<PAGE>
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PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund
PaineWebber New York Tax-Free Income Fund
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- JULY 1, 1998
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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 and local 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 medium grade and high yield, high risk
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 this Prospectus
carefully and retain a copy for future reference.
A Statement of Additional Information dated July 1, 1998 has been filed with the
Securities and Exchange Commission ('SEC' or '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. In addition, the Commission maintains a
website (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference, and other information regarding
registrants that file electronically with the Commission.
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THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of seven broad categories,
which are presented here. Generally, investors seeking to maximize return must
assume greater risk. The Funds offered by this Prospectus are in the TAX-FREE
BOND category.
ASSET ALLOCATION FUNDS for high total return by investing in stocks and
bonds.
BOND FUNDS for income by investing mainly in bonds.
TAX-FREE BOND FUNDS for income exempt from federal income tax and, in some
cases, state and local income tax, by investing in municipal bonds.
MONEY MARKET FUND for income and stability by investing in high-quality,
short-term investments.
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.
FUNDS OF FUNDS for either long-term growth of capital; total return; or
income (and, secondarily, growth of capital) by investing in other
PaineWebber mutual funds.
A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
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INVESTORS SHOULD RELY ONLY 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 SELL 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 OTHER
FUND MAY INVEST UP TO 35% OF ITS NET 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. INVESTORS SHOULD CAREFULLY ASSESS
THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS.
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Prospectus Page 1
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
-----
<S> <C>
The Funds at a Glance............................................................ 3
Expense Table.................................................................... 6
Financial Highlights............................................................. 10
Investment Objectives & Policies................................................. 20
Investment Philosophy & Process.................................................. 21
Performance...................................................................... 22
The Funds' Investments........................................................... 26
Flexible Pricing'sm'............................................................. 32
How to Buy Shares................................................................ 36
How to Sell Shares............................................................... 37
Other Services................................................................... 38
Management....................................................................... 39
Determining the Shares' Net Asset Value.......................................... 41
Dividends & Taxes................................................................ 41
General Information.............................................................. 44
Appendix......................................................................... 46
</TABLE>
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Prospectus Page 2
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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THE FUNDS AT A GLANCE
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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
the Funds are to finance college educations, plan for retirement or diversify a
portfolio. The Funds are not suitable for tax-exempt institutions, qualified
retirement plans or Individual Retirement Accounts ('IRAs') 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, 1998, the Fund had over $149 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, 1998, the Fund had over $306 million in assets.
MUNICIPAL HIGH INCOME FUND
GOAL: Current income that is exempt from federal income tax by investing
primarily in medium grade and high yield, high risk lower grade municipal bonds.
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 greater risks associated with the
types of securities in which the Fund invests.
SIZE: On May 31, 1998, the Fund had over $104 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 taxes.
SIZE: On May 31, 1998, the Fund had over $44 million in assets.
RISKS
Investors may lose money by investing in the Funds; your investment is not
guaranteed.
INTEREST RATE RISK. The municipal 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
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Prospectus Page 3
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
rate trends and other factors. However, efforts to limit this risk may not be
successful.
CREDIT RISK. The issuer or a guarantor of a municipal bond may be unable or
unwilling to pay interest or repay principal on the bond.
QUALITY RISK. Below investment grade municipal bonds in which Municipal High
Income Fund may invest without limit are considered predominantly speculative
and involve major risk exposure to adverse conditions. The other Funds may each
invest up to 35% of its net assets in these types of municipal bonds. Some
lower-tier investment grade municipal bonds also have speculative
characteristics.
MARKET RISK. During periods of market uncertainty, the values of municipal
bonds can become volatile.
CALIFORNIA OBLIGATIONS. The concentration of California Tax-Free Income Fund's
investments in bonds issued by the State of California, its municipalities and
public authorities may subject the Fund to greater risks than a fund that has a
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 New York Tax-Free Income Fund's
investments in bonds issued by the State of New York, its municipalities and
public authorities may subject the Fund to greater risks than a fund that has a
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 New York
State, 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 involves special risks.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned
asset management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of each Fund.
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 have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 0.75% is charged on shares sold
within one year
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Prospectus Page 4
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
of purchase. Class C shares never convert to any other class of shares.
CLASS Y SHARES
Class Y shares are currently offered only to limited groups of investors. The
price is the net asset value. 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. Class Y shares have lower ongoing
expenses than any other class of shares.
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Prospectus Page 5
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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EXPENSE TABLE
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The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Funds.
Expenses shown below are based on those incurred for the most recent fiscal
year, except that 'Other Expenses' for Class Y shares of New York Tax-Free
Income Fund have been estimated because no Class Y shares were outstanding
during the 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 offering price or net asset
value at the time of 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(1)
Management fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 fees..................................................................... 0.25 1.00 0.75 None
Other expenses................................................................. 0.23 0.25 0.25 0.26
------- ------- ------- -------
Total operating expenses....................................................... 0.98% 1.75% 1.50% 0.76%
------- ------- ------- -------
------- ------- ------- -------
NATIONAL TAX-FREE INCOME FUND
Management fees................................................................ 0.50% 0.50% 0.50% 0.50%
12b-1 fees..................................................................... 0.25 1.00 0.75 None
Other expenses................................................................. 0.20 0.23 0.22 0.18
------- ------- ------- -------
Total operating expenses....................................................... 0.95% 1.73% 1.47% 0.68%
------- ------- ------- -------
------- ------- ------- -------
MUNICIPAL HIGH INCOME FUND
Management fees................................................................ 0.60% 0.60% 0.60% 0.60%
12b-1 fees..................................................................... 0.25 1.00 0.75 None
Other expenses................................................................. 0.37 0.38 0.37 0.40
------- ------- ------- -------
Total operating expenses....................................................... 1.22% 1.98% 1.72% 1.00%
------- ------- ------- -------
------- ------- ------- -------
NEW YORK TAX-FREE INCOME FUND(2)
Management fees................................................................ 0.60% 0.60% 0.60% 0.60%
12b-1 fees..................................................................... 0.25 1.00 0.75 None
Other expenses................................................................. 0.43 0.45 0.43 0.43
------- ------- ------- -------
Total operating expenses....................................................... 1.28% 2.05% 1.78% 1.03%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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(1) Effective July 1, 1998, Mitchell Hutchins is voluntarily waiving 0.20% of
its 0.50% management fee for California Tax-Free Income Fund. This waiver
may be terminated by Mitchell Hutchins at any time.
(2) All expenses for New York Tax-Free Income Fund are those that would have
been incurred by the Fund for the fiscal year ended February 28, 1998 had
Mitchell Hutchins and PaineWebber not waived a portion of their fees.
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Prospectus Page 6
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
EXPENSE TABLE
(Continued)
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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 an initial
sales charge. However, if an investor sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale, whichever is less, is
imposed.
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: If an investor sells these shares within one year after
purchase, a contingent deferred sales charge of 0.75% of the offering price or
the net asset value of the shares at the time of sale, whichever is less, is
imposed.
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. Class Y shares
may be purchased by participants in certain investment programs that are
sponsored by PaineWebber and that may invest in PaineWebber mutual funds ('PW
Programs'), when Class Y shares are purchased through that PW Program.
Participation in a PW Program is subject to an advisory fee at an annual rate of
no more than 1.5% of assets held through that PW Program. This account charge is
not included in the table because investors who are not PW Program participants
also are permitted to purchase Class Y shares.
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.......................................................... None 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 examples is required by regulations of the 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 a 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.................................................................. $ 50 $70 $ 92 $ 155
Class B (Assuming sale of all shares at end of period)................... $ 68 $85 $ 115 $ 167
Class B (Assuming no sale of shares)..................................... $ 18 $55 $ 95 $ 167
Class C (Assuming sale of all shares at end of period)................... $ 23 $47 $ 82 $ 179
Class C (Assuming no sale of shares)..................................... $ 15 $47 $ 82 $ 179
Class Y.................................................................. $ 8 $24 $ 42 $ 94
</TABLE>
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Prospectus Page 7
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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EXPENSE TABLE
(Continued)
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<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ----------- -----------
NATIONAL TAX-FREE INCOME FUND
<S> <C> <C> <C> <C>
EXAMPLE
Class A.................................................................. $ 49 $69 $ 90 $ 152
Class B (Assuming sale of all shares at end of period)................... $ 68 $84 $ 114 $ 164
Class B (Assuming no sale of shares)..................................... $ 18 $54 $ 94 $ 164
Class C (Assuming sale of all shares at end of period)................... $ 22 $46 $ 80 $ 176
Class C (Assuming no sale of shares)..................................... $ 15 $46 $ 80 $ 176
Class Y.................................................................. $ 7 $22 $ 38 $ 85
MUNICIPAL HIGH INCOME FUND
EXAMPLE
Class A.................................................................. $ 52 $77 $ 104 $ 182
Class B (Assuming sale of all shares at end of period)................... $ 70 $92 $ 127 $ 193
Class B (Assuming no sale of shares)..................................... $ 20 $62 $ 107 $ 193
Class C (Assuming sale of all shares at end of period)................... $ 25 $54 $ 93 $ 203
Class C (Assuming no sale of shares)..................................... $ 17 $54 $ 93 $ 203
Class Y.................................................................. $ 10 $32 $ 55 $ 122
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
NEW YORK TAX-FREE INCOME FUND
EXAMPLE
Class A.................................................................. $ 53 $79 $ 107 $ 188
Class B (Assuming sale of all shares at end of period)................... $ 71 $94 $ 130 $ 200
Class B (Assuming no sale of shares)..................................... $ 21 $64 $ 110 $ 200
Class C (Assuming sale of all shares at end of period)................... $ 26 $56 $ 96 $ 209
Class C (Assuming no sale of shares)..................................... $ 18 $56 $ 96 $ 209
Class Y.................................................................. $ 11 $33 $ 57 $ 126
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
ALL CLASSES: Reinvestment of all dividends and other 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.
