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As filed with the Securities and Exchange Commission on July 1, 1998
1933 Act Registration No. 2-98149
1940 Act Registration No. 811-4312
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 26 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 26
PAINEWEBBER MUTUAL FUND TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
BENJAMIN J. HASKIN, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to Rule 485(b)
|X| On July 1, 1998 pursuant to Rule 485(b)
|_| 60 days after filing pursuant to Rule 485(a)(1)
|_| On pursuant to Rule 485(a)(1)
|_| 75 days after filing pursuant to Rule 485(a)(2)
|_| On pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Shares of Beneficial Interest.
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PaineWebber Mutual Fund Trust
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Table of Contents
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
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PaineWebber Mutual Fund Trust
PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
Form N-1A Cross Reference Sheet
Part A Item No. and Caption Prospectus Caption
1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Expense Table
3. Condensed Financial Information Financial Highlights; Performance
4. General Description of Registrant The Funds at a Glance; Investment
Objectives & Policies; Investment
Philosophy & Process; The Funds'
Investments; General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Financial Highlights
Performance
6. Capital Stock and Other Cover Page; Flexible Pricing;
Securities Dividends & Taxes; General
Information
7. Purchase of Securities Being Flexible Pricing; How to Buy
Offered Shares; Other Services; Determining
the Shares' Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
Part B Item No. and Caption Statement of Additional Information
Caption
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Investment Policies and
Restrictions; Hedging and Other
Strategies Using Derivative
Instruments; Portfolio Transactions
14. Management of the Fund Trustees and Officers; Principal
Holders of Securities
15. Control Persons and Principal Trustees and Officers; Principal
Holders of Securities Holders of Securities
16. Investment Advisory and Other Investment Advisory and
Services Distribution Arrangements; Other
Information
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Conversion of Class B Shares; Other
Securities Information
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Part B Item No. and Caption Statement of Additional Information
Caption
19. Purchase, Redemption and Pricing Reduced Sales Charges, Additional
of Securities Being Offered Exchange and Redemption Information
and Other Services; Valuation of
Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and
Distribution Arrangements
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
Part C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
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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 Class Y shares were not outstanding.
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
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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
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NATIONAL TAX-FREE INCOME FUND
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
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 8
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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
FOR THE YEARS ENDED 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>
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.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------------------------------------------------------------------------
CLASS B
---------------------------------------------------------------------------------------------------------------
FOR THE
FOR THE PERIOD
FOR THE YEARS ENDED 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
------- ------- ------------ ------- ------- ------------ ------------ ------------
<S> <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>
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
------- ----------- ------------ ------- ------- ------------ ------------ ------------
<S> <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
FOR THE YEARS ENDED 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 $419,596
Expenses to average
net assets........... 0.95% 0.91% 0.93%(2) 0.88% 0.89% 0.88%*
Net investment income
to average net
assets............... 4.77% 4.85% 5.06%(2) 5.62% 5.28% 5.86%*
Portfolio turnover
rate................. 79% 81% 74% 60% 16% 5%
<CAPTION>
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 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 FOR THE
FOR THE YEARS ENDED THREE FOR THE PERIOD
- --------------------------------------------------------------- MONTHS YEAR JULY 1, 1991'D'
FEBRUARY 28, FEBRUARY 28, ENDED ENDED THROUGH
- ----------------------- FEBRUARY 29, ------------------- FEBRUARY 28, NOVEMBER 30, FEBRUARY 28,
1998 1997 1996 1995 1994 1993 1992 1998
- ------------ ------- ------------ ------- ------- ------------ ------------ -----------------
<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>
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 FOR THE
YEARS 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 $82,251
Expenses to average net
assets, net of waivers
from adviser.......... 1.22% 1.15% 1.10% 1.13% 1.03% 0.87%
Expenses to average net
assets, before waivers
from adviser.......... 1.22% 1.15% 1.10% 1.13% 1.16% 1.29%
Net investment income to
average net assets,
net of waivers from
adviser............... 5.15% 5.49% 5.94% 5.96% 5.52% 6.31%
Net investment income to
average net assets,
before waivers from
adviser............... 5.15% 5.49% 5.94% 5.96% 5.39% 5.89%
Portfolio turnover
rate.................. 22% 64% 48% 28% 23% 10%
<CAPTION>
FEBRUARY 28,
FEBRUARY 29, ---------------------------
1992 1991 1990 1989
------------ ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 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 PERIOD
FOR THE YEARS ENDED 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>
$ 10.39 $ 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>
CLASS C
---------------------------------------------------------------------------------
FOR THE PERIOD CLASS Y
FOR THE YEARS ENDED JULY 2, ------------------------
-------------------------------------------------------------- 1992'D' FOR THE PERIOD FEBRUARY
FEBRUARY 28, FEBRUARY 28, THROUGH 5, 1998'D' THROUGH
----------- FEBRUARY 29, ------------------- FEBRUARY 28, 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 $43,443
Expenses to average net
assets, net of waivers
and reimbursements from
adviser................. 1.02% 1.02% 1.02% 1.01% 0.75% 0.34%
Expenses to average net
assets, before waivers
and reimbursements from
adviser................. 1.28% 1.50% 1.15% 1.26% 1.25% 1.47%
Net investment income to
average net assets, net
of waivers and
reimbursements from
adviser................. 4.74% 4.91% 5.11% 5.38% 5.13% 6.07%
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................. 4.48% 4.42% 4.98% 5.13% 4.63% 4.94%
Portfolio turnover
rate.................... 34% 40% 13% 6% 8% 6%
<CAPTION>
FEBRUARY 28, FOR THE PERIOD
FEBRUARY 29, ------------------ SEPTEMBER 30, 1988'D'
1992 1991 1990 TO FEBRUARY 28, 1989
------------ ------- ------- ---------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year.......$ 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 PERIOD
FOR THE YEARS ENDED 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>
CLASS C
- -------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED 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
[GRAPH]
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................. 4.37% 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>
---------------------
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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
[GRAPH]
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
[GRAPH]
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>
---------------------
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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
[GRAPH]
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>
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Prospectus Page 25
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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
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.
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THE FUNDS' INVESTMENTS
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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
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Prospectus Page 26
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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
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
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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.
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Prospectus Page 28
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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. 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
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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
1996, 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, 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 values, interest rates or other economic
factors in
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Prospectus Page 30
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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
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 taken at market value. Lending securities enables a Fund to
earn additional income but could result in a loss or delay in recovering
securities. Because the income generated by securities lending activities is
taxable, the Funds do not expect to engage in securities lending except under
unusual circumstances.
OTHER INFORMATION. Each Fund may purchase bonds on a when-issued basis or may
purchase or sell securities for delayed delivery. A Fund generally would not pay
for such securities or start earning interest on them until they are delivered,
but it would immediately assume the risks of ownership, including the risk of
price fluctuation. Each Fund may borrow money for temporary or emergency
purposes, but not in excess of 10% of its total assets.
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
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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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FLEXIBLE PRICING'sm'
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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
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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 may payments out of its own
resources to PaineWebber and to the variable annuity's sponsor, advisor 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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<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
ASSET
IF THE INVESTOR VALUE IS
SELLS SHARES WITHIN: MULTIPLIED:
- --------------------------------- -------------------
<S> <C>
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming the investors are
selling:
First, Class B shares owned through reinvested dividends and 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
- --------------------------------------------------------------------------------
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>
<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 System'sm' and is not
available for exchanges.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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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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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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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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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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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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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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. An issue 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
PAINEWEBBER ASSET ALLOCATION Income Fund
FUNDS Strategic Income Fund
Balanced Fund U.S. Government Income Fund
Tactical Allocation Fund PAINEWEBBER TAX-FREE BOND FUNDS
PAINEWEBBER STOCK FUNDS California Tax-Free Income Fund
Financial Services Growth Fund Municipal High Income Fund
Growth Fund National Tax-Free Income Fund
Growth and Income Fund New York Tax-Free Income Fund
Mid Cap Fund PAINEWEBBER GLOBAL FUNDS
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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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
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above are series of professionally managed, open-end
management investment companies each organized as a Massachusetts business trust
(each a 'Trust'). These 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 and
PaineWebber National Tax-Free Income Fund are series of PaineWebber Mutual Fund
Trust. California Tax-Free Income Fund invests primarily in investment grade
bonds issued by the State of California, its municipalities and public
authorities. National Tax-Free Income Fund invests primarily in investment grade
bonds issued by various states, municipalities and public authorities.
PaineWebber Municipal High Income Fund and PaineWebber New York Tax-Free Income
Fund are series of PaineWebber Municipal Series. 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. New York
Tax-Free Income Fund invests primarily in investment grade bonds issued by the
State of New York, its municipalities and public authorities.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned
asset management subsidiary of PaineWebber Incorporated ('PaineWebber'). As
distributor, Mitchell Hutchins has appointed PaineWebber as the exclusive dealer
for the sale of Fund shares.
This Statement of Additional Information ('SAI') is not a prospectus and
should be read only in conjunction with the Funds' current Prospectus, dated
July 1, 1998. A copy of the Prospectus may be obtained by calling any
PaineWebber investment executive or correspondent firm or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated July 1, 1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or the Statement of Additional Information, there
are no policy limitations on a Fund's ability to use the investments or
techniques discussed in these documents.
YIELD FACTORS AND RATINGS. The yield of a municipal security depends on a
variety of factors, including general municipal and fixed-income security market
conditions, the financial condition of the issuer, the size of the particular
offering, the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Each Fund may invest in municipal securities
with a broad range of maturities, based on Mitchell Hutchins' judgment of
current and future market conditions as well as other factors, such as the
Fund's liquidity needs. Generally, the longer the maturity of a municipal
security, the higher the rate of interest paid and the greater the volatility.
Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ('S&P'), and other nationally recognized
statistical rating organizations ('NRSROs') are private services that provide
ratings of the credit quality of debt obligations, including issues of municipal
securities. A description of the range of ratings assigned to municipal
securities by Moody's and S&P is included in the Appendix to the Funds'
Prospectus. The Funds may use these ratings in determining whether to purchase,
sell or hold a security. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, municipal
securities with the same maturity, interest rate and rating may have different
market prices. Also, rating agencies may fail to make timely changes in
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credit ratings in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates. The rating
assigned to a security by a NRSRO does not reflect an assessment of the
volatility of the security's market value or of the liquidity of an investment
in the security. Subsequent to its purchase by a Fund, an issue of municipal
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund.
Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax (and, when available, from
the federal alternative minimum tax ('AMT')) and (where applicable) California
personal income tax and New York State and New York City personal income taxes
are rendered by bond counsel to the respective issuing authorities at the time
of issuance. Neither the Funds nor Mitchell Hutchins review the proceedings
relating to the issuance of municipal securities or the basis for such opinions.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors (such as the federal bankruptcy laws) and federal, state
and local laws that may be enacted that adversely affect the tax-exempt status
of interest on the municipal securities held by a Fund or of the exempt-interest
dividends received by a Fund's shareholders, extend the time for payment of
principal or interest, or both, or impose other constraints upon enforcement of
such obligations. There is also the possibility that, as a result of litigation
or other conditions, the power or ability of issuers to meet their obligations
for the payment of principal of and interest on their municipal securities may
be materially and adversely affected.
Medium and lower grade municipal securities are frequently traded only in
markets where the number of potential purchasers and sellers, if any, is
limited. This factor may limit a Fund's ability to acquire such securities and
also may limit its ability to sell such securities at their fair value in
response to changes in the economy or the financial markets. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower rated securities, especially in
thinly traded markets.
TYPES OF MUNICIPAL SECURITIES. Each Fund may invest in a variety of
municipal securities, as described below:
Municipal Bonds. Municipal bonds are debt obligations issued to obtain
funds for various public purposes that pay interest that is exempt from federal
income tax in the opinion of issuer's counsel. The two principal classifications
of municipal bonds are 'general obligation' and 'revenue' bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
The term 'municipal bonds' also includes 'moral obligation' issues, which are
normally issued by special purpose authorities. In the case of such issues, an
express or implied 'moral obligation' of a related government unit is pledged to
the payment of the debt service, but is usually subject to annual budget
appropriations.
Municipal Lease Obligations. The term 'municipal bonds' also includes
municipal lease obligations, such as leases, installment purchase contracts and
conditional sales contracts, and certificates of participation therein.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment or facilities and may
be subject to annual budget appropriations. The Funds generally invest in
municipal lease obligations through certificates of participation. No Fund
intends to invest more than 5% of its total assets in uninsured 'non-
appropriation' municipal lease obligations (defined below). There is no
percentage limitation on the Funds' ability to invest in other municipal lease
obligations.
Although municipal lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain municipal lease obligations, however, provide that lease payments are
subject to partial or full abatement if, because of material damage or
destruction of the leased property, there is substantial interference with the
lessee's use or occupancy of such property. This 'abatement risk' may
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be reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
Certain municipal lease obligations contain 'non-appropriation' clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Some municipal lease obligations of this type
are insured as to timely payment of principal and interest, even in the event of
a failure by the municipality to appropriate sufficient funds to make payments
under the lease. However, in the case of an uninsured municipal lease
obligation, a Fund's ability to recover under the lease in the event of a
non-appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove difficult.
Industrial Development Bonds ('IDBs') and Private Activity Bonds
('PABs'). IDBs and PABs are issued by or on behalf of public authorities to
finance various privately operated facilities, such as airport or pollution
control facilities. These obligations are included within the term 'municipal
bonds' if the interest paid thereon is exempt from federal income tax in the
opinion of the bond issuer's counsel. IDBs and PABs are in most cases revenue
bonds and thus are not payable from the unrestricted revenues of the issuer. The
credit quality of IDBs and PABs is usually directly related to the credit
standing of the user of the facilities being financed. IDBs issued after August
15, 1986 generally are considered PABs, and to the extent a Fund invests in such
PABs, shareholders generally will be required to include a portion of their
exempt-interest dividends from that Fund in calculating their liability for the
AMT. See 'Dividends and Taxes' in the Prospectus. Each Fund is authorized to
invest more than 25% of its net assets in IDBs and PABs.
Floating Rate and Variable Rate Obligations. Floating rate and variable
rate obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or capital
depreciation is less than for fixed rate obligations. Floating rate or variable
rate obligations typically permit the holder to demand payment of principal from
the issuer or remarketing agent at par value prior to maturity and may permit
the issuer to prepay principal, plus accrued interest, at its discretion after a
specified notice period. Frequently, floating rate or variable rate obligations
and/or the demand features thereon are secured by letters of credit or other
credit support arrangements provided by banks or other financial institutions,
the credit standing of which affects the credit quality of the obligations.
Changes in the credit quality of these institutions could cause losses to a Fund
and adversely affect its share price.
A demand feature gives the Fund the right to sell the securities to a
specified party, usually a remarketing agent, on a specified date. A demand
feature is often backed by a letter of credit from a bank or guarantee or other
liquidity support arrangement from a bank or other financial institution. As
discussed under 'Participation Interests,' to the extent that payment of an
obligation is backed by a letter of credit, guarantee or other liquidity support
that may be drawn upon demand, such payment may be subject to that institution's
ability to satisfy that commitment. The interest rate on floating rate or
variable rate securities ordinarily is readjusted on the basis of the prime rate
of the bank that originated the financing or some other index or published rate,
such as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect
market rates of interest. Generally, these interest rate adjustments cause the
market value of floating rate and variable rate municipal securities to
fluctuate less than the market value of fixed rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
capital depreciation is less than for fixed rate obligations.
Participation Interests. Participation interests are interests in
municipal bonds, including IDBs and PABs, and floating and variable rate
obligations that are owned by banks. These interests carry a demand feature
permitting the holder to tender them back to the bank, which demand feature
generally is backed by an irrevocable letter of credit or guarantee of the bank.
The credit standing of such bank affects the credit quality of the participation
interests.
A participation interest gives a Fund an undivided interest in a municipal
bond owned by a bank. The Fund has the right to sell the instrument back to the
bank. Such right generally is backed by the bank's irrevocable letter of credit
or guarantee and permits the Fund to draw on the letter of credit on demand,
after specified notice, for all or any part of the principal amount of the
Fund's participation
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interest plus accrued interest. Generally, each Fund intends to exercise the
demand under the letters of credit or other guarantees only (1) upon a default
under the terms of the underlying bond, (2) to maintain the Fund's portfolio in
accordance with its investment objective and policies or (3) as needed to
provide liquidity to the Fund in order to meet redemption requests. The ability
of a bank to fulfill its obligations under a letter of credit or guarantee might
be affected by possible financial difficulties of its borrowers, adverse
interest rate or economic conditions, regulatory limitations or other factors.
Mitchell Hutchins will monitor the pricing, quality and liquidity of the
participation interests held by a Fund, and the credit standing of banks issuing
letters of credit or guarantees supporting such participation interests on the
basis of published financial information reports of rating services and bank
analytical services.
Tender Option Bonds. Tender option bonds are long-term municipal
securities sold by a bank subject to a 'tender option' that gives the purchaser
the right to tender them to the bank at par plus accrued interest at designated
times (the 'tender option'). The tender option may be excercisable at intervals
ranging from bi-weekly to semi-annually, and the interest rate on the bonds is
typically reset at the end of the applicable interval in an attempt to cause the
bonds to have a market value that approximates their par value. The tender
option generally would not be exercisable in the event of a default on, or
significant downgrading of, the underlying municipal securities. Therefore, a
Fund's ability to exercise the tender option will be affected by the credit
standing of both the bank involved and the issuer of the underlying securities.
Put Bonds. A put bond is a municipal bond which gives the holder the
unconditional right to sell the bond back to the issuer or a remarketing agent
at a specified price and exercise date, which is typically well in advance of
the bond's maturity date. The obligation to purchase the bond on the exercise
date may be supported by a letter of credit or other credit support arrangement
from a bank, insurance company or other financial institution, the credit
standing of which affects the credit quality of the obligation.
If the put is a 'one time only' put, the Fund ordinarily will either sell
the bond or put the bond, depending upon the more favorable price. If the bond
has a series of puts after the first put, the bond will be held as long as, in
the judgment of Mitchell Hutchins, it is in the best interest of the Fund to do
so. There is no assurance that the issuer of a put bond acquired by a Fund will
be able to repurchase the bond upon the exercise date, if the Fund chooses to
exercise its right to put the bond back to the issuer.
Tax-Exempt Commercial Paper and Short-Term Municipal Notes. Tax-exempt
commercial paper and short-term municipal notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements and
other revenues.
Inverse Floaters. Each Fund may invest in municipal obligations on which
the rate of interest varies inversely with interest rates on other municipal
obligations or an index. Such obligations include components of securities on
which interest is paid in two separate parts -- an auction component, which pays
interest at a market rate that is set periodically through an auction process or
other method, and a residual component, or 'inverse floater,' which pays
interest at a rate equal to the difference between the rate that the issuer
would have paid on a fixed-rate obligation at the time of issuance and the rate
paid on the auction component. The market value of an inverse floater will be
more volatile than that of a fixed-rate obligation and, like most debt
obligations, will vary inversely with changes in interest rates. Because of the
market volatility associated with inverse floaters, no Fund will invest more
than 10% of its total assets in inverse floaters.
Because the interest rate paid to holders of inverse floaters is generally
determined by subtracting the interest rate paid to the holders of auction
components from a fixed amount, the interest rate paid to holders of inverse
floaters will decrease as market rates increase and increase as market rates
decrease. Moreover, the extent of the increases and decreases in the market
value of inverse floaters may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal obligation having
similar credit quality redemption provisions and maturity. In a declining
interest rate environment, inverse floaters can provide a Fund with a means of
increasing or maintaining the level of tax-exempt interest paid to shareholders.
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Mortgage Subsidy Bonds. The Funds also may purchase mortgage subsidy bonds
that are normally issued by special purpose public authorities. In some cases
the repayment of such bonds depends upon annual legislative appropriations; in
other cases repayment is a legal obligation of the issuer and, if the issuer is
unable to meet its obligations, repayment becomes a moral commitment of a
related government unit (subject, however, to such appropriations). The types of
municipal securities identified above and in the Prospectus may include
obligations of issuers whose revenues are primarily derived from mortgage loans
on housing projects for moderate to low income families.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Funds may purchase securities on a 'when-issued' or delayed delivery basis.
A security purchased on a when-issued or delayed delivery basis is recorded as
an asset on the commitment date and is subject to changes in market value,
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect a
Fund's net asset value. When a Fund commits to purchase securities on a
when-issued or delayed delivery basis, its custodian segregates assets to cover
the amount of the commitment. See 'Investment Policies and
Restrictions -- Segregated Accounts.' The Funds purchase when-issued securities
only with the intention of taking delivery, but may sell the right to acquire
the security prior to delivery if Mitchell Hutchins deems it advantageous to do
so, which may result in capital gain or loss to a Fund.
STAND-BY COMMITMENTS. Each Fund may acquire stand-by commitments pursuant
to which a bank or other municipal bond dealer agrees to purchase securities
that are held in the Fund's portfolio or that are being purchased by the Fund,
at a price equal to (1) the acquisition cost (excluding any accrued interest
paid on acquisition), less any amortized market premium or plus any accrued
market or original issue discount, plus (2) all interest accrued on the
securities since the last interest payment date or the date the securities were
purchased by the Fund, whichever is later. Although the Funds do not currently
intend to acquire stand-by commitments with respect to municipal securities held
in their portfolios, each Fund may acquire such commitments under unusual market
conditions to facilitate portfolio liquidity.
A Fund would enter into stand-by commitments only with those banks or other
dealers that, in the opinion of Mitchell Hutchins, present minimal credit risk.
A Fund's right to exercise stand-by commitments would be unconditional and
unqualified. A stand-by commitment would not be transferable by a Fund, although
the Fund could sell the underlying securities to a third party at any time. A
Fund may pay for stand-by commitments either separately in cash or by paying a
higher price for the securities that are acquired subject to such a commitment
(thus reducing the yield to maturity otherwise available for the same
securities). The acquisition of a stand-by commitment would not ordinarily
affect the valuation or maturity of the underlying municipal securities.
Stand-by commitments acquired by a Fund would be valued at zero in determining
net asset value. Whether the Fund paid directly or indirectly for a stand-by
commitment, its cost would be treated as unrealized depreciation and would be
amortized over the period the commitment is held by the Fund.
REPURCHASE AGREEMENTS. The Funds do not intend to enter into repurchase
agreements except as a temporary measure and under unusual circumstances,
because repurchase agreements generate taxable income. Each Fund is, however,
authorized to enter into repurchase agreements with U.S. banks and dealers with
respect to any obligation issued or guaranteed by the U.S. government, its
agencies or instrumentalities and also with respect to commercial paper, bank
certificates of deposit and bankers' acceptances. Repurchase agreements are
transactions in which a Fund purchases securities from a bank or recognized
securities dealer and simultaneously commits to resell the securities to the
bank or dealer at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. The Fund maintains custody of the underlying securities
prior to their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to or upon demand is, in effect, secured by
such securities. If the value of these securities is less than the repurchase
price, plus any agreed-upon additional amount, the other party to the agreement
must provide additional collateral so that at all times the collateral is at
least equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price which was paid by the Fund upon acquisition is accrued
as interest and included in the Fund's net investment income.
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Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
a repurchase agreement becomes insolvent. Each Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the appropriate Trust's board of trustees (sometimes referred to
as a 'board'). Mitchell Hutchins reviews and monitors the creditworthiness of
those institutions under each board's general supervision.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term 'illiquid securities' for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and municipal lease obligations (including certificates of
participation) other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the appropriate board.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
securities in each Fund's portfolio and reports periodically on liquidity
decisions to each board.
In making determinations as to the liquidity of municipal lease
obligations, Mitchell Hutchins will distinguish between direct investments in
municipal lease obligations (or participations therein) and investments in
securities that may be supported by municipal lease obligations or certificates
of participation therein. Since these municipal lease obligation-backed
securities are based on a well-established means of securitization, Mitchell
Hutchins does not believe that investing in such securities presents the same
liquidity issues as direct investments in municipal lease obligations. The
assets used as cover for any over-the-counter ('OTC') options written by a Fund
would be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure will be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES. The Funds do not intend to lend their
portfolio securities, except under unusual circumstances, because securities
loans generate taxable income. As indicated in the Prospectus, however, each
Fund is authorized to lend up to 33 1/3% of its total assets to broker-dealers
or institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with the Fund's custodian, marked
to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral is
limited to cash, U.S. government securities and irrevocable letters of credit
that meet certain guidelines established by Mitchell Hutchins. Each Fund may
reinvest cash collateral in money market instruments or other short-term liquid
investments. In determining whether to lend securities to a particular broker-
dealer or institutional investor, Mitchell Hutchins will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. Each Fund will retain authority
to terminate any loan at any time. A Fund may pay reasonable fees in connection
with a loan and may pay the borrower or placing broker a negotiated portion of
the interest earned on the cash or money market instruments held as collateral.
A Fund will receive amounts equivalent to any dividends, interest or other
distributions on the securities loaned. A Fund will retain record ownership of
loaned securities to exercise beneficial rights, such as voting and subscription
rights and rights to dividends, interest or other distributions, when regaining
such rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the appropriate board governing each
Fund's securities lending program, PaineWebber has been retained to serve as
lending agent for each Fund. Each board also has authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
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PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, the Fund will
maintain with an approved custodian in a segregated account cash or other liquid
securities, marked to market daily, in an amount at least equal to the Fund's
obligation or commitment under such transactions. As described below under
'Hedging and Other Strategies Using Derivative Instruments,' segregated accounts
may also be required in connection with certain transactions involving options
or futures contracts.
DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept 'term
to maturity.' Traditionally, a debt security's 'term to maturity' has been used
as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the 'interest rate risk' or 'volatility' of the security).
However, 'term to maturity' measures only the time until a debt security
provides for a final payment, taking no account of the pattern of the security's
payments prior to maturity.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a Treasury note with a
remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining stated
maturity and the duration is likely to be much greater.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Fund's duration by approximately the
same amount as would holding an equivalent amount of the underlying securities.
Short futures or put options have durations roughly equal to the negative
duration of the securities that underlie these positions, and have the effect of
reducing portfolio duration by approximately the same amount as would selling an
equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. In this and other similar situations, Mitchell Hutchins will use
more sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its duration and, therefore, its interest
rate exposure.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
The financial condition of the State of California, its public authorities
and local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of, a Fund, or
result in the default of existing obligations, including obligations which may
be held by the Fund. The following section provides only a brief summary of the
complex factors affecting the financial condition of California, and is based on
information obtained from the State of California, as publicly available on the
date of this Statement of Additional Information. The information contained in
such publicly available documents has not been independently verified. It should
be noted that the creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness of California, and that there is no obligation
on the part of California to make payment on such local obligations in the event
of default in the absence of a specific guarantee or pledge provided by the
State of California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1994. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further
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reduced, and the market value and marketability of all outstanding notes and
bonds issued by California, its public authorities or local governments could be
adversely affected.
Economic Factors
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 33 million represents
over 12% of the total United States population and grew by 26% in the 1980s,
more than double the national rate. Population growth slowed to less than 1%
annually in 1994 and 1995, but rose to 1.8% in 1997. During the early 1990's,
net population growth in the State was due to births and foreign immigration,
but more recently net in-migration from elsewhere in the United States has
resumed.
Total personal income in the State, at an estimated $867 billion in 1997,
accounts for almost 13% of all personal income in the nation. Total employment
is over 14 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s, due in significant part
to reductions in the federal military budget and base closures. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Job losses were the
worst of any post-war recession. Employment levels stabilized by late 1993 and
steady job growth has occurred since early 1994. Pre-recession job levels were
reached in 1996. Unemployment, while remaining higher than the national average,
has come down from its 10% recession peak to under 6% in Spring, 1998. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994 particularly in export-related industries, services, electronics,
entertainment and tourism and construction. The Asian economic difficulties
starting in mid-1997 are expected to have a moderate dampening effect on the
State's economy. Any delay or reversal of the recovery may create new shortfalls
in State revenues.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as 'Proposition 13.' Briefly, Article XIIIA limits to 1% of full cash
value of the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This system
has resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, but it was upheld by the U.S. Supreme Court in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any 'special tax.' Court decisions,
however, allowed a non-voter approved levy of 'general taxes' which were not
dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the 'Right to Vote on Taxes
Act.' Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for
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specific purposes require a two-thirds vote. Further, any general purpose tax
which was imposed, extended or increased without voter approval after December
31, 1994 must be approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain 'assessments' for municipal
services and programs. Article XIIID also contains several new provisions
affecting 'fees' and 'charges', defined for purposes of Article XIIID to mean
'any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service.' All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as 'property related'
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual 'appropriations limit' imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending 'appropriations subject
to limitation' in excess of the appropriations limit imposed. 'Appropriations
subject to limitation' are authorizations to spend 'proceeds of taxes,' which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but 'proceeds of
taxes' exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not 'proceeds of taxes,' such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
'Excess' revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
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taxpayers. Since that year, appropriations subject to limitation have been under
the State limit. State appropriations were $6.3 billion under the limit for
fiscal year 1997-98.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of April 1,
1998, the State had outstanding approximately $18.4 billion of long-term general
obligation bonds, plus $1.3 billion of general obligation commercial paper which
is planned to be refunded by long-term bonds in the future ($600 million was so
converted on April 30, 1998), and $6.5 billion of lease-purchase debt supported
by the State General Fund. The State also had about $8.2 billion of authorized
and unissued long-term general obligation bonds and lease-purchase debt. In FY
1996-97, debt service on general obligation bonds and lease purchase debt was
approximately 5.0% of General Fund revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1965-1997 were the
California personal income tax (47% of total revenues), the sales tax (34%),
bank and corporation taxes (12%), and the gross premium tax on insurance (2%).
