 16 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed July 1,
1994.
17/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Declaration of Trust, as amended effective January 28,
1988, March 21, 1991, July 1, 1991, April 6, 1992, June 30, 1992, July
20, 1995, and November 10, 1995, and from Articles II, VII, X of the
Registrant's By-Laws, as amended September 28, 1994.
18/ Incorporated by reference from Post-Effective Amendment No. 17 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed June 30, 1995.
19/ Incorporated by reference from Post-Effective Amendment No. 18 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed August 31,
1995.
20/ Incorporated by reference from Post-Effective Amendment No. 20 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed April 25,
1996.
21/ Incorporated by reference from Post-Effective Amendment No. 21 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed July 1, 1996.
22/ Incorporated by reference from Post-Effective Amendment No. 22 to registration
statement of PaineWebber Mutual Fund Trust, SEC File No. 2-98149, filed September 23,
1996.
</TABLE>
Item 25. Persons Controlled by or under
Common Control with Registrant
------------------------------
None.
<PAGE>
<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
Title of Class Number of Record
-------------- Shareholders
as of
March 31, 1997
--------------
Shares of beneficial interest, par
value $.001 per share
PaineWebber California Tax-Free
Income Fund
Class A Shares 2,565
Class B Shares 659
Class C Shares 558
Class Y Shares 0
PaineWebber National Tax-Free Income
Fund
Class A Shares 7,502
Class B Shares 1,415
Class C Shares 2,316
Class Y Shares 13
Item 27. Indemnification
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the Registrant will indemnify its trustees and officers to the
fullest extent permitted by law against claims and expenses asserted against or
incurred by them by virtue of being or having been a trustee or officer;
provided that no such person shall be indemnified where there has been an
adjudication or other determination, as described in Article X, that such person
is liable to the Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration
of Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Trust; and that, provided they have exercised reasonable
care and have acted under the reasonable belief that their actions are in the
best interest of the Registrant, the trustees and officers shall not be liable
for neglect or wrongdoing by them or any officer, agent, employee or investment
adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally
provides that, subject to the provisions of Section 1 of Article XI and to
Article X, trustees shall not be liable for errors of judgment or mistakes of
fact or law, 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.
<PAGE>
<PAGE>
Article IX 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 any liability to the
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
Section 9 of the Investment Advisory and Administration Contract (the
"Contract") provides that Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") shall not be liable for any error of judgement or mistake of law or
for any loss suffered by the Registrant in connection with the matters to which
the Contract relates, except for a loss resulting from the willful misfeasance,
bad faith, or gross negligence of Mitchell Hutchins in the performance of its
duties or from its reckless disregard of its obligations and duties under the
Contract. Section 10 of the Contract provides that the trustees shall not be
liable for any obligations of the Registrant under the Contract and that
Mitchell Hutchins shall look only to the assets and property of the Registrant
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 Registrant will
indemnify Mitchell Hutchins, its officers, directors and 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 Registrant 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 also provides that Mitchell Hutchins agrees to
indemnify, defend and hold the Registrant, 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 the
Distribution Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of the Distribution Contract, with respect to PaineWebber Incorporated
("PaineWebber").
Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Registrant against all liabilities, except
those arising out of bad faith, gross negligence, willful misfeasance or
reckless disregard of its duties under the Service Contract.
Section 10 of the Distribution Contract and Section 7 of the Service
Contract contain provisions similar to that of Section 10 of the Investment
Advisory and Administration Contract, with respect to Mitchell Hutchins and
PaineWebber, as appropriate.
<PAGE>
<PAGE>
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 Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser 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.
Item 29. Principal Underwriters
(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following 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 INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
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
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant.
The directors and officers of Mitchell Hutchins, their principal
business addresses, and their positions and
<PAGE>
<PAGE>
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 herein 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, New York 10019.