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Prospectus Page 9
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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FINANCIAL HIGHLIGHTS
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CALIFORNIA TAX-FREE INCOME FUND
The following table provides 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, accompanying notes and
the report of Ernst & Young LLP, independent auditors, which appear in the
Fund's Annual Report to Shareholders for the fiscal year ended February 28,
1998, and are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the table below relating to each of the five fiscal years in the period ended
February 28, 1998 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 28, 1994 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
-----------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE
------------------------------------------------------------ THREE
MONTHS
FEBRUARY 28, FEBRUARY 28, ENDED
-------------------- FEBRUARY 29, -------------------- FEBRUARY 28,
1998 1997 1996 1995 1994 1993
-------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 10.91 $ 11.02 $ 10.68 $ 11.41 $ 11.80 $ 11.39
-------- -------- ------------ -------- -------- ------------
Net investment income.... 0.51 0.52 0.57 0.58 0.60 0.16
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.48 (0.11) 0.34 (0.63) (0.08) 0.58
-------- -------- ------------ -------- -------- ------------
Net increase (decrease)
from investment
operations.............. 0.99 0.41 0.91 (0.05) 0.52 0.74
-------- -------- ------------ -------- -------- ------------
Dividends from net
investment income....... (0.51) (0.52) (0.57) (0.58) (0.60) (0.16)
Distributions from net
realized gains from
investment
transactions............ -- -- -- (0.10) (0.31) (0.17)
-------- -------- ------------ -------- -------- ------------
Total dividends and other
distributions to
shareholders............ (0.51) (0.52) (0.57) (0.68) (0.91) (0.33)
-------- -------- ------------ -------- -------- ------------
Net asset value, end of
period.................. $ 11.39 $ 10.91 $ 11.02 $ 10.68 $ 11.41 $ 11.80
-------- -------- ------------ -------- -------- ------------
-------- -------- ------------ -------- -------- ------------
Total investment
return (1).............. 9.26% 3.92% 8.68% (0.18)% 4.46% 6.52%
-------- -------- ------------ -------- -------- ------------
-------- -------- ------------ -------- -------- ------------
Ratios/Supplemental data:
Net assets, end of
period (000's)........ $120,804 $127,040 $ 151,684 $178,234 $227,179 $247,025
Expenses to average net
assets................ 0.98% 0.97% 0.94% 0.88% 0.90% 0.99%*
Net investment income to
average net assets.... 4.56% 4.85% 5.21% 5.55% 5.10% 5.61%*
Portfolio turnover
rate.................. 107% 73% 32% 11% 37% 3%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------------------
CLASS A
---------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 11.13 $ 10.94 $ 10.95 $ 10.67 $ 10.40
-------- -------- -------- -------- --------
Net investment income.... 0.66 0.71 0.78 0.74 0.75
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.29 0.22 (0.01) 0.28 0.27
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 0.95 0.93 0.77 1.02 1.02
-------- -------- -------- -------- --------
Dividends from net
investment income....... (0.66) (0.71) (0.78) (0.74) (0.75)
Distributions from net
realized gains from
investment
transactions............ (0.03) (0.03) -- -- --
-------- -------- -------- -------- --------
Total dividends and other
distributions to
shareholders............ (0.69) (0.74) (0.78) (0.74) (0.75)
-------- -------- -------- -------- --------
Net asset value, end of
period..................$ 11.39 $ 11.13 $ 10.94 $ 10.95 $ 10.67
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment
return (1).............. 8.73% 8.84% 6.89% 9.85% 10.02%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of
period (000's)........$239,851 $231,987 $211,701 $200,398 $163,651
Expenses to average net
assets................ 0.93% 0.83% 0.68% 0.76% 0.73%
Net investment income to
average net assets.... 5.80% 6.46% 6.78% 6.82% 6.98%
Portfolio turnover
rate.................. 25% 2% 23% 4% 8%
</TABLE>
- ------------
'D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Classes A, B and C would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
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Prospectus Page 10
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- --------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------
FOR THE
FOR THE YEARS ENDED FOR THE PERIOD
------------------------------------------------------------ THREE FOR THE JULY 1,
MONTHS YEAR 1991'D'
FEBRUARY 28, FEBRUARY 28, ENDED ENDED THROUGH
------------------- FEBRUARY 29, ------------------- FEBRUARY 28, NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995 1994 1993 1992 1991
------- ------- ------------ ------- ------- ------------ ------------ ------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 10.92 $ 11.03 $ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14 $ 10.95
------- ------- ------ ------- ------- ------ ------ ------
0.42 0.44 0.48 0.50 0.51 0.14 0.57 0.25
0.47 (0.11) 0.34 (0.62) (0.09) 0.59 0.28 0.19
------- ------- ------ ------- ------- ------ ------ ------
0.89 0.33 0.82 (0.12) 0.42 0.73 0.85 0.44
------- ------- ------ ------- ------- ------ ------ ------
(0.42) (0.44) (0.48) (0.50) (0.51) (0.14) (0.57) (0.25)
-- -- -- (0.10) (0.31) (0.17) (0.03) --
------- ------- ------ ------- ------- ------ ------ ------
(0.42) (0.44) (0.48) (0.60) (0.82) (0.31) (0.60) (0.25)
------- ------- ------ ------- ------- ------ ------ ------
$ 11.39 $ 10.92 $ 11.03 $ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14
------- ------- ------ ------- ------- ------ ------ ------
------- ------- ------ ------- ------- ------ ------ ------
8.33% 3.14% 7.86% (0.85)% 3.56% 6.50% 7.80% 3.69%
------- ------- ------ ------- ------- ------ ------ ------
------- ------- ------ ------- ------- ------ ------ ------
$16,783 $20,943 $ 27,175 $33,007 $41,979 $ 36,693 $ 30,205 $ 10,743
1.75% 1.74% 1.70% 1.64% 1.65% 1.74%* 1.68% 1.62%*
3.79% 4.08% 4.45% 4.78% 4.32% 4.81%* 4.91% 5.02%*
107% 73% 32% 11% 37% 3% 25% 2%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------------------------------------------------------------------------------
CLASS C CLASS Y
------------------------------------------------------------------------------------------------------ ------------
FOR THE FOR THE
FOR THE PERIOD PERIOD
FOR THE YEARS ENDED THREE JULY 2, FEBRUARY 5,
- --------------------------------------------------------------------- MONTHS 1992'D' 1998'D'
FEBRUARY 28, FEBRUARY 28, ENDED THROUGH THROUGH
--------------------------- FEBRUARY 29, ------------------- FEBRUARY 28, NOVEMBER 30, FEBRUARY 28,
1998 1997 1996 1995 1994 1993 1992 1998
------- --------- ------------ ------- ------- ------------ ------------ ------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 10.90 $ 11.02 $ 10.67 $ 11.40 $ 11.79 $ 11.38 $ 11.41 $11.42
------- ------- ------ ------- ------- ------ ------ ------
0.45 0.47 0.51 0.53 0.54 0.14 0.21 0.04
0.48 (0.12) 0.35 (0.63) (0.08) 0.58 (0.03) (0.04)
------- ------- ------ ------- ------- ------ ------ ------
0.93 0.35 0.86 (0.10) 0.46 0.72 0.18 0.00
------- ------- ------ ------- ------- ------ ------ ------
(0.45) (0.47) (0.51) (0.53) (0.54) (0.14) (0.21) (0.04)
-- -- -- (0.10) (0.31) (0.17) -- --
------- ------- ------ ------- ------- ------ ------ ------
(0.45) (0.47) (0.51) (0.63) (0.85) (0.31) (0.21) (0.04)
------- ------- ------ ------- ------- ------ ------ ------
$ 11.38 $ 10.90 $ 11.02 $ 10.67 $ 11.40 $ 11.79 $ 11.38 $11.38
------- ------- ------ ------- ------- ------ ------ ------
------- ------- ------ ------- ------- ------ ------ ------
8.71% 3.30% 8.22% (0.70)% 3.91% 6.49% 1.28% (0.34)%
------- ------- ------ ------- ------- ------ ------ ------
------- ------- ------ ------- ------- ------ ------ ------
$16,522 $17,624 $ 22,155 $28,217 $53,874 $ 39,029 $ 30,141 $ 114
1.50% 1.49% 1.46% 1.40% 1.39% 1.48%* 1.39%* 0.76%*
4.05% 4.34% 4.69% 5.05% 4.55% 5.06%* 4.79%* 5.07%*
107% 73% 32% 11% 37% 3% 25% 107%
</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 table provides 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, accompanying notes and
the report of Ernst & Young LLP, independent auditors, which appear in the
Fund's Annual Report to Shareholders for the fiscal year ended February 28,
1998, and are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the table below relating to each of the five fiscal years in the period ended
February 28, 1998 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 28, 1994 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
-------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE
--------------------------------------------------------------- THREE
MONTHS
FEBRUARY 28, FEBRUARY 28, ENDED
--------------------- FEBRUARY 29, --------------------- FEBRUARY 28,