The State maintains a Special Fund for Economic Uncertainties (the 'SFEU'),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance. Because of the recession and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.
General. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Starting in mid-1990, the State has faced adverse economic, fiscal, and
budget conditions. The 1990-1994 economic recession seriously affected State tax
revenues. It also caused increased expenditures for health and welfare programs.
Recent Budgets. As a result of the recession and other factors, the State
experienced substantial revenue shortfalls, and greater than anticipated social
service costs, in the early 1990's. The State accumulated and sustained a budget
deficit in the SFEU, approaching $2.8 billion at its peak at June 30, 1993. The
Legislature and Governor agreed on a number of different steps to respond to the
adverse financial conditions and produce Budget Acts in the Years 1991-92 to
1994-95, including the following (although not all of these actions were taken
in each year):
significant cuts in health and welfare program expenditures;
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transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in
mandates on local government;
transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other
districts to local school districts, thereby reducing State funding
for schools;
reduction in growth of support for higher education programs, coupled
with increases in student fees;
revenue increases (particularly in the 1992-93 Fiscal Year budget),
most of which were for a short duration;
increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration had requested);
and
various one-time adjustment and accounting changes (some of which
have been successfully challenged in court).
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results, with revenues equaling or exceeding expenditures
starting in FY 1992-93. As a result, the accumulated budget deficit of about
$2.8 billion was eliminated by June 30, 1997, when the State showed a positive
balance of about $408 million, on a budgetary basis, in the SFEU.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts 'borrowed' from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late Spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. The last of these deficit notes was repaid in
April, 1996.
The 1995-96 and 1996-97 Budget Acts reflected significantly improved
financial conditions, as the State's economy recovered and tax revenues soared
above projections. Over the two years, revenues averaged about $2 billion higher
than initially estimated. Most of the additional revenues were allocated to
school funding, as required by Proposition 98, and to make up shortfalls in
federal aid for health and welfare costs and costs of illegal aliens. The
budgets for both these years showed strong increases in funding for K-14 public
education, including implementation of initiatives to reduce class sizes for
lower elementary grades to not more than 20 pupils. Higher education funding
also increased. Spending for health and welfare programs was kept in check, as
previously-implemented cuts in benefit levels were retained.
Fiscal Year 1997-98 Budget. With continued strong economic recovery and
surging tax receipts, the State entered the 1997-98 Fiscal Year in the strongest
financial position in the decade. However, in May 1997, the California Supreme
Court ruled that the State had acted illegally in 1993 and 1994 by using a
deferral of payments to the Public Employees Retirement Fund to help balance
earlier budgets. In response to this court decision, the Governor ordered an
immediate repayment to the Retirement Fund of about $1.235 billion, which was
made in late July, 1997, and substantially 'used up' the expected additional
revenues for the fiscal year. The Budget Act as signed provided for about $52.8
billion of General Fund expenditures, and assumed about $52.5 billion of
revenues.
The 1997-98 Budget Act provided another year of rapidly increasing funding
for K-14 public education. Total General Fund support was targeted to reach
$5,150 per pupil, more than 20% higher than the recession-period levels which
were in effect as late as FY 1993-94. The $1.75 billion in new funding was
budgeted to be spent on class size reduction and other initiatives, as well as
fully funding growth and cost of living increases. Support for higher education
units in the State also increased by about 6 percent. Because of the pension
payment, most other State programs were funded at levels
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consistent with prior years, and several initiatives had to be dropped. These
included additional assistance to local governments, state employee raises, and
funding of a bond bank.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called 'CalWORKs,' became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits were placed on receipt of welfare aid. Grant levels for 1997-98
remained at the reduced, prior years' levels.
The Department of Finance released updated budget estimates in May, 1998,
which showed that revenues for the 1997-98 Fiscal Year would be $54.6 billion,
almost $2 billion higher than initial budget estimates, as a result of the
strong economy. Expenditures were expected to increase to about $53.0 billion,
resulting in a significant balance in the SFEU at June 30, 1998.
Proposed 1998-99 Fiscal Year Budget
The Governor released his proposed FY 1998-99 Budget on January 9, 1998,
and updated his revenue projections and budgetary proposals on May 13, 1998 (the
'May Revision'). The May Revision projected General Fund revenues and transfers
of $57.8 billion. Revenue losses due to tax cuts enacted in late 1997 were
expected to be offset by higher capital gains realizations. These revenue
estimates were $2.5 billion higher than the Governor had projected with the
January Budget proposal. The Governor proposed expenditures of $58.3 billion.
The Governor proposed significant additional funding for K-12 schools under
Proposition 98, as well as additional funding for higher education, with a
proposed reduction of college student fees. State and federal funds will be used
in the new CalWORKS welfare program, with projections of a fourth consecutive
year of caseload decline. The Governor proposed a large capital expenditure
program, focusing on schools and universities, but also including corrections,
environmental and general government projects. These proposals would require
approval of almost $10 billion of new general obligation bonds over the next six
years. No agreement was reached with the Legislature to place any bond measures
on the June, 1998 ballot, but negotiations will continue for bonds at the
November, 1998 election.
With the significantly increased revenue projection for both 1997-98 and
1998-99, the Governor proposed in the May Revision that the State reduce its
Vehicle License Fee (a personal property tax on the value of automobiles, the
'VLF') by 75% over five years, by which time the tax cut would be more than $3.5
billion annually. Under current law, the VLF is entirely dedicated to city and
county government, and the Governor proposed to use the State's burgeoning
General Fund to offset the loss of VLF funds to local government. All of the
Governor's proposals must be negotiated with the Legislature as part of the
annual budget process.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from 'AAA' levels which had existed prior to the recession.
In 1996 and 1997, the ratings of California's general obligation bonds were
raised by the three major rating agencies, which as of June 1998 assigned
ratings of 'A+' from Standard & Poor's, 'A1' from Moody's and 'AA-' from Fitch.
There can be no assurance that such ratings will be maintained in the future. It
should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to creditworthiness of obligations issued by
the State of California, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of default.
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Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have entered tentative decisions or injunctions
which would overturn several parts of the State's recent budget compromises. The
matters covered by these lawsuits include reductions in welfare payments and the
use of certain cigarette tax funds for health costs. All of these cases are
subject to further proceedings and appeals, and if California eventually loses,
the final remedies may not have to be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 'bailout' aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. While the Governor initially proposed to
grant new aid to local governments from the State's improved fiscal condition in
1997-98, the decision to repay the State pension fund eliminated these monies.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1995-96 and FY1996-97. Los Angeles County's debt was downgraded by
Moody's and S&P in the summer of 1995. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the 'Welfare-to-Work' programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide 'general assistance' for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
Legislation enacted in late 1997 provides for the State to take over
financial responsibility for funding trial courts throughout the State. This is
estimated to save counties and cities a total of over $350 million annually.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many
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cases, such bonds are secured by land which is undeveloped at the time of
issuance but anticipated to be developed within a few years after issuance. In
the event of such reduction or slowdown, such development may not occur or may
be delayed, thereby increasing the risk of a default on the bonds. Because the
special assessments or taxes securing these bonds are not the personal liability
of the owners of the property assessed, the lien on the property is the only
security for the bonds. Moreover, in most cases the issuer of these bonds is not
required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve fund
established for the bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
'indebtedness' requiring voter approval. Such leases, however, are subject to
'abatement' in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Litigation is brought from time to time which challenges the constitutionality
of such lease arrangements.
Other Considerations
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect 'tax
allocation' bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing
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billions of dollars in damages. The federal government provided more than $13
billion in aid for both earthquakes, and neither event is expected to have any
long-term negative economic impact. Any California Municipal Obligation in the
Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal or State
government to appropriate sufficient funds within their respective budget
limitations.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
The financial condition of the State of New York ('New York State' or the
'State'), its public authorities and public benefit corporations (the
'Authorities') and its local governments, particularly The State of New York.
(the 'City'), could affect the market values and marketability of, and therefore
the net asset value per share and the interest income of a Fund, or result in
the default of existing obligations, including obligations which may be held by
the Fund. The following section provides only a brief summary of the complex
factors affecting the financial situation in New York and is based on
information obtained from New York State, certain of its Authorities, the City
and certain other localities as publicly available on the date of this Statement
of Additional Information. The information contained in such publicly available
documents has not been independently verified. Such information is subject to
change upon the adoption by the State Legislature of the State's final budget
for fiscal year 1998-1999, which has not been enacted as of the date of this
Statement of Additional Information. Further, the adoption of a final State
budget may cause changes to the City budget for the City's fiscal year
1998-1999. There can be no assurance that such changes may not have adverse
effects on the City's cash flow, expenditures or revenues. It should be noted
that the creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness of New York State, and that there is no
obligation on the part of New York State to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by New York State.
ECONOMIC FACTORS. New York is the third most populous state, and has a
relatively high level of personal wealth. Both the State and the City
experienced substantial revenue increases in the mid-1980s attributable directly
(corporate income and financial corporations taxes) and, indirectly (personal
income and a variety of other taxes) to growth in new jobs, rising profits and
capital appreciation derived from the finance sector of the City's economy.
Economic activity in the City has experienced periods of growth and recession
and can be expected to experience periods of growth and recession in the future.
In recent years, the City has experienced increases in employment. Real per
capita personal income (i.e., per capita personal income adjusted for the
effects of inflation and the differential in living costs) has generally
experienced fewer fluctuations than employment in the City. Although the City
periodically experienced declines in real per capita personal income between
1969 and 1981, real per capita personal income in the City has generally
increased from the mid-1980s until the present. In nearly all of the years
between 1969 and 1988 the City experienced strong increases in retail sales.
However, from 1989 to 1993, the City experienced a weak period of retail sales.
Since 1994, the City has returned to a period of growth in retail sales.
Overall, the City's economic improvement accelerated significantly, in fiscal
year 1997. Much of the increase can be traced to the performance of the
securities industry, but the City's economy also produced gains in the retail
trade sector, the hotel and tourism industry, and business services, with
private sector employment higher than previously forecasted. The City's current
Financial Plan assumes that, after strong growth in 1997-1998, moderate economic
growth will exist through calendar year 2002, with moderating job growth and
wage increases. However, there can be no assurance that the economic projections
assumed in the Financial Plan will occur or that the tax revenues projected in
the Financial Plan to be received will be received in the amounts anticipated.
During the calendar years 1984 through 1991, the State's rate of economic
expansion was somewhat slower than that of the nation as a whole. In the
1990-1991 national recession, the economy of the Northeast region in general and
the State in particular was more heavily damaged than that of the rest of the
nation and has been slower to recover.
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Although the national economy began to expand in 1991, the State economy
remained in recession until 1993, when employment growth resumed. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility and defense industries. Personal
income increased substantially in 1992 and 1993. The State's economy entered
into the fourth year of a slow recovery in 1996. Most of the growth occurred in
the trade, construction and service industries, with business, social services
and health sectors accounting for most of the service industry growth.
The State has updated its mid-year forecast of national and state economic
activity through the end of 1999 in its update to the Annual Information
Statement of the State of New York dated January 30, 1998 ('Second Update to the
Annual Information Statement'). At the State level, the Second Update to the
Annual Information Statement projects that moderate growth will continue in 1998
and 1999 for employment, wages and personal income, although the growth rates
are projected to lessen gradually during the course of the two years. Personal
income is estimated to grow by 5.4 percent in 1997, fueled in part by a
continued large increase in financial sector bonus payments, and is projected to
grow 4.7 percent in 1998 and 4.4 percent in 1999. Increases in bonus payments at
year end 1998 are projected to be modest, a substantial change from the rate of
increase of the last few years. Overall employment growth is expected to
continue at a modest rate, reflecting the slowing growth in the national
economy, continued spending restraint in government, and restructuring in the
health care, social service, and banking sectors.
The State revised the cash basis 1997-98 State Financial Plan on January
20, 1998, in conjunction with the release of the Executive Budget for the
1998-99 fiscal year. The changes from the prior Update reflect actual results
through December 1997, as well as modified economic and spending projections for
the balance of the current fiscal year. The 1997-98 General Fund Financial Plan
continues to be balanced, with a projected cash surplus $1.83 billion, an
increase of $1.3 billion over the surplus estimate of $530 million in the prior
update. The increase in the surplus results primarily from higher than expected
tax receipts, which are forecast to exceed the October estimate by $1.28
billion.
In order to make the surplus available to help finance 1998-99
requirements, the State plans to accelerate $1.8 billion in income tax refund
payments into 1997-98, or provide reserves for such payments. The balance in the
refund reserve on March 31, 1998 is projected to be $1.647 billion, including
$521 million as a result of LGAC. This acceleration decreases reported personal
income receipts by $1.18 billion in 1997-98, while increasing available personal
income receipts in 1998-99, as these refunds will no longer be a charge against
current revenues in 1998-99. As a result, projections of available receipts in
1997-98 have been increased by only $103 million from the Mid-Year Update.
Compared to the prior update, personal income tax collections for 1997-98
are now projected at $18.5 billion, or $363 million less than projected in
October after accounting for the refund reserve transaction discussed above.
Business tax receipts are projected at $4.98 billion, an increase of $158
million. User tax collections are estimated at $7.06 billion, or $52 million
higher dm the prior update, and reflect a projected loss of $20 million in sales
tax receipts from an additional week of sales tax exemption for clothing and
footwear costing less than $500, which was authorized and implemented in January
1998. Other tax receipts are projected to increase by $103 million over the
prior update and total $1.09 billion for the fiscal year. Miscellaneous receipts
and transfers from other funds are projected to reach $3.57 billion, or $153
million higher than the Mid-Year Update.
The State projects that disbursements will increase by $565 million over
the Mid-Year Update, with nearly the entire increase attributable to one time
disbursements of $561 million that prepay expenditures previously scheduled for
1998-99. In the absence of these accelerated payments, projected General Fund
spending in the current year would have remained essentially unchanged from the
Mid-Year Update. The Governor is proposing legislation to use a portion of the
current year surplus to transfer $425 million to pay for capital projects
authorized under the Community Enhancement Facilities Assistance Program (CEFAP)
that were previously planned to be financed with bond proceeds in 1998-99 and
thereafter, and $1.36 million in costs for an additional Medicaid payment
originally scheduled for 1998-99. Aside from these actions, a number of other
changes produced a net increase of $4 million in projected disbursements over
the Mid-Year Update. These included higher spending in General State charges
($80 million), largely as a result of litigation settlements and collective
bargaining
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costs, an increase in General Fund transfers for education ($70 million) to
offset declines in Lottery receipts, and additional costs associated with a
delay of Housing Finance Agency (HFA) receipts into 1998-99 that were originally
planned to offset capital projects spending ($25 million). These increases were
offset in part by projected savings in Medicaid ($85 million), social services
($75 million), and debt service ($37 million).
The General Fund closing balance is projected to be $465 million at the end
of 1997-98, a decline of $462 million from the Mid-Year Update. The decline
reflects the application of the $530 million undesignated reserve plus
additional surplus monies projected in the January Update to pay for certain one
time costs in the State's Financial Plan. The effect of this action is to help
lower the State's projected disbursements in 1998-2000.
The remaining General Fund closing balance will be held in two funds, the
TSRF and CRF. The TSRF is projected to have $400 million on deposit at the close
of the fiscal year, following a required deposit of $15 million and an
extraordinary deposit of $68 million made from the 1997-98 surplus. The CRF is
projected to have a closing balance of $65 million following an earlier planned
deposit of $24 million in 1997-98.
There can be no assurance that the State economy will not experience worse
than predicted results in FY 1998-99 with corresponding material and adverse
effects on the State's projections of receipts and disbursements. As all State
Financial Plans are based upon forecasts of national and State economic activity
it should be noted that many uncertainties exist in such forecasts, including
federal financial and monetary policies, the availability of credit and the
condition of the world economy. In addition, the economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. These factors can be complex, may vary from year to year
and are frequently the results of actions taken not only by the State and its
agencies and instrumentalities, but also by other entities, such as the federal
government, that are not under the control of the State.
Uncertainties with regard to the economy present the largest potential risk
to future budget balance in New York State. This risk includes either a
financial market or broader economic 'correction' during the period, a risk
heightened by the relatively lengthy expansions currently heightened by the
relatively lengthy expansions currently underway. The securities industry to the
New York economy than the national economy, and a significant deterioration in
stock market performance could ultimately produce adverse changes in wage and
employment levels. In addition, a normal 'forecast error' of one percentage
point in the expected growth rate could cumulatively raise or lower receipts by
over $1 billion by the last year of the 1998 through 2001 projection period. On
the other hand, the national or State economy may continue to perform better
than projected, which could produce beneficial short term results in State
receipts.
THE STATE. As noted above, the financial condition of the State is affected
by several factors, including the strength of the State and its regional
economics, actions of the federal government, and State actions affecting the
level of receipts and disbursements. Owing to these and other factors, the State
may, in future years, face substantial potential budget gaps resulting from a
significant disparity between tax revenues projected from a lower recurring
receipts base and the future costs of maintaining State programs at current
levels.
Total General Fund receipts and transfers from other funds were projected
to be $35.09 billion, an increase of $2.05 billion from the 1996-97 fiscal year.
Total General Fund disbursements and transfers to other funds were projected to
be $34.60 billion, an increase of $1.70 billion from the 1996-97 fiscal year.
The projected $2 billion increase in receipts exaggerates the underlying
year-to-year growth in State tax revenues. This increase is largely the result
of actions undertaken by the State to utilize the $1.4 billion 1996-97 budget
surplus reported by DOB to finance costs in the State's 1997-98 fiscal year.
This transaction reduced reported receipts in the 1996-97 fiscal year and
increased projected receipts in the State's 1997-98 fiscal year. Conversely, the
incremental cost of tax reductions newly effective in 1997-98 and the impact of
new earmarking statutes which divert receipts from the General Fund to other
funds work to depress apparent growth below the underlying growth in the
receipts base attributable to expansion of the State's economy. After adjusting
for these actions, tax receipts are projected to grow by approximately 5 percent
in 1997-98.
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However, the economic and financial condition of the State may be affected
by various financial, social, economic and political factors. Those factors can
be very complex, can vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State but also by entities, such as
the federal government, that are outside the State's control. Because of the
uncertainty and unpredictability of changes in these factors, their impact
cannot be fully included in the assumptions underlying the State's projections.
On August 11, 1997 President Clinton exercised his line item veto powers to
cancel a provision in the Federal Balanced Budget Act of 1997 that would have
deemed New York State's health care provider taxes to be approved by the federal
government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of taxation
and redistribution of health care dollars was sanctioned by federal legislation
in 1987 and 1991. However, the Federal Health Care Financing Administration
(HCFA) regulations governing the use of provider taxes require the State to seek
waivers from HCFA the grant explicit approval of the provider taxing system now
in place. The State filed the majority of these waivers with HCFA in 1995 but
has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The Financial Plan projections do not anticipate
any provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The Governor stated that this proposal did not
appear to address all of the State's concerns, and negotiations are ongoing
between the State and HCFA. In addition, the City of New York and other affected
parties in the health care industry have filed a lawsuit challenging the
constitutionality of the President's line item veto.
REVENUE BASE. The State's principal revenue sources are economically
sensitive, and include the personal income tax, user taxes and fees and business
taxes. The 1998-99 Financial Plan projects General Fund receipts (including
transfers from other funds) of $36.22 billion, an increase of $1.02 billion over
the estimated 1997-98 level. Recurring growth in the State General Fund tax base
is projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or currently estimated for 1997-98, but roughly equivalent to the rate
for 1995-96.
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for senior
citizens under STAR, which is projected to reduce General Fund receipts by $537
million in 1998-99. The proposed reduction supplements STAR tax reductions
already scheduled in law, which are projected at $187 million in 1998-99. The
Budget also proposes several new tax cut initiatives and other funding changes
that are projected to further reduce receipts available to the General Fund by
over $200 million. These initiatives include reducing the fee to register
passenger motor vehicles and earmarking a larger portion of such fees to
dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
parimutuel tax rates; and accelerating scheduled property tax relief for farmers
from 1999 to 1998. In addition to the specific tax and fee reductions discussed
above, the Executive Budget also proposes establishing a reserve of $100 million
to permit the acceleration into 1998-99 of other tax reductions that are
otherwise scheduled in law for implementation in future fiscal years.
General Fund receipts in 1998-99 will also be affected by the loss of
certain one time receipts recorded in 1997-98, the largest of which include
approximately $200 million in retroactive federal reimbursements for prior year
social service spending recorded as a transfer from other funds and about $55
million in retroactive assessments on Office of Mental Retardation and
Developmental Disabilities facilities that were received in 1997-98 as
miscellaneous receipts. Estimates for 1998-99 also reflect the loss of one time
receipts from a tax amnesty program.
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The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based on federal definitions of income and deductions with
certain modifications. In 1995, the State enacted a tax reduction program
designed to reduce receipts from the personal income tax by 20 percent over
three years. Prior to 1995, the tax had remained substantially unchanged since
1989 as a result of annual deferrals of tax reductions originally enacted in
1987. Personal income tax collections in the General Fund are projected to
increase by $1.32 billion over 1997-98, from $18.50 billion to $19.82 billion.
The increase reflects growth in constant law liability of over six percent in
1998, down from an estimated 12 percent growth in 1997. Growth in personal
income tax liability in 1997 benefited from a temporary surge in capital gains
income in response to 1997 reductions in the federal tax rate on such income. In
addition to the General Fund receipts, approximately $724 million in personal
income tax collections will be deposited in special revenue funds to finance the
School Tax Assistance program (STAR). The minimum rate was reduced from the
7.875 percent in effect between 1989 and 1994 to 7.59375 percent for 1995, to
7.125 percent for 1996, and is scheduled under current law to be reduced to 6.85
percent for 1997 and thereafter. In addition to significant reductions in
overall tax rates, the program also includes increases in the standard
deduction, widening tax brackets to increase the income thresholds to which
higher tax rates apply, and modification of certain tax credits. The FY
1996-1997 Annual Information Statement stated that the projected yield of the
tax for FY 1996-97 was $17.1 billion, an increase of $103 million from reported
collections in the State's FY 1995-96.
User taxes and fees comprised of three quarters of the State four percent
sales and use tax (the balance, one percent, flows to support Government
Assistance Corporation ('LGAC') debt service requirements), cigarette, alcoholic
beverage container, and auto rental taxes, and a portion of the motor fuel
excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage license fees. Beginning in
1993-94, a portion of the motor fuel tax and motor vehicle registration fees and
all of the highway use tax are earmarked for dedicated transportation funds.
User tax collections and fee receipts are projected to reach $7.2 billion
in 1998-99, an increase of $144 million over the current year. The largest
source of receipts in this category is the sales and use tax, which accounts for
nearly 80 percent of projected receipts. Sales tax receipts are the most
responsive to economic trends such as nominal growth in income, prices,
employment, and consumer confidence. The strong growth in income experienced
this year produced continuing growth in the base of the sales and use tax of 5.2
percent in 1997-98. The sales tax growth rate projected for the coming year is
expected to be marginally higher.
The 1998-99 forecast for user taxes and fees also reflects the impact of
scheduled tax reductions that will lower receipts by $38 million, as well as the
impact of two Executive Budget proposals that are projected to lower receipts by
an additional $79 million. The first proposal would divert $30 million in motor
vehicle registration fees from the General Fund to the Dedicated Highway and
Bridge Trust Fund; the second would reduce fees for motor vehicle registrations,
which would further lower receipts by $49 million. The underlying growth of
receipts in this category is projected at 4 percent, after adjusting for these
scheduled and recommended changes.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross receipt
taxes on utilities and galling-based petroleum business taxes. Through 1993,
these levies had been subject to a 15 percent surcharge initially imposed in
19%. Beginning in 1994, the surcharge rate has been phased out and, for more
taxpayers, there will be no surcharge liability for taxable periods ending in
1997 and thereafter. The Update of the Annual Information Statement of the State
of New York stated that in comparison to the current fiscal year, business tax
receipts are projected to decline slightly in 1998-99, falling from $4.98
billion to $4.96 billion. The decline in this category is largely attributable
to scheduled tax reductions. In total, collections for corporation and utility
taxes and the petroleum business tax are projected to fall by $107 million from
1997-98. The decline in receipts in these categories is partially offset by
growth in the corporation franchise, insurance and bank taxes, which are
projected to grow by $8 million over the current fiscal year.
STATE DEBT. The 1998-99 Financial Plan projects General Fund disbursement
of $36.18 billion, an increase of $1.02 billion over projected spending for the
current year. Disbursements from the category
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of Grants to local Governments constitute approximately 67.9 percent of all
General Fund spending, and include payments to local governments, nonprofit
providers and individuals. Disbursements in this category are projected to
increase by $931 million to $24.55 billion in 1998-99, or 3.9 percent above
1997-98. The largest increases are for school aid and Medicaid.
NONRECURRING SOURCES. The Division of the Budget estimates that the 1997-98
State Financial Plan contains actions that provide nonrecurring resources or
savings totaling approximately $270 million. These include the use of $200
million in federal reimbursement funds available from retroactive social service
claims approved by the federal government in April 1997. The balance is composed
of various other actions, primarily the transfer of unused special revenue fund
balances to the General Fund.
OUTYEAR PROJECTIONS OF RECEIPTS AND DISBURSEMENTS. The State closed
projected budget gaps of $5.0 billion, $3.9 billion, and $2.3 billion for the
1995-96 through 1997-98 fiscal years, respectively. The 1998-99 budget gap was
projected at $1.68 billion (before the application of any assumed efficiencies)
in the outyear projections submitted to the Legislature in February 1997. As a
result of changes made in the adopted budget, the 1998-99 gap is now expected to
be about the same or smaller than the amount previously projected, after
application of the $530 million reserve for future needs. The expected gap is
smaller than the three previous budget gaps closed by the State. The Governor
has indicated that he will propose to close any potential imbalance primarily
through General Fund expenditure reductions and without increases in taxes or
deferrals of scheduled tax reductions.
The revised expectations for the 1998-99 fiscal year reflect the loss of
$1.4 billion in surplus resources from 1996-97 operations that are being
utilized to finance current year spending, and an incremental effect of
approximately $300 million in legislated State and local tax reductions in the
outyear. Other factors include the annualized costs of certain program increases
in the 1997-98 adopted budget, most of which are subject to annual
appropriation.
Certain actions taken in the State's 1997-98 fiscal year, such as Medicaid
and welfare reforms, are expected to provide recurring savings in future fiscal
years. Continued controls on State agency spending will also provide recurring
savings. The availability of $530 million in reserves created as a part of the
1997-98 adopted budget and included in the Financial Plan is expected to benefit
the 1998-99 fiscal year. Sustained growth in the State's economy and continued
declines in welfare caseload and health care costs would also produce additional
savings in the 1998-99 Financial Plan. Finally various federal actions,
including the potential beneficial effect on State tax receipts from changes to
the federal tax treatment of capital gains, could potentially provide
significant benefits to the State over the next several years.
LABOR COSTS. The State government workforce is mostly unionized, subject to
the Taylor-Law which authorizes collective bargaining and prohibits (but has
not, historically, prevented) strikes and work slowdowns. Costs for employee
health benefits have increased substantially, and can be expected to further
increase. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund investment return
assumptions to reduce current contribution requirements. If such investment
earnings assumptions are not sustained by actual results, additional State
contributions will be required in future years to meet the State's contractual
obligations. The State's change in actuarial method from the aggregate cost
method to a modified projected unit credit in FY 1990-91 created a substantial
surplus that was amortized and applied to offset the State's contribution
through FY 1993-94. This change in actuarial method was ruled unconstitutional
by the State's highest court and the State returned to the aggregate cost method
in FY 1994-95 using a four year phase in. Employer contributions, including the
State's, are expected to increase over the next five to ten years. Since January
1995, the State's workforce has been reduced by about 10 percent, and is
projected to reach a level of approximately 191,000 persons by the end of the
1997-98 year. Collective bargaining agreements have been ratified by employee
bargaining units representing most State employees subject to such agreements,
and the 199-98 projections reflect salary increases under these agreements.