<TABLE>
<CAPTION>
Positions and Offices With
Position With Underwriter or
Name and Principal Business Address Registrant Exclusive Dealer
- ----------------------------------- ---------- ----------------
<S> <C> <C>
Margo N. Alexander Trustee and Director, President, and
President (Chief Chief Executive Officer of
Executive Officer) Mitchell Hutchins; Executive
Vice President and Director
of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior
Investment Strategist and
Member of the Investment
Policy Committee of
PaineWebber
Cynthia Bow Vice President First Vice President and a
Portfolio Manager of Mitchell
Hutchins
Elbridge Gerry III Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
C. William Maher Vice President and First Vice President and a
Assistant Treasurer Senior Manager of the Mutual
Fund Finance Division of
Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief
Investment Officer - Fixed
Income of Mitchell Hutchins
Ann E. Moran Vice President and Vice President of Mitchell
Assistant Treasurer Hutchins
Richard S. Murphy Vice President Senior Vice President of
Mitchell Hutchins
Dianne E. O'Donnell Vice President and Senior Vice President and
Secretary Deputy General Counsel of
Mitchell Hutchins
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Emil Polito Vice President Senior Vice President,
Director of Operations and
control for Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General
Counsel of Mitchell Hutchins
Paul H. Schubert Vice President and First Vice President and a
Assistant Treasurer Senior Manager of the Mutual
Fund Finance Division of
Mitchell Hutchins
Julian F. Sluyters Vice President and Senior Vice President and
Treasurer Director of the Mutual Fund
Finance Division of Mitchell
Hutchins
Keith A. Weller Vice President and First Vice President and
Assistant Secretary Associate General Counsel of
Mitchell Hutchins
Teresa M. West Vice President First Vice President of
Mitchell Hutchins
c) None
</TABLE>
Item 30. Location of Accounts and Records
The books and other documents required by paragraphs (b)(4), (c) and (d)
of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins Asset Management Inc., 1285 Avenue of
the Americas, New York, New York 10019. All other accounts, books and documents
required by Rule 31a-1 are maintained in the physical possession of Registrant's
transfer agent and custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has 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 25th day of April, 1997.
PAINEWEBBER MUTUAL FUND 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:
Signature Title Date
/s/ Margo N. Alexander President and Trustee April 25, 1997
- -------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman April 25, 1997
- -------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee April 25, 1997
- --------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee April 25, 1997
- --------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee April 25, 1997
- --------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee April 25, 1997
- --------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee April 25, 1997
- --------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee April 25, 1997
- --------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee April 25, 1997
- --------------------------
Carl W. Schafer *
/s/ Julian F. Sluyters Vice President and April 25, 1997
- -------------------------- Treasurer (Chief Financial
Julian F. Sluyters and Accounting Officer)
<PAGE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to power 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 No. 2-89016, filed June 27, 1996.
<PAGE>
<PAGE>
PAINEWEBBER MUTUAL FUND TRUST
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
(1) (a) Declaration of Trust 1/
(b) Amendment effective January 28, 1988 to Declaration of Trust
2/
(c) Amendment effective March 21, 1991 to Declaration of Trust
9/
(d) Amendment effective July 1, 1991 to Declaration of Trust
11/
(e) Amendment effective April 6, 1992 to Declaration of Trust
14/
(f) Amendment effective June 30, 1992 to Declaration of Trust
15/
(g) Amendment effective July 20, 1995 to Declaration of Trust
19/
(h) Amendment effective November 10, 1995 to Declaration of
Trust 21/
(2) (a) By-Laws 1/
(b) Amendment dated March 19, 1991 to By-Laws 9/ (c) Amendment
dated September 28, 1994 to By-Laws 18/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's
shares of beneficial interest 17/
(5) Investment Advisory and Administration Contract 6/
(6) (a) Distribution Contract (Class A Shares) 16/
(b) Distribution Contract (Class B Shares) 16/
(c) Distribution Contract (Class C Shares) 21/
(d) Distribution Contract (Class Y Shares) 21/
(e) Exclusive Dealer Agreement (Class A Shares) 16/
(f) Exclusive Dealer Agreement (Class B Shares) 16/
(g) Exclusive Dealer Agreement (Class C Shares) 21/
(h) Exclusive Dealer Agreement (Class Y Shares) 21/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 3/
(9) (a) Transfer Agency and Service Contract 8/
(b) Service Contract 7/
(10)(a) Opinion and consent of Kirkpatrick & Lockhart LLP with
respect to Class A, B and C shares 14/
(b) Opinion and consent of Kirkpatrick & Lockhart LLP with
respect to Class Y shares of PaineWebber National Tax-Free