1998 1997 1996 1995 1994 1993
-------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 11.55 $ 11.64 $ 11.26 $ 12.00 $ 12.09 $ 11.67
-------- -------- ------------ -------- -------- ------------
Net investment income.... 0.56 0.55 0.58 0.63 0.64 0.17
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.50 (0.09) 0.39 (0.73) 0.03 0.55
-------- -------- ------------ -------- -------- ------------
Net increase (decrease)
from investment
operations.............. 1.06 0.46 0.97 (0.10) 0.67 0.72
-------- -------- ------------ -------- -------- ------------
Dividends from net
investment income....... (0.56) (0.55) (0.59) (0.63) (0.64) (0.17)
Distributions from net
realized gains from
investment
transactions............ (0.08) -- -- (0.01) (0.12) (0.13)
-------- -------- ------------ -------- -------- ------------
Total dividends and other
distributions to
shareholders............ (0.64) (0.55) (0.59) (0.64) (0.76) (0.30)
-------- -------- ------------ -------- -------- ------------
Net asset value, end of
period.................. $ 11.97 $ 11.55 $ 11.64 $ 11.26 $ 12.00 $ 12.09
-------- -------- ------------ -------- -------- ------------
-------- -------- ------------ -------- -------- ------------
Total investment return
(1)..................... 9.48% 4.14% 8.75% (0.63)% 5.65% 6.31%
-------- -------- ------------ -------- -------- ------------
-------- -------- ------------ -------- -------- ------------
Ratios/Supplemental data:
Net assets, end of
period (000's)....... $229,040 $263,425 $315,899 $346,579 $432,825 $419,596
Expenses to average
net assets........... 0.95% 0.91% 0.93%(2) 0.88% 0.89% 0.88%*
Net investment income
to average net
assets............... 4.77% 4.85% 5.06%(2) 5.62% 5.28% 5.86%*
Portfolio turnover
rate................. 79% 81% 74% 60% 16% 5%
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
-------------------------------------------------------
CLASS A
-------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 11.40 $ 11.20 $ 11.21 $ 10.98 $ 10.64
-------- -------- -------- -------- --------
Net investment income.... 0.71 0.76 0.78 0.81 0.79
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.31 0.20 (0.01) 0.23 0.34
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 1.02 0.96 0.77 1.04 1.13
-------- -------- -------- -------- --------
Dividends from net
investment income....... (0.71) (0.76) (0.78) (0.81) (0.79)
Distributions from net
realized gains from
investment
transactions............ (0.04) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and other
distributions to
shareholders............ (0.75) (0.76) (0.78) (0.81) (0.79)
-------- -------- -------- -------- --------
Net asset value, end of
period..................$ 11.67 $ 11.40 $ 11.20 $ 11.21 $ 10.98
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return
(1)..................... 9.21% 8.85% 7.17% 9.77% 10.85%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of
period (000's).......$396,587 $366,300 $343,539 $333,314 $307,954
Expenses to average
net assets........... 0.91% 0.83% 0.69% 0.62% 0.75%
Net investment income
to average net
assets............... 6.13% 6.66% 7.08% 7.32% 7.14%
Portfolio turnover
rate................. 21% 27% 24% 11% 1%
</TABLE>
- ------------
'D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Classes A, B and C would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
(2) These ratios include non-recurring acquisition expenses of 0.03%.
- --------------------------------------------------------------------------------
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
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE FOR THE
- --------------------------------------------------------------- THREE FOR THE PERIOD
MONTHS YEAR JULY 1, 1991'D'
FEBRUARY 28, FEBRUARY 28, ENDED ENDED THROUGH
----------------- FEBRUARY 29, ------------------- FEBRUARY 28, NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995 1994 1993 1992 1991
------ ------- ------------ ------- ------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 11.55 $ 11.64 $ 11.26 $ 11.99 $ 12.08 $ 11.67 $ 11.40 $ 11.19
------ ------- ------ ------- ------- ------ ------ -----
0.47 0.46 0.49 0.54 0.55 0.15 0.62 0.27
0.50 (0.09) 0.39 (0.72) 0.03 0.54 0.31 0.21
------ ------- ------ ------- ------- ------ ------ -----
0.97 0.37 0.88 (0.18) 0.58 0.69 0.93 0.48
------ ------- ------ ------- ------- ------ ------ -----
(0.47) (0.46) (0.50) (0.54) (0.55) (0.15) (0.62) (0.27)
(0.08) -- -- (0.01) (0.12) (0.13) (0.04) --
------ ------- ------ ------- ------- ------ ------ -----
(0.55) (0.46) (0.50) (0.55) (0.67) (0.28) (0.66) (0.27)
------ ------- ------ ------- ------- ------ ------ -----
$ 11.97 $ 11.55 $ 11.64 $ 11.26 $ 11.99 $ 12.08 $ 11.67 $ 11.40
------ ------- ------ ------- ------- ------ ------ -----
------ ------- ------ ------- ------- ------ ------ -----
8.62% 3.35% 7.94% (1.29)% 4.87% 6.02% 8.36% 4.06%
------ ------- ------ ------- ------- ------ ------ -----
------ ------- ------ ------- ------- ------ ------ -----
$32,815 $40,949 $ 51,546 $58,958 $70,988 $ 50,064 $ 39,564 $ 8,620
1.73% 1.67% 1.68%(2) 1.64% 1.63% 1.63%* 1.65% 1.65%*
3.98% 4.09% 4.31%(2) 4.86% 4.50% 5.08%* 5.16% 5.26%*
79% 81% 74% 60% 16% 5% 21% 27%
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
- -----------------------------------------------------------------------------------------------
CLASS C FOR THE
- ------------------------------------------------------------- FOR THE PERIOD
FOR THE YEARS ENDED THREE JULY 2,
- ------------------------------------------------------------- MONTHS 1992'D'
FEBRUARY 28, FEBRUARY 28, ENDED THROUGH
- ------------------- FEBRUARY 29, --------------------- FEBRUARY 28, NOVEMBER 30
1998 1997 1996 1995 1994 1993 1992
- -------- ------- ------------ -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 11.55 $ 11.64 $ 11.26 $ 12.00 $ 12.09 11.67 $ 11.71
------ ------- ------ -------- -------- ------ ------
0.50 0.49 0.52 0.57 0.58 0.15 0.23
0.50 (0.09) 0.39 (0.73) 0.03 0.55 (0.04)
------ ------- ------ -------- -------- ------ ------
1.00 0.40 0.91 (0.16) 0.61 0.70 0.19
------ ------- ------ -------- -------- ------ ------
(0.50) (0.49) (0.53) (0.57) (0.58) (0.15) (0.23)
(0.08) -- -- (0.01) (0.12) (0.13) --
------ ------- ------ -------- -------- ------ ------
(0.58) (0.49) (0.53) (0.58) (0.70) (0.28) (0.23)
------ ------- ------ -------- -------- ------ ------
$ 11.97 $ 11.55 $ 11.64 $ 11.26 $ 12.00 12.09 $ 11.67
------ ------- ------ -------- -------- ------ ------
------ ------- ------ -------- -------- ------ ------
8.92% 3.61% 8.19% (1.13)% 5.13% 6.18% 1.41%
------ ------- ------ -------- -------- ------ ------
------ ------- ------ -------- -------- ------ ------
$49,647 $59,652 $ 75,076 $101,642 $187,778 138,989 $105,854
1.47% 1.42% 1.45%(2) 1.40% 1.37% 1.37%* 1.42%*
4.26% 4.34% 4.57%(2) 5.13% 4.75% 5.30%* 5.17%*
79% 81% 74% 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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL TAX-FREE
INCOME FUND
-----------------------------------------
CLASS Y
-----------------------------------------
FOR THE
YEARS FOR THE PERIOD
ENDED NOVEMBER 3, 1995'D'
FEBRUARY 28, THROUGH
------------------ FEBRUARY 29,
1998 1997 1996
--------- ------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of period.................................................. $11.55 $11.65 $11.62
------ ------ ------
Net investment income................................................................. 0.59 0.58 0.19
Net realized and unrealized gains (losses) from investments and futures............... 0.51 (0.10) 0.01
------ ------ ------
Net increase (decrease) from investment operations.................................... 1.10 0.48 0.20
------ ------ ------
Dividends from net investment income.................................................. (0.59) (0.58) (0.17)
Distributions from net realized gains from investment transactions.................... (0.08) -- --
------ ------ ------
Total dividends and other distributions to shareholders............................... (0.67) (0.58) (0.17)
------ ------ -------
Net asset value, end of period........................................................ $11.98 $11.55 $11.65
------ ------ -------
------ ------ -------
Total investment return (1)........................................................... 9.87% 4.32% 1.70%
------ ------ -------
------ ------ -------
Ratios/Supplemental data:
Net assets, end of period (000's).................................................. $ 241 $ 246 $ 341
Expenses to average net assets..................................................... 0.68% 0.65% 0.64%(2)*
Net investment income to average net assets........................................ 5.04% 5.13% 5.19%(2)*
Portfolio turnover rate............................................................ 79% 81% 74%
</TABLE>
- ------------
'D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Classes A, B and C would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
(2) These ratios include non-recurring acquisition expenses of 0.03%.