PUBLIC ASSISTANCE. On August 22, 1996, the President signed into law the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996. This
federal legislation fundamentally changed the programmatic and fiscal
responsibilities for administration of welfare programs at the federal, state
and local levels. The new law abolishes the federal Aid to Families with
Dependent Children program
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(AFDC), and creates a new Temporary Assistance to Needy Families with Dependent
Children program (AFDC), and creates a new Temporary Assistance to Needy
Families program (TANF) funded with a fixed federal block grant to states. The
new law also imposes (with certain exceptions) a five era durational limit on
TANF recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receipt benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
Proposed legislation that includes both provisions necessary to implement
the State's TANF plan to conform with federal law and implement the Governor's
welfare reform proposal is still pending before the Legislature. There can be no
assurances of timely enactment of certain conforming provisions required under
the federal law. Further delay increases the risk that the State could incur
fiscal penalties for failure to comply with federal law.
MEDICAID. New York participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides a substantial 1)6rtion of eligible program costs, with the
remainder shared by the State and its counties (including the City). Basic
program eligibility and benefits are determined by federal guidelines, but the
State provides a number of optional benefits and expanded eligibility. Program
costs have increased substantially in recent years, and account for a rising
share of the State budget. Federal law requires that the State adopt
reimbursement rates for hospitals and nursing homes that are reasonable and
adequate to meet the costs that must be incurred by efficiently and economically
operated facilities in providing patient care, a standard that has led to past
litigation by hospitals and nursing homes seeking higher reimbursement from the
State. General Fund payments for Medicaid are projected to be $5.42 billion,
virtually unchanged from the level of $5.38 billion in 1996-97. This slow growth
is due primarily to continuation of cost containment measures enacted in 1995-96
and 1996-97, new reforms included in the 1997-98 adopted budget and forecasts
for slower underlying growth. Other social service spending is forecast to
increase by only $115 million to $3.15 billion in 1997-98. This slow growth
stems from continued State efforts to reduce welfare fraud, declining caseloads,
and changes produced by federal welfare legislation enacted in 1996. Revenue
sharing and other general purpose aid is projected at $802 million, an increase
of approximately $54 million from 1996-97.
THE STATE AUTHORITIES. There are numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authority operating expenses and
debt service costs are generally paid by revenues generated by the projects
financed or operated, such as tolls charged for the use of highways, bridges or
tunnels, rentals charged for housing units, and charges for occupancy at medical
care facilities. In addition, State legislation authorizes several financing
techniques for public authorities. Also there are statutory arrangements
providing for State local assistance payments otherwise payable to localities to
be made under certain circumstances to public authorities. Although the State
has no obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, if local assistance payments are diverted the affected localities
could seek additional State assistance. Some authorities also receive moneys
from State appropriations to pay for the operating costs of certain of their
programs. Subsequently, the Federal government enacted the Balanced Budget Act
of 1997, which amended the 1996 Welfare Act, and the State enacted its Welfare
Reform Act of 1997. These laws made major changes to welfare and other benefit
programs including conversion of AFDC into the TANF block grant states, and the
imposition of Federal and State work requirements and time limits on assistance.
The State also amended its statutes in response to Federal restrictions on
benefits to non citizens. The MTA receives the bulk of this money in order to
provide transit and commuter services.
Since 1980, the State has enacted several taxes including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12 county Metropolitan Transportation Region served by the
MTA and a special one quarter of 1 percent regional sales and use tax that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987 State
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law has required that the proceeds of a one quarter of 1 percent mortgage
recording tax paid on certain mortgages in the Metropolitan Transportation
Region be deposited in a special MTA fund for operating or capital expenses. In
1993, the State dedicated a portion of certain additional State petroleum
business tax receipts to fund operating or capital assistance to the MTA.
State legislation accompanying the FY 1996-97 adopted State budget
authorized the MTA, Triborough Bridge and Tunnel Authority and Transit Authority
to issue an aggregate of $6.5 billion in bonds to finance a portion of a new
$11.98 billion MTA capital plan for the 1995 through 1999 calendar years (the
'1995-99 Capital Program'), and authorized the MTA to submit the 1995-99 Capital
Program to the Capital Program Review Board for approval. This plan will
supersede the overlapping portion of the MTA's 1992-96 Capital Program. This is
the fourth capital plan since the Legislature authorized procedures for the
adoption, approval and amendment of MTA capital programs and is designed to
upgrade the performance of the MTA's transportation systems by investing in new
rolling stock, maintaining replacement schedules for existing assets and
bringing the MTA system into a state of good repair. The 1995-99 Capital Program
assumes the issuance of an estimated $5.1 billion in bonds under this $6.5
billion aggregate bonding authority. The remainder of the plan is projected to
financed through assistance from the State, the federal government, and the City
of New York, and from various other revenues generated from actions taken the
MTA.
There can be no assurance that all the necessary governmental actions for
the 1995-99 Capital Program or future capital programs will be taken, that
funding sources currently identified will not be decreased or eliminated, or
that the 1995-99 Capital Program, or parts thereof, will not be delayed or
reduced. Should funding levels fall below current projections, the MTA Would
have to revise its 1995-99 Capital Program accordingly. If the 1995-99 Capital
Program is delayed or reduced, ridership and Fare revenues may decline, which
could, among other things, impair the MTA's ability to meet its operating
expenses without additional assistance.
THE CITY. The City has required, and continues to require significant
financial assistance from the State. The City depends on the State to enable the
City to balance its budget and meet its cash requirements. In the early 1970s,
the City incurred substantial operating deficits, and its financial controls,
accounting practices and disclosure policies were widely criticized. In 1975,
the City encountered severe financial difficulties and lost access to the public
credit markets. The State Legislature responded in 1975 by creating the
Municipal Assistance Corporation For The City of New York ('MAC') to provide
financing assistance for the City and the Financial Control Board to exercise
certain oversight and review functions with respect to the City's finances. The
Financial Control Board's powers over the City were suspended in June 1986, but
would be reinstated (under current law) if the City experiences certain adverse
financial circumstances. At the time of the fiscal crisis the State provided
substantial financial assistance to the City, the Federal government provided
the City with direct seasonal loans and guarantees on the City's long term debt
and the City's labor unions accepted deferrals of wage increases and approved
purchases of City bonds by the pension funds. No assurance can be given that
similar assistance would again be made available if needed, particularly given
the current budgetary constraints faced by both the Federal and State
governments. As of March 31, 1998, MAC had outstanding an aggregate of
approximately $4.242 billion of its bonds. MAC is authorized to issue bonds and
notes to refund its outstanding bonds and notes to fund certain reserves.
The City provides services usually undertaken by counties, school districts
or special districts in other large urban areas, including the provision of
social services such as day care, foster care, health care, family planning,
services for the elderly and special employment services for needy individuals
and families who qualify for such assistance. State law requires the City to
allocate a large portion of its total budget to Board of Education operations,
and mandates that the City assume the local share of public assistance and
Medicaid costs. For each of the 1981 through 1996 fiscal years, the City
achieved balanced operating results as reported in accordance with then
applicable generally accepted accounting principles ('GAAP'). The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional reductions in. City
services or entitlement programs, which could adversely affect the City's
economic base.
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Pursuant to the New York State Financial Emergency Act for The City of New
York (the 'Financial Emergency Act' or the 'Act'), the City prepares a four year
annual financial plan, which is reviewed and revised on a quarterly basis and
which includes the City's capital, revenue and expense projections and outlines
proposed gap closing programs for years with projected budget gaps. The City's
projections set forth in the 1999-2002 Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly effect the City's ability to
balance its budget and to meet its annual cash flow and financing requirements.
Such assumptions and contingencies include the timing and pace of a regional and
local economic recovery, increases in tax revenues, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives which may require in certain cases the cooperation of the
City's municipal unions, the ability of New York City Health and Hospitals
Corporation and the Board of Education to take actions to offset reduced
revenues, the ability to complete revenue generating transactions, provision of
State and federal aid and mandate relief, and the impact on City revenues of
proposals for federal and State welfare reform. No assurance can be given that
the assumptions used by the City in the 1999-2002 Financial Plan will be
realized. Due to the uncertainty existing on the federal and state levels, the
ultimate adoption of the State budget for FY 1997-98 may result in substantial
reductions in projected expenditures for social spending programs. Cost
containment assumptions contained in the 1997-2000 Financial Plan and the City
FY 1997-98 Budget may therefore be significantly adversely affected upon the
final adoption of the State budget for FY 1997-98. Furthermore, actions taken in
recent fiscal years to avert deficits may have reduced the City's flexibility in
responding to future budgetary imbalances, and have deferred certain
expenditures to later fiscal year.
The 1999-2002 Financial Plan projects revenues and expenditures for the
1999 fiscal year balanced in accordance with GAAP, and projects gaps of $1.5
billion, $2.1 billion and $1.6 billion for the 2000, 2001 and 2002 fiscal years,
respectively.
On April 24, 1998, the City released the Financial Plan for the 1999
through 2002 fiscal years, which relates to the City and certain entities which
receive funds from the City, and which is based on the Executive Budget and
Budget Message for the City's 1999 fiscal year (the 'Executive Budget'). The
Executive Budget and Financial Plan project revenues and expenditures for the
1999 fiscal year balanced in accordance with GAAP, and project gaps of $1.5
billion, $2.1 billion and $1.6 billion for the 2000, 2001 and 2002 fiscal years,
respectively.
Changes since the June Financial Plan include: (i) an increase in projected
tax revenues of $1.3 billion, $1.1 billion, $955 million, $897 million and $1.7
billion in the 1998 through 2002 fiscal years, respectively; (ii) a reduction in
assumed State aid of $283 million in the 1998 fiscal year and of between $134
million and $142 million in each of the 1999 through 2002 fiscal years,
reflecting the adopted budget for the State's 1998 fiscal year; (iii) a delay in
the assumed collection of $350 million of projected rent payments for the City's
airports in the 1999 fiscal year to fiscal years 2000 through 2002; (iv) a
reduction in projected debt service expenditures totaling $197 million, $361
million, $204 million and $226 million in the 1998 through 2001 fiscal years,
respectively; (v) an increase in the Board of Education (the 'BOE') spending of
$266 million, $26 million, $58 million and $193 million in the 1999 through 2002
fiscal years, respectively; (vi) an increase in expenditures for the City's
proposed drug initiatives totaling $68 million in the 1998 fiscal year and of
between $167 million and $193 million in each of the 1999 through 2002 fiscal
years; (vii) other agency net spending initiatives totaling $112 million, $443
million, $281 million, $273 million and $677 million in fiscal years 1998
through 2002, respectively; and (viii) reduced pension costs of $116 million,
$168 million and $404 million in fiscal years 2000 through 2002, respectively.
The Financial Plan also sets forth gap closing actions for the 1998 through 2002
fiscal years, which include: (i) additional agency actions totaling $176
million, $595 million, $516 million, $494 million and $552 million in fiscal
years 1998 through 2002, respectively, and (ii) assumed additional Federal and
State aid of $100 million in each of fiscal years 1999 through 2002.
The 1998 Modification and the 1999-2002 Financial Plan include a proposed
discretionary transfer in the 1998 fiscal year of approximately $2.0 billion to
pay debt service due in the 1999 fiscal year, and a proposed discretionary
transfer in the 1999 fiscal year of $416 million to pay debt service due in
fiscal
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year 2000, included in the Budget Stabilization Plan for the 1998 and 1999
fiscal years, respectively. In addition, the Financial Plan reflects proposed
tax reduction programs totaling $237 million, $537 million, $657 million and
$666 million in fiscal years 1999 through 2002, respectively, including the
elimination of the City sales tax on all clothing as of December 1, 1999, a City
funded acceleration of the State funded personal income tax reduction for the
1999 through 2001 fiscal years, the extension of current tax reductions for
owners of cooperative and condominium apartments starting in fiscal year 2000
and a personal income tax credit for child care and for residential holders of
Subchapter S corporations, which are subject to State legislative approval, and
reduction of the commercial rent tax commencing in fiscal year 2000.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1998 fiscal year, there can be no assurance that the gap closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
The City derives its revenues from a variety of local taxes, user charges
and miscellaneous revenues, as well as from Federal and State unrestricted and
categorical grants. State aid as a percentage of the City's revenues has
remained relatively constant over the period from 1980 to 1997, while
unrestricted Federal aid has been sharply reduced. The City projects that local
revenues will provide approximately 66.9% of total revenues in the 1998 fiscal
year while Federal aid, including categorical grants, will provide 13.2%, and
State aid, including unrestricted aid and categorical grants, will provide
19.7%.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short term obligations within their fiscal
year of issuance. The City has issued $1.075 billion of short term obligations
in fiscal year 1998 to finance the City's projected cash flow needs for the 1998
fiscal year. The City issued $2.4 billion of short term obligations in fiscal
year 1997. Seasonal financing requirements for the 1996 fiscal year increased to
$2.4 billion from $2.2 billion and $1.75 billion in the 1995 and 1994 fiscal
years, respectively. The delay in the adoption of the State's budget in certain
past fiscal years has required the city to issue short term notes in amounts
exceeding those expected early in such fiscal years.
The City makes substantial capital expenditures to reconstruct and
rehabilitate the city's infrastructure and physical assets, including City mass
transit facilities, sewers, streets, bridges and tunnels, and to make capital
investments that will improve productivity in City operations.
The City utilizes a three tiered capital planning process consisting of the
Ten Year Capital Strategy, the Four Year Capital Plan and the current year
Capital Budget. The Ten Year Capital Strategy is a long term planning tool
designed to reflect fundamental allocation choices and basic policy objectives.
The Four Year Capital Program translates mid-range policy goals into specific
projects. The Capital Budget defines specific projects and the timing of their
initiation, design, construction and completion.
This City's projection of its capital financing need pursuant to the
Mayor's Declaration of Need and Proposed Transitional Capital Plan of June 30,
1997 indicates additional projected debt and contract liabilities of
approximately $3 billion for fiscal year 1998. To provide for the City's capital
program, State legislation was enacted which created the Finance Authority, the
debt of which is not subject to the general debt limit. Without the Finance
Authority or other legislative relief, new contractual commitments for the
City's general obligation financed capital program would have been virtually
brought to a halt during the Financial Plan period beginning early in the 1998
fiscal year. By utilizing projected Finance Authority borrowing and including
the Finance Authority's projected borrowing as part of the total debt incurring
power set forth in the following table, the City's total debt incurring power
has been increased. Even with the increase, the City may reach the limit of its
capacity to enter into new contractual commitments in fiscal year 2000.
OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems which, if significant, could lead to requests for additional
State assistance during the State's fiscal 1998 and thereafter.
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Municipalities and school districts have engaged in substantial short term
and long term borrowings. In 1994, the total indebtedness of all localities in
the State other than New York City was approximately $17.7 billion. A small
portion (approximately $82.9 million) of that indebtedness represented
borrowing, to finance budgetary deficits and was issued pursuant to State
enabling legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1994.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment
limitations cannot be changed for a Fund without the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares of the Fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations.
Each Fund will not:
(1) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same
industry, except that this limitation does not apply to securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities or to municipal securities.
(2) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ('1940 Act') and then not in
excess of 331/3% of the Fund's total assets (including the amount
of the senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of the issuance or
borrowing, except that the Fund may borrow up to an additional 5%
of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt
securities or instruments, or participations or other interests
therein and investments in government obligations, commercial
paper, certificates of deposit, bankers' acceptances or similar
instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other
issuers, except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with
its disposition of portfolio securities.
(5) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments
in mortgage-backed securities, mortgage participations or other
instruments supported by interests in real estate are not subject
to this limitation, and except that the Fund may exercise rights
under agreements relating to such securities, including the right
to enforce security interests and to hold real estate acquired by
reason of such enforcement until that real estate can be
liquidated in an orderly manner.
(6) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the Fund may
purchase, sell or enter into financial options and futures,
forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(7) In addition, each Fund has a fundamental limitation requiring it
to invest, except for temporary defensive purposes or under
unusual market conditions, at least 80% of its net assets:
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(a) in the case of California Tax-Free Income Fund, in debt
obligations issued by the State of California, its
municipalities and public authorities or by other issuers if
such obligations pay interest that is exempt from federal
income tax and California personal income tax and is not an
item of tax preference for purposes of the AMT ('AMT exempt
interest');
(b) in the case of National Tax-Free Income Fund, in debt
obligations issued by states, municipalities and public
authorities and other issuers that pay interest that is exempt
from federal income tax ('municipal obligations') and is AMT
exempt interest;
(c) in the case of Municipal High Income Fund, in municipal
obligations; and
(d) in the case of New York Tax-Free Income Fund, in debt
obligations issued by the State of New York, its
municipalities and public authorities or by other issuers if
such obligations pay interest that is exempt from federal
income tax as well as New York State and New York City
personal income taxes and is AMT exempt interest.
In addition, California Tax-Free Income Fund and National Tax-Free Income
Fund each will not:
(8) purchase securities of any one issuer if, as a result, more than
5% of the Fund's total assets would be invested in securities of
that issuer or the Fund would own or hold more than 10% of the
outstanding voting securities of that issuer, except that up to
25% of the Fund's total assets may be invested without regard to
this limitation, and except that this limitation does not apply to
securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities or to securities issued by other
investment companies.
The following interpretation applies to, but is not a part of,
fundamental limitation (8): Each state, territory and possession
of the United States (including the District of Columbia and
Puerto Rico), each political subdivision, agency, instrumentality
and authority thereof, and each multi-state agency of which a
state is a member is a separate 'issuer.' When the assets and
revenues of an agency, authority, instrumentality or other
political subdivision are separate from the government creating
the subdivision and the security is backed only by the assets and
revenues of the subdivision, such subdivision would be deemed to
be the sole issuer. Similarly, in the case of an IDB or PAB, if
that bond is backed only by the assets and revenues of the
non-governmental user, then that non-governmental user would be
deemed to be the sole issuer. However, if the creating government
or another entity guarantees a security, then to the extent that
the value of all securities issued or guaranteed by that
government or entity and owned by the Fund exceeds 10% of the
Fund's total assets, the guarantee would be considered a separate
security and would be treated as issued by that government or
entity.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are not
fundamental and may be changed by each board without shareholder approval.
Each Fund will not:
(1) invest more than 10% of its net assets in illiquid securities, a
term which means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities and includes,
among other things, repurchase agreements maturing in more than
seven days.
(2) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that
the Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or
derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short 'against the box' and (b)
maintain short positions in connection with its use of financial
options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative
instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation
does not apply to securities received or acquired as
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dividends, through offers of exchange, or as a result of
reorganization, consolidation, or merger.
(5) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. As discussed in the
Prospectus, Mitchell Hutchins may use a variety of financial instruments
('Derivative Instruments'), including certain options, futures contracts
(sometimes referred to as 'futures') and options on futures contracts, to
attempt to hedge a Fund's portfolio and to enhance income or realize gains. A
Fund may enter into transactions using one or more types of Derivative
Instruments, under which the full value of its portfolio is at risk. Under
normal circumstances, however, a Fund's use of those instruments will place at
risk a much smaller portion of its assets. The particular Derivative Instruments
used by the Funds are described below:
OPTIONS ON DEBT SECURITIES -- A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise during the option term, to buy the underlying security
at the exercise price.
OPTIONS ON INDICES OF DEBT SECURITIES -- An index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payments and do not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize and the writer will pay an amount
based on the difference between the exercise price and the closing price of the
index. Currently, options on indices of debt securities do not exist.
MUNICIPAL BOND INDEX FUTURES CONTRACTS -- A municipal bond index futures
contract is a bilateral agreement pursuant to which one party agrees to accept
and the other party agrees to make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the bonds comprising the index is
made; generally contracts are closed out prior to the expiration date of the
contract.
MUNICIPAL DEBT AND INTEREST RATE FUTURES CONTRACTS -- A municipal debt or
interest rate futures contract is a bilateral agreement pursuant to which one
party agrees to accept and the other party agrees to make delivery of the
specific type of debt security called for in the contract at a specified future
time and at a specified price. Although such futures contracts by their terms
call for actual delivery or acceptance of debt securities, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance, which represents the amount
by which the market price of the futures contract exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the future. The writer of an option, upon exercise, will assume a short position
in the case of a call, and a long position in the case of a put.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as 'short hedges' and 'long hedges.' A
short hedge is a purchase or sale of a Derivative Instrument intended to
partially or fully offset potential declines in the value of one or more
investments held in a Fund's portfolio. Thus, in a short hedge a Fund takes a
position in a Derivative
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Instrument whose price is expected to move in the opposite direction of the
price of the investment being hedged. For example, a Fund might purchase a put
option on a security to hedge against a potential decline in the value of that
security. If the price of the security declined below the exercise price of the
put, the Fund could exercise the put and thus limit its loss below the exercise
price to the premium paid plus transaction costs. In the alternative, because
the value of the put option can be expected to increase as the value of the
underlying security declines, the Fund might be able to close out the put option
and realize a gain to offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge a Fund takes a position in a Derivative Instrument whose price is expected
to move in the same direction as the price of the prospective investment being
hedged. For example, a Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Fund might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund owns
or intends to acquire. Derivative Instruments on indices, in contrast, generally
are used to hedge against price movements in broad market sectors in which a
Fund has invested or expects to invest. Derivative Instruments on debt
securities may be used to hedge either individual securities or broad fixed
income market sectors.
The use of Derivative Instruments is subject to applicable regulations of
the Securities and Exchange Commission ('SEC'), the several options and futures
exchanges upon which they are traded and the Commodity Futures Trading
Commission ('CFTC'). In addition, a Fund's ability to use Derivative Instruments
will be limited by tax considerations. See 'Taxes.'
In addition to the products and strategies described below, Mitchell
Hutchins may discover additional opportunities in connection with Derivative
Instruments and with hedging, income and gain strategies. These new
opportunities may become available as regulatory authorities broaden the range
of permitted transactions and as new Derivative Instruments and techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Funds' investment objectives and permitted by the
Funds' investment limitations and applicable regulatory authorities. The Funds'
Prospectus or SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Derivative Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which
Derivative Instruments are traded. The effectiveness of hedges using Derivative
Instruments on indices will depend on the degree of correlation between price
movements in the index and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
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movements in the hedged investments. For example, if a Fund entered into a short
hedge because Mitchell Hutchins projected a decline in the price of a security
in the Fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss. In either such case, the Fund would have been in a
better position had it not hedged at all.
(4) As described below, a Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If a Fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that a Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any position in a Derivative
Instrument can be closed out at a time and price that is favorable to the Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose a Fund to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ('covered') position in securities or
other options or futures contracts or (2) cash or liquid securities, with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. Each Fund will comply with SEC guidelines
regarding cover for such transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
Fund's assets to cover positions or to segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put and call options, on debt securities. The purchase of call options
may serve as a long hedge, and the purchase of put options may serve as a short
hedge. Writing covered put or call options can enable a Fund to enhance income
by reason of the premiums paid by the purchasers of such options. However, if
the market price of the security underlying a covered put option declines to
less than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options may serve as a
limited short hedge, because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security appreciates to a price higher than the exercise price
of the call option, it can be expected that the option will be exercised and the
Fund will be obligated to sell the security at less than its market value. If
the covered call option is an OTC option, the securities or other assets used as
cover would be considered illiquid to the extent described under 'Investment
Policies and Restrictions -- Illiquid Securities.'
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, OTC options on debt securities are European
style options. This means that the option is only exercisable immediately prior
to its expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option. Options that
expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
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Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
However, exchange-traded or liquid OTC options on municipal debt securities are
not currently available. Exchange markets for options on debt securities exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counterparty
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the
counterparty to make or take delivery of the underlying investment upon exercise
of the option. Failure by the counterparty to do so would result in the loss of
any premium paid by the Fund as well as the loss of any expected benefit of the
transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with counterparties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
In the event that options on indices of municipal and non-municipal debt
securities become available, a Fund may purchase and write put and call options
on such indices in much the same manner as the more traditional options
discussed above, except that index options may serve as a hedge against overall
fluctuations in the debt securities markets (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
GUIDELINES FOR OPTIONS. A Fund's use of options is governed by the
following guidelines, which can be changed by its board without shareholder
vote:
1. A Fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums
on all other options held by the Fund, does not exceed 5% of its total
assets.
2. The aggregate value of securities underlying put options written by
any Fund determined as of the date the put options are written will not
exceed 50% of its net assets.
3. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by a Fund that are held at any time will not exceed 20% of its
net assets.
FUTURES. The Funds may purchase and sell municipal bond index futures
contracts, municipal debt futures contracts and interest rate futures contracts.
The Funds also may purchase put and call options, and write covered put and call
options, on such futures contracts. The purchase of futures or call options
thereon may serve as a long hedge, and the sale of futures or the purchase of
put options thereon may serve as a short hedge. Writing covered call options on
futures contracts may serve as a limited short hedge, and writing covered put
options on futures contracts may serve as a limited long hedge, using a strategy
similar to that used for writing covered call options on securities or indices.
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Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
a Fund's portfolio, the Fund may sell a futures contract or a call option
thereon, or purchase a put option on that futures contract. If Mitchell Hutchins
wishes to lengthen the average duration of a Fund's portfolio, the Fund may buy
a futures contract or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities
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markets involving arbitrage, 'program trading' and other investment strategies
might result in temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS. A Fund's use of futures and
related options is governed by the following guidelines, which can be changed by
its board without shareholder vote:
1. To the extent a Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are 'in-the-money') may not exceed
5% of the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by any Fund that are held at any time will not exceed 20% of the
Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's total
assets.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Trustee and Mrs. Alexander is president, chief executive officer
President and a director of Mitchell Hutchins (since January
1995) and an executive vice president and director
of PaineWebber (since March 1984). Mrs. Alexander
is president and a director or trustee of 31
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and principal of RQA
78 West Brother Drive Enterprises (management consulting firm) (since
Greenwich, CT 06830 April 1991 and principal occupation since March
1995). Mr. Armstrong was chairman of the board,
chief executive officer and co-owner of Adirondack
Beverages (producer and distributor of soft drinks
and sparkling/still waters) (October 1993-March
1995). He was a partner of The New England
Consulting Group (management consulting firm)
(December 1992-September 1993). He was managing
director of LVMH U.S. Corporation (U.S. subsidiary
of the French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation) (1987-1991)
and chairman of its wine and spirits subsidiary,
Schieffelin & Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of 30
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
</TABLE>
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<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 71 Trustee and Mr. Bewkes is a director of Paine Webber Group Inc.
Chairman of the ('PW Group') (holding company of PaineWebber and
Board of Mitchell Hutchins). Prior to December 1995, he was
Trustees a consultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief
executive officer of American Bakeries Company.
Mr. Bewkes is a director of Interstate Bakeries
Corporation and NaPro BioTherapeutics, Inc. Mr.
Bewkes is a director or trustee of 31 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Avenue, N.W. (international investments and consulting firm)
Washington, D.C. 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since 1991).
He is also a director of Archer-Daniels-Midland
Co. (agricultural commodities), Hollinger
International Co. (publishing), Homestake Mining
Corp., Powerhouse Technologies Inc. and Wierton
Steel Corp. He was the chief negotiator in the
Strategic Arms Reduction Talks with the former
Soviet Union (1989-1991) and the U.S. Ambassador
to the Federal Republic of Germany (1985-1989).
Mr. Burt is a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Mary C. Farrell**; 48 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the Investment
Policy Committee of PaineWebber. Ms. Farrell
joined PaineWebber in 1982. She is a member of the
Financial Women's Association and Women's Economic
Roundtable, and appears as a regular panelist on
Wall $treet Week with Louis Rukeyser. She also
serves on the Board of Overseers of New York
University's Stern School of Business. Ms. Farrell
is a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
33
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of the
New York, New York 10027 Illinois Institute of Technology. Dean Feldberg is
also a director of Primedia Inc., Federated
Department Stores, Inc. and Revlon, Inc. Dean
Feldberg is a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
George W. Gowen; 68 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May 1994,
New York, New York 10017 he was a partner in the law firm of Fryer, Ross &
Gowen. Mr. Gowen is a director of Columbia Real
Estate Investments, Inc. Mr. Gowen is a director
or trustee of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Avenue N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle '92.
Washington, D.C. 20004 From 1990 to 1992, he was vice chairman and, from
1989 to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.). Prior to 1989, he
was employed by the Marriott Corporation (hotels,
restaurants, airline catering and contract
feeding), where he most recently was an executive
vice president and president of Marriott Hotels
and Resorts. Mr. Malek is also a director of
American Management Systems, Inc. (management
consulting and computer related services),
Automatic Data Processing, Inc., CB Commercial
Group, Inc. (real estate services), Choice Hotels
International (hotel and hotel franchising), FPL
Group, Inc. (electric services), Integra, Inc.
(bio-medical), Manor Care, Inc. (health care) and
Northwest Airlines Inc. Mr. Malek is a director or
trustee of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
34
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the Atlantic Foundation
66 Witherspoon Street #1100 (charitable foundation supporting mainly
Princeton, New Jersey 08542 oceanographic exploration and research). He is a
director of Base Ten Systems, Inc. Roadway
Express, Inc. (trucking), The Guardian Group of
Mutual Funds, the Harding, Loevner Funds, Evans
Systems, Inc. (motor fuels, convenience store and
diversified company), Electronic Clearing House,
Inc. (financial transactions processing), Frontier
Oil Corporation and Nutraceutix, Inc.