Income Fund 19/
(c) Opinion and consent of Kirkpatrick & Lockhart LLP with
respect to Class Y shares of PaineWebber California
Tax-Free Income Fund 21/
(11)(a) Independent Auditor's Consent (to be filed)
(b) Consent of Special Counsel with respect to California law (to
be filed)
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent 4/
(14) Prototype Retirement Plan 5/
(15)(a) Plan of Distribution pursuant to Rule 12b-1 (Class A Shares) 11/
(b) Plan of Distribution pursuant to Rule 12b-1 (Class B Shares)
11/
(c) Plan of Distribution pursuant to rule 12b-1 (Class C
Shares) 15/
(16)(a) Schedule for Computation of Performance Quotations for
Class A shares of PaineWebber California Tax-Free Income
Fund 9/
(b) Schedule for Computation of Performance Quotations for Class B
shares of PaineWebber California Tax-Free Income Fund 11/
<PAGE>
<PAGE>
(c) Schedule for Computation of Performance Quotations for Class A
shares of PaineWebber National Tax-Free Income Fund 12/
(d) Schedule for Computation of Performance Quotations for Class B
shares of PaineWebber National Tax-Free Income Fund 13/
(e) Schedule for Computation of Performance Quotations for Class C
shares of PaineWebber California Tax-Free Income Fund 15/
(f) Schedule for Computation of Performance Quotations for Class C
shares of PaineWebber National Tax-Free Income Fund 15/
(g) Schedule for Computation of Performance Quotations for Class Y
shares of PaineWebber National Tax-Free Income Fund 21/
(17) and (27) Financial Data Schedule (to be filed)
(18) Plan pursuant to Rule 18f-3 22/
- -----------------------
1/ Incorporated by reference from Post-Effective Amendment No. 3 to
registration statement, SEC File No. 2-98149, filed January 30, 1987.
2/ Incorporated by reference from Post-Effective Amendment No. 6 to
registration statement, SEC File No. 2-98149, filed March 31, 1988.
3/ Incorporated by reference from Post-Effective Amendment No. 5 to
registration statement, SEC File No. 2-98149, filed February 1, 1988.
4/ Incorporated by reference from Post-Effective Amendment No. 2 to
registration statement, SEC File No. 2-98149, filed August 30, 1985.
5/ Incorporated by reference from Post-Effective Amendment No. 20 of
PaineWebber Managed Investments Trust, SEC File No. 2-91362, filed April 1,
1992.
6/ Incorporated by reference from Post-Effective Amendment No. 7 to
registration statement, SEC File No. 2-98149, filed March 31, 1989.
7/ Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 2-98149, filed March 30, 1990.
8/ Incorporated by reference from Post-Effective Amendment No. 9 to
registration statement, SEC File No. 2-98149, filed February 1, 1991.
9/ Incorporated by reference from Post-Effective Amendment No. 10 to
registration statement, SEC File No. 2-98149, filed March 28, 1991.
10/ Incorporated by reference from Post-Effective Amendment No. 11 to
registration statement, SEC File No. 2-98149, filed April 29, 1991.
11/ Incorporated by reference from Post-Effective Amendment No. 12 to
registration statement, SEC File No. 2-98149, filed March 31, 1992.
12/ Incorporated by reference from Post-Effective Amendment No. 20 to
registration statement of PaineWebber Managed Municipal Trust, SEC File No.
2-89016, filed March 28, 1991.
<PAGE>
<PAGE>
13/ Incorporated by reference from Post-Effective Amendment No. 23 to
registration statement of PaineWebber Managed Municipal Trust, SEC File No.
2-89016, filed March 31, 1992.
14/ Incorporated by reference from Post-Effective Amendment No. 13 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed April 29, 1992.
15/ Incorporated by reference from Post-Effective Amendment No. 14 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed April 1, 1993.
16/ Incorporated by reference from Post-Effective Amendment No. 16 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1994.
17/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Declaration of Trust, as amended effective January 28, 1988,
March 21, 1991, July 1, 1991, April 6, 1992, June 30, 1992, July 20, 1995,
and November 10, 1995, and from Articles II, VII, X of the Registrant's
By-Laws, as amended September 28, 1994.
18/ Incorporated by reference from Post-Effective Amendment No. 17 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed June 30, 1995.
19/ Incorporated by reference from Post-Effective Amendment No. 18 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed August 31, 1995.
20/ Incorporated by reference from Post-Effective Amendment No. 20 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed April 25, 1996.
21/ Incorporated by reference from Post-Effective Amendment No. 21 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1996.
22/ Incorporated by reference from Post-Effective Amendment No. 22 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed September 23, 1996.
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as..................... 'r'
The service mark symbol shall be expressed as............................. 'sm'
The dagger symbol shall be expressed as................................... 'D'
The copyright symbol shall be expressed as................................ 'c'
Characters normally expressed as superscript shall be preceded by......... 'pp'
<PAGE>