- -------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
<PAGE>
[This page intentionally left blank]
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
MUNICIPAL HIGH INCOME FUND
The following table provides 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, accompanying notes and
the report of Ernst & Young LLP, independent auditors, which appear in the
Fund's Annual Report to Shareholders for the fiscal year ended February 28,
1998, and are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the table below relating to each of the five fiscal years in the period ended
February 28, 1998 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 28, 1994 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 29, ---------------------------
1998 1997 1996 1995 1994 1993
------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 10.39 $ 10.29 $ 9.92 $ 10.77 $ 10.96 $ 10.29
------- ------- ------------ ------- ------- -------
Net investment income.... 0.55 0.56 0.62 0.59 0.61 0.67
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.57 0.10 0.37 (0.82) 0.01 0.81
------- ------- ------------ ------- ------- -------
Net increase (decrease)
from investment
operations.............. 1.12 0.66 0.99 (0.23) 0.62 1.48
------- ------- ------------ ------- ------- -------
Dividends from net
investment income....... (0.55) (0.56) (0.62) (0.59) (0.61) (0.67)
Distributions from net
realized gains from
investment
transactions............ -- -- -- (0.03) (0.20) (0.14)
------- ------- ------------ ------- ------- -------
Total dividends and other
distributions to
shareholders............ (0.55) (0.56) (0.62) (0.62) (0.81) (0.81)
------- ------- ------------ ------- ------- -------
Net asset value, end of
period.................. $ 10.96 $ 10.39 $ 10.29 $ 9.92 $ 10.77 $ 10.96
------- ------- ------------ ------- ------- -------
------- ------- ------------ ------- ------- -------
Total investment
return(1)............... 11.06% 6.61% 10.18% (2.03)% 5.77% 15.05%
------- ------- ------------ ------- ------- -------
------- ------- ------------ ------- ------- -------
Ratios/Supplemental data:
Net assets, end of
period (000's)........ $59,288 $52,593 $ 57,280 $63,287 $82,248 $82,251
Expenses to average net
assets, net of waivers
from adviser.......... 1.22% 1.15% 1.10% 1.13% 1.03% 0.87%
Expenses to average net
assets, before waivers
from adviser.......... 1.22% 1.15% 1.10% 1.13% 1.16% 1.29%
Net investment income to
average net assets,
net of waivers from
adviser............... 5.15% 5.49% 5.94% 5.96% 5.52% 6.31%
Net investment income to
average net assets,
before waivers from
adviser............... 5.15% 5.49% 5.94% 5.96% 5.39% 5.89%
Portfolio turnover
rate.................. 22% 64% 48% 28% 23% 10%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
------------------------------------------
CLASS A
------------------------------------------
FEBRUARY 28,
FEBRUARY 29, ---------------------------
1992 1991 1990 1989
------------ ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 9.92 $ 10.00 $ 9.91 $ 9.80
-------- ------- ------- -------
Net investment income.... 0.71 0.72 0.74 0.75
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.44 (0.08) 0.09 0.11
-------- ------- ------- -------
Net increase (decrease)
from investment
operations.............. 1.15 0.64 0.83 0.86
-------- ------- ------- -------
Dividends from net
investment income....... (0.71) (0.72) (0.74) (0.75)
Distributions from net
realized gains from
investment
transactions............ (0.07) -- -- --
-------- ------- ------- -------
Total dividends and other
distributions to
shareholders............ (0.78) (0.72) (0.74) (0.75)
-------- ------- ------- -------
Net asset value, end of
period.................. $ 10.29 $ 9.92 $ 10.00 $ 9.91
-------- ------- ------- -------
-------- ------- ------- -------
Total investment
return(1)............... 11.94% 6.69% 8.74% 9.11%
-------- ------- ------- -------
-------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of
period (000's)........ $68,830 $62,559 $61,067 $54.512
Expenses to average net
assets, net of waivers
from adviser.......... 0.75% 0.69% 0.65% 0.60%
Expenses to average net
assets, before waivers
from adviser.......... 1.25% 1.54% 1.49% 1.46%
Net investment income to
average net assets,
net of waivers from
adviser............... 6.99% 7.32% 7.35% 7.64%
Net investment income to
average net assets,
before waivers from
adviser............... 6.49% 6.47% 6.51% 6.78%
Portfolio turnover
rate.................. 45% 20% 17% 14%
</TABLE>
- ------------
'D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Classes A, B and C would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
- --------------------------------------------------------------------------------
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
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
-------------------------------------------------------------------------------------------
CLASS B
-------------------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
------------------------------------------------------------------------ JULY 1,
1991'D'
FEBRUARY 28, FEBRUARY 28, THROUGH
------------------- FEBRUARY 29, ------------------------------- FEBRUARY 29,
1998 1997 1996 1995 1994 1993 1992
------- ------- ------------ ------- ------- ------- --------------
<C> <C> <C> <C> <C> <C> <C>
$ 10.39 $ 10.29 $ 9.92 $ 10.76 $ 10.96 $ 10.29 $10.05
------- ------- ------------ ------- ------- ------- ------
0.47 0.48 0.54 0.52 0.52 0.59 0.42
0.57 0.10 0.37 (0.81) -- 0.81 0.31
------- ------- ------------ ------- ------- ------- ------
1.04 0.58 0.91 (0.29) 0.52 1.40 0.73
------- ------- ------------ ------- ------- ------- ------
(0.47) (0.48) (0.54) (0.52) (0.52) (0.59) (0.42)
-- -- -- (0.03) (0.20) (0.14) (0.07)
------- ------- ------------ ------- ------- ------- ------
(0.47) (0.48) (0.54) (0.55) (0.72) (0.73) (0.49)
------- ------- ------------ ------- ------- ------- ------
$ 10.96 $ 10.39 $ 10.29 $ 9.92 $ 10.76 $ 10.96 $10.29
------- ------- ------------ ------- ------- ------- ------
------- ------- ------------ ------- ------- ------- ------
10.23% 5.82% 9.36% (2.67)% 4.88% 14.81% 6.89%
------- ------- ------------ ------- ------- ------- ------
------- ------- ------------ ------- ------- ------- ------
$18,097 $19,427 $ 23,868 $25,823 $32,287 $22,922 $8,176
1.98% 1.90% 1.85% 1.87% 1.79% 1.63% 1.50%*
1.98% 1.90% 1.85% 1.87% 1.90% 2.01% 1.98%*
4.39% 4.73% 5.19% 5.21% 4.72% 5.48% 5.80%*
4.39% 4.73% 5.19% 5.21% 4.61% 5.10% 5.32%*
22% 64% 48% 28% 23% 10% 46%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
--------------------------------------------------------------------------------------------------------------
CLASS C FOR THE PERIOD CLASS Y
---------------------------------------------------------------- JULY 2, -----------------------
FOR THE YEARS ENDED 1992'D' FOR THE PERIOD
FEBRUARY 28, FEBRUARY 28, THROUGH FEBRUARY 5, 1998'D'
----------------------- FEBRUARY 29, ------------------- FEBRUARY 28, THROUGH FEBRUARY 28,
1998 1997 1996 1995 1994 1993 1998
------- ------- ------------ ------- ------- -------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
$ 10.39 $ 10.29 $ 9.92 $ 10.77 $ 10.96 $ 10.50 $10.98
------- ------- ------------ ------- ------- ------- ------
0.50 0.51 0.56 0.55 0.55 0.36 0.04
0.57 0.10 0.37 (0.82) 0.01 0.47 (0.01)
------- ------- ------------ ------- ------- ------- ------
1.07 0.61 0.93 (0.27) 0.56 0.83 0.03
------- ------- ------------ ------- ------- ------- ------
(0.50) (0.51) (0.56) (0.55) (0.55) (0.36) (0.04)
-- -- -- (0.03) (0.20) (0.01) --
------- ------- ------------ ------- ------- ------- ------
(0.50) (0.51) (0.56) (0.58) (0.75) (0.37) (0.04)
------- ------- ------------ ------- ------- ------- ------
$ 10.96 $ 10.39 $ 10.29 $ 9.92 $ 10.77 $ 10.96 $10.97
------- ------- ------------ ------- ------- ------- ------
------- ------- ------------ ------- ------- ------- ------
10.51% 6.08% 9.64% (2.51)% 5.24% 7.72% (0.09)%
------- ------- ------------ ------- ------- ------- ------
------- ------- ------------ ------- ------- ------- ------
$21,982 $16,967 $ 20,700 $23,158 $35,872 $ 21,638 $ 56
1.72% 1.66% 1.60% 1.63% 1.54% 1.40%* 1.00%*
1.72% 1.66% 1.60% 1.63% 1.64% 1.69%* 1.00%*
4.64% 4.98% 5.45% 5.48% 4.95% 5.26%* 5.44%*
4.64% 4.98% 5.45% 5.48% 4.85% 4.97%* 5.44%*
22% 64% 48% 28% 23% 10% 22%
</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
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
NEW YORK TAX-FREE INCOME FUND
The following table provides 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, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended February 28, 1998 and are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the table below
relating to each of the five fiscal years in the period ended February 28, 1998
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 28, 1994 also has been
audited by Ernst & Young LLP, whose reports thereon were unqualified. The Fund
had no Class Y shares outstanding during the periods shown.