(biotechnology company). Prior to January 1993, he
was chairman of the Investment Advisory Committee
of the Howard Hughes Medical Institute. Mr.
Schafer is a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Cynthia N. Bow; 39 Vice President Ms. Bow is a vice president and a portfolio manager
(PW Mutual Fund of Mitchell Hutchins. Ms. Bow has been with
Trust only) Mitchell Hutchins since 1982. Ms. Bow is a vice
president of three investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Elbridge T. Gerry III; 41 Vice President Mr. Gerry is a senior vice president and a portfolio
manager of Mitchell Hutchins. Prior to January
1996, he was with J.P. Morgan Private Banking
where he was responsible for managing municipal
assets, including several municipal bond funds.
Mr. Gerry is a vice president of five investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
John J. Lee; 29 Vice President Mr. Lee is a vice president and a manager of the
and Assistant mutual fund finance department of Mitchell
Treasurer Hutchins. Prior to September 1997, he was an audit
manager in the financial services practice of
Ernst & Young LLP. Mr. Lee is a vice president and
assistant treasurer of 30 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
35
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Dennis McCauley; 51 Vice President Mr. McCauley is a managing director and chief
investment officer -- fixed income of Mitchell
Hutchins. Prior to December 1994, he was director
of fixed income investments of IBM Corporation.
Mr. McCauley is a vice president of 20 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Ann E. Moran; 40 Vice President Ms. Moran is a vice president and a manager of the
and Assistant mutual fund finance department of Mitchell
Treasurer Hutchins. Ms. Moran is a vice president and
assistant treasurer of 31 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Richard S. Murphy; 43 Vice President Mr. Murphy is a senior vice president and a
(PW Mutual Fund portfolio manager of Mitchell Hutchins. Prior to
Trust only) March 1994 Mr. Murphy was a vice president at
American International Group. Mr. Murphy is a vice
president of two investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 46 Vice President Ms. O'Donnell is a senior vice president and deputy
and Secretary general counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and secretary of 30
investment companies and vice president and
assistant secretary of one investment company for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior vice president and director
of operations and control for Mitchell Hutchins.
From March 1991 to September 1993 he was director
of the mutual funds sales support and service
center for Mitchell Hutchins and PaineWebber. Mr.
Polito is also a vice president of 31 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
36
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. Prior to May 1994,
she was a partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice president of 30
investment companies and vice president and
secretary of one investment company for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 35 Vice President Mr. Schubert is a senior vice president and the
and Treasurer director of the mutual fund finance department of
Mitchell Hutchins. From August 1992 to August
1994, he was a vice president at BlackRock
Financial Management L.P. Mr. Schubert is a vice
president and treasurer of 31 investment companies
for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Barney A. Taglialatela; 37 Vice President Mr. Taglialatela is a vice president and a manager
and Assistant of the mutual fund finance department of Mitchell
Treasurer Hutchins. Prior to February 1995, he was a manager
of the mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr. Taglialatela is
a vice president of 31 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
William W. Veronda; 52 Vice President Mr. Veronda is a senior vice president of Mitchell
(PW Municipal Hutchins. Prior to September 1995, he was a senior
Series only) vice president and general manager at Invesco
Funds Group. Mr. Veronda is vice president of one
investment company for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Keith A. Weller; 36 Vice President Mr. Weller is a first vice president and associate
and Assistant general counsel of Mitchell Hutchins. Prior to May
Secretary 1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary
of 30 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Ian W. Williams; 41 Vice President Mr. Williams is a vice president and a manager of
and Assistant the mutual fund finance department of Mitchell
Treasurer Hutchins. Mr. Williams is a vice president of 31
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
</TABLE>
(footnotes on next page)
37
<PAGE>
<PAGE>
(footnotes from previous page)
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of each
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
Each Trust pays trustees who are not 'interested persons' of the Trust
('disinterested trustees') $1,000 annually for each series and $150 per series
for each board meeting and each separate meeting of a board committee (other
than committee meetings held on the same day as a board meeting). Each Trust
presently has two series and thus pays each such trustee $2,000 annually, plus
any additional annual amounts due for board or committee meetings. Each chairman
of the audit and contract review committees of individual funds within the
PaineWebber fund complex receives additional compensation aggregating $15,000
annually from the relevant funds. All Trustees are reimbursed for any expenses
incurred in attending meetings. Trustees and officers of the Trusts own in the
aggregate less than 1% of the shares of each Fund. Because Mitchell Hutchins and
PaineWebber perform substantially all of the services necessary for the
operation of the Trusts and the Funds, neither Trust requires any employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trusts for acting as a trustee or officer.
The table below includes certain information relating to the compensation
of each Trust's current trustees who held office with that Trust or with other
PaineWebber funds during the fiscal year ended February 28, 1998.
COMPENSATION TABLE'D'
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM PAINEWEBBER FROM PAINEWEBBER MUTUAL THE TRUSTS AND THE FUND
NAME OF PERSON, POSITION MUNICIPAL SERIES* FUND TRUST* COMPLEX**
- ----------------------------------- ---------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Richard Q. Armstrong,
Trustee.......................... $4,100 $ 4,100 $ 94,885
Richard R. Burt,
Trustee.......................... 3,800 3,800 87,085
Meyer Feldberg,
Trustee.......................... 4,100 4,100 117,853
George W. Gowen,
Trustee.......................... 4,692 4,692 101,567
Frederic V. Malek,
Trustee.......................... 4,100 4,100 95,845
Carl W. Schafer,
Trustee.......................... 4,100 4,100 94,885
</TABLE>
- ------------------
'D'Only disinterested trustees are compensated by the Trusts and identified
above; trustees who are 'interested persons,' as defined by the 1940 Act, do
not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended February
28, 1998.
** Represents total compensation paid to each board member during the calendar
year ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
As of May 31, 1998, the Trusts' records indicate that no shareholder owned
more than 5% of a Fund's shares.
38
<PAGE>
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of California Tax-Free Income Fund and National
Tax-Free Income Fund pursuant to a contract dated April 21, 1988 with
PaineWebber Mutual Fund Trust, as supplemented by a Fee Agreement dated June 30,
1992 with respect to National Tax-Free Income Fund, and of Municipal High Income
Fund and New York Tax-Free Income Fund pursuant to a contract with PaineWebber
Municipal Series dated July 1, 1989 (each an 'Advisory Contract' and,
collectively, the 'Advisory Contracts'). Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.50% of average daily net assets in the case of California Tax-Free
Income Fund and National Tax-Free Income Fund and 0.60% of average daily net
assets in the case of Municipal High Income Fund and New York Tax-Free Income
Fund.
Pursuant to the Advisory Contracts, during each of the periods indicated,
Mitchell Hutchins earned (or accrued) advisory fees in the amounts set forth
below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28/29
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
California Tax-Free Income Fund............................. $ 776,955 $ 902,327 $1,116,442
National Tax-Free Income Fund............................... $1,634,990 $2,022,871 $2,388,482
Municipal High Income Fund.................................. $ 551,107 $ 555,499 $ 647,537
New York Tax-Free Income Fund............................... $ 264,754 $ 312,553 $ 380,993
(of which (of which
$117,350 $123,590
was waived) was waived)
</TABLE>
Prior to August 1, 1997 PaineWebber provided certain services to the Funds
not otherwise provided by PFPC Inc. ('PFPC'), the Fund's transfer agent, which
agreement is reviewed by each board annually, PaineWebber earned (or accrued)
the amounts set forth below during each of the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FOR THE FIVE FEBRUARY 28/29
MONTHS ENDED --------------------
JULY 31, 1997 1997 1996
------------- ------- -------
<S> <C> <C> <C>
California Tax-Free Income Fund........................... $ 5,924 $16,293 $19,943
National Tax-Free Income Fund............................. $15,757 $43,965 $52,513
Municipal High Income Fund................................ $ 5,104 $13,436 $15,997
New York Tax-Free Income Fund............................. $ 2,077 $ 7,682 $ 9,267
(of
which
$7,682
was
waived)
</TABLE>
Subsequent to July 31, 1997, PFPC (not the Funds) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to PaineWebber.
Under the terms of the applicable Advisory Contract, each Fund bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of a Trust not readily identifiable as belonging to a
particular Fund are allocated between the appropriate Funds by or under the
direction of the board in such manner as the board deems fair and equitable.
Expenses borne by each Fund include the following: (1) the cost (including
brokerage commissions, if any) of securities purchased or sold by the Fund and
any losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons of the Fund or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and other insurance or fidelity bonds; (9) any costs, expenses or losses
arising out of a liability of or claim for damages or other relief asserted
against the Fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent
39
<PAGE>
<PAGE>
trustees; (11) charges of custodians, transfer agents and other agents; (12)
costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders and costs of mailing such materials to existing shareholders; (14)
any extraordinary expenses (including fees and disbursements of counsel)
incurred by the Fund; (15) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations; (16)
costs of mailing and tabulating proxies and costs of meetings of shareholders,
the board and any committees thereof; (17) the cost of investment company
literature and other publications provided to trustees and officers; and (18)
costs of mailing, stationery and communications equipment.
Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of a Fund's outstanding
voting securities, on 60 days' written notice to Mitchell Hutchins or by
Mitchell Hutchins on 60 days' written notice to a Fund.
The following table shows the approximate net assets as of May 31, 1998,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($MIL)
- --------------------------------------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................................ $ 7,322.7
Global........................................................................... 3,788.7
Equity/Balanced.................................................................. 6,260.8
Fixed Income (excluding Money Market)............................................ 4,850.6
Taxable Fixed Income............................................................. 3,267.9
Tax-Free Fixed Income............................................................ 1,582.7
Money Market Funds............................................................... 28,628.3
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of the PaineWebber funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins directors, officers
and employees, establishes procedures for personal investing and restricts
certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber funds and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of the Funds under separate distribution contracts with
each Trust (collectively, 'Distribution Contracts'). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable Fund. Shares of the Funds are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber, relating to each class of shares of the Funds
(collectively, 'Exclusive Dealer Agreements'), PaineWebber and its correspondent
firms sell each Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of the Funds adopted by the Trusts in the manner prescribed under
Rule 12b-1 under the 1940 Act ('Class A Plan,' 'Class B Plan' and 'Class C
Plan,' collectively, 'Plans'), each Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of shares. Under the Class B Plan, each Fund also
pays Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at
the annual rate of 0.75% of the average daily net assets of the Class B shares.
Under the Class C Plan, each Fund pays Mitchell Hutchins a distribution
40
<PAGE>
<PAGE>
fee, accrued daily and payable monthly, at the annual rate of 0.50% of the
average daily net assets of the Class C shares. There is no distribution plan
with respect to the Funds' Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment thereto
is approved, by the applicable board, including those board members who are not
'interested persons' of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan,
acting in person at a meeting called for that purpose, (3) payments by a Fund
under the Plan shall not be materially increased without the affirmative vote of
the holders of a majority of the outstanding shares of the relevant Class of
that Fund and (4) while the Plan remains in effect, the selection and nomination
of board members who are not 'interested persons' of the Trust shall be
committed to the discretion of the board members who are not interested persons
of the Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins will allocate expenses attributable to the sale of each Class
of Fund shares to such Class based on the ratio of sales of the shares of such
Class to the sales of the three classes of shares for which there are Plans. The
fees paid by one Class of Fund shares will not be used to subsidize the sale of
any other Class of Fund shares.
Under prior plans of distribution substantially similar to the Class A
Plan, each Fund paid Mitchell Hutchins a monthly distribution fee computed at
the same rate and in the same manner as the service fees under the Class A Plan.
The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year ended February 28,
1998:
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND*
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Class A............................................. $ 299,711 $ 593,783 $136,456 $ 56,124
Class B............................................. 185,535 364,267 183,553 85,494
Class C............................................. 127,095 396,151 141,828 98,452
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the Funds during the fiscal year
ended February 28, 1998:
CLASS A
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Marketing and advertising........................... $ 123,927 $ 190,360 $ 70,894 $ 52,043
Amortization of commissions......................... N/A N/A N/A N/A
Printing of prospectuses and statements of
additional information............................ 1,847 3,761 400 361
Branch network costs allocated and interest
expense........................................... 562,515 1,186,550 219,232 107,351
Service fees paid to PaineWebber investment
executives........................................ 113,889 225,638 51,853 21,330
</TABLE>
41
<PAGE>
<PAGE>
CLASS B
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Marketing and advertising............................ $19,161 $ 29,190 $ 23,888 $19,840
Amortization of commissions.......................... 52,693 102,588 52,001 24,132
Printing of prospectuses and statements of additional
information........................................ 286 538 136 119
Branch network costs allocated and interest
expense............................................ 93,032 192,916 73,873 43,617
Service fees paid to PaineWebber investment
executives......................................... 17,625 34,606 17,437 8,151
</TABLE>
CLASS C
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Marketing and advertising............................ $17,519 $ 42,336 $ 24,538 $30,439
Amortization of commissions.......................... 32,198 100,357 35,931 25,066
Printing of prospectuses and statements of additional
information........................................ 261 815 142 198
Branch network costs allocated and interest
expense............................................ 80,100 265,571 75,894 63,223
Service fees paid to PaineWebber investment
executives......................................... 16,098 50,179 17,965 11,704
</TABLE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. 'Branch network costs
allocated and interest expense' consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of each Fund's
shares, including the PaineWebber retail branch system.
In approving the Funds' overall Flexible Pricing'sm' system of
distribution, each board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the Funds and attracting
new investors and assets to the Funds to the benefit of each Fund and its
shareholders; (2) facilitate distribution of the Funds' shares; and (3) maintain
the competitive position of the Funds in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, each board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the Funds than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in each Fund's assets and potential continued growth, (4) the services provided
to each Fund and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.
In approving the Class B Plan, each board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from Fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales commissions when Class B shares are sold and continuing service
fees thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the investment
executives and correspondent
42
<PAGE>
<PAGE>
firms, resulting in greater growth of each Fund than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in each Fund's assets and potential continued growth, (5) the
services provided to each Fund and its shareholders by Mitchell Hutchins, (6)
the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement
with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service- and
distribution-related expenses and costs. The board members also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives, without the concomitant receipt by Mitchell Hutchins of initial
sales charges, was conditioned upon its expectation of being compensated under
the Class B Plan.
In approving the Class C Plan, each board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from Fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in Fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber investment executives and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and do not face contingent deferred sales
charges, would prove attractive to the investment executives and correspondent
firms, resulting in greater growth to each Fund than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in each Fund's assets and potential continued growth, (5) the
services provided to each Fund and its shareholders by Mitchell Hutchins, (6)
the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement
with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-and
distribution-related expenses and costs. The board members also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives, without the concomitant receipt by Mitchell Hutchins of initial
sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the boards considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of a Fund, which
fees would increase if the Plan were successful and the Funds attained and
maintained significant asset levels.
Under the Distribution Contract between each Trust and Mitchell Hutchins
for the Class A shares and similar prior distribution contracts, for the fiscal
years (or periods) set forth below, Mitchell Hutchins earned the following
approximate amounts of sales charges and retained the following approximate
amounts, net of concessions to PaineWebber as exclusive dealer:
CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Earned...................................................................... $79,848 $56,842 $57,198
Retained.................................................................... 6,304 4,798 1,224
</TABLE>
NATIONAL TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Earned.................................................................... $79,748 $148,485 $66,206
Retained.................................................................. 6,357 1,253 1,026
</TABLE>
43
<PAGE>
<PAGE>
MUNICIPAL HIGH INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Earned.................................................................... $121,988 $23,894 $52,683
Retained.................................................................. 7,764 1,867 964
</TABLE>
NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Earned...................................................................... $47,579 $11,290 $14,417
Retained.................................................................... 3,962 838 1,034
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
February 28, 1998:
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL MUNICIPAL NEW YORK
TAX-FREE TAX-FREE HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Class A............................ None None None None
Class B............................ $64,883 $ 121,302 $ 87,604 $25,199
Class C............................ 1,006 2,014 1,442 1,278
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of each Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for a Fund, taking into
account such factors as the price (including the applicable dealer spread or
brokerage commission), size of order, difficulty of execution and operational
facilities of the firm involved. Each Fund effects its portfolio transactions
with municipal bond dealers. Municipal securities are traded on the OTC market
on a 'net' basis without a stated commission through dealers acting for their
own account and not as brokers. Prices paid to dealers in principal transactions
generally include a 'spread,' which is the difference between the prices at
which the dealer is willing to purchase and sell a specific security at that
time. Since inception, the Funds have not paid any brokerage commissions.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with those transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins' receiving multiple quotes from dealers before executing the
transactions on an agency basis.
Information and research services furnished by dealers or brokers with or
through which the Funds effect securities transactions may be used by Mitchell
Hutchins in advising other funds or accounts and, conversely, research services
furnished to Mitchell Hutchins by dealers or brokers in connection with other
funds or accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in
advising the Funds. Information and research received from such brokers or
dealers will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contracts.
Investment decisions for the Funds and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a Fund and one or
44
<PAGE>
<PAGE>
more such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between the Fund
involved and such other account(s) as to amount according to a formula deemed
equitable to the Fund and such account(s). While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as a Fund is concerned, or upon its ability to complete its entire order, in
other cases it is believed that coordination and the ability to participate in
volume transactions will be beneficial to the Fund.
No Fund will purchase securities that are offered in underwritings in which
Mitchell Hutchins or any of its affiliates is a member of the underwriting or
selling group, except pursuant to procedures adopted by each Trust's board of
trustees pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the commission or spread paid in connection with such a
purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the date
of the public offering and that Mitchell Hutchins or any affiliate thereof not
participate in or benefit from the sale to a Fund.
PORTFOLIO TURNOVER. Each Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year.
During the periods indicated, the portfolio turnover rates for each Fund
were as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES FOR THE
YEARS ENDED FEBRUARY 28
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
California Tax-Free Income Fund........................... 107% 73%
National Tax-Free Income Fund............................. 79% 81%
Municipal High Income Fund................................ 22% 64%
New York Tax-Free Income Fund............................. 34% 40%
</TABLE>
45
<PAGE>
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges for Class A shares
indicated in the tables of sales charges in the Prospectus. The sales charge
payable on the purchase of shares of Class A shares of the Funds and Class A
shares of such other funds will be at the rates applicable to the total amount
of the combined concurrent purchases.
An 'eligible group of related Fund investors' can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts.
The registered investment adviser must communicate at least quarterly
through a newsletter or investment update establishing a relationship with
all of the accounts.
RIGHTS OF ACCUMULATION-CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount equal
to the then-current net asset value of the purchaser's combined holdings of
Class A Fund shares and Class A shares of any other PaineWebber mutual fund. The
purchaser must provide sufficient information to permit confirmation of his or
her holdings, and the acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time.
WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of each Fund may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except that no notice need be given if under extraordinary
circumstances, either redemptions are suspended under the circumstances
described below or a Fund temporarily delays or ceases the sales of its shares
because it is unable to invest amounts effectively in accordance with the Fund's
investment objectives, policies and restrictions.
If conditions exist that make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and
46
<PAGE>
<PAGE>
valued in the same way as they would be valued for purposes of computing the
Fund's net asset value. Any such redemption in kind will be made with readily
marketable securities, to the extent available. If payment is made in
securities, a shareholder may incur brokerage expenses in converting these
securities into cash. Each Trust has elected, however, to be governed by Rule
18f-1 under the 1940 Act, under which a Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for one shareholder. This election is irrevocable
unless the SEC permits its withdrawal. A Fund may suspend redemption privileges
or postpone the date of payment during any period (1) when the New York Stock
Exchange ('NYSE') is closed or trading on the NYSE is restricted as determined
by the SEC, (2) when an emergency exists, as defined by the SEC, that makes it
not reasonably practicable for the Fund to dispose of securities owned by it or
fairly to determine the value of its assets or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of a Fund's portfolio at the time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of 'dollar cost averaging.' When the
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Fund's net asset value per share is low and
fewer shares when the net asset value per share is high. Using this technique,
an investor's average purchase price per share over any given period will be
lower than if the investor purchased a fixed number of shares on a monthly basis
during the period. Of course, investing through the automatic investment plan
does not assure a profit or protect against loss in declining markets.
Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both high and low
price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the 'Initial Account Balance' (a
term that means the value of the Fund account at the time the investor elects to
participate in the systematic withdrawal plan) less aggregate redemptions made
other than pursuant to the systematic withdrawal plan is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional Fund shares concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, initial sales charges. On or about the 20th of a month for monthly,
quarterly, semi-annual or annual plans, PaineWebber will arrange for redemption
by a Fund of sufficient Fund shares to provide the withdrawal payment specified
by participants in the Funds' systematic withdrawal plan. The payment generally
is mailed approximately five business days (defined under 'Valuation of Shares')
after the redemption date. Withdrawal payments should not be considered
dividends but redemption proceeds, with the tax consequences described under
'Dividends and Taxes' in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends and other distributions, a shareholder's investment
may be correspondingly reduced. A shareholder may change the amount of the
systematic withdrawal or terminate participation in the systematic withdrawal
plan at any time without charge or penalty by written instructions with
signatures guaranteed to PaineWebber or PFPC ('Transfer Agent').
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber investment executives, correspondent
firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed Class A shares of a Fund may reinstate their
account without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be
47
<PAGE>
<PAGE>
deductible to the extent the redemption proceeds are reinvested, if the
reinstatement privilege is exercised within 30 days after redemption, and an
adjustment will be made to the shareholder's tax basis for the shares acquired
pursuant to the reinstatement privilege. Gain or loss on a redemption also will
be adjusted for federal income tax purposes by the amount of any sales charge
paid on Class A shares, under the circumstances and to the extent described
under 'Dividends & Taxes' in the Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN'sm';
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT'r' (RMA'r')
Shares of the PaineWebber mutual funds (each a 'PW Fund' and, collectively,
the 'PW Funds') are available for purchase by customers of PaineWebber and its
correspondent firms who maintain Resource Management Accounts ('RMA
Accountholders') through the RMA Resource Accumulation Plan ('Accumulation
Plan'). The Accumulation Plan allows an RMA accountholder to continually invest
in one or more of the PW Funds at regular intervals, with payment for shares
purchased automatically deducted from the client's RMA account. The client may
elect to invest at monthly or quarterly intervals and may elect either to invest
a fixed dollar amount (minimum $100 per period) or to purchase a fixed number of
shares. A client can elect to have Accumulation Plan purchases executed on the
first or fifteenth day of the month. Settlement occurs three Business Days
(defined under 'Valuation of Shares') after the trade date, and the purchase
price of the shares is withdrawn from the investor's RMA account on the
settlement date from the following sources and in the following order:
uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Accumulation Plan, an investor must be an RMA
accountholder, must have made an initial purchase of the shares of each PW Fund
selected for investment under the Accumulation Plan (meeting applicable minimum
investment requirements) and must complete and submit the RMA Resource
Accumulation Plan Client Agreement and Instruction Form available from
PaineWebber. The investor must have received a current prospectus for each PW
Fund selected prior to enrolling in the Accumulation Plan. Information about
mutual fund positions and outstanding instructions under the Accumulation Plan
are noted on the RMA accountholder's account statement. Instructions under the
Accumulation Plan may be changed at anytime, but may take up to two weeks to
become effective.
The terms of the Accumulation Plan or an RMA accountholder's participation
in the Accumulation Plan may be modified or terminated at any time. It is
anticipated that, in the future, shares of other PW Funds and/or mutual funds
other than the PW Funds may be offered through the Accumulation Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of 'dollar cost
averaging.' By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both high
and low share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the
Accumulation Plan, an investor must have opened an RMA account with PaineWebber
or one of its correspondent firms. The RMA account is PaineWebber's
comprehensive asset management account and offers investors a number of
features, including the following:
monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard'r' transactions during the period, and provide unrealized and
realized gain and loss estimates for most securities held in the account;
48
<PAGE>
<PAGE>
comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
automatic 'sweep' of uninvested cash into the RMA accountholder's choice
of the six RMA money market funds -- RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money
Fund, RMA New Jersey Municipal Money Fund and RMA New York Municipal Money
Fund. Each money market fund attempts to maintain a stable price per share
of $1.00, although there can be no assurance that it will be able to do
so. Investments in the money market funds are not insured or guaranteed by
the U.S. government;
check writing, with no per-check usage charge, no minimum amount on checks
and no maximum number of checks that can be written. RMA accountholders
can code their checks to classify expenditures. All canceled checks are
returned each month;
Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
expanded account protection to $100 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and
automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of each Fund will automatically convert to Class A shares of
that Fund, based on the relative net asset values per share of the two Classes,
as of the close of business on the first Business Day (as defined under
'Valuation of Shares') of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (1) the date on which the Class B shares were issued
or (2) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
also converts to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
'preferential dividends' under the Internal Revenue Code ('Code') and that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares would not be converted and
would continue to be subject to the higher ongoing expenses of the Class B
shares beyond six years from the date of purchase. Mitchell Hutchins has no
reason to believe that this condition for the availability of the conversion
feature will not continue to be met.
VALUATION OF SHARES
Each Fund determines the net asset value per share separately for each
Class of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is
49
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<PAGE>
defined as each Monday through Friday when the NYSE is open. Currently, the NYSE
is closed on the observance of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on exchanges normally are valued at the last
sale price on the day the securities are being valued or, lacking any sales on
such day, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
OTC market and listed on the Nasdaq Stock Market ('Nasdaq') normally are valued
at the last available sale price on the Nasdaq at 4:00 p.m., Eastern time; other
OTC securities normally are valued at the last bid price available prior to
valuation.
Where market quotations are readily available, portfolio securities are
valued based upon market quotations, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the security.
Where such market quotations are not readily available, securities are valued
based upon appraisals received from a pricing service using a computerized
matrix system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. The amortized cost method of valuation generally is used with
respect to debt obligations with 60 days or less remaining to maturity unless
the applicable board determines that this does not represent fair value. All
other assets are valued at fair value as determined in good faith by or under
the direction of each board.
PERFORMANCE INFORMATION
The Funds' performance data quoted in advertising and other promotional
materials ('Performance Advertisements') represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
('Standardized Return') used in each Fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
<TABLE>
<S> <C> <C>
where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of that
period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value for Class A shares, the
maximum 4% initial sales charge is deducted from the initial $1,000 payment and,
for Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
Each Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). A Fund calculates Non-Standardized Return for
specified periods of time by assuming an investment of $1,000 in Fund shares and
assuming the reinvestment of all dividends and other distributions. The rate of
return is determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the initial value. Neither initial
nor contingent deferred sales charges are taken into account in calculating
Non-Standardized Return; the inclusion of those charges would reduce the return.
50
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<PAGE>
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following table shows performance information for each class of the
Funds' shares outstanding for the periods indicated. No Class Y shares were
outstanding for the periods indicated for New York Tax-Free Income Fund. All
returns for periods of more than one year are expressed as an average annual
return.
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE NATIONAL TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------- -------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One year ended
February 28, 1998:
Standardized
Return*.......... 4.93% 3.33% 7.96% N/A 5.11% 3.62% 8.17% 9.87%
Non-Standardized
Return........... 9.26 8.33 8.71 N/A 9.48 8.62 8.92 9.87
Five years ended
February 28, 1998:
Standardized
Return*.......... 4.31 4.03 4.63 N/A 4.56 4.30 4.88 N/A
Non-Standardized
Return........... 5.17 4.35 4.63 N/A 5.41 4.64 4.88 N/A
Ten years or since
inception** to
February 28, 1998:
Standardized
Return*.......... 6.50 6.06 5.47 (0.34) 6.77 6.34 5.67 6.81
Non-Standardized
Return........... 6.94 6.06 5.47 (0.34) 7.21 6.34 5.67 6.81
<CAPTION>
MUNICIPAL HIGH NEW YORK TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------ -------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
One year ended
February 28, 1998:
Standardized
Return*.......... 6.65 % 5.23% 9.76% N/A 5.02% 3.65% 8.07%
Non-Standardized
Return........... 11.06 10.23 10.51 N/A 9.36 8.65 8.82
Five years ended
February 28, 1998:
Standardized
Return*.......... 5.35 5.10 5.69 N/A 4.81 4.58 5.16
Non-Standardized
Return........... 6.22 5.42 5.69 N/A 5.68 4.91 5.16
Ten years or since
inception** to
February 28, 1998:
Standardized
Return*.......... 7.96 7.25 6.39 (0.09) 7.27 6.90 6.03
Non-Standardized
Return........... 8.37 7.25 6.39 (0.09) 7.73 6.90 6.03
</TABLE>
- ------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for Class
B and Class C shares reflect deduction of the applicable contingent deferred
sales charges imposed on a redemption of shares held for the period. Class Y
shares do not impose an initial or contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.
** The inception dates for the classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
--------- --------------- --------- ------------------
<S> <C> <C> <C> <C>
California Tax-Free Income Fund....... 9/16/85 7/1/91 7/2/92 2/5/98
National Tax-Free Income Fund......... 12/3/84 7/1/91 7/2/92 11/3/95
Municipal High Income Fund............ 6/23/87 7/1/91 7/2/92 2/5/98
New York Tax-Free Income Fund......... 9/23/88 7/1/91 7/2/92 N/A
</TABLE>
YIELD. Yields used in each Fund's Performance Advertisements are
calculated by dividing the Fund's interest income attributable to a Class of
shares for a 30-day period ('Period'), net of expenses attributable to such
Class, by the average number of shares of such Class entitled to receive
dividends during the Period and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the maximum offering price per
share (in the case of Class A shares) or the net asset value per share (in the
case of Class B, Class C shares (formerly Class D shares), and Class Y shares)
at the end of the Period. Yield quotations are calculated according to the
following formula:
51
<PAGE>
<PAGE>
a-b
YIELD = 2[(---)'pp'6-1]
cd
<TABLE>
<S> <C> <C>
Where: a = interest earned during the Period attributable to a Class of shares
b = expenses accrued for the Period attributable to a Class of shares (net of reimbursements)
c = the average daily number of shares of the Class outstanding during the Period that were entitled
to receive dividends
d = the maximum offering price per share (in the case of Class A shares) or the net asset value per
share (in the case of Class B and Class C shares) on the last day of the Period.
</TABLE>
Except as noted below, in determining net investment income earned during
the Period (variable 'a' in the above formula), a Fund calculates interest
earned on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360 and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by a Fund, interest
earned during the Period is then determined by totalling the interest earned on
all debt obligations. For purposes of these calculations, the maturity of an
obligation with one or more call provisions is assumed to be the next date on
which the obligation reasonably can be expected to be called or, if none, the
maturity date. With respect to Class A shares, in calculating the maximum
offering price per share at the end of the Period (variable 'd' in the above
formula), a Fund's current maximum 4% initial sales charge on Class A shares is
included. The Funds had the following yields for the 30-day period ended
February 28, 1998:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
California Tax-Free Income Fund................................. 4.20% 3.62% 3.87% N/A
National Tax-Free Income Fund................................... 4.32 3.68 3.97 4.77%
Municipal High Income Fund...................................... 4.64 4.05 4.34 N/A
New York Tax-Free Income Fund................................... 4.33 3.75 4.01 N/A
</TABLE>
Tax-exempt yield is calculated according to the same formula except that
variable 'a' equals interest exempt from federal income tax earned during the
Period. This tax-exempt yield is then translated into tax-equivalent yield
according to the following formula:
E
TAX EQUIVALENT YIELD = (---)+ t
l-p
E = tax-exempt yield of a Class of shares
p = stated income tax rate
t = taxable yield of a Class of shares
The tax-equivalent yield of California Tax-Free Income Fund assumes a
45.22% combined effective California and federal tax rate. The tax-equivalent
yield of New York Tax-Free Income Fund assumes a 46.43% effective New York
State, New York City and federal tax rate. The tax-equivalent yield of each of
National Tax-Free Income Fund and Municipal High Income Fund assumes a 39.6%
effective federal tax rate.
The Funds had the following tax-equivalent yields for the 30-day period
ended February 28, 1998:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
California Tax-Free Income Fund................................... 7.67% 6.61% 7.06% N/A
National Tax-Free Income Fund..................................... 7.15 6.09 6.57 7.90%
Municipal High Income Fund........................................ 7.68 6.71 7.19 N/A
New York Tax-Free Income Fund..................................... 8.08 7.00 7.49 N/A
</TABLE>
OTHER INFORMATION. In Performance Advertisements, each Fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Analytical Services, Inc. ('Lipper'), CDA Investment Technologies,
Inc. ('CDA'), Wiesenberger Investment Companies Service
52
<PAGE>
<PAGE>
('Wiesenberger'), Investment Company Data Inc. ('ICD') or Morningstar Mutual
Funds ('Morningstar'), or with the performance of recognized stock, bond and
other indexes, including (but not limited to) the Municipal Bond Buyers Indices,
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, Merrill Lynch Municipal Bond Indices, the Morgan
Stanley Capital International World Index, the Lehman Brothers Treasury Bond
Index, Lehman Brothers Government/Corporate Bond Index, the Salomon Brothers
World Government Bond Index and changes in the Consumer Price Index as published
by the U.S. Department of Commerce. Each Fund also may refer in such materials
to mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of a Fund
and comparative mutual fund data and ratings reported in independent
periodicals, including THE WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS
WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO
TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in
performance advertisements may be in graphic form.
Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on an investment in a Fund are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
Each Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index and
the averages of yields of CDs of major banks published by Banxquote'r' Money
Markets. In comparing a Fund's performance to CD performance, investors should
keep in mind that bank CDs are insured in whole or in part by an agency of the
U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Fund shares are not
insured or guaranteed by the U.S. government and returns and net asset value
will fluctuate. The securities held by a Fund generally have longer maturities
than most CDs and may reflect interest rate fluctuations for longer term
securities. An investment in a Fund involves greater risks than an investment in
either a money market fund or a CD.
TAXES
FEDERAL TAXES. To continue to qualify for treatment as a regulated
investment company ('RIC') under the Code, each Fund must distribute to its
shareholders for each taxable year at least 90% of the sum of its net interest
income excludable from gross income under section 103(a) of the Code and its
investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain) and must meet several
additional requirements. For each Fund these requirements include the following:
(1) the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities, or other income (including gains
from options or futures) derived with respect to its business of investing in
securities ('Income Requirement'); (2) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (3) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its total assets may be invested in securities (other than
U.S. government securities or the securities of other RICs) of any one issuer.
If a Fund failed to qualify for treatment as a RIC for any taxable year, it
would be taxed as an ordinary corporation on its taxable income for that year
(even if that income was distributed to its shareholders) and all distributions
out of its earnings and profits (including distributions attributable to
tax-exempt interest income) would be taxable to its shareholders, as dividends
(that is, ordinary income).
53
<PAGE>
<PAGE>
Entities or persons who are 'substantial users' (or persons related to
'substantial users') of facilities financed by IDBs or PABs should consult their
tax advisers before purchasing Fund shares because, for users of certain of
these facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, 'substantial user' is defined to include a 'non-exempt
person' who regularly uses in a trade or business a part of a facility financed
from the proceeds of IDBs or PABs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as a Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from a Fund still would
be tax-exempt to the extent described in the Prospectus; they would only be
included in the calculation of whether a recipient's income exceeded the
established amounts.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares, and any loss not disallowed will be treated as
long-term, instead of short-term, capital loss to the extent of any capital gain
distributions received thereon. Investors also should be aware that if shares
are purchased shortly before the record date for a capital gain distribution,
the shareholder will pay full price for the shares and receive some portion of
the price back as a taxable distribution.
If a Fund invests in instruments that generate taxable interest income,
under the circumstances described in the Prospectus and in the discussion of
municipal market discount bonds below, the portion of any Fund dividend
attributable to the interest earned thereon will be taxable to the Fund's
shareholders as ordinary income to the extent of its earnings and profits, and
only the remaining portion will qualify as an 'exempt-interest dividend' (as
described in the Prospectus). The respective portions will be determined by the
'actual earned' method, under which the portion of any dividend that qualifies
as exempt-interest may vary, depending on the relative proportions of tax-exempt
and taxable interest earned during the dividend period. Moreover, if a Fund
realizes capital gain as a result of market transactions, any distributions of
the gain will be taxable to its shareholders. Each Fund is required to withhold
31% of all taxable dividends, capital gain distributions and redemption proceeds
payable to any individuals and certain other noncorporate shareholders who do
not provide the Fund with a correct taxpayer identification number. Each Fund
also is required to withhold 31% of all taxable dividends and capital gain
distributions payable to those shareholders who otherwise are subject to backup
withholding.
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Each Fund invests almost exclusively in debt
securities and Derivative Instruments and receives no dividend income;
accordingly, no (or only a negligible) portion of the dividends or other
distributions paid by any Fund will be eligible for the dividends-received
deduction allowed to corporations.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary (taxable) income for the calendar year and capital gain net income for
the one-year period ending on October 31 of that year, plus certain other
amounts.
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the amount, character and timing of recognition of the
gains and losses a Fund realizes in connection therewith. Gains from options and
futures derived by a Fund with respect to its business of investing in
securities will qualify as permissible income under the Income Requirement.
If a Fund has an 'appreciated financial position' -- generally, an interest
(including an interest through an option, futures contract or short sale) with
respect to any stock, debt instrument (other than 'straight debt') or
partnership interest the fair market value of which exceeds its adjusted
basis -- and enters into a 'constructive sale' of the same or substantially
similar property, the Fund will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures
54
<PAGE>
<PAGE>
contract entered into by a Fund or a related person with respect to the same or
substantially similar property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially similar property will be deemed a
constructive sale.
Each Fund may invest in municipal bonds that are purchased, generally not
on their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with
original issue discount, a price less than the amount of the issue price plus
accrued original issue discount) ('municipal market discount bonds'). If a
bond's market discount is less than the product of (1) 0.25% of the redemption
price at maturity times (2) the number of complete years to maturity after the
taxpayer acquired the bond, then no market discount is considered to exist. Gain
on the disposition of a municipal market discount bond purchased by a Fund after
April 30, 1993 (other than a bond with a fixed maturity date within one year
from its issuance) generally is treated as ordinary (taxable) income, rather
than capital gain, to the extent of the bond's accrued market discount at the
time of disposition. Market discount on such a bond generally is accrued
ratably, on a daily basis, over the period from the acquisition date to the date
of maturity. In lieu of treating the disposition gain as above, a Fund may elect
to include market discount in its gross income currently, for each taxable year
to which it is attributable.
CALIFORNIA TAXES. Individual shareholders of California Tax-Free Income
Fund who reside in California will not be subject to California personal income
tax on distributions received from the Fund to the extent such distributions are
attributable to interest on tax-exempt obligations issued by the State of
California or a California local government (or interest earned on obligations
of U.S. possessions or territories) ('exempt-interest dividends'), provided that
the Fund qualifies as a RIC under the Code and satisfies the requirement of
California law that at least 50% of its assets at the close of each quarter of
its taxable year be invested in obligations the interest on which is exempt from
personal income taxation under the laws or Constitution of California or the
laws of the United States. Distributions from the Fund which are attributable to
sources other than those described in the preceding sentence will generally be
taxable to such shareholders as ordinary income. However, distributions by
California Tax-Free Income Fund, if any, that are derived from interest on
obligations of the U.S. government may also be designated by the Fund and
treated by its shareholders as exempt from California personal income tax,
provided that the foregoing 50% requirement is satisfied. Moreover, under
California legislation incorporating certain provisions of the Code applicable
to RICs, amounts treated as capital gain distributions for federal income tax
purposes generally will be treated as long-term capital gains for California
personal income tax purposes. In addition, distributions to shareholders other
than exempt-interest dividends are includable in income subject to the
California alternative minimum tax.
Distributions of investment income and long-term and short-term capital
gains will not be excluded from taxable income in determining the California
corporate franchise tax for corporate shareholders. In addition, such
distributions may be includable in income subject to the California alternative
minimum tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of California Tax-Free Income Fund will not be deductible for California
personal income tax purposes.
Shares of California Tax-Free Income Fund will not be subject to the
California property tax.
NEW YORK TAXES. Individual shareholders of New York Tax-Free Income Fund
will not be required to include in their gross income for New York State and
City purposes any portion of distributions received from the Fund to the extent
such distributions are directly attributable to interest earned on tax-exempt
obligations issued by New York state or any political subdivisions thereof
(including the City) or interest earned on obligations of U.S. possessions or
territories to the extent interest on such obligations is exempt from state
taxation pursuant to federal law, provided that the Fund qualifies as a RIC
under the Code and satisfies certain requirements, among others, that at least
50% of its assets at the close of each quarter of its taxable year constitute
obligations which are tax-exempt for federal income tax purposes. Distributions
from the Fund which are attributable to sources other than those described in
the preceding sentence (including interest on obligations of other states and
their political subdivisions) will generally be taxable to such individual
shareholders as ordinary income. Distributions to individual shareholders by the
Fund which represents long-term capital gains for federal income tax
55
<PAGE>
<PAGE>
purposes will be treated as long-term capital gains for New York State and City
personal income tax purposes. (Certain undistributed capital gains of the Fund
that are treated as (taxable) long-term capital gains in the hands of
shareholders will be treated as long-term capital gains for New York State and
City personal income taxes.)
Shareholders of New York Tax-Free Income Fund that are subject to the New
York State corporation franchise tax or the City general corporation tax will be
required to include exempt-interest dividends paid by the Fund in their 'entire
net income' for purposes of such taxes and will be required to include their
shares of the Fund in their investment capital for purposes of such taxes.
Shareholders of New York Tax-Free Income Fund will be subject to the
unincorporated business taxation imposed by the City solely by reason of their
ownership of shares in the Fund. If a shareholder is subject to the
unincorporated business tax, income and gains distributed by the Fund will be
subject to such tax except in general to the extent such distributions are
directly attributable to interest earned on tax-exempt obligations issued by New
York State or any political subdivision thereof (including the City).
Shares of New York Tax-Free Income Fund will not be subject to property
taxes imposed by New York State or the City.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the New York Tax-Free Income Fund (and certain other expenses relating
thereto) generally will not be deductible for New York State and City personal
income tax purposes.
Interest income of New York Tax-Free Income Fund which is distributed to
shareholders will generally not be taxable to the Fund for purposes of the New
York State corporation franchise tax or the New York City general corporation
tax.
The Fund is subject to the corporation franchise (income) tax measured by
the entire net income base, the minimum taxable income base or the fixed dollar
minimum, whichever is greater. 'Entire net income' of the Fund is federal
'investment company taxable income' with certain modifications. In addition, the
Fund is permitted to deduct dividends paid to its shareholders in determining
its federal taxable income.
The foregoing is a general summary of certain provisions of federal,
California and New York State and City tax laws currently in effect as they
directly govern the taxation of shareholders of the Funds. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to Fund transactions. Shareholders are advised
to consult with their own tax advisers for more detailed information concerning
tax matters.
TAX-FREE INCOME VS. TAXABLE INCOME-NATIONAL TAX-FREE INCOME FUND AND
MUNICIPAL HIGH INCOME FUND. Table I below illustrates approximate equivalent
taxable and tax-free yields at the 1997 federal individual income tax rates. For
example, a couple with taxable income of $90,000 in 1997, or a single individual
with taxable income of $55,000 in 1997, whose investments earned a 6% tax-free
yield, would have had to earn approximately an 8.33% taxable yield to receive
the same benefit.
TABLE I. 1997 FEDERAL TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
- ------------------------------------- ---------------------------------------------
4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ---------------- ---------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.7 $ 0 - 41.2 15.00% 4.71% 5.88% 7.06% 8.24% 9.41%
24.7 - 59.8 41.2 - 99.6 28.00 5.56 6.94 8.33 9.72 11.11
59.8 - 124.7 99.6 - 151.8 31.00 5.80 7.25 8.70 10.14 11.59
124.7 - 271.1 151.8 - 271.1 36.00 6.25 7.81 9.38 10.94 12.50
Over $271.1 Over $271.1 39.60 6.62 8.28 9.93 11.59 13.25
</TABLE>
- ------------
* See note following Table III.
56
<PAGE>
<PAGE>
TAX-FREE INCOME VS. TAXABLE INCOME-CALIFORNIA TAX-FREE INCOME FUND. Table
II below illustrates approximate equivalent taxable and tax-free yields at the
1997 federal individual and 1997 California personal income tax rates. For
example, a California couple with taxable income of $90,000 in 1997, or a single
California individual with taxable income of $55,000 in 1997, whose investments
earned a 6% tax-free yield, would have had to earn approximately a 9.19% taxable
yield to receive the same benefit.
TABLE II. 1997 FEDERAL AND CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
EFFECTIVE A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) CALIFORNIA ---------------------------------------------
- ------------------------------------- AND 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ---------------- ---------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 18.4 - 24.7 $ 36.7 - 41.2 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
24.7 - 25.5 41.2 - 51.0 32.32 5.91 7.39 8.87 10.34 11.82
25.5 - 32.2 51.0 - 64.4 33.76 6.04 7.55 9.06 10.57 12.08
32.2 - 59.8 64.4 - 99.6 34.70 6.13 7.66 9.19 10.72 12.25
59.8 - 124.7 99.6 - 151.8 37.42 6.39 7.99 9.59 11.19 12.78
124.7 - 271.1 151.8 - 271.1 41.95 6.89 8.61 10.34 12.06 13.78
Over $271.1 Over $271.1 45.22 7.30 9.13 10.95 12.78 14.60
</TABLE>
- ------------
* See note following Table III.
TAX-FREE INCOME VS. TAXABLE INCOME-NEW YORK TAX-FREE INCOME FUND. Table
III below illustrates approximate equivalent taxable and tax-free yields at the
1997 federal individual, and New York State and New York City personal, income
tax rates. For example, a New York City couple with taxable income of $90,000 in
1997, whose investments earned a 4% tax-free yield, would have had to earn
approximately a 6.26% taxable yield to receive the same benefit. A couple who
lives in New York State outside of New York City with taxable income of $90,000
in 1997 would have had to earn approximately a 5.96% taxable yield to realize a
4% tax-free yield.
Single taxpayers may also take advantage of high tax-free income. For
example, a single individual with taxable income of $55,000 in 1997, who lives
in New York City and whose investments earn a 4% tax-free yield, would have had
to earn approximately a 6.26% taxable yield to receive the same benefit. A
single individual with taxable income of $55,000 in 1997, who lives in New York
State outside of New York City, would have had to earn approximately a 5.96%
taxable yield to realize a 4% tax-free yield.
57
<PAGE>
<PAGE>
TABLE III. 1997 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
COMBINED A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) FEDERAL/ ---------------------------------------------
- ------------------------------------------ NYS/NYC 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- --------------------- ---------------- ------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.7 $ 0 - 41.2 24.55% 5.30% 6.63% 7.95% 9.28% 10.60%
24.7 - 50.0 41.2 - 90.0 36.10 6.26 7.82 9.39 10.95 12.52
50.0 - 59.8 90.0 - 99.6 36.14 6.26 7.83 9.40 10.96 12.53
59.8 - 124.7 99.6 - 151.8 38.80 6.54 8.17 9.80 11.44 13.07
124.7 - 271.1 151.8 - 271.1 43.24 7.05 8.81 10.57 12.33 14.09
Over $271.1 Over $271.1 46.43 7.47 9.33 11.20 13.07 14.93
</TABLE>
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF
TAXABLE INCOME (000'S) ---------------------------------------------
- ------------------------------------- COMBINED 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT FEDERAL/NYS ----- ----- ----- ----- -----
RETURN RETURN TAX BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ---------------- ---------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.7 $ 0 - 41.2 20.82% 5.05% 6.31% 7.58% 8.84% 10.10%
24.7 - 59.8 41.2 - 99.6 32.93 5.96 7.46 8.95 10.44 11.93
59.8 - 124.7 99.6 - 151.8 35.73 6.22 7.78 9.34 10.89 12.45
124.7 - 271.1 151.8 - 271.1 40.38 6.71 8.39 10.06 11.74 13.42
Over $271.1 Over $271.1 43.74 7.11 8.89 10.66 12.44 14.22
</TABLE>
- ------------
* Certain simplifying assumptions have been made. The amount of 'Taxable
Income' is the net amount subject to federal income tax after deductions and
exemptions, assuming that all income is ordinary income. Any particular
taxpayer's effective tax rate may differ. The effective rates reflect the
highest tax bracket within each range of income listed. However, a California
or New York taxpayer within the lowest income ranges shown may fall within a
lower effective tax bracket. The figures set forth above do not reflect the
AMT, limitations on federal or state itemized deductions, the phase out of
personal exemptions, the taxability of social security or railroad retirement
benefits or any state or local taxes payable on Fund distributions (other
than California, New York State and New York City personal income taxes in
the case of Tables II and III).
The yields listed are for illustration only and are not necessarily
representative of a Fund's yield. Each Fund invests primarily in obligations the
interest on which is exempt from federal income tax and, in the case of
California Tax-Free Income Fund, from California personal income tax and, in the
case of New York Tax-Free Income Fund, from New York State and New York City
personal income taxes; however, some of a Fund's investments may generate
taxable income. Effective tax rates shown are those in effect on the date of
this SAI; such rates might change after that date.
OTHER INFORMATION
Prior to November 10, 1995, the Funds' Class C shares were known as 'Class
D' shares.
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust or a
Fund. However, each Trust's Declaration of Trust disclaims shareholder liability
for the obligations of the Trust or a Fund and requires that notice of such
disclaimer be given in each note, bond, contract, instrument, certificate or
undertaking made or issued by the Trust's trustees or by any officers or officer
by or on behalf of a Fund, the trustees or any of them in connection with the
Fund. Each Declaration of Trust provides for indemnification from a Fund's
property for all losses and expenses of any Fund shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations,
a possibility that Mitchell Hutchins believes is remote and not material. Upon
payment of any liability incurred by a shareholder solely by reason of being or
having been a shareholder, the shareholder paying such liability will be
entitled to reimbursement from the general assets of a Fund. The trustees intend
to
58
<PAGE>
<PAGE>
conduct the operations of each Fund in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of the
Fund's shares to which those expenses are attributable. For example, Class B and
Class C shares bear higher transfer agency fees per shareholder account than
those borne by Class A or Class Y shares. The higher fee is imposed due to the
higher costs incurred by the transfer agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the applicable
charge. Although the transfer agency fee will differ on a per account basis as
stated above, the specific extent to which the transfer agency fees will differ
between the classes as a percentage of net assets is not certain, because the
fee as a percentage of net assets will be affected by the number of shareholder
accounts in each class and the relative amounts of net assets in each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C., 20036-1800 serves as counsel to the Funds.
Kirkpatrick & Lockhart LLP also acts as counsel to Mitchell Hutchins and
PaineWebber in connection with other matters. The law firm of Orrick, Herrington
& Sutcliffe, 400 Sansome Street, San Francisco, CA 94111, serves as counsel to
California Tax-Free Income Fund with respect to California law. The law firm of
Orrick, Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10103,
serves as counsel to New York Tax-Free Income Fund with respect to New York law.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Funds.
FINANCIAL STATEMENTS
The Funds' Annual Report to Shareholders for the fiscal year ended February
28, 1998 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
59
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<PAGE>
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<PAGE>
<PAGE>
[This page intentionally left blank]
<PAGE>
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY A FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY ANY
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions......... 1
Hedging and Other Strategies Using Derivative
Instruments................................ 27
Trustees and Officers; Principal Holders of
Securities................................. 32
Investment Advisory and Distribution
Arrangements............................... 39
Portfolio Transactions....................... 44
Reduced Sales Charges, Additional Exchange
and Redemption Information and Other
Services................................... 46
Conversion of Class B Shares................. 49
Valuation of Shares.......................... 49
Performance Information...................... 50
Taxes........................................ 53
Other Information............................ 58
Financial Statements......................... 59
</TABLE>
'c'1998 PaineWebber Incorporated
PaineWebber California
Tax-Free Income Fund
PaineWebber National
Tax-Free Income Fund
PaineWebber Municipal
High Income Fund
PaineWebber New York
Tax-Free Income Fund
---------------------------------------------------
Statement of Additional Information
July 1, 1998
---------------------------------------------------
PAINEWEBBER
<PAGE>
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(1) Amended and Restated Declaration of Trust (filed herewith)
(2) Restated By-Laws (filed herewith)
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest (1)
(4) (a) Investment Advisory and Administration Contract (filed herewith)
(b) Investment Advisory and Administration Fee Agreement (filed
herewith)
(5) (a) Distribution Contract (Class A Shares) (filed herewith)
(b) Distribution Contract (Class B Shares) (filed herewith)
(c) Distribution Contract (Class C Shares) (2)
(d) Distribution Contract (Class Y Shares) (2)
(e) Exclusive Dealer Agreement (Class A Shares) (filed herewith)
(f) Exclusive Dealer Agreement (Class B Shares) (filed herewith)
(g) Exclusive Dealer Agreement (Class C Shares) (2)
(h) Exclusive Dealer Agreement (Class Y Shares) (2)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement (filed herewith)
(8) Transfer Agency Agreement (filed herewith)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings, and consents:
(a) Independent Auditor's Consent (filed herewith)
(b) Consent of Special Counsel with respect to California law
(filed herewith)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent (filed herewith)
(13) (a) Plan of Distribution pursuant to Rule 12b-1 (Class A Shares)
(filed herewith)
(b) Plan of Distribution pursuant to Rule 12b-1 (Class B Shares)
(filed herewith)
(c) Plan of Distribution pursuant to rule 12b-1 (Class C, formerly
Class D, Shares) (filed herewith)
(14) and
(27) Financial Data Schedule (filed herewith)
(15) Plan pursuant to Rule 18f-3 (3)
- --------------
1/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Amended and Restated Declaration of Trust and from Articles
II, VII, X of the Registrant's Restated By-Laws.
C-1
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<PAGE>
2/ Incorporated by reference from Post-Effective Amendment No. 21 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1996.
3/ Incorporated by reference from Post-Effective Amendment No. 22 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed September 23, 1996.
Item 24. Persons Controlled by or under Common Control with Registrant
None.
Item 25. Indemnification
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the Registrant will indemnify its trustees and officers to the
fullest extent permitted by law against claims and expenses asserted against or
incurred by them by virtue of being or having been a trustee or officer;
provided that no such person shall be indemnified where there has been an
adjudication or other determination, as described in Article X, that such person
is liable to the Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Trust; and that, provided they have exercised reasonable
care and have acted under the reasonable belief that their actions are in the
best interest of the Registrant, the trustees and officers shall not be liable
for neglect or wrongdoing by them or any officer, agent, employee or investment
adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgment or mistakes of fact or law,
for any act or omission in accordance with advice of counsel or other experts,
or failing to follow such advice, with respect to the meaning and operation of
the Declaration of Trust.
Article IX of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the Registrant would have the power to indemnify him or
her against such liability, provided that the Registrant may not acquire
insurance protecting any trustee or officer against any liability to the
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
Section 9 of the Investment Advisory and Administration Contract (the
"Contract") provides that Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Registrant in connection with the matters to which
the Contract relates, except for a loss resulting from the willful misfeasance,
bad faith, or gross negligence of Mitchell Hutchins in the performance of its
duties or from its reckless disregard of its obligations and duties under the
Contract. Section 10 of the Contract provides that the trustees shall not be
liable for any obligations of the Registrant under the Contract and that
Mitchell Hutchins shall look only to the assets and property of the Registrant
in settlement of such right or claim and not to the assets and property of the
trustees.
Section 9 of each Distribution Contract provides that the Registrant will
indemnify Mitchell Hutchins, its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a
C-2
<PAGE>
<PAGE>
material fact required to be stated in it or necessary to make the statements in
it, in light of the circumstances under which they were made, not misleading,
except insofar as liability arises from untrue statements or omissions made in
reliance upon and in conformity with information furnished by Mitchell Hutchins
to the Registrant for use in the Registration Statement; and provided that this
indemnity agreement shall not protect any such persons against liabilities
arising by reason of their bad faith, gross negligence or willful misfeasance
and shall not inure to the benefit of any such persons unless a court of
competent jurisdiction or controlling precedent determines that such result is
not against public policy as expressed in the Securities Act of 1933. Section 9
also provides that Mitchell Hutchins agrees to indemnify, defend and hold the
Registrant, its officers and trustees free and harmless of any claims arising
out of any alleged untrue statement or any alleged omission of material fact
contained in information furnished by Mitchell Hutchins for use in the
Registration Statement or arising out of an agreement between Mitchell Hutchins
and any retail dealer, or arising out of supplementary literature or advertising
used by Mitchell Hutchins in connection with the Distribution Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions similar
to Section 9 of the Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Section 10 of the Distribution Contract contains provisions similar to
that of Section 10 of the Investment Advisory and Administration Contract, with
respect to Mitchell Hutchins and PaineWebber, as appropriate.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number
801-13219), and is incorporated herein by reference.
Item 27. Principal Underwriters
(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
PAINEWEBBER AMERICA FUND
C-3
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<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant. The
directors and officers of Mitchell Hutchins, their principal business addresses,
and their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission (Registration
Number 801-13219). The directors and officers of PaineWebber, their principal
business addresses, and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby incorporated
herein by reference. The information set forth below is furnished for those
directors and officers of Mitchell Hutchins or PaineWebber who also serve as
trustees or officers of the Registrant. Unless otherwise indicated, the
principal business address of each person named is 1285 Avenue of the Americas,
New York, New York 10019.