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
FOR THE YEARS ENDED
---------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28,
------------------ FEBRUARY 29, -----------------------------
1998 1997 1996 1995 1994 1993
------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year....... $ 10.66 $ 10.71 $ 10.27 $ 11.03 $ 10.99 $ 10.12
------- ------- ------ ------- ------- -------
Net investment income.... 0.51 0.51 0.54 0.54 0.57 0.63
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.46 (0.05) 0.45 (0.66) 0.07 0.87
------- ------- ------ ------- ------- -------
Net increase (decrease)
from investment
operations.............. 0.97 0.46 0.99 (0.12) 0.64 1.50
------- ------- ------ ------- ------- -------
Dividends from net
investment income....... (0.51) (0.51) (0.55) (0.54) (0.57) (0.63)
Distributions from net
realized gains from
investment
transactions............ -- -- -- (0.10) (0.03) --
------- ------- ------ ------- ------- -------
Total dividends and other
distributions to
shareholders............ (0.51) (0.51) (0.55) (0.64) (0.60) (0.63)
------- ------- ------ ------- ------- -------
Net asset value, end of
year.................... $ 11.12 $ 10.66 $ 10.71 $ 10.27 $ 11.03 $ 10.99
------- ------- ------ ------- ------- -------
------- ------- ------ ------- ------- -------
Total investment return
(1)..................... 9.36% 4.49% 9.83% (0.83)% 5.89% 15.44%
------- ------- ------ ------- ------- -------
------- ------- ------ ------- ------- -------
Ratios/Supplemental data:
Net assets, end of year
(000's)................. $23,694 $23,160 $ 28,734 $32,475 $45,033 $43,443
Expenses to average net
assets, net of waivers
and reimbursements from
adviser................. 1.02% 1.02% 1.02% 1.01% 0.75% 0.34%
Expenses to average net
assets, before waivers
and reimbursements from
adviser................. 1.28% 1.50% 1.15% 1.26% 1.25% 1.47%
Net investment income to
average net assets, net
of waivers and
reimbursements from
adviser................. 4.74% 4.91% 5.11% 5.38% 5.13% 6.07%
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................. 4.48% 4.42% 4.98% 5.13% 4.63% 4.94%
Portfolio turnover
rate.................... 34% 40% 13% 6% 8% 6%
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
----------------------------------------------------------
CLASS A
----------------------------------------------------------
FEBRUARY 28, FOR THE PERIOD
FEBRUARY 29, ------------------ SEPTEMBER 30, 1988'D'
1992 1991 1990 TO FEBRUARY 28, 1989
------------ ------- ------- ---------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year....... $ 9.76 $ 9.72 $ 9.59 $ 9.60
------- ------- ------- ------
Net investment income.... 0.66 0.67 0.70 0.28
Net realized and
unrealized gains
(losses) from
investments and
futures................. 0.36 0.04 0.13 (0.01)
------ ------- ------- ------
Net increase (decrease)
from investment
operations.............. 1.02 0.71 0.83 0.27
------ ------- ------- ------
Dividends from net
investment income....... (0.66) (0.67) (0.70) (0.28)
Distributions from net
realized gains from
investment
transactions............ -- -- -- --
------- ------- ------- ------
Total dividends and other
distributions to
shareholders............ (0.66) (0.67) (0.70) (0.28)
------- ------- ------- ------
Net asset value, end of
year.................... $ 10.12 $ 9.76 $ 9.72 $ 9.59
------- ------- ------- ------
------- ------- ------- ------
Total investment return
(1)..................... 10.80% 7.59% 8.94% 2.25%
------- ------- ------- ------
------- ------- ------- ------
Ratios/Supplemental data:
Net assets, end of year
(000's)................. $35,961 $30,173 $21,999 $11,222
Expenses to average net
assets, net of waivers
and reimbursements from
adviser................. 0.25% 0.21% 0.00% 0.00%*
Expenses to average net
assets, before waivers
and reimbursements from
adviser................. 1.53% 1.84% 2.20% 3.04%*
Net investment income to
average net assets, net
of waivers and
reimbursements from
adviser................. 6.65% 6.93% 7.07% 6.96%*
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................. 5.37% 5.30% 4.87% 3.92%*
Portfolio turnover
rate.................... 6% 3% 0% 0.00%*
</TABLE>
- ------------
'D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for Classes A, B and C would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-----------------------------------------------------------------------------------------
CLASS B
-----------------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
---------------------------------------------------------------------- JULY 1,
1991'D'
FEBRUARY 28, FEBRUARY 28, THROUGH
----------------- FEBRUARY 29, ------------------------------- FEBRUARY 29,
1998 1997 1996 1995 1994 1993 1992
------ ------ ------------ ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
$10.65 $10.71 $ 10.27 $ 11.03 $ 10.98 $ 10.12 $ 9.81
------ ------ ------ ------- ------- ------- ------
0.43 0.44 0.47 0.47 0.49 0.56 0.39
0.47 (0.06) 0.44 (0.66) 0.08 0.86 0.31
------ ------ ------ ------- ------- ------- ------
0.90 0.38 0.91 (0.19) 0.57 1.42 0.70
------ ------ ------ ------- ------- ------- ------
(0.43) (0.44) (0.47) (0.47) (0.49) (0.56) (0.39)
-- -- -- (0.10) (0.03) -- --
------ ------ ------ ------- ------- ------- ------
(0.43) (0.44) (0.47) (0.57) (0.52) (0.56) (0.39)
------ ------ ------ ------- ------- ------- ------
$11.12 $10.65 $ 10.71 $ 10.27 $ 11.03 $ 10.98 $10.12
------ ------ ------ ------- ------- ------- ------
------ ------ ------ ------- ------- ------- ------
8.65% 3.62% 9.01% (1.57)% 5.19% 14.35% 6.80%
------ ------ ------ ------- ------- ------- ------
------ ------ ------ ------- ------- ------- ------
$7,829 $9,462 $ 11,862 $14,660 $19,193 $13,776 $6,026
1.77% 1.76% 1.77% 1.76% 1.51% 1.10% 1.00%*
2.05% 2.27% 1.89% 2.01% 1.99% 2.19% 2.20%*
3.99% 4.16% 4.36% 4.63% 4.34% 5.22% 5.59%*
3.70% 3.65% 4.24% 4.83% 3.86% 4.13% 4.39%*
34% 40% 13% 6% 8% 6% 6%
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-----------------------------------------------------------------------------------
CLASS C
-----------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
---------------------------------------------------------------- JULY 2,
1992'D'
FEBRUARY 28, FEBRUARY 28, THROUGH
----------------------- FEBRUARY 29, ------------------- FEBRUARY 28,
1998 1997 1996 1995 1994 1993
------ ------- ------------ ------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 10.66 $ 10.71 $ 10.28 $ 11.03 $ 10.99 $ 10.45
------ ------- ------ ------- ------- ------
0.46 0.46 0.49 0.49 0.51 0.36
0.46 (0.05) 0.43 (0.65) 0.07 0.54
------ ------- ------ ------- ------- ------
0.92 0.41 0.92 (0.16) 0.58 0.90
------ ------- ------ ------- ------- ------
(0.46) (0.46) (0.49) (0.49) (0.51) (0.36)
-- -- -- (0.10) (0.03) --
------ ------- ------ ------- ------- ------
(0.46) (0.46) (0.49) (0.59) (0.54) (0.36)
------ ------- ------ ------- ------- ------
$ 11.12 $ 10.66 $ 10.71 $ 10.28 $ 11.03 $ 10.99
------ ------- ------ ------- ------- ------
------ ------- ------ ------- ------- ------
8.82% 3.98% 9.17% (1.20)% 5.35% 8.38%
------ ------- ------ ------- ------- ------
------ ------- ------ ------- ------- ------
$12,966 $13,786 $ 17,849 $21,095 $38,165 $ 19,553
1.52% 1.52% 1.52% 1.52% 1.27% 0.90%*
1.78% 2.04% 1.64% 1.75% 1.72% 1.83%*
4.24% 4.41% 4.61% 4.89% 4.55% 5.04%*
3.98% 3.89% 4.50% 4.65% 4.10% 4.11%*
34% 40% 13% 6% 8% 6%
</TABLE>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Except where noted, their other investment policies are not
fundamental and may be changed by the Funds' boards.
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'). 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'). Although the Fund invests primarily in investment grade
municipal securities, it may invest up to 35% of its net assets in municipal
securities rated below investment grade.
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.
Although the Fund invests primarily in investment grade municipal securities, it
may invest up to 35% of its net assets in municipal securities rated below
investment grade.
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
and may invest without limit in municipal securities that are rated below
investment grade. The Fund also 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 interest 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'). Except under unusual market conditions,
invests at least 80% of its net assets in New York Obligations that pay AMT
exempt interest. Although the Fund invests primarily in investment grade
municipal securities, it may invest up to 35% of its net assets in municipal
securities rated below investment grade.
* * * *
As with any mutual fund, there is no assurance that any Fund will achieve its
investment objective. Each Fund's net asset value fluctuates based upon changes
in the value of its portfolio securities.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
In selecting municipal securities for the Funds that will provide investors with
high current income exempt from federal and/or state and local income taxes,
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: duration, sector and security selection. 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 exemptions. Finally, security selection is
established by performing an analysis of both credit quality and structure of
individual issues.
All aspects of the Municipal Investment 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 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 21
<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 for Class A, B and C shares. Returns would be lower
if sales charges were deducted. New York Tax-Free Income Fund did not have any
Class Y shares outstanding during the periods shown. Average annual total
returns, both before and after deducting the maximum sales charges, are shown
below in the tables that follow the performance charts. Past results are not a
guarantee of future results.
CALIFORNIA TAX-FREE INCOME FUND
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
CLASS A % CLASS B % CLASS C %
--------- --------- ---------
<S> <C> <C> <C>
1988 10.20 -- --
1989 9.11 -- --
1990 6.68 -- --
1991 10.84 6.20 --
1992 7.49 6.67 2.68
1993 11.96 11.11 11.40
1994 -8.07 -8.69 -8.47
1995 16.80 15.91 16.09
1996 2.74 1.96 2.31
1997 8.80 7.96 8.24
</TABLE>
The 1991 return for Class B shares represents the period from inception on July
1, 1991 through December 31, 1991. The 1992 return for Class C shares represents
the period from inception on July 2, 1992 through December 31, 1992. No Class Y
shares were outstanding in 1997.
AVERAGE ANNUAL RETURNS
As of February 28, 1998
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Inception Date.......................................... 9/16/85 7/1/91 7/2/92 2/5/98
ONE YEAR
Without deducting maximum sales charges............... 9.26% 8.33% 8.71% N/A
After deducting maximum sales charges................. 4.93% 3.33% 7.96% N/A
FIVE YEARS
Without deducting maximum sales charges............... 5.17% 4.35% 4.63% N/A
After deducting maximum sales charges................. 4.31% 4.03% 4.63% N/A
TEN YEARS (OR LIFE)
Without deducting maximum sales charges............... 6.94% 6.06% 5.47% (0.34)%
After deducting maximum sales charges................. 6.50% 6.06% 5.47% (0.34)%
</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
NATIONAL TAX-FREE INCOME FUND
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
CLASS A % CLASS B % CLASS C % CLASS Y %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1988 10.98 -- -- --
1989 9.11 -- -- --
1990 6.55 -- -- --
1991 11.12 6.50 -- --
1992 8.01 7.27 2.78 --
1993 12.32 11.49 11.77 --
1994 -7.14 -7.84 -7.60 --
1995 16.01 15.05 15.42 3.34
1996 2.29 1.52 1.77 2.57
1997 9.37 8.62 8.81 9.66
</TABLE>
The 1991 return for Class B shares represents the period from inception on July
1, 1991 through December 31, 1991. The 1992 return for Class C shares represents
the period from inception on July 2, 1992 through December 31, 1992. The 1995
return for Class Y shares represents the period from inception on November 3,
1995 through December 31, 1995.
AVERAGE ANNUAL RETURNS
As of February 28, 1998
<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................ 9.48% 8.62% 8.92% 9.87%
After deducting maximum sales charges.................. 5.11% 3.62% 8.17% 9.87%
FIVE YEARS
Without deducting maximum sales charges................ 5.41% 4.64% 4.88% N/A
After deducting maximum sales charges.................. 4.56% 4.30% 4.88% N/A
TEN YEARS (OR LIFE)
Without deducting maximum sales charges................ 7.21% 6.34% 5.67% 6.81%
After deducting maximum sales charges.................. 6.77% 6.34% 5.67% 6.81%
</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
MUNICIPAL HIGH INCOME FUND
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
CLASS A % CLASS B % CLASS C %
--------- --------- ---------
<S> <C> <C> <C>
1988 14.45 -- --
1989 9.66 -- --
1990 5.52 -- --
1991 13.32 7.21 --
1992 9.79 8.95 3.06
1993 12.14 11.30 11.57
1994 -7.77 -8.47 -8.23
1995 15.55 14.59 14.88
1996 5.94 5.14 5.51
1997 10.73 9.91 10.18
</TABLE>
The 1991 return for Class B shares represents the period from inception on July
1, 1991 through December 31, 1991. The 1992 return for Class C shares represents
the period from inception on July 2, 1992 through December 31, 1992. No Class Y
shares were outstanding in 1997.
AVERAGE ANNUAL RETURNS
As of February 28, 1998
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Inception Date.......................................... 6/23/87 7/1/91 7/2/92 2/5/98
ONE YEAR
Without deducting maximum sales charges............... 11.06% 10.23% 10.51% N/A
After deducting maximum sales charges................. 6.65% 5.23% 9.76% N/A
FIVE YEARS
Without deducting maximum sales charges............... 6.22% 5.42% 5.69% N/A
After deducting maximum sales charges................. 5.35% 5.10% 5.69% N/A
TEN YEARS (OR LIFE)
Without deducting maximum sales charges............... 8.37% 7.25% 6.39% (0.09)%
After deducting maximum sales charges................. 7.96% 7.25% 6.39% (0.09)%
</TABLE>
- --------------------------------------------------------------------------------
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
NEW YORK TAX-FREE INCOME FUND
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
CLASS A % CLASS B % CLASS C %
--------- --------- ---------
<S> <C> <C> <C>
9/23/88-12/31/88 1.82 -- --
1989 9.90 -- --
1990 5.53 -- --
1991 12.85 7.25 --
1992 9.85 9.02 3.65
1993 12.72 11.78 12.04
1994 -8.48 -9.08 -8.81
1995 17.57 16.71 16.87
1996 3.46 2.69 2.95
1997 9.31 8.50 8.77
</TABLE>
The 1988 return for Class A shares represents the period from inception on
September 23, 1988 through December 31, 1988. The 1991 return for Class B shares
represents the period from inception on July 1, 1991 through December 31, 1991.
The 1992 return for Class C shares represents the period from inception on July
2, 1992 through December 31, 1992. No Class Y shares were outstanding in 1997.
AVERAGE ANNUAL RETURNS
As of February 28, 1998
<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................................ 9.36% 8.65% 8.82%
After deducting maximum sales charges.................................. 5.02% 3.65% 8.07%
FIVE YEARS
Without deducting maximum sales charges................................ 5.68% 4.91% 5.16%
After deducting maximum sales charges.................................. 4.81% 4.58% 5.16%
LIFE
Without deducting maximum sales charges................................ 7.73% 6.90% 6.03%
After deducting maximum sales charges.................................. 7.27% 6.90% 6.03%
</TABLE>
- --------------------------------------------------------------------------------
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
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,
known as 'Life.' 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.
The Funds also may advertise their yields or tax-equivalent yields. Yield
reflects investment income net of expenses over a 30-day (or one month) period
on a Fund share. Yield is expressed as an annualized percentage of the maximum
offering price for a Fund share at the end of the period. For Class B, C and Y
shares, the maximum offering price is the same as the net asset value per share.
Tax-equivalent yield shows the yield that would produce the same income after a
stated rate of taxes as a Fund's tax-exempt yield (that is, yield excluding
taxable income). Yield computations differ from other accounting methods and may
differ from dividends actually paid or reported net income.
Total return and yield 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 to Shareholders, 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. Municipal bonds 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. Various types of municipal bonds are described below.
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
- --------------------------------------------------------------------------------
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
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.
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 this market volatility, 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 bond prices will fall, lowering
the value of the Funds' investments. In general, municipal bonds 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 or
unwilling 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. Credit ratings attempt to
evaluate the safety of principal and interest payments, but they do not evaluate
the volatility of a bond's value or its liquidity and do not guarantee the
performance of the issuer. Rating agencies may fail to make timely changes in
credit ratings in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates. There is a
risk that rating agencies may downgrade municipal securities.
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 long-term rating or one of the two highest short-term
ratings from a nationally recognized rating agency, such as Moody's Investors
Service, Inc. ('Moody's') or Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ('S&P'), or
if unrated, are determined by Mitchell Hutchins to be of comparable quality.
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.
Municipal High Income Fund normally invests at least 65% of its total assets,
and seeks to invest substantially all of its assets, in medium grade and high
yield, high risk lower grade municipal securities. Medium grade municipal
securities are investment grade and:
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Prospectus Page 27
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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 rating
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.
Municipal High Income Fund may invest without limit in municipal securities
rated below investment grade. The other Funds each may invest up to 35% of its
net assets in such securities. These lower rated municipal securities may be
rated:
Ba, B, or MIG-3 by Moody's or BB, B or SP-3 by S&P,
have an equivalent rating from another nationally recognized rating agency, or
if unrated, are determined by Mitchell Hutchins to be of comparable quality.
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
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
Such securities are commonly referred to as municipal 'junk bonds.' A Fund's
investments in these lower rated securities entail greater risk than its
investments in higher rated bonds. Lower rated municipal bonds may be less
sensitive to interest rate changes than higher rated investments but are more
sensitive to adverse market conditions. During an economic downturn or period of
rising interest rates, their issuers may experience financial stress that
adversely affects their ability to pay interest and principal and may increase
the possibility of default. The prices for lower rated municipal bonds often are
more volatile than those of higher rated securities in response to changes in
market conditions. The market for these municipal bonds is thinner and less
active, which may limit the Funds' ability to sell them at fair value in
response to changes in the economy or financial markets.
Although Mitchell Hutchins will attempt to minimize the speculative risks
associated with investing 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 investment objectives and policies of
Municipal High Income Fund and the other Funds and consider their ability to
assume the investment risks involved before making an investment.
During the fiscal year ended February 28, 1998, only Municipal High Income Fund
invested 5% or more of its average annual net assets in securities rated below
investment grade. Municipal High Income Fund's average annual net assets during
that fiscal year were invested as follows:
<TABLE>
<CAPTION>
MUNICIPAL
HIGH
% OF THE AVERAGE ANNUAL NET INCOME
ASSETS INVESTED IN FUND
- ----------------------------------------------- ---------
<S> <C>
Debt securities rated by S&P or Moody's 84.16
Debt Securities not so rated 15.84
Securities rated AAA/Aaa (including cash items) 2.24
Securities rated AA/Aa --
Securities rated A/A 0.41
Securities rated BBB/Baa 55.33
Securities rated BB/Ba 22.82
Securities rated B/B 3.36
Securities rated CCC/Caa --
Securities rated CC/Ca --
Securities rated C/C --
Securities rated D --
</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 Municipal High Income Fund's assets during
the fiscal year ended February 28, 1998, 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.