Name Position With Positions and Office With
Registrant Underwriter or Exclusive Dealer
Margo N. Alexander President and Trustee Director, President, and Chief
Executive Officer of Mitchell
Hutchins; Executive Vice
President of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior
Investment Strategist and
Member of the Investment
Policy Committee of PaineWebber
Cynthia Bow Vice President First Vice President and a
Portfolio Manager of Mitchell
Hutchins
Elbridge T Gerry III Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
John J. Lee Vice President and Vice President of Mitchell
Assistant Treasurer Hutchins and a Manager of the
Mutual Fund Finance Division
of Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief
Investment Officer - Fixed
Income of Mitchell Hutchins
Ann E. Moran Vice President and Vice President of Mitchell
Assistant Treasurer Hutchins and a Manager of the
Mutual Fund Finance Division
of Mitchell Hutchins
Richard S. Murphy Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
C-4
<PAGE>
<PAGE>
Dianne E. O'Donnell Vice President and Senior Vice President and
Secretary Deputy General Counsel of
Mitchell Hutchins
Emil Polito Vice President Senior Vice President and
Director of Operations and
Control for Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General
Counsel of Mitchell Hutchins
Paul H. Schubert Vice President and First Vice President and
Treasurer Director of the Mutual Fund
Finance Division of Mitchell
Hutchins
Barney A. Taglialatela Vice President and Vice President and a Manager
Assistant Treasurer of the Mutual Fund Finance
Division of Mitchell Hutchins
Keith A. Weller Vice President and First Vice President and
Assistant Secretary Associate General Counsel of
Mitchell Hutchins
Ian W. Williams Vice President and Vice President and a Manager
Assistant Treasurer of the Mutual Fund Finance
Division of Mitchell Hutchins
c) None
Item 28. Location of Accounts and Records
The books and other documents required by paragraphs (b)(4), (c) and (d)
of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins Asset Management Inc., 1285 Avenue of
the Americas, New York, New York 10019. All other accounts, books and documents
required by Rule 31a-1 are maintained in the physical possession of Registrant's
transfer agent and custodian.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
None.
C-5
<PAGE>
<PAGE>
PAINEWEBBER MUTUAL FUND TRUST
EXHIBIT INDEX
Exhibit
Number
- -------
(1) Amended and Restated Declaration of Trust (filed herewith)
(2) Restated By-Laws (filed herewith)
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest (1)
(4) (a) Investment Advisory and Administration Contract (filed herewith)
(b) Investment Advisory and Administration Fee Agreement (filed
herewith)
(5) (a) Distribution Contract (Class A Shares) (filed herewith)
(b) Distribution Contract (Class B Shares) (filed herewith)
(c) Distribution Contract (Class C Shares) (2)
(d) Distribution Contract (Class Y Shares) (2)
(e) Exclusive Dealer Agreement (Class A Shares) (filed herewith)
(f) Exclusive Dealer Agreement (Class B Shares) (filed herewith)
(g) Exclusive Dealer Agreement (Class C Shares) (2)
(h) Exclusive Dealer Agreement (Class Y Shares) (2)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement (filed herewith)
(8) Transfer Agency Agreement (filed herewith)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings, and consents:
(a) Independent Auditor's Consent (filed herewith)
(b) Consent of Special Counsel with respect to California law
(filed herewith)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent (filed herewith)
(13) (a) Plan of Distribution pursuant to Rule 12b-1 (Class A Shares)
(filed herewith)
(b) Plan of Distribution pursuant to Rule 12b-1 (Class B Shares)
(filed herewith)
(c) Plan of Distribution pursuant to rule 12b-1 (Class C, formerly
Class D, Shares) (filed herewith)
(14) and
(27) Financial Data Schedule (filed herewith)
<PAGE>
<PAGE>
1/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Amended and Restated Declaration of Trust and from Articles
II, VII, X of the Registrant's Restated By-Laws.
2/ Incorporated by reference from Post-Effective Amendment No. 21 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1996.
3/ Incorporated by reference from Post-Effective Amendment No. 22 to
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed September 23, 1996.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 26th day of June, 1998.
PAINEWEBBER MUTUAL FUND TRUST
By: /s/ Dianne E. O'Donnell
-----------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Margo N. Alexander President and Trustee June 26, 1998
- --------------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman June 26, 1998
- --------------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee June 26, 1998
- ---------------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee June 26, 1998
- ---------------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee June 26, 1998
- ---------------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee June 26, 1998
- ---------------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee June 26, 1998
- ---------------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee June 26, 1998
- ---------------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee June 26, 1998
- ---------------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and June 26, 1998
- --------------------------------- Treasurer (Chief Financial
Paul H. Schubert and Accounting Officer)
<PAGE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File 2-89016, filed June 27, 1996.
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................ 'tm'
The copyright symbol shall be expressed as............................ 'c'
The registered trademark symbol shall be expressed as................. 'r'
The service mark symbol shall be expressed as......................... 'sm'
The dagger symbol shall be expressed as............................... 'D'
Characters normally expressed as superscript shall be preceded by..... 'pp'
<PAGE>
<PAGE>
Exhibit No. 1
PAINEWEBBER MUTUAL FUND TRUST
AMENDED AND RESTATED DECLARATION OF TRUST
DECLARATION OF TRUST, made at Boston, Massachusetts, this 21st day of November
1986 and amended and restated this 19th day of November, 1997 by the Trustees:
WHEREAS, the Trustees desire to establish a trust fund for the investment
and reinvestment of funds contributed thereto;
NOW, THEREFORE, the Trustees declare that all money and property
contributed to the trust fund hereunder shall be held and managed in trust under
this Declaration of Trust as herein set forth below.
ARTICLE I
NAME AND DEFINITIONS
NAME
Section 1. This Trust shall be known as "PaineWebber Mutual Fund Trust."
The resident agent for the Trust in Massachusetts shall be CT Corporation
System, whose address is 2 Oliver Street, Boston, Massachusetts, or such other
person as the Trustees may from time to time designate.
DEFINITIONS
Section 2. Wherever used herein, unless otherwise required by the context
or specifically provided:
(a) The Terms "Affiliated Person", "Assignment", "Commission", "Interested
Person", "Majority Shareholder Vote" (the 67% or 50% requirement of the third
sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) and
"Principal Underwriter" shall have the meanings given them in the 1940 Act, as
amended from time to time;
(b) The "Trust" refers to PaineWebber Mutual Fund Trust and reference to
the Trust, when applicable to one or more Series of the Trust, shall refer to
any such Series;
(c) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article IX, Section 3;
(d) "Shareholder" means a record owner of Shares of the Trust;
(e) The "Trustees" means the person who has signed this Declaration of
Trust so long as he shall continue in office in accordance with the terms
hereof, and all other persons who may from time to time be duly elected or
appointed, qualified and serving as Trustees in accordance with the provisions
of Article IV hereof, and reference herein to a Trustee or the Trustees shall
refer to such person or persons in his capacity or their capacities as trustees
hereunder.
<PAGE>
<PAGE>
(f) "Shares" means the equal proportionate transferable units of interest
into which the beneficial interest of each Series or Class thereof shall be
divided from time to time and includes fractions of shares as well as whole
shares (all of the transferable units of a Series or of a single Class may be
referred to as "Shares" as the context may require);
(g) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time;
(h) "Series" refers to series of Shares of the Trust established in
accordance with the provisions of Article III;
(i) "Class" refers to the class of Shares of a Series of the Trust
established in accordance with the Provisions of Article III.
ARTICLE II
PURPOSE OF TRUST
The purpose of this Trust is to provide investors a continuous source of
managed investment in securities.
ARTICLE III
BENEFICIAL INTEREST
SHARES OF BENEFICIAL INTEREST
Section 1. The beneficial interest in the Trust shall be divided into such
transferable Shares of one or more separate and distinct Series or Classes
thereof as the Trustees shall from time to time create and establish. The number
of Shares is unlimited and each Share shall have a par value of $0.001 per Share
and upon issuance in accordance with the terms hereof shall be fully paid and
nonassessable. The Trustees shall have full power and authority, in their sole
discretion and without obtaining any prior authorization or vote of the
Shareholders of the Trust, to create and establish (and to change in any manner)
Shares with such preferences, terms of conversion, voting powers, rights and
privileges as the Trustees may from time to time determine, to divide or combine
the Shares into a greater or lesser number, to classify or reclassify any
unissued Shares into one or more Series or Classes of Shares, to abolish any one
or more Series or Classes of Shares, and to take such other action with respect
to the Shares as the Trustees may deem desirable. The Trustees, in their
discretion without a vote of the Shareholders, may divide the Shares of any
Series into Classes. In such event, each Class of a Series shall represent
interests in the assets of that Series and have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
expenses allocated to a Class of a Series may be borne solely by such Class as
shall be determined by the Trustees and a Class of a Series may have exclusive
voting rights with respect to matters affecting only that Class. Without
limiting the authority of the Trustees set forth in this Section 1 to establish
and designate any further Series or Classes, the Trustees have established and
designated the Series of Shares and Classes listed in Schedule A attached hereto
and made a part hereof.
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ESTABLISHMENT OF SERIES OR CLASS
Section 2. The establishment of any Series or Class in addition to those
set forth in Section 1 shall be effective upon the adoption of a resolution by a
majority of the then Trustees setting forth such establishment and designation
and the relative rights and preferences of the Shares of such Series or Class
thereof. At any time that there are no Shares outstanding of any particular
Series previously established and designated, the Trustees may by a majority
vote abolish that Series and the establishment and designation thereof. At any
time that there are no shares outstanding of any particular Class of a Series,
the Trustees may by a majority vote abolish that Class and the establishment and
designation thereof. The Trustees by a majority vote may change the name of any
Series or Class.
OWNERSHIP OF SHARES
Section 3. The ownership of Shares shall be recorded in the books of the
Trust. The Trustees may make such rules as they consider appropriate for the
transfer of Shares and similar matters. The record books of the Trust shall be
conclusive as to who are the holders of Shares and as to the number of Shares
held from time to time by each Shareholder.
INVESTMENT IN THE TRUST
Section 4. The Trustees shall accept investments in the Trust from such
persons and on such terms as they may from time to time authorize. Such
investments may be in the form of cash or securities in which the appropriate
Series is authorized to invest, valued as provided in Article IX, Section 3.
After the date of the initial contribution of capital, the number of Shares to
represent the initial contribution may in the Trustees' discretion be considered
as outstanding and the amount received by the Trustees on account of the
contribution shall be treated as an asset of the Trust or a Series thereof, as
appropriate. Subsequent investments in the Trust shall be credited to each
Shareholder's account in the form of full Shares at the Net Asset Value per
Share next determined after the investment is received; provided, however, that
the Trustees may, in their sole discretion, (a) impose a sales charge upon
investments in the Trust or Series and (b) issue fractional Shares. The Trustees
shall have the right to refuse to accept investments in the Trust or any Series
at any time without any cause or reason therefor whatsoever.
ASSETS AND LIABILITIES OF SERIES
Section 5. All consideration received by the Trust for the issue or sale
of Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be
referred to as "assets belonging to" that Series. In addition, any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Series shall be
allocated by the Trustees between and among one or more of the Series in such
manner as they, in their sole discretion, deem fair and equitable. Each such
allocation shall be conclusive and binding upon the
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Shareholders of all Series for all purposes, and shall be referred to as assets
belonging to that Series. The assets belonging to a particular Series shall be
so recorded upon the books of the Trust, and shall be held by the Trustees in
Trust for the benefit of the holders of Shares of that Series. The assets
belonging to each particular Series shall be charged with the liabilities of
that Series and all expenses, costs, charges and reserves attributable to that
Series except that liabilities and expenses allocated solely to a particular
Class shall be borne by that Class. Any general liabilities, expenses, costs,
charges or reserves of the Trust or Series which are not readily identifiable as
belonging to any particular Series or Class shall be allocated and charged by
the Trustees between or among any one or more of the Series or Classes in such
manner as the Trustees in their sole discretion deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series or Classes for all purposes. Any creditor of any Series may look only to
the assets of that Series to satisfy such creditor's debt. See Article X,
Section 1.
NO PREEMPTIVE RIGHTS
Section 6. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust or
the Trustees.
STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY
Section 7. Shares shall be deemed to be personal property giving only the
rights provided in this Declaration of Trust. Every Shareholder by virtue of
having become a Shareholder shall be held expressly to have assented and agreed
to the terms of this Declaration of Trust and to have become a party hereto. The
death of a Shareholder during the continuance of the Trust shall not operate to
terminate the Trust nor entitle the representative of any deceased Shareholder
to an accounting or to take any action in court or elsewhere against the Trust
or the Trustees, but only to the rights of said decedent under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or to the
whole or any part of the Trust property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders partners. Neither the Trust nor the Trustees shall
have any power to bind any Shareholder personally or to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay by way of
subscription for any Shares or otherwise.
ARTICLE IV
THE TRUSTEES
MANAGEMENT OF THE TRUST
Section 1. The business and affairs of the Trust shall be managed by the
Trustees, and they shall have all powers necessary and desirable to carry out
that responsibility. A Trustee shall not be required to be a Shareholder of the
Trust.
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ELECTION OF TRUSTEES AND APPOINTMENT OF INITIAL TRUSTEE
Section 2. On a date fixed by the Trustees, the Shareholders shall elect
the Trustees. Until such election, the Trustees shall be the initial Trustee and
such other persons as may be hereafter appointed pursuant to Section 4 of this
Article IV. The initial Trustee shall be Dianne E. O'Donnell.
TERM OF OFFICE OF TRUSTEES
Section 3. The Trustees shall hold office during the lifetime of this
Trust, and until its termination as hereinafter provided; except (a) that any
Trustee may resign his trust by written instrument signed by him and delivered
to the other Trustees or to any officer of the Trust, which shall take effect
upon such delivery or upon such later date as is specified therein; (b) that any
Trustee may be removed with or without cause at any time by written instrument,
signed by at least two-thirds of the number of Trustees prior to such removal,
specifying the date when such removal shall become effective; (c) that any
Trustee who requests in writing to be retired or who has become incapacitated by
illness or injury may be retired by written instrument signed by a majority of
other Trustees, specifying the date of his retirement; and (d) that any Trustee
may be removed at any Special Meeting of the Trust by a vote of at least
two-thirds of the outstanding Shares.
RESIGNATION AND APPOINTMENT OF TRUSTEES
Section 4. In case of the declination, death, resignation, retirement,
removal, incapacity, or inability of any of the Trustees, or in case a vacancy
shall exist by reason of an increase in number or for any other reason, the
remaining Trustees shall fill such vacancy by appointment of such other person
as they in their discretion shall see fit consistent with the limitations under
the 1940 Act. Such appointment shall be evidenced by a written instrument signed
by a majority of the Trustees in office or by a recording in the records of the
Trust, whereupon the appointment shall take effect. An appointment of a Trustee
may be made by the Trustees then in office as aforesaid in anticipation of a
vacancy to occur by reason of retirement, resignation or increase in number of
Trustees effective at a later date, provided that said appointment shall become
effective only at or after the effective date of said retirement, resignation or
increase in number of Trustees. As soon as any Trustee so appointed shall have
accepted this trust, the trust estate shall vest in the new Trustee or Trustees,
together with the continuing Trustees, without any further act or conveyance,
and he shall be deemed a Trustee hereunder. The power of appointment is subject
to the provisions of Section 16(a) of the 1940 Act.
TEMPORARY ABSENCE OF TRUSTEE
Section 5. Any Trustee may, by power of attorney, delegate his power for a
period not exceeding six months at any one time to any other Trustee or
Trustees, provided that in no case shall less than two Trustees personally
exercise the other powers hereunder except as herein otherwise expressly
provided.
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NUMBER OF TRUSTEES
Section 6. The number of Trustees shall initially be one (1) and
thereafter shall be such number as shall be fixed from time to time by a written
instrument signed by a majority of the Trustees (or by an officer of the Trust
pursuant to a vote of the majority of such Trustees); provided, however, that
the number of Trustees serving hereunder at any time shall in no event be less
than one (1) nor more than fifteen (15).
Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled, or while any Trustee is absent from his state of domicile
(unless said Trustee has made arrangements to be informed about, and to
participate in, the affairs of the Trust during such absence), or is physically
or mentally incapacitated by reason of disease or otherwise, the other Trustees
shall have all the powers hereunder and the certificate of the other Trustees of
such vacancy, absence or incapacity, shall be conclusive.
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
Section 7. The death, declination, resignation, retirement, removal,
incapacity, or inability of the Trustee, or any one of them, shall not operate
to annul the Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust.
OWNERSHIP OF ASSETS OF THE TRUST
Section 8. The assets of the Trust shall be held separate and apart from
any assets now or hereafter held in any capacity other than as Trustee hereunder
by the Trustees or any successor Trustees. All of the assets of the Trust shall
at all times be considered as vested in the Trustees.
ARTICLE V
POWERS OF THE TRUSTEES
POWERS
Section 1. The Trustees in all instances shall act as principals, and are
and shall be free from the control of the Shareholders. The Trustees shall have
full power and authority to do any and all acts and to make and execute any and
all contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to trust
investments, but shall have full authority and power to make any and all
investments which they, in their uncontrolled discretion, shall deem proper to
accomplish the purposes of this Trust. Subject to any applicable limitation in
this Declaration of Trust or the By-Laws of the Trust, the Trustees shall have
power and authority, without limitation:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
present or future law or custom in regard to investments by trustees, and to
sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease
any or all of the assets of the Trust; to purchase and sell (or write) options
on securities, currencies, indices, futures contracts and other financial
instruments and enter into
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closing transactions in connection therewith; to enter into all types of
commodities contracts, including without limitation the purchase and sale of
futures contracts and forward contracts on securities, indices, currencies, and
other financial instruments; to engage in forward commitment, "when issued" and
delayed delivery transactions; to enter into repurchase agreements and reverse
repurchase agreements; and to employ all kinds of hedging techniques and
investment management strategies.
(b) To adopt By-Laws not inconsistent with this Declaration of Trust
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve the right to the Shareholders.
(c) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate.
(d) To employ as custodian of any assets of the Trust subject to any
conditions set forth in this Declaration of Trust or in the By-Laws, if any, a
bank, trust company, or other entity permitted by the Commission to serve as
such.
(e) To retain a transfer agent and Shareholder servicing agent, or both.
(f) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by the
Trust itself, or both.
(g) To set record dates in the manner hereinafter provided for.
(h) To delegate such authority as they consider desirable to any officers
of the Trust and to any agent, independent contractor, custodian or underwriter.
(i) To sell or exchange any or all of the assets of the Trust, subject to
the provisions of Article XI, Section 4(b) hereof.
(j) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper.
(k) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities.
(l) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form; or either in its own
name or in the name of a custodian or a nominee or nominees, subject in either
case to proper safeguards according to the usual practice of Massachusetts trust
companies or investment companies.
(m) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article III and to establish separate Classes
thereof.
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(n) To allocate assets, liabilities and expenses of the Trust to a
particular Series and liabilities and expenses to a particular Class thereof or
to apportion the same between or among two or more Series or Classes, provided
that any liabilities or expenses incurred by a particular Series or Class shall
be payable solely out of the assets belonging to that Series or Class as
provided for in Article III.
(o) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust.
(p) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes.
(q) To make distributions of income and of capital gains to Shareholders
in the manner hereinafter provided for.
(r) To borrow money.
(s) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder.
No one dealing with the Trustees shall be under any obligation to make any
inquiry concerning the authority of the Trustees, or to see to the application
of any payments made or property transferred to the Trustees or upon their
order.
TRUSTEES AND OFFICERS AS SHAREHOLDERS
Section 2. Any Trustee, officer, other agent or independent contractor of
the Trust may acquire, own and dispose of Shares to the same extent as if he
were not a Trustee, officer, agent or independent contractor; and the Trustees
may issue and sell or cause to be issued and sold Shares to and buy such Shares
from any such person or any firm or company in which he is interested, subject
only to the general limitations herein contained as to the sale and purchase of
such Shares; and all subject to any restrictions which may be contained in the
By-Laws.
ACTION BY THE TRUSTEES
Section 3. The Trustees shall act by majority vote at a meeting duly
called or by unanimous written consent without a meeting or by telephone consent
provided a quorum of Trustees participate in any such telephonic meeting, unless
the 1940 Act requires that a particular action be taken only at a meeting in
person of the Trustees. At any meeting of the Trustees, a majority of the
Trustees shall constitute a quorum. Meetings of the Trustees may be called
orally or in writing by the Chairman of the Trustees or by any two other
Trustees. Notice of the time, date and place of all meetings of the Trustees
shall be given by the party calling the meeting to each Trustee by telephone or
telegram sent to his home or business address at least twenty-four hours in
advance of the meeting or by written notice mailed to his home or business
address at least seventy-two hours
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in advance of the meeting. Notice need not be given to any Trustee who attends
the meeting without objecting to the lack of notice or who executes a written
waiver of notice with respect to the meeting either before or after such
meeting. Subject to the requirements of the 1940 Act, the Trustees by majority
vote may delegate to any one of their number their authority to approve
particular matters or take particular actions on behalf of the Trust.
CHAIRMAN OF THE TRUSTEES
Section 4. The Trustees may appoint one of their number to be Chairman of
the Board of Trustees. The Chairman shall preside at all meetings of the
Trustees, shall be responsible for the execution of policies established by the
Trustees and the administration of the Trust, and may be the chief executive,
financial and/or accounting officer of the Trust.
ARTICLE VI
EXPENSES OF THE TRUST
TRUSTEE REIMBURSEMENT
Section 1. Subject to the provisions of Article III, Section 5, the
Trustees shall be reimbursed from the Trust estate or the assets belonging to
the appropriate Series for their expenses and disbursements, including, without
limitation, fees and expenses of Trustees who are not Interested Persons of the
Trust, interest expense, taxes, fees and commissions of every kind, expenses of
pricing Trust portfolio securities, expenses of issue, repurchase and redemption
of Shares including expenses attributable to a program of periodic repurchases
or redemptions, expenses of distributing its Shares and providing services to
Shareholders, expenses of registering and qualifying the Trust and its Shares
under Federal and State laws and regulations, charges of investment advisers,
administrators, custodians, transfer agents, and registrars, expenses of
preparing and setting in type prospectuses and statements of additional
information, expenses of printing and distributing prospectuses and statements
of additional information sent to existing Shareholders, auditing and legal
expenses, reports to Shareholders, expenses of meetings of Shareholders and
proxy solicitations therefor, insurance expense, association membership dues and
for such non-recurring items as may arise, including litigation to which the
Trust is a party (except those losses and expenses the indemnification of which
is not permitted under Article X hereof), and for all losses and liabilities by
them incurred in administering the Trust; and for the payment of such expenses,
disbursements, losses and liabilities the Trustees shall have a lien on the
assets belonging to the appropriate Series prior to any rights or interests of
the Shareholders thereto. This section shall not preclude the Trust from
directly paying any of the aforementioned fees and expenses.
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ARTICLE VII
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT
INVESTMENT ADVISER
Section 1. Subject to a Majority Shareholder Vote, the Trustees may in
their discretion from time to time enter into an investment advisory or
management contract(s) with respect to the Trust or any Series thereof whereby
the other party(ies) to such contract(s) shall undertake to furnish the Trustees
such management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions, as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration of Trust, the Trustees may
authorize the investment adviser(s) (subject to such general or specific
instruments as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of portfolio securities and other investment instruments of
the Trust on behalf of the Trustees or may authorize any officer, agent, or
Trustee to effect such purchases, sales or exchanges pursuant to recommendations
of the investment adviser (and all without further action by the Trustees). Any
such purchases, sales and exchanges shall be deemed to have been authorized by
all of the Trustees.
The Trustees may, subject to applicable requirements of the 1940 Act,
including those relating to Shareholder approval, authorize the investment
adviser to employ one or more sub-advisers from time to time to perform such of
the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and
sub-adviser.
PRINCIPAL UNDERWRITER
Section 2. The Trustees may in their discretion from time to time enter
into one or more contract(s) providing for the sale of the Shares, whereby the
Trust may either agree to sell the Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as may be prescribed in the
By-Laws, if any, and such further terms and conditions as the Trustees may in
their discretion determine not inconsistent with the provisions of this Article
VII, or of the By-Laws, if any; and such contract may also provide for the
repurchase or sale of Shares by such other party as principal or as agent of the
Trust. The Trustees may in their discretion adopt a plan or plans of
distribution and enter into any related agreements whereby the Trust finances
directly or indirectly any activity that is primarily intended to result in
sales of Shares. Such plan or plans of distribution and any related agreements
may contain such terms and conditions as the Trustees may in their discretion
determine subject to the requirements of Section 12 of the 1940 Act, Rule 12b-1
thereunder and any other applicable rules and regulations.
TRANSFER AGENT
Section 3. The Trustees may in their discretion from time to time enter
into a transfer agency and Shareholder service contract whereby the other party
shall undertake to furnish the Trustees and Trust with transfer agency and
shareholder services. The contract shall be on such terms and conditions as the
Trustees may in their discretion determine not inconsistent with the
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provisions of this Declaration of Trust or of the By-Laws, if any. Such services
may be provided by one or more entities, including one or more agents of such
other party.
PARTIES TO CONTRACT
Section 4. Any contract of the character described in Sections 1, 2 and 3
of this Article VII or that relates to the provision of custodian services to
the Trust may be entered into with any corporation, firm, partnership, trust or
association, although one more of the Trustees or officers of the Trust may be
an officer, director, trustee, shareholder, or member of such other party to the
contract, and no such contract shall be invalidated or rendered voidable by
reason of the existence of any relationship, nor shall any person holding such
relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of said contract or accountable for any
profit realized directly or indirectly therefrom, provided that the contract
when entered into was reasonable and fair and not inconsistent with the
provisions of this Article VII or the By-Laws, if any. The same person
(including a firm, corporation, partnership, trust, or association) may be the
other party to contracts entered into pursuant to Sections 1, 2 and 3 above or
with respect to the provision of custodian services to the Trust, and any
individual may be financially interested in or otherwise affiliated with persons
who are parties to any or all of the contracts mentioned in this Section 4.
PROVISIONS AND AMENDMENTS
Section 5. Any contract entered into pursuant to Sections 1 and 2 of this
Article VII shall be consistent with and subject to the applicable requirements
of Sections 12 and 15 of the 1940 Act and the rules and orders thereunder
(including any amendments thereto or other applicable Act of Congress hereafter
enacted) with respect to its continuance in effect, its termination, and the
method of authorization and approval of such contract or renewal thereof.
ARTICLE VIII
SHAREHOLDERS' VOTING POWERS AND MEETINGS
VOTING POWERS
Section 1. The Shareholders shall have power to vote (i) for the election
of Trustees as provided in Article IV, Section 2, (ii) for the removal of
Trustees as provided in Article IV, Section 3(d), (iii) with respect to any
investment advisory or management contract as provided in Article VII, Section
1, (iv) with respect to any termination or reorganization of the Trust as
provided in Article XI, Section 4, (v) with respect to the amendment of this
Declaration of Trust to the extent and as provided in Article XI, Section 7,
(vi) to the same extent as the shareholders of a Massachusetts business
corporation, as to whether or not a court action, proceeding or claim should be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, provided, however, that a Shareholder of a particular
Series shall not be entitled to bring any derivative or class action on behalf
of any other Series of the Trust, and provided further that, within a Series, a
Shareholder of a particular Class shall not be entitled to bring any derivative
or class action on behalf of any other Class except with respect to matters
sharing a common fact pattern with said Shareholder's own Class; and (vii) with
respect to such additional matters relating
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to the Trust as may be required or authorized by law, by this Declaration of
Trust, or the By-Laws of the Trust, if any, or any registration of the Trust
with the Commission or any State, or as the Trustees may consider desirable. On
any matter submitted to a vote of the Shareholders, all Shares shall be voted by
individual Series, except (i) when required by the 1940 Act, Shares shall be
voted in the aggregate and not by individual Series; and (ii) when the Trustees
have determined that the matter affects only the interests of one or more
Classes, then only the Shareholders of such Class or Classes shall be entitled
to vote thereon. Each whole Share shall be entitled to one vote as to any matter
on which it is entitled to vote, and each fractional Share shall be entitled to
a proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. Until Shares
are issued, the Trustees may exercise all rights of Shareholders and may take
any action required or permitted by law, this Declaration of Trust or any
By-Laws of the Trust to be taken by Shareholders.
MEETINGS
Section 2. The first Shareholders' meeting shall be held as specified in
Section 2 of Article IV at the principal office of the Trust or such other place
as the Trustees may designate. Special meetings of the Shareholders or any
Series or Class thereof may be called by the Trustees and shall be called by the
Trustees upon the written request of Shareholders owning at least one-tenth of
the outstanding Shares entitled to vote. Whenever ten or more Shareholders
meeting the qualifications set forth in Section 16(c) of the 1940 Act, as the
same may be amended from time to time, seek the opportunity of furnishing
materials to the other Shareholders with a view to obtaining signatures on such
a request for a meeting, the Trustees shall comply with the provisions of said
Section 16(c) and any rules or orders thereunder with respect to providing such
Shareholders access to the list of the Shareholders of record of the Trust or
the mailing of such materials to such Shareholders of record. Shareholders shall
be entitled to at least fifteen days' notice of any meeting.