MARKET RISK. During periods of market uncertainty, the prices of municipal
securities can become volatile.
- --------------------------------------------------------------------------------
Prospectus Page 28
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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 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 ten years generally will
decrease by approximately 10%. Thus, if Mitchell Hutchins calculates the
duration of a Fund's portfolio as ten years, it normally would expect the
portfolio to change in value by approximately 10% 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 or to enhance income or realize gains. 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 an issuer's 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.
NON-DIVERSIFIED STATUS. Municipal High Income Fund and New York Tax-Free Income
Fund are each 'non-diversified,' as that term is defined in the Investment
Company Act of 1940 ('1940 Act'). 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. When the Fund's portfolio is comprised of securities of a
smaller number of issuers than if it were 'diversified,' the Fund will be
subject to greater risk because changes in the financial condition or market
assessment of a single issuer may have a greater effect on the Fund's total
return and the price of Fund shares.
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Prospectus Page 29
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
YEAR 2000 RISK. Like other mutual funds and other financial and business
organizations around the world, each Fund could be adversely affected if the
computer systems used by Mitchell Hutchins, other service providers and entities
with computer systems that are linked to Fund records do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the 'Year 2000 Issue.' Mitchell Hutchins is taking
steps that it believes are reasonably designed to address the Year 2000 Issue
with respect to the computer systems that it uses and to obtain satisfactory
assurances that comparable steps are being taken by each of the Fund's other
major service providers. However, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Funds.
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 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.
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 employment in New York State has grown at a
modest rate since 1993 and the State's economy continued its slow recovery in
1997, New York State has experienced slower employment growth than the nation as
a whole. Although New York City has closed substantial budget gaps in recent
years to maintain a balanced budget as required by State law and indeed in its
most recent fiscal year realized a significant budget surplus, additional tax
increases or additional reductions in essential City services or entitlement
programs could adversely affect the City's economic base. A more detailed
discussion of the risks of investing in New York Obligations is included in the
Statement of Additional Information.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Fund may use
certain instruments and strategies designed to adjust the overall risk of its
investment portfolio ('hedge') or to enhance income or realize gains. Use of
these derivative instruments solely to enhance income or realize gains may be
considered a form of speculation. The use of derivative instruments also may
generate taxable income. These strategies involve derivative instruments,
including options (both exchange traded and over-the-counter) and futures
contracts. The Funds' ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. 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. The Statement of
Additional Information contains further information on these derivative
instruments and related strategies.
The Funds might not use any derivative instrument or strategies, and there can
be no assurance that any strategy will succeed. If Mitchell Hutchins is
incorrect in its judgment on market
- --------------------------------------------------------------------------------
Prospectus Page 30
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
values, interest rates or other economic factors in using a derivative
instrument or strategy, a Fund may have lower net income and a net loss on the
investment. Each strategy involves certain risks, which include:
the fact that the skills needed to use derivative 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 on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to 'cover' or to
segregate securities; and
the possibility that a Fund is unable to close out or liquidate its hedged
position.
PORTFOLIO TURNOVER. Each Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. A higher turnover rate for a Fund (100% or more)
will involve correspondingly greater transaction costs, which will be borne
directly by that Fund and may increase the potential for short-term capital
gains.
DEFENSIVE POSITIONS. When Mitchell Hutchins believes that unusual circumstances
warrant a defensive posture and that there are not enough suitable municipal
obligations available, each Fund may temporarily and without percentage limit
hold cash and invest in money market instruments that pay taxable interest,
including repurchase agreements. If a Fund holds cash, the cash would not earn
income and would reduce the Fund's yield. In addition, for temporary 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. 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.
New forms of bonds, derivatives and hedging instruments continue to be
developed. Each Fund may invest in such securities to the extent consistent with
its investment objectives.
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Prospectus Page 31
<PAGE>
<PAGE>
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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 eligible 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' offering price or
the net asset value at the time of sale by the shareholder whichever is
less, is charged on sales of shares made within one year of the purchase
date. 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 withdraw no more than 12% of the value of the Fund account
under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors 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.
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Prospectus Page 32
<PAGE>
<PAGE>
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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;
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
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 contingent deferred 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 ('Code') (each a 'qualified pension plan'). This
waiver is subject to minimum requirements, with respect to the number of
employees and amount of plan assets, established by Mitchell Hutchins.
Currently, a plan must have 50 or more eligible employees and at least $1
million in plan assets. For investments made pursuant to this waiver, Mitchell
Hutchins may make a payment to PaineWebber out of its own resources in an
amount not to exceed 1% of the amount invested;
is a participant in the PaineWebber Members Only Program'tm'. For investments
made pursuant to this waiver, Mitchell Hutchins may make payments out of its
own resources to PaineWebber and to participating membership organizations in a
total amount not to exceed 1% of the amount invested;
is a variable annuity offered only to qualified plans. For investments made
pursuant to this waiver, Mitchell Hutchins may make payments out of its own
resources to PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed 1% of the amount invested;
acquires Class A shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for program
services, provided that the program sponsor has entered into a written
agreement with PaineWebber permitting the sale of Class A shares at net asset
value to that program. For investments made pursuant to this waiver, Mitchell
Hutchins may make a payment to PaineWebber out of its own resources in an
amount not to exceed 1% of the amount invested. For subsequent investments or
exchanges made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also waived; 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. Investors must provide satisfactory information to
PaineWebber or a Fund if they seek any of these sales charge reductions or
waivers.
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Prospectus Page 33
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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
offering price (net asset value of the shares at the time of purchase) or the
net asset value at the time of sale by the shareholder, 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.
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
IF THE INVESTOR ASSET 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 other
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
withdraw annually no 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 59 1/2);
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.
Investors must provide satisfactory information to PaineWebber or the Fund to
seek 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
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
of Class A shares. Because investors do not pay an initial sales charge when
they buy Class C shares, 100% of their purchase is immediately invested. 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 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 other distributions are not subject to the
0.75% charge. Withdrawals under the Systematic Withdrawal Plan also are not
subject to this charge. However, investors may withdraw no more than 12% of the
value of the Fund account under the Plan in the first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED: Eligible investors may purchase Class Y shares at the
net asset value next calculated 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. No contingent deferred sales charge is imposed on Class Y
shares, and 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 one of the PW Programs listed below when Class Y shares are
purchased through that PW 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.
PACE MULTI-ADVISOR PROGRAM: An investor who participates in the PACE
Multi-Advisor Program is eligible to purchase Class Y shares. The PACE
Multi-Advisor Program is an advisory program sponsored by PaineWebber that
provides comprehensive investment services, including investor profiling, a
personalized asset allocation strategy using an appropriate combination of
funds, and a quarterly investment performance review. Participation in the PACE
Multi-Advisor Program is subject to payment of an advisory fee at the maximum
annual rate of 1.5% of assets. Employees of PaineWebber and its affiliates are
entitled to a waiver of this fee.
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACE Multi-Advisor Program.
INSIGHT: An investor who participates in the INSIGHT Advisory Program
('INSIGHT'), a total portfolio asset allocation program sponsored by
PaineWebber, is eligible to purchase Class Y shares. 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. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT.
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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HOW TO BUY SHARES
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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.
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.
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.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up an
account through the Transfer Agent (PFPC Inc.) by completing an account
application, which you may obtain 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 are new to PaineWebber may complete and sign an account
application and mail it along with a check. Investors also may open an account
in person.
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>
<CAPTION>
<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 unaffiliated investment programs or the Fund's
automatic investment plan.
transactions in Class A and Class Y shares made in certain investment programs.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of most other PaineWebber mutual funds. Class Y shares
are not exchangeable. 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.
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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. A signature guarantee may
be obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association which is a participant in a medallion program
recognized by the Securities Transfer Association. The three recognized
medallion programs are Securities Transfer Agents Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and the New York Stock Exchange
Medallion Signature Program (MSP). Signature guarantees which are not a part
of these programs will not be accepted.
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 Class A, B or C 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. PaineWebber S&P 500
Index Fund does not participate in the Flexible Pricing SystemSM and is not
available for exchanges.
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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 (less any applicable contingent deferred
sales charge) after the order is received by PaineWebber's New York City
headquarters or the transfer agent. 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, then Class B and last, Class Y.
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
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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 a 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.
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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, 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 on a monthly,
quarterly, semiannual or annual basis 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), semiannual (June and December) or annual
(December) withdrawals from their PaineWebber mutual fund accounts. Minimum
balances and withdrawals vary according to the class of shares:
CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.
CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly, semiannual and annual withdrawals of $200, $400, $600 and $800,
respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may withdraw no more than 12% of
the value of the Fund account when the investor signed up for the Plan (for
Class B shares annually; for Class A and C shares, during the first year under
the Plan). Shareholders who elect to receive dividends or other distributions in
cash may not participate in this Plan.
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.
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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MANAGEMENT
- --------------------------------------------------------------------------------
Each Fund is governed by its board of trustees, which oversees the Fund's
operations. Each board has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the 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.