QUORUM AND REQUIRED VOTE
Section 3. A majority of Shares entitled to vote in person or by proxy
shall be a quorum for the transaction of business at a Shareholders' meeting,
except that where any provision of law or of this Declaration of Trust permits
or requires that holders of any Series or Class thereof shall vote as a Series
or Class, then a majority of the aggregate number of Shares of that Series or
Class thereof entitled to vote shall be necessary to constitute a quorum for the
transaction of business by that Series or Class. Any lesser number shall be
sufficient for adjournments. Any adjourned session or sessions may be held,
within a reasonable time after the date set for the original meeting, without
the necessity of further notice. Except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws, a majority of the Shares
voted in person or by proxy shall decide any questions and a plurality shall
elect a Trustee, provided that where any provision of law or of this Declaration
of Trust permits or requires that the holders of any Series or Class shall vote
as a Series or Class, then a majority of the Shares of that Series or Class
voted on the matter shall decide that matter insofar as that Series or Class is
concerned.
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ARTICLE IX
DISTRIBUTIONS AND REDEMPTIONS
DISTRIBUTIONS
Section 1.
(a) The Trustees may from time to time declare and pay dividends and other
distributions. The amount of such dividends and the payment of them shall be
wholly in the discretion of the Trustees.
(b) The Trustees shall have power, to the fullest extent permitted by the
laws of the Commonwealth of Massachusetts, at any time to declare and cause to
be paid dividends on Shares of a particular Series, from the assets belonging to
that Series, which dividends and other distributions, at the election of the
Trustees, may be paid daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine, and may be payable in Shares of that Series or Class thereof, as
appropriate, at the election of each Shareholder of that Series or Class. All
dividends and distributions on Shares of a particular Series shall be
distributed pro rata to the holders of that Series in proportion to the number
of Shares of that Series held by such holders at the date and time of record
established for the payment of such dividends or distributions, except that such
dividends and distributions shall appropriately reflect expenses allocated to a
particular Class of such Series.
(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute a "stock dividend" pro rata
among the Shareholders of a particular Series or of a Class thereof as of the
record date of that Series (fixed as provided in Section 3 of Article XI
hereof).
REDEMPTIONS
Section 2. In case any holder of record of Shares of a particular Series
or Class desires to dispose of his Shares, he may deposit at the office of the
transfer agent or other authorized agent of that Series a written request or
such other form of request as the Trustees may from time to time authorize,
requesting that the Series purchase the Shares in accordance with this Section
2; and the Shareholder so requesting shall be entitled to require the Series to
purchase, and the Series or the principal underwriter of the Series shall
purchase his said Shares, but only at the Net Asset Value of the Series or Class
held by the Shareholder (as described in Section 3 hereof) minus any applicable
sales charge or redemption or repurchase fee. The Series shall make payment for
any such Shares to be redeemed, as aforesaid, in cash or property from the
assets of that Series and payment for such Shares shall be made by the Series or
the principal underwriter of the Series to the Shareholder of record within
seven (7) days after the date upon which the request is effective; provided,
however, that if Shares being redeemed have been purchased by check, the Trust
may postpone payment until the Trust has assurance that good payment has been
collected for the purchase of the Shares. The Trust may require Shareholders to
pay a sales charge to the Trust, the underwriter or any other person designated
by the Trustees upon redemption or repurchase of Shares of any Series or Class
thereof, in such amount as shall be determined from time to time by the
Trustees. The amount of
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such sales charge may but need not vary depending on various factors, including
without limitation the holding period of the redeemed or repurchased Shares. The
Trustees may also charge a redemption or repurchase fee in such amount as may be
determined from time to time by the Trustees.
DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS
Section 3. The term "Net Asset Value" of any Series shall mean that amount
by which the assets of that Series exceed its liabilities, all as determined by
or under the direction of the Trustees. Net Asset Value per Share shall be
determined separately for each Series of Shares and shall be determined on such
days and at such times as the Trustees may determine. Such determination may be
made on a Series-by-Series or Class-by-Class basis, as appropriate, and shall
include any expenses allocated to a specific Series or Class. The determination
shall be made with respect to securities for which market quotations are readily
available at the market value of such securities; and with respect to other
securities and assets, at the fair value as determined in good faith by the
Trustees, provided, however, that the Trustees, without Shareholder approval,
may alter the method of appraising portfolio securities insofar as permitted
under the 1940 Act and the rules, regulations and interpretations thereof
promulgated or issued by the Commission or insofar as permitted by any order of
the Commission applicable to the Series. The Trustees may delegate any of their
powers and duties under this Section 3 with respect to appraisal of assets and
liabilities. At any time the Trustees may cause the Net Asset Value per Share
last determined to be determined again in a similar manner and may fix the time
when such redetermined values shall become effective.
SUSPENSION OF THE RIGHT OF REDEMPTION
Section 4. Notwithstanding Section 2 hereof, the Trustees may declare a
suspension of the right of redemption or postpone the date of payment as
permitted under the 1940 Act. Such suspension shall take effect at such time as
the Trustees shall specify but not later than the close of business on the
business day next following the declaration of suspension, and thereafter there
shall be no right of redemption or payment until the Trustees shall declare the
suspension at an end. In the case of a suspension of the right of redemption, a
Shareholder may either withdraw his request for redemption or receive payment
based on the Net Asset Value per Share existing after the termination of the
suspension.
ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATION OF LIABILITY
Section 1. All persons extending credit to, contracting with or having any
claim against the Trust or a particular Series shall look only to the assets of
the Trust or such Series, as the case may be, for payment under such credit,
contract or claim; and neither the Shareholders nor the Trustees, nor any of the
Trust's officers, employees or agents, whether past, present or future, nor any
other Series shall be personally liable therefor.
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Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust, any Series, or the Trustees or any of them in connection with the Trust
shall be conclusively deemed to have been executed or done only in or with
respect to their or his capacity as Trustees or Trustee and neither such
Trustees or Trustee nor the Shareholders shall be personally liable thereon.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that the
same was executed or made by them on behalf of the Trust or by them as Trustees
or Trustee or as officers or officer and not individually and that the
obligations of such instrument are not binding upon any of them or the
Shareholders individually but are binding only upon the assets and property of
the Trust or the particular Series in question, as the case may be, but the
omission thereof shall not operate to bind any Trustees or Trustee or officers
or officer or Shareholders or Shareholder individually.
Section 2. Provided they have exercised reasonable care and have acted
under the reasonable belief that their actions are in the best interest of the
Trust, the Trustees and officers of the Trust shall not be responsible for or
liable in any event for neglect or wrongdoing of them or any officer, agent,
employee, investment adviser or independent contractor of the Trust, but nothing
contained in this Declaration of Trust shall protect any Trustee or officer
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
INDEMNIFICATION
Section 3.
(a) Subject to the exceptions and limitations contained in Section 3(b)
below:
(i) every person who is, or has been a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by the
appropriate Series to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in connection with any
claim, action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or
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(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office,
(A) by the court or other body approving the settlement;
(B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based
upon a review of readily available facts (as opposed to a full
trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon
a review of readily available facts (as opposed to a full trial-type
inquiry);
provided, however, that any Shareholder may, by appropriate legal proceedings,
challenge any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled to by contract or otherwise under
law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 3 may be paid by the applicable Series from time
to time prior to final disposition thereof upon receipt of an undertaking by or
on behalf of such Covered Person that such amount will be paid over by him to
the applicable Series if it is ultimately determined that he is not entitled to
indemnification under this Section 3; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust is insured against losses arising out of any such advance payments
or (c) either a majority of the Trustees who are neither interested persons of
the Trust nor parties to the matter, or independent legal counsel in a written
opinion, shall have determined, based upon a review of readily available facts
(as opposed to a trial-type inquiry or full investigation), that there is reason
to believe that such Covered Person will not be disqualified from
indemnification under this Section 3.
SHAREHOLDERS
Section 4. In case any Shareholder or former Shareholder of any Series of
the Trust shall be held to be personally liable solely by reason of his being or
having been a Shareholder and not because of his acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Series
shall, upon request by the Shareholder, assume the defense
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of any claim made against the Shareholder for any act or obligation of the
Series and satisfy any judgment thereon.
ARTICLE XI
MISCELLANEOUS
TRUST NOT A PARTNERSHIP
Section 1. It is hereby expressly declared that a trust and not a
partnership is created hereby. No Trustee hereunder shall have any power to bind
personally either the Trust's officers or any Shareholder.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
Section 2. The exercise by the Trustees of their powers and discretion
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the provisions
of Article X, the Trustees shall not be liable for errors of judgment or
mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and subject to the provisions of Article X, shall be under no liability for any
act or omission in accordance with such advice or for failing to follow such
advice. The Trustees shall not be required to give any bond as such, nor any
surety if a bond is obtained.
ESTABLISHMENT OF RECORD DATES
Section 3. The Trustees may close the stock transfer books of the Trust
for a period not exceeding sixty (60) days preceding the date of any meeting of
Shareholders, or the date for the payment of any dividends, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect; or in lieu of closing the stock transfer books as
aforesaid, the Trustees may fix in advance a date, not exceeding ninety (90)
days preceding the date of any meeting of Shareholders, or the date for payment
of any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or to receive payment of such dividend, or to receive
such allotment or rights, or to exercise such rights in respect of any such
change, conversion or exchange of Shares, and in such case such Shareholders and
only such Shareholders as shall be Shareholders of record on the date so fixed
shall be entitled to such notice of, and to vote at, such meeting, or to receive
payment of such dividend, or to receive such allotment of rights, or to exercise
such rights, as the case may be, notwithstanding any transfer of any Shares on
the books of the Trust after any such record date fixed or aforesaid.
TERMINATION OF TRUST
Section 4.
(a) This Trust shall continue without limitation of time but subject to
the provisions of sub-section (b) of this Section 4.
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(b) Subject to a Majority Shareholder Vote of each Series affected by the
matter or, if applicable, to a Majority Shareholder Vote of the Trust, the
Trustees may
(i) sell, convey, merge and transfer all or substantially all of the
assets of the Trust or any affected Series to another Series or to a trust,
partnership, association or corporation organized under the laws of any state
which is an investment company as defined in the 1940 Act, for adequate
consideration which may include the assumption of all outstanding obligations,
taxes and other liabilities, accrued or contingent, of the Trust or any affected
Series, and which may include shares of beneficial interest or stock of such
Series, trust, partnership, association or corporation; or
(ii) at any time sell and convert into money all or substantially
all of the assets of the Trust or any affected Series.
Upon making provision for the payment of all known liabilities of the
Trust or any affected Series in either (i) or (ii), by such assumption or
otherwise, the Trustees shall distribute the remaining proceeds or assets (as
the case may be) ratably among the holders of the Shares of the Trust or any
affected Series then outstanding; however, the payment to any particular Class
within such Series may be reduced by any fees, expenses or charges allocated to
that Class. Nothing in this Declaration of Trust shall preclude the Trustees
from distributing such remaining proceeds or assets so that holders of the
Shares of a particular Class of the Trust or any affected Series receive as
their ratable distribution shares solely of an analogous class, as determined by
the Trustees, of such trust, partnership, association or corporation.
The Trustees may take any of the actions specified in clauses (i) and (ii)
above without obtaining a Majority Shareholder Vote of any Series or the Trust
if a majority of the Trustees makes a determination that the continuation of a
Series or the Trust is not in the best interests of such Series, the Trust or
their respective Shareholders as a result of factors or events adversely
affecting the ability of such Series or the Trust to conduct its business and
operations in an economically viable manner. Such factors and events may include
the inability of a Series or the Trust to maintain its assets at an appropriate
size, changes in laws or regulations governing the Series or Trust or affecting
assets of the type in which such Series or the Trust invests or economic
developments or trends having a significant adverse impact on the business or
operations of such Series or the Trust.
(c) Upon completion of the distribution of the remaining proceeds or the
remaining assets as provided in sub-section (b), the Trust or any affected
Series shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder with respect thereto and the right,
title and interest of all parties therein shall be canceled and discharged.
FILING OF COPIES, REFERENCES, HEADINGS
Section 5. The original or a copy of this instrument and of each amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
shareholder. A copy of this instrument and of each amendment hereto shall be
filed by the Trustees with the Secretary of the Commonwealth of Massachusetts
and the Boston City Clerk, as well as any other governmental office where such
filing may from time to time be required. Anyone dealing with the Trust may
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rely on a certificate by an officer or Trustee of the Trust as to whether or not
any such amendments to this Declaration of Trust have been made and as to any
matters in connection with the Trust hereunder, and with the same effect as if
it were the original, may rely on a copy certified by an officer or Trustee of
the Trust to be a copy of this instrument or of any such amendments. In this
instrument or in any such amendments, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended from time to time. The masculine gender shall include
the feminine and neuter genders. Headings are placed herein for convenience of
reference only, and in case of any conflict, the text of this instrument, rather
than the headings, shall control. This instrument may be executed in any number
of counterparts each of which shall be deemed an original.
APPLICABLE LAW
Section 6. The Trust set forth in this instrument is made in the
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and,
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
AMENDMENTS
Section 7. All rights granted to the Shareholders under this Declaration
of Trust are granted subject to the reservation of the right to amend this
Declaration of Trust as herein provided, except that no amendment shall repeal
the limitations on personal liability of any Shareholder or Trustee or repeal
the prohibition of assessment upon the Shareholders without the express consent
of each Shareholder or Trustee involved. Subject to the foregoing, the
provisions of this Declaration of Trust (whether or not related to the rights of
Shareholders) may be amended at any time, so long as such amendment does not
adversely affect the rights of any Shareholder with respect to which such
amendment is or purports to be applicable and so long as such amendment is not
in contravention of applicable law, including the 1940 Act, by an instrument in
writing signed by a majority of the then Trustees (or by an officer of the Trust
pursuant to the vote of a majority of such Trustees). Except as provided in the
first sentence of this Section 7, any amendment to this Declaration of Trust
that adversely affects the rights of Shareholders may be adopted at any time by
an instrument signed in writing by a majority of the then Trustees (or by an
officer of the Trust pursuant to the vote of a majority of such Trustees) when
authorized to do so by Majority Shareholder Vote; provided, however, that an
amendment that shall affect the Shareholders of one or more Series (or of one or
more Classes), but not the Shareholders of all outstanding Series (or Classes),
shall be authorized by a Majority Shareholder Vote of each Series (or Class, as
the case may be) affected, and no vote of a Series (or Class) not affected shall
be required. Subject to the foregoing, any such amendment shall be effective as
provided in the instrument containing the terms of such amendment or, if there
is no provision therein with respect to effectiveness, upon the execution of
such instrument and of a certificate (which may be a part of such instrument)
executed by a Trustee or officer to the effect that such amendment has been duly
adopted. Copies of the amendment to this Declaration of Trust shall be filed as
specified in Section 5 of this Article XI. A restated Declaration of Trust,
integrating into a single instrument all of the provisions of the Declaration of
Trust which are then in effect and operative, may be executed from time to time
by a majority of the Trustees and shall be effective upon filing as specified in
such Section 5.
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FISCAL YEAR
Section 8. The fiscal year of the Trust shall be determined by the
Trustees in accordance with the By-Laws, provided, however, that the Trustees
may, without Shareholder approval, change the fiscal year of the Trust.
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Schedule A
Series of the Trust
PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
Classes of Shares of Each Series
An unlimited number of shares of beneficial interest have been established by
the Board as Class A shares, Class B shares, Class C shares and Class Y shares
of each of the above Series. Each of the Class A shares, Class B shares, Class C
shares and Class Y shares of a Series represents interests in the assets of only
that Series and has the same preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of shares, except as provided in the Trust's
Declaration of Trust and as set forth below with respect to the Class B shares
of each Series:
1. Each Class B share, other than a share purchased through the
reinvestment of a dividend or a distribution with respect to the
Class B share, shall be converted automatically, and without any
action or choice on the part of the holder thereof, into Class A
shares of the same Series, based on the relative net asset value of
each such class at the time of the calculation of the net asset
value of such class of shares on the date that is the first Business
Day (as defined in the Series' prospectus and/or statement of
additional information) of the month in which the sixth anniversary
of the issuance of such Class B shares occurs (which, for the
purpose of calculating the holding period required for conversion,
shall mean (i) the date on which the issuance of such Class B shares
occurred or (ii) for Class B shares obtained through an exchange,
the date on which the issuance of the Class B shares of an eligible
PaineWebber fund occurred, if such shares were exchanged directly,
or through a series of exchanges for the Series' Class B shares (the
"Conversion Date")).
2. Each Class B share purchased through the reinvestment of a dividend
or a distribution with respect to the Class B shares and the
dividends and distributions on such shares shall be segregated in a
separate sub-account on the stock records of the Series for each of
the holders of record thereof. On any Conversion Date, a number of
the shares held in the sub-account of the holder of record of the
share or shares being converted, calculated in accordance with the
next following sentence, shall be converted automatically, and
without any action or choice on the part of the holder thereof, into
Class A shares of the same Series. The number of shares in the
holder's sub-account so converted shall bear the same relation to
the total number of shares maintained in the sub-account on the
Conversion Date as the number of shares of the holder converted on
the Conversion Date pursuant to Paragraph 2(a) hereof bears to the
total number of Class B shares of the holder on the Conversion Date
not purchased through the automatic reinvestment of dividends or
distributions with respect to the Class B shares.
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3. The number of Class A shares into which a Class B share is converted
pursuant to paragraphs 1 and 2 hereof shall equal the number
(including for this purpose fractions of a share) obtained by
dividing the net asset value per share of the Class B shares for
purposes of sales and redemptions thereof at the time of the
calculation of the net asset value on the Conversion Date by the net
asset value per share of the Class A shares for purposes of sales
and redemptions thereof at the time of the calculation of the net
asset value on the Conversion Date.
4. On the Conversion Date, the Class B shares converted into Class A
shares will cease to accrue dividends and will no longer be
outstanding and the rights of the holders thereof will cease (except
the right to receive declared but unpaid dividends to the Conversion
Date).
For purposes of Paragraph 1 above, the term "eligible PaineWebber fund" includes
any and all mutual funds for which PaineWebber Incorporated or Mitchell Hutchins
Asset Management Inc. serves as investment adviser that offer shares with a
contingent deferred sales charge imposed upon certain redemptions of such shares
and that are exchangeable with the Class B shares of the Series.
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IN WITNESS WHEREOF, the undersigned, being the all the Trustees of the
Trust, have executed this Amended and Restated Declaration of Trust as of the
day and year first above written.
/s/ Margo N. Alexander /s/ Meyer Feldberg
- --------------------------------- ----------------------------------------
Margo N. Alexander Meyer Feldberg
/s/ E. Garrett Bewkes, Jr. /s/ George W. Gowen
- --------------------------------- ----------------------------------------
E. Garrett Bewkes, Jr. George W. Gowen
/s/ Richard Q. Armstrong /s/ Frederic V. Malek
- --------------------------------- ----------------------------------------
Richard Q. Armstrong Frederic V. Malek
/s/ Richard R. Burt /s/ Carl W. Schafer
- --------------------------------- ----------------------------------------
Richard R. Burt Carl W. Schafer
/s/ Mary C. Farrell
- ---------------------------------
Mary C. Farrell
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PaineWebber Mutual Fund Trust
Attachment 1
1. The principal place of business of PaineWebber Mutual Fund ("Trust") is:
1285 Avenue of the Americas
New York, New York 10019
2. The Trustees of the Trust and their business addresses* are:
Margo N. Alexander
Richard Q. Armstrong
78 West Brother Drive
Greenwich, CT 06830
E. Garrett Bewkes, Jr.
Richard R. Burt
1101 Connecticut Avenue, N.W.
Washington, D. C. 20036
Mary C. Farrell
Meyer Feldberg
Columbia University
101 Uris Hall
New York, New York 10027
George W. Gowen
666 Third Avenue
New York, New York 10017
Frederic V. Malek
1455 Pennsylvania Avenue, N.W.
Suite 350
Washington, D. C. 20004
Carl W. Schafer
P. O. Box 1164
Princeton, N. J. 08542
* Unless otherwise indicated, the business address of each Trustee is 1285
Avenue of the Americas, New York, New York 10019
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Exhibit No. 2
PAINEWEBBER MUTUAL FUND TRUST
A Massachusetts Business Trust
RESTATED BY-LAWS
November 19, 1997
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BY-LAWS OF PAINEWEBBER MUTUAL FUND TRUST
ARTICLE I
DECLARATION OF TRUST,
LOCATION OF OFFICES AND SEAL
Section 1.01. Declaration of Trust: These By-Laws shall be subject to the
Declaration of Trust, as from time to time in effect (the "Declaration of
Trust"), of PaineWebber Mutual Fund Trust, the Massachusetts business trust
established by the Declaration of Trust (the "Trust").
Section 1.02. Principal Office of the Trust: Resident Agent: The principal
office of the Trust shall be located in the City of New York, New York. Its
resident agent in Massachusetts shall be CT Corporation System, 2 Oliver Street,
Boston, Massachusetts, or such other person as the Trustees may from time to
time designate. The Trust may establish and maintain such other offices and
places of business as the Trustees may, from time to time, determine.
Section 1.03. Seal: The seal of the Trust shall be circular in form and
shall bear the name of the Trust. The form of the seal shall be subject to
alteration by the Trustees and the seal may be used by causing it or a facsimile
to be impressed or affixed or printed or otherwise reproduced. Any officer or
Trustee of the Trust shall have authority to affix the seal of the Trust to any
document, instrument or other paper executed and delivered by or on behalf of
the Trust; however, unless otherwise required by the Trustees, the seal shall
not be necessary to be placed on and its absence shall not impair the validity
of any document, instrument, or other paper executed by or on behalf of the
Trust.
ARTICLE II
SHAREHOLDERS
Section 2.01. Shareholder Meetings: Meetings of the shareholders may be
called at any time by the Trustees or, if the Trustees shall fail to call any
meeting for a period of 30 days after written request of Shareholders owning at
least one-tenth of the outstanding shares entitled to vote, then such
Shareholders may call such meeting. Each call of a meeting shall state the
place, date, hour and purposes of the meeting.
Section 2.02. Place of Meetings: All meetings of the Shareholders shall be
held at the principal office of the Trust, except that the Trustees may
designate a different place of meeting within the United States.
Section 2.03. Notice of Meeting: The secretary or an assistant secretary
or such other officer as may be designated by the Trustees shall cause notice of
the place, date and hour, and purpose or purposes for which the meeting is
called, to be mailed, not less than fifteen days before the date of the meeting,
to each Shareholder entitled to vote at such meeting, at his address as it
appears on the records of the Trust at the time of such mailing. Notice of any
Shareholders' meeting need not be given to any Shareholder if a written waiver
of notice, executed before or after such meeting, is filed with the records of
such meeting, or to any Shareholder who shall attend such
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meeting in person or by proxy. Notice of adjournment of a Shareholders' meeting
to another time or place need not be given, if such time and place are announced
at the meeting.
Section 2.04. Ballots: The vote upon any question shall be by ballot
whenever requested by any person entitled to vote, but, unless such a request is
made, voting may be conducted in any way approved by the meeting.
Section 2.05. Voting; Proxies: Shareholders entitled to vote may vote
either in person or by proxy, provided that such proxy to act is authorized to
act by (1) a written instrument, dated not more than eleven months before the
meeting and executed either by the Shareholder or by his or her duly authorized
attorney in fact (who may be so authorized by a writing or by any non-written
means permitted by the laws of the Commonwealth of Massachusetts) or (2) such
electronic, telephonic, computerized or other alternative means as may be
approved by a resolution adopted by the Trustees. Proxies shall be delivered to
the secretary of the Trust or other person responsible for recording the
proceedings before being voted. A proxy with respect to shares held in the name
of two or more persons shall be valid if executed by one of them unless at or
prior to exercise of such proxy the Trust receives a specific written notice to
the contrary from any one of them. Unless otherwise specifically limited by
their terms, proxies shall entitle the holder thereof to vote at any adjournment
of a meeting. A proxy purporting to be exercised by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise
and the burden of proving invalidity shall rest on the challenger. At all
meetings of the Shareholders, unless the voting is conducted by inspectors, all
questions relating to the qualifications of voters, the validity of proxies, and
the acceptance or rejection of votes shall be decided by the chairman of the
meeting.
Section 2.06. Action Without a Meeting: Any action to be taken by
Shareholders may be taken without a meeting if all Shareholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of meetings of Shareholders of the Trust. Such consent
shall be treated for all purposes as a vote at a meeting.
ARTICLE III
TRUSTEES
Section 3.01. Regular Meetings: Regular meetings of the Trustees may be
held without further call or notice at such places and at such times as the
Trustees may from time to time determine, provided that notice of the first
regular meeting following any such determination shall be given to absent
Trustees. A regular meeting of the Trustees may be held without further call or
notice immediately after and at the same place as any meeting of the
Shareholders.
Section 3.02. Special Meetings: Special meetings of the Trustees may be
held at any time and at any place designated in the call of the meeting, when
called by the chairman of the Trustees or by two or more Trustees, provided that
notice thereof shall being given to each Trustee as set forth in the Declaration
of Trust.
Section 3.03. Committees: The Trustees, by vote of a majority of the
Trustees then in office, may elect from their number an executive committee or
other committees and may delegate thereto some or all of their powers except
those which by law, by the Declaration of Trust, or by
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these By-Laws may not be delegated. Except as the Trustees may otherwise
determine, any such committee may make rules for the conduct of its business,
but unless otherwise provided by the Trustees or in such rules, its business
shall be conducted so far as possible in the same manner as is provided by these
By-Laws for the Trustees themselves. All members of such committees shall hold
such offices at the pleasure of the Trustees. The Trustees may abolish any such
committee at any time. Any committee to which the Trustees delegate any of their
powers or duties shall keep records of its meetings and shall report its actions
to the Trustees. The Trustees shall have power to rescind any action of any
committee, but no such rescission shall have retroactive effect. Any such
committee may act by meeting in person, by unanimous written consent, or by
telephonic meeting provided a quorum of members participates in any such
telephonic meeting.
Section 3.04. Other Committees: The Trustees may appoint other committees,
each consisting of one or more persons, who need not be Trustees. Each such
committee shall have such powers perform such duties and abide by such
procedures as may be determined from time to time by the Trustees, but shall not
exercise any power which may lawfully be exercised only by the Trustees or a
committee of Trustees.
Section 3.05. Compensation: Each Trustee and each committee member may
receive such compensation for his services and reimbursement for his expenses as
may be fixed from time to time by resolution of the Trustees.
ARTICLE IV
OFFICERS
Section 4.01. General: The officers of the Trust shall be a president, a
treasurer, a secretary and such other officers, if any, as the Trustees from
time to time may in their discretion elect or appoint. The Trust may also have
such agents, if any, as the Trustees from time to time may in their discretion
appoint. Any officer may be but need not be a Trustee or shareholder. Any two or
more offices may be held by the same person.
Section 4.02. Election and Term of Office: The president, the treasurer
and the secretary shall be elected annually by the Trustees at their first
meeting in each calendar year or at such later meeting in such year as the
Trustees shall determine ("Annual Meeting"). Other officers or agents, if any,
may be elected or appointed by the Trustees at said meeting or at any other
time. The president, treasurer and secretary shall hold office until the next
Annual Meeting and until their respective successors are chosen and qualified,
or in each case until he dies, resigns, is removed or become disqualified. Each
other officer shall hold office and each agent shall retain his authority at the
pleasure of the Trustees.
Section 4.03. Powers: Subject to the other provisions of these By-Laws,
each officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to his office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate.
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Section 4.04. Chairman of the Board: The chairman of the Board of
Trustees, if one is so appointed, shall be chosen from among the Trustees and
may hold office only so long as he continues to be a Trustee. Unless the
Trustees otherwise provide, the chairman, if any is so appointed, shall preside
at all meetings of the Shareholders and of the Trustees at which he is present;
may be ex officio a member of all committees established by the Trustees; and
shall have such other duties and powers as specified herein and as may be
assigned to him by the Trustees.
Section 4.05. President: The president shall be the chief executive
officer of the Trust and, subject to the supervision of the Trustees, shall have
general charge of the business, affairs and property of the Trust and general
supervision over its officers, employees and agents. He shall exercise such
other powers and perform such other duties as from time to time may be assigned
to him by the Trustees.
Section 4.06. Vice Presidents: The Trustees may from time to time
designate and elect one or more vice presidents who shall have such powers and
perform such duties as from time to time may be assigned to them by the Trustees
or the president. At the request or in the absence or disability of the
president, the vice president (or, if there are two or more vice presidents,
then the senior of the vice presidents present and able to act) may perform all
the duties of the president and, when so acting, shall have all the powers of
and be subject to all the restrictions upon the president.
Section 4.07. Treasurer and Assistant Treasurers: The treasurer shall be
the principal financial and accounting officer of the Trust and shall have
general charge of the finances and books of account of the Trust. Except as
otherwise provided by the Trustees, he shall have general supervision of the
funds and property of the Trust and of the performance by the custodian of its
duties with respect thereto. He shall render to the Trustees, whenever directed
by the Trustees, an account of the financial condition of the Trust and of all
his transactions as treasurer; and as soon as possible after the close of each
financial year he shall make and submit to the Trustees a like report for such
financial year. He shall perform all the acts incidental to the office of
treasurer, subject to the control of the Trustees.