In accordance with procedures adopted by the boards, brokerage transactions for
the Funds may be conducted through PaineWebber or its affiliates and the Funds
may pay fees to PaineWebber for its services as lending agent in their portfolio
securities lending programs. 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.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is a wholly owned asset management subsidiary of PaineWebber, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On May 31, 1998, Mitchell Hutchins was adviser or sub-adviser
of 31 investment companies with 68 separate portfolios and aggregate assets of
approximately $39.7 billion.
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
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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 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 28, 1998, Mitchell Hutchins received a monthly fee for these
services from each Fund at the following annual rate, expressed as a percentage
of average daily net assets:
<TABLE>
<S> <C>
California Tax-Free Income Fund 0.50%
National Tax-Free Income Fund 0.50
Municipal High Income Fund 0.60
New York Tax-Free Income Fund 0.60
</TABLE>
Effective July 1, 1998, Mitchell Hutchins is voluntarily waiving 0.20% of its
management fee for California Tax-Free Income Fund. This waiver may be
terminated at any time by Mitchell Hutchins.
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 uses the service fees under the Plans for Class A, B and C
shares primarily to pay PaineWebber for shareholder servicing, currently at the
annual rate of 0.25% of the aggregate investment amounts maintained in each
Fund's Class A, Class B and Class C shares 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
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
bought and of the contingent deferred sales charge paid upon sales of shares.
These proceeds may be used to cover distribution expenses.
The Plans and the related distribution contracts for Class A, B and C 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 each Plan and Mitchell Hutchins' corresponding expenses for each class
separately from the Plans and expenses of the other classes.
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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 or, when such market quotations are not
available, based upon appraisals received from a pricing system using a
computerized matrix system or based upon appraisals derived from information
from recognized dealers. If such value cannot be established, assets are valued
at fair value as determined in good faith by or under the direction of each
Fund's board. The amortized cost method 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. It should be recognized that
judgment plays a greater role in valuing below investment grade municipal
securities in which the Funds may invest because there is less reliable,
objective data available.
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DIVIDENDS & TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Dividends from each Fund's net investment income are declared daily and paid
monthly.
Net investment income includes accrued interest and discount, less amortization
of premium and accrued expenses, with respect to municipal securities. Each Fund
annually distributes 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 ordinary (taxable) 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 shares of the first three classes
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
have higher expenses resulting from their service fees and, in the case of Class
B and C shares, their distribution fees. Dividends on Class B and C shares of a
Fund are expected to be lower than those on its Class A shares, and dividends on
Class B shares of a Fund are expected to be lower than those on its Class C
shares, because those classes bear different distribution fees. Dividends on
each class might also be affected differently by the allocation of other
class-specific expenses. See 'General Information.'
A Fund's 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 them 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.
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 that 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.
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.
If a Fund realizes capital gains as a result of market transactions, any
distribution of those gains is taxable to its shareholders. Under the Taxpayer
Relief Act of 1997, different maximum tax rates apply to a non-corporate
taxpayer's net capital gain depending on the taxpayer's holding
period -- generally 28% for gain recognized on capital assets held for more than
one year but not more than 18 months and 20% for gain recognized on capital
assets held for more than 18 months. A Fund may divide each net capital gain
distribution into 28% and 20% rate gain distributions (in accordance with the
holding periods for the securities it sold that generated the distributed gain).
The Fund's shareholders must then treat these portions accordingly, irrespective
of how long a shareholder has held Fund shares.
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 PABs,
shareholders must include a portion of their exempt-interest dividends from that
Fund in calculating their liability for the federal alternative minimum tax.
Corporate shareholders must include all of their exempt-interest dividends in
calculating their liability for that tax.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the amounts of exempt-interest dividends, any portion of those dividends that is
not AMT exempt interest, taxable dividends and other distributions paid (or
deemed paid) that year. The information regarding capital gain distributions
will designate the portions thereof subject to the different maximum rates of
tax applicable to non-corporate taxpayers' net capital gain indicated above.
BACKUP WITHHOLDING
Each Fund must withhold 31% of all taxable 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 taxable dividends and
capital gain distributions payable to those shareholders who otherwise are
subject to backup withholding.
TAX ON THE SALE OR EXCHANGE OF FUND SHARES
A shareholder's sale (redemption) of Fund shares may result in a taxable gain or
loss. This depends on whether the shareholder receives
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
more or less than his or her adjusted basis for the shares (which normally
includes any initial sales charge paid on Class A shares). An exchange of a
Fund's shares for shares of another PaineWebber mutual fund generally will have
similar tax consequences. In addition, if an investor buys a Fund's shares
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 (redeems) or exchanges Class A
shares within 90 days of purchase and subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount would 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-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.
* * * *
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. Please see the further
discussion in the Statement of Additional Information. Prospective shareholders
are urged to consult their tax advisers.
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Prospectus Page 43
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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GENERAL INFORMATION
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ORGANIZATION
California Tax-Free Income Fund and National Tax-Free Income Fund are
diversified series of PaineWebber Mutual Fund Trust, an open-end management
investment company formed on November 21, 1986 as a business trust under the
laws of the Commonwealth of Massachusetts. Municipal High Income Fund and New
York Tax-Free Income Fund are non-diversified series of PaineWebber Municipal
Series, an open-end management investment company formed on January 28, 1987 as
a business trust under the laws of the Commonwealth of Massachusetts. The
trustees of PaineWebber Mutual Fund Trust and PaineWebber Municipal Series (each
a '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.
SHARES
The shares of each Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. A share of each class represents an identical
interest in that Fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege, if any. The different sales charges and other
expenses applicable to the different classes of shares of a Fund will affect the
performance of those classes.
Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due to
the differing expenses of the classes, dividends and liquidation proceeds on
each Fund's Class A, B, C and Y shares will differ.
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 board of each Trust 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 a Trust may
elect all of that Trust's board members. The shares of a Fund will be voted
together except that only the shareholders of a particular class of a Fund may
vote on matters affecting only that class, such as the terms of a Plan as it
relates to that class. The shares of each series of a Trust will be voted
separately, except when an aggregate vote of all the securities is required by
law.
SHAREHOLDER MEETINGS
The Funds do not hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of a
Trust may remove a board member through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called to vote on the removal of a board member at the written request of
holders of 10% of a Trust's outstanding shares.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semiannual
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 Funds' Statement of
Additional Information, which is incorporated herein by reference, is available
to shareholders upon request.
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Prospectus Page 44
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND DISBURSING 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.
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Prospectus Page 45
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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APPENDIX
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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.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic category.
DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:
'AAA' An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
'AA' An obligation rated 'AA' differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
'A' An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
obligor's capacity to meet its financial commitment on the obligation is still
strong.
'BBB' An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
'BB' An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
'B' An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
'CCC' An obligation rated 'CCC' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
'CC' An obligation rated 'CC' is currently highly vulnerable to nonpayment.
'C' The 'C' rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
'D' An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM OBLIGATIONS:
There are three categories for short-term obligations that define an investment
grade situation. These are designated Moody's Investment Grade as MIG 1 (best
quality) through MIG 3. Short-term obligations of speculative quality are
designated SG.
In the case of variable rate demand obligations (VRDOs), a two-component rating
is assigned. The first element represents an evaluation of the degree of risk
associated with scheduled principal and interest payments, and the other
represents an evaluation of the degree of risk associated with the demand
feature. The short-term rating assigned to the demand feature of a VRDO is
designated as VMIG. When either the long- or short-term aspect of a VRDO is not
rated, that piece is designated NR, e.g. Aaa/NR or NR/VMIG 1.
MIG ratings terminate at the retirement of the obligation, while a VMIG rating
expiration will be a function of each issue's specific structural or credit
features.
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. Liquidity and cash
flow protection may be narrow and market access for refinancing is likely to be
less well established.
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Prospectus Page 47
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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:
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. Strong capacity to pay principal and interest. 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 SHORT-TERM DEBT COMMERCIAL PAPER RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated PRIME-1 by Moody's (or supporting institutions) have a superior
capacity for repayment of short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of 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.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by rating of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating categories.
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.
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PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund
PaineWebber New York Tax-Free Income Fund
PROSPECTUS -- JULY 1, 1998
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<TABLE>
<S> <C>
PAINEWEBBER FUNDS OF FUNDS PAINEWEBBER BOND FUNDS
Mitchell Hutchins Aggressive Portfolio High Income Fund
Mitchell Hutchins Moderate Portfolio Investment Grade Income Fund
Mitchell Hutchins Conservative Portfolio Low Duration U.S. Government
Income Fund
PAINEWEBBER ASSET ALLOCATION Strategic Income Fund
FUNDS U.S. Government Income Fund
Balanced Fund PAINEWEBBER TAX-FREE BOND FUNDS
Tactical Allocation Fund
California Tax-Free Income Fund
PAINEWEBBER STOCK FUNDS Municipal High Income Fund
National Tax-Free Income Fund
Financial Services Growth Fund New York Tax-Free Income Fund
Growth Fund
Growth and Income Fund PAINEWEBBER GLOBAL FUNDS
Mid Cap Fund
Small Cap Fund Asia Pacific Growth Fund
S&P 500 Index Fund Emerging Markets Equity Fund
Utility Income Fund Global Equity Fund
Global Income Fund
PAINEWEBBER MONEY MARKET 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'1998 PaineWebber Incorporated
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STATEMENT OF DIFFERENCES
------------------------
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'