Any assistant treasurer may perform such duties of the treasurer as the
treasurer or the Trustees may assign, and, in the absence of the treasurer, (or,
if there are two or more assistant treasurers, then the senior of the assistant
treasurers present and able to act) may perform all the duties of the treasurer,
subject to the control of the Trustees.
Section 4.08. Secretary and Assistant Secretaries: The secretary shall
attend to the giving and serving of all notices of the Trust and shall record
all proceedings of the meetings of the Shareholders and Trustees in books to be
kept for that purpose. He shall keep in safe custody the seal of the Trust, and
shall have charge of the records of the Trust, all of which shall at all
reasonable times be open to inspection by the Trustees. He shall perform such
other duties as appertain to his office or as may be required by the Trustees.
Any assistant secretary may perform such duties of the secretary as the
secretary or the Trustees may assign, and, in the absence of the secretary, (or,
if there are two or more assistant secretaries. then the senior of the assistant
secretaries present and able to act) may perform all the duties of the
secretary.
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Section 4.09. Subordinate Officers: The Trustees from time to time may
appoint such other officers or agents as they may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Trustees may determine. The Trustees from time to
time may delegate to one or more officers or agents the power to appoint any
such subordinate officers or agents and to prescribe their respective rights,
terms of office, authorities and duties.
Section 4.10. Remuneration: The salaries or other compensation of the
officers of the Trust shall be fixed from time to time by resolution of the
Trustees, except that the Trustees may by resolution delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 4.09 hereof.
Section 4.11. Surety Bonds: The Trustees may require any officer or agent
of the Trust to execute a bond (including, without limitation, any bond required
by the Investment Company Act of 1940, as amended, ("1940 Act") and the rules
and regulations of the Securities and Exchange Commission ("Commission")) to the
Trust in such sum and with such surety or sureties as the Trustees may
determine, conditioned upon the faithful performance of his duties to the Trust
including responsibility for negligence and for the accounting of any of the
Trust's property, funds or securities that may come into his hands.
Section 4.12. Resignation: Any officer may resign his office at any time
by delivering a written resignation to the Trustees, the president, the
secretary, or any assistant secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 4.13. Removal: Any officer may be removed from office whenever in
the judgment of the Trustees the best interest of the Trust will be served
thereby, by the vote of a majority of the Trustees given at a regular meeting or
any special meeting of the Trustees called for such purpose. In addition, any
officer or agent appointed in accordance with the provision of Section 4.09
hereof may be removed, either with or without cause, by any officer upon whom
such power of removal shall have been conferred by the Trustees.
Section 4.14. Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Trustees at any regular or special meeting
of the Trustees or, in the case of any office created pursuant to Section 4.09
hereof, by any officer upon whom such power shall have been conferred by the
Trustees.
ARTICLE V
CUSTODIAN
Section 5.01. Employment of Custodian: The Trustees shall at all times
employ one or more banks or trust companies organized under the laws of the U.S.
or one of the states thereof provided that each such bank or trust company has
capital, surplus and undivided profits of at least two million dollars
($2,000,000) as custodian with authority as the Trust's agent, but subject to
such restrictions, limitations and other requirements, if any, as may be
contained in these By-Laws:
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(1) to hold the securities owned by the Trust and deliver the same upon
written order, or oral order if confirmed in writing, or order
delivered by such electromechanical or electronic devices as are
agreed to by the Trust and the custodian, if such procedures have
been authorized in writing by the Trust;
(2) to receive and give receipt for any moneys due to the Trust and
deposit the same in its own banking department or elsewhere as the
Trustees may direct; and
(3) to disburse such moneys upon orders or vouchers;
and the Trust may also enjoy such custodian as its agent:
(1) to keep the books and accounts of the Trust and furnish clerical and
accounting services; and
(2) to compute, if authorized to do so by the Trustees, the Net Asset
Value of any Series or Class (which terms are defined in the
Declaration of Trust) in accordance with the provisions of the
Declaration of Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a vote of a majority of the outstanding
shares of the Trust entitled to vote, the custodian shall deliver and pay over
all property of the Trust held by it as specified in such vote.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least two million dollars ($2,000,000) or
such other person as may be permitted by the Commission, or otherwise in
accordance with the 1940 Act.
Section 5.02. Use of Central Securities Handling System: Subject to such
rules, regulations and orders as the Commission may adopt, the Trustees may
direct the custodian to deposit any or all of the securities owned by the Trust
(1) in a system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, pursuant to which system
all securities of any particular class or series of any issuer deposited within
the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust; or (2) with such other person as may be permitted by the Commission, or
otherwise in accordance with the 1940 Act.
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ARTICLE VI
EXECUTION OF PAPERS
Section 6.01. General: Except as the Trustees may generally or in
particular cases authorize the execution thereof in some other manner, all
deeds, leases, transfers, contracts, bonds, notes, checks, drafts, and other
obligations made, accepted, or endorsed by the Trust shall be executed by the
president, any vice president, or the treasurer, or by whomever else shall be
designated for that purpose by the Trustees, and need not bear the seal of the
Trust.
ARTICLE VII
SHARES OF BENEFICIAL INTEREST
Section 7.01. Share Certificates: No certificates certifying the ownership
of Shares shall be issued except as the Trustees may otherwise authorize. In the
event that the Trustees authorize the issuance of Share certificates, subject to
the provisions of Section 7.03, each Shareholder shall be entitled to a
certificate stating the number of shares owned by him, in such form as shall be
prescribed from time to time by the Trustees. Such certificate shall be signed
by the president or a vice president and by the treasurer, assistant treasurer,
secretary or assistant secretary. Such signatures may be facsimiles if the
certificate is signed by a transfer or shareholder services agent or by a
registrar, other than a Trustee, officer or employee of the Trust. In case any
officer who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Trust with the same effect as if he were such
officer at the time of its issue.
In lieu of issuing certificates for shares, the Trustees, the transfer
agent or shareholder services agent may either issue receipts therefor or may
keep accounts upon the books of the Trust for the record holders of such shares,
who shall in either case be deemed, for all purposes hereunder, to be the
holders of certificates for such shares as if they had accepted such
certificates and shall be held to have expressly assented and agreed to the
terms hereof.
Section 7.02. Loss of Certificates: In the case of the alleged loss or
destruction or the mutilation of a Share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees may prescribe.
Section 7.03. Discontinuance of Issuance of Certificates: The Trustees may
at any time discontinue the issuance of Share certificates and may, by written
notice to each Shareholder, require the surrender of Share certificates to the
Trust for cancellation. Such surrender and cancellation shall not affect the
ownership of Shares in the Trust.
Section 7.04. Equitable Interest Not Recognized: The Trust shall be
entitled to treat the holder of record of any Share or Shares of the Trust as
the holder in fact thereof, and shall not be bound to recognize any equitable or
other claim of interest in such Share or Shares on the part of any other person
except as may be otherwise expressly provided by law.
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Section 7.05. Transfer of Shares: The Shares of the Trust shall be
transferable only by transfer recorded on the books of the Trust, in person or
by attorney.
ARTICLE VIII
FISCAL YEAR; ACCOUNTANT
Section 8.01. Fiscal Year: The fiscal year of the Trust shall end on such
date in each year as the Trustees shall from time to time determine.
Section 8.02. Accountant:
(a) The Trust shall employ an independent public accountant or firm of
independent public accountants as its accountant to examine the accounts of the
Trust and to sign and certify the financial statements of the Trust. The
accountant's certificates and reports shall be addressed both to the Trustees
and to the Shareholders of the Trust.
(b) Any vacancy occurring due to the death or resignation of the
accountant may be filled by a majority vote of the Trustees who are not
interested persons of the Trust.
ARTICLE IX
INSURANCE
Section 9.01. Insurance of Officers, Trustees, and Employees: The Trust
may purchase and maintain insurance on behalf of any person who is or was a
Trustee, officer or employee of the Trust, or is or was serving at the request
of the Trust as a Trustee, officer or employee of a corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the Trust would have the power to indemnify him against
such liability.
The Trust may not acquire or obtain a contract for insurance that protects
or purports to protect any Trustee or officer of the Trust against any liability
to the Trust or its Shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
ARTICLE X
AMENDMENTS; REPORTS; MISCELLANEOUS
Section 10.1. Amendments: These By-Laws may be amended or repealed, in
whole or in part, by a majority of the Trustees then in office at any meeting of
the Trustees, or by one or more writings signed by such majority.
Section 10.2. Reports: The Trustees shall at least semiannually submit to
the Shareholders a written report of the transactions of the Trust, including
financial statements that shall at least annually be certified by independent
public accountants.
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Section 10.3. Gender: As used in these By-Laws, the masculine gender shall
include the feminine and neuter genders.
Section 10.3. Headings: Headings are placed in these bylaws for
convenience of reference only and in case of any conflict, the text of these
By-Laws rather than the headings shall control.
Section 10.4. Inspection of Books: The Trustees shall from time to time
determine whether and to what extent, and at what times and places, and under
what conditions and regulations the accounts and books of the Trust or any of
them shall be open to the inspection of the Shareholders, and no Shareholder
shall have any right to inspect any account or book or document of the Trust
except as conferred by law or otherwise by the Trustees.
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Exhibit No. 4(a)
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of April 21, 1988, between PAINEWEBBER CALIFORNIA
TAX-EXEMPT INCOME FUND, a Massachusetts business trust ("Trust"), and MITCHELL
HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation
registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended ("1934 Act"), and as an investment adviser under the Investment Advisers
Act of 1940, as amended.
WHEREAS the Trust is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company, and
intends to offer for public sale distinct series of shares of beneficial
interest ("Series"), each corresponding to a distinct portfolio; and
WHEREAS the Trust desires to retain Mitchell Hutchins as investment
adviser and administrator to furnish certain administrative, investment advisory
and portfolio management services to the Trust and each Series as now exists and
as hereafter may be established, and Mitchell Hutchins is willing to furnish
such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints Mitchell Hutchins as investment
adviser and administrator of the Trust and each Series for the period and on the
terms set forth in this Contract. Mitchell Hutchins accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. Duties as Investment Adviser.
(a) Subject to the supervision of the Trust's Board of Trustees ("Board"),
Mitchell Hutchins will provide a continuous investment program for each Series,
including investment research and management with respect to all securities and
investments and cash equivalents in each Series. Mitchell Hutchins will
determine from time to time what securities and other investments will be
purchased, retained or sold by each Series.
(b) Mitchell Hutchins agrees that in placing orders with brokers and
dealers, it will attempt to obtain the best net result in terms of price and
execution; provided that, on behalf
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of any Series, Mitchell Hutchins may, in its discretion, purchase and sell
portfolio securities to and from brokers and dealers who provide the Series with
research, analysis, a higher commission or spread than may be charged by other
brokers and dealers, subject to Mitchell Hutchins' determining in good faith
that such commission or spread is reasonable in terms either of the particular
transaction or of the overall responsibility of Mitchell Hutchins to such Series
and its other clients and that the total commissions or spreads paid by such
Series will be reasonable in relation to the benefits to the Series over the
long term. In no instance will portfolio securities be purchased from or sold to
Mitchell Hutchins, or any affiliated person thereof, except in accordance with
the federal securities laws and the rules and regulations thereunder. Whenever
Mitchell Hutchins simultaneously places orders to purchase or sell the same
security on behalf of a Series and one or more other accounts advised by
Mitchell Hutchins, such orders will be allocated as to price and amount among
all such accounts in a manner believed to be equitable to each account. The
Trust recognizes that in some cases this procedure may adversely affect the
results obtained for the Series.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and will
furnish the Board with such periodic and special reports as the Board reasonably
may request. In compliance with the requirements of Rule 31a-3 under the 1940
Act, Mitchell Hutchins hereby agrees that all records which it maintains for the
Trust are the property of the Trust, agrees to preserve for the periods
prescribed by rule 31a-2 under the 1940 Act any records which it maintains for
the Trust and which are required to be maintained by Rule 31a-1 under the 1940
Act, and further agrees to surrender promptly to the Trust any records which it
maintains for the Trust upon request by the Trust.
(d) Mitchell Hutchins will oversee the computation of the net asset value
and the net income of each Series as described in the currently effective
registration statement of the Trust under the Securities Act of 1933, as
amended, and 1940 Act and any supplements thereto ("Registration Statement") or
as more frequently requested by the Board.
(e) The Trust hereby authorizes Mitchell Hutchins and any entity or person
associated with Mitchell Hutchins which is a member of a national securities
exchange to effect any transaction on such exchange for the account of any
Series, which transaction is permitted by Section 11(a) of the 1934 Act and Rule
11a2-2(T) thereunder, and the Trust hereby consents to the retention of
compensation by Mitchell Hutchins or person or
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entity associated with Mitchell Hutchins for such transactions in accordance
with Rule 11a2-2(T)(a)(2)(iv).
3. Duties as Administrator. Mitchell Hutchins will administer the affairs
of the Trust and each Series subject to the supervision of the Board and the
following understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of the
Trust and each Series, including the oversight of transfer agency, custodial and
accounting services, except as hereinafter set forth; provided, however, that
nothing herein contained shall be deemed to relieve or deprive the Board of its
responsibility for and control of the conduct of the affairs of the Trust and
each Series.
(b) Mitchell Hutchins will provide the Trust and each Series with such
corporate, administrative and clerical personnel (including officers of the
Trust) and services as are reasonably deemed necessary or advisable by the
Board, including the maintenance of certain books and records of the Trust and
each Series.
(c) Mitchell Hutchins will arrange, but no pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Trust's
Registration Statement, proxy material, tax returns and required reports to each
Series' shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Trust and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies and
similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. Further Duties. In all matters relating to the performance of this
Contract, Mitchell Hutchins will act in conformity with the Declaration of
Trust, By-Laws and Registration Statement of the Trust and with the instructions
and directions of the Board and will comply with the requirements of the 1940
Act, the rules thereunder, and all other applicable federal and state laws and
regulations.
5. Delegation of Mitchell Hutchins' Duties as Investment Adviser and
Administrator. With respect to any or all Series,
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Mitchell Hutchins may enter into one or more contracts ("Sub-Advisory or
Sub-Administration Contract") with a sub-adviser or sub-administrator in which
Mitchell Hutchins delegates to such sub-adviser or sub-administrator any or all
its duties specified in Paragraph 2 and 3 of this Contract, provided that each
Sub-Advisory or Sub-Administration Contract imposes on the sub-adviser or
sub-administrator bound thereby all the duties and conditions to which Mitchell
Hutchins is subject by Paragraph 2, 3 and 4 of this Contract, and further
provided that each Sub-Advisory or Sub-Administration Contract meets all
requirements of the 1940 Act and rules thereunder.
6. Services Not Exclusive. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a Trustee, officer or employee of the Trust, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
7. Expenses.
(a) During the term of this Contract, each Series will bear all expenses,
not specifically assumed by Mitchell Hutchins, incurred in its operation and the
offering of its shares.
(b) Expenses borne by each Series will include but not be limited to the
following (or each Series' proportionate share of the following): (i) the cost
(including brokerage commissions) of securities purchased or sold by the Series
and any losses incurred in connection therewith; (ii) fees payable to and
expenses incurred on behalf of the Series by Mitchell Hutchins under this
Contract; (iii) expenses of organizing the Trust and the Series; (iv) filing
fees and expenses relating to the registration and qualification of the Series'
shares and the Trust under federal and/or state securities laws and maintaining
such registrations and qualifications; (v) fees and salaries payable to the
Trust's Trustees who are not interested persons of the Trust or Mitchell
Hutchins; (vi) all expenses incurred in connection with the Trustees' services,
including travel expenses; (vii) taxes (including any income or franchise taxes)
and governmental fees; (viii) costs of any liability, uncollectible items of
deposit and other insurance and fidelity bonds; (ix) any costs, expenses or
losses arising out of a liability of or claim for damages or other relief
asserted against the Trust or Series for violation of any law; (x) legal,
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accounting and auditing expenses, including legal fees of special counsel for
those Trustees of the Trust who are not interested persons of the Trust; (xi)
charges of custodians, transfer agents and other agents; (xii) costs of
preparing share certificates; (xiv) costs of mailing prospectuses and
supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials to existing shareholders; (xv) any
extraordinary expenses (including fees and disbursements of counsel, costs of
actions, suits or proceedings to which the Trust is a party and the expenses the
Trust may incur as a result of its legal obligation to provide indemnification
to its officers, Trustees, agents and shareholders) incurred by the Trust or
Series; (xvi) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (xvii) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the Board
any committees thereof; (xviii) the cost of investment company literature and
other publications provided by the Trust to its Trustees and officers; and (xix)
costs of mailing, stationery and communications equipment.
(c) The Trust or a Series may pay directly any expense incurred by it in
its normal operations and, if any such payment is consented to by Mitchell
Hutchins and acknowledged as otherwise payable by Mitchell Hutchins pursuant to
this Contract, the Series may reduce the fee payable to Mitchell Hutchins
pursuant to Paragraph 8 hereof by such amount. To the extent that such
deductions exceed the fee payable to Mitchell Hutchins on any monthly payment
date, such excess shall be carried forward and deducted in the same manner from
the fee payable on succeeding monthly payment dates.
(d) Mitchell Hutchins will assume the cost of any compensation for
services provided to the Trust received by the officers of the Trust and by
those Trustees who are interested persons of the Trust.
(e) The payment or assumption by Mitchell Hutchins of any expense of the
Trust or a Series that Mitchell Hutchins is not required by this Contract to pay
or assume shall not obligate Mitchell Hutchins to pay or assume the same or any
similar expense of the Trust or a Series on any subsequent occasion.
8. Compensation.
(a) For the services provided and the expenses assumed pursuant to this
Contract with respect to the Initial Series established by the Trust's
Declaration of Trust, the Trust will pay Mitchell Hutchins a fee, computed daily
and paid monthly, at an annual rate of 0.50% of such Series' average daily net
assets.
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(b) For the services provided and the expenses assumed pursuant to this
Contract with respect to any Series hereafter established, the Trust will pay to
Mitchell Hutchins from the assets of such Series a fee in an amount to be agreed
upon in a written fee agreement ("Fee Agreement") executed by the Trust on
behalf of such Series and by Mitchell Hutchins. All such Fee Agreements shall
provide that they are subject to all terms and conditions of this Contract.
(c) The fee shall be computed daily and paid monthly to Mitchell Hutchins
on or before the last business day of the next succeeding calendar month.
(d) If this Contract becomes effective or terminates before the end of any
month, the fee for the period from the effective date to the end of the month or
from the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. Limitation of Liability of Mitchell Hutchins. Mitchell Hutchins shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by any Series or the Trust in connection with the matters to which this
Contract relates except a loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Contract. Any person,
even though also an officer, partner, employee, or agent of Mitchell Hutchins,
who may be or become an officer, Trustee, employee or agent of the Trust shall
be deemed, when rendering services to any Series or the Trust or acting with
respect to any business of such Series or the Trust, to be rendering such
service to or acting solely for the Series or the Trust and not as an officer,
partner, employee, or agent or one under the control or direction of Mitchell
Hutchins even though paid by it.
10. Limitation of Liability of the Trustees and Shareholders of the Trust.
The Trustees of the Trust and the shareholders of any Series shall not be liable
for any obligations of any Series or the Trust under this Contract, and Mitchell
Hutchins agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Trust in settlement of such
right or claim, and not to such Trustees or shareholders.
11. Duration and Termination.
(a) This Contract shall become effective upon the date hereabove written
provided that, with respect to any Series, this
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Contract shall not take effect unless it has first been approved (i) by a vote
of a majority of those Trustees of the Trust who are not parties to this
Contract or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (ii) by vote of a
majority of that Series' outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those Trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or with respect to any given Series by vote of a majority of
the outstanding voting securities of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board or by a vote of a majority of the outstanding voting
securities of such Series on sixty days' written notice to Mitchell Hutchins or
by Mitchell Hutchins at any time, without the payment of any penalty, on sixty
days' written notice to the Trust. Termination of this Contract with respect to
any given Series shall in no way affect the continued validity of this Contract
or the performance thereunder with respect to any other Series. This Contract
will automatically terminate in the event of its assignment.
12. Amendment of this Contract. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Contract as to any
given Series shall be effective until approved by vote of a majority of such
Series' outstanding voting securities.
13. Governing Law. This Contract shall be construed in accordance with the
laws of the State of Delaware and the 1940 Act, provided, however, that Section
10 above will be construed in accordance with the laws of the Commonwealth of
Massachusetts. To the extent that the applicable laws of the State of Delaware
or the Commonwealth of Massachusetts conflict with the applicable provisions of
the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their
7
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<PAGE>
construction or effect. If any provision of this Contract shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Contract shall not be affected thereby. This Contract shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors. As used in this Contract, the terms "majority of the outstanding
voting securities," "interested person," "assignment", "broker," "dealer,"
"investment adviser," "national securities exchange," "net assets,"
"prospectus," "sale," "sell" and "security" shall have the same meaning as such
terms have in the 1940 Act, subject to such exemption as may be granted by the
Securities and Exchange Commission by any rule, regulation or order. Where the
effect of a requirement of the 1940 Act reflected in any provision of this
Contract is relaxed by a rule, regulation or order of the Securities and
Exchange Commission, whether of special or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated as of the day and year first above
written.
Attest: PAINEWEBBER CALIFORNIA TAX-EXEMPT INCOME
FUND
/s/ Abbe P. Stein By: /s/ Dianne E. O'Donnell
- ------------------------ ------------------------------
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
/s/ Abbe P. Stein By: /s/ Ellen R. Harris
- ------------------------ ------------------------------
8
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Exhibit No. 4(b)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of June 29, 1992, between PAINEWEBBER MUTUAL FUND
TRUST, a Massachusetts business trust ("Trust"), on behalf of PaineWebber
National Tax-Free Income Fund ("Fund"), a series of shares of beneficial
interest of the Trust and MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Mitchell
Hutchins"), a Delaware corporation registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended, and as an investment adviser under
the Investment Advisers Act of 1940, as amended.
WHEREAS the Trust has appointed Mitchell Hutchins as investment adviser
and administrator for each series of shares of beneficial interest of the Trust
as now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract dated April 21, 1988 between the Trust and
Mitchell Hutchins ("Advisory Contract"); and
WHEREAS the Fund has been established as a new series of shares of the
Trust;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Fund, the Fund will pay to Mitchell
Hutchins a fee, computed daily and paid monthly, at the annual rate of 0.50% of
the Fund's average daily net assets.
2. This Fee Agreement shall be subject to all terms and conditions of
the Advisory Contract.
3. This Fee Agreement shall become effective upon the date hereabove
written, provided that it shall not take effect unless it has first been
approved (1) by a vote of majority of those Trustees of the Trust who are not
parties to this Fee Agreement or the Advisory Contract or interested persons of
any such persons at a meeting called for the purpose of such approval and (ii)
by a vote of a majority of the Fund's outstanding voting securities.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
PAINEWEBBER MUTUAL FUND TRUST
By: /s/ Dianne E. O'Donnell
_____________________________________________
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By: /s/ Jack W. Murphy
_____________________________________________
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Exhibit No. 5(a)
PAINEWEBBER MUTUAL FUND TRUST
DISTRIBUTION CONTRACT
CLASS A SHARES
CONTRACT made as of July 7, 1993, between PAINEWEBBER MUTUAL FUND TRUST, a
Massachusetts business trust ("Fund"), and MITCHELL HUTCHINS ASSET MANAGEMENT
INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of l940,
as amended ("l940 Act"), as an open-end management investment company and
currently has two distinct series of shares of beneficial interest ("Series"),
which correspond to distinct portfolios and have been designated as the
PaineWebber California Tax-Free Income Fund and PaineWebber National Tax-Free
Income Fund; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class A shares ("Class A Shares"); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act for its Class A Shares ("Plan") and desires to retain
Mitchell Hutchins as principal distributor in connection with the offering and
sale of the Class A Shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Board and have Class A Shares
established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of
the Class A Shares of each such Series on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins as its
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class A Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class A Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the Securities Act of
1933, as amended ("1933 Act"), and the 1940 Act.
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2. Services and Duties of Mitchell Hutchins.
(a) Mitchell Hutchins agrees to sell Class A Shares on a best
efforts basis from time to time during the term of this Contract as agent for
the Fund and upon the terms described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Class A Shares to the public by a Series, Mitchell Hutchins will
hold itself available to receive purchase orders, satisfactory to Mitchell
Hutchins, for Class A Shares of that Series and will accept such orders on
behalf of the Fund as of the time of receipt of such orders and promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class A Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class A Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office plus the applicable initial
sales charge, if any, computed as set forth in the Registration Statement. The
Fund shall promptly furnish Mitchell Hutchins with a statement of each
computation of net asset value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class A Shares.
(f) To facilitate redemption of Class A Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class A Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement. Such price shall reflect the subtraction
of the contingent deferred sales charge, if any, computed in accordance with and
in the manner set forth in the Registration Statement.
(g) Mitchell Hutchins shall provide ongoing shareholder services,
which include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class A Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Section 26(d) of the National Association of Securities Dealers,
Inc. ("NASD") Rules of Fair Practice (collectively, "service activities").
"Service activities" do not include the transfer agency-related and other
services for which PaineWebber receives compensation under the Service Contract
between PaineWebber and the Fund.
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<PAGE>
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
3. Authorization to Enter into Exclusive Dealer Agreements and to Delegate
Duties as Distributor. With respect to the Class A Shares of any or all Series,
Mitchell Hutchins may enter into an exclusive dealer agreement with PaineWebber
or any other registered and qualified dealer with respect to sales of the Class
A Shares or the provision of service activities. In a separate contract or as
part of any such exclusive dealer agreement, Mitchell Hutchins also may delegate
to PaineWebber or another registered and qualified dealer ("sub-distributor")
any or all of its duties specified in this Contract, provided that such separate
contract or exclusive dealer agreement imposes on the sub-distributor bound
thereby all applicable duties and conditions to which Mitchell Hutchins is
subject under this Contract, and further provided that such separate contract or
exclusive dealer agreement meets all requirements of the 1940 Act and rules
thereunder.
4. Services Not Exclusive. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. Compensation.
(a) As compensation for its service activities under this contract
with respect to the Class A Shares, Mitchell Hutchins shall receive from the
Fund a service fee at the rate and under the terms and conditions of the Plan
adopted by the Fund with respect to the Class A Shares of the Series, as such
Plan is amended from time to time, and subject to any further limitations on
such fee as the Board may impose.
(b) As compensation for its activities under this contract with
respect to the distribution of the Class A Shares, Mitchell Hutchins shall
retain the initial sales charge, if any, on purchases of Class A Shares as set
forth in the Registration Statement. Mitchell Hutchins is authorized to collect
the gross proceeds derived from the sale of the Class A Shares, remit the net
asset value thereof to the fund upon receipt of the proceeds and retain the
initial sales charge, if any.
(c) As compensation for its activities under this contract with
respect to the distribution of the Class A Shares, Mitchell Hutchins shall
receive all contingent deferred sales charges imposed on redemptions of Class A
Shares of each Series. Whether and at what rate a
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<PAGE>
contingent deferred sales charge will be imposed with respect to a redemption
shall be determined in accordance with, and in the manner set forth in, the
Registration Statement.
(d) Mitchell Hutchins may reallow any or all of the initial sales
charges, contingent deferred sales charges, or service fees which it is paid
under this Contract to such dealers as Mitchell Hutchins may from time to time
determine.
6. Duties of the Fund.
(a) The Fund reserves the right at any time to withdraw offering
Class A Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class A Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing Class A Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing Class A Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of Class A Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class A Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class A Shares under the 1933 Act to the end that there will be available for
sale such number of Class A Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class A Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Declaration of Trust or By-Laws to comply with the laws of
any jurisdiction, to maintain an office in any jurisdiction, to change the terms
of the offering of the Class A Shares in
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<PAGE>
any jurisdiction from the terms set forth in its Registration Statement, to
qualify as a foreign corporation in any jurisdiction, or to consent to service
of process in any jurisdiction other than with respect to claims arising out of
the offering of the Class A Shares. Mitchell Hutchins shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such qualifications.
7. Expenses of the Fund. The Fund shall bear all costs and expenses of
registering the Class A Shares with the Securities and Exchange Commission and
state and other regulatory bodies, and shall assume expenses related to
communications with shareholders of each Series, including (i) fees and
disbursements of its counsel and independent public accountant; (ii) the
preparation, filing and printing of registration statements and/or prospectuses
or statements of additional information required under the federal securities
laws; (iii) the preparation and mailing of annual and interim reports,
prospectuses, statements of additional information and proxy materials to
shareholders; and (iv) the qualifications of Class A Shares for sale and of the
Fund as a broker or dealer under the securities laws of such jurisdictions as
shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph 6(e)
hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. Expenses of Mitchell Hutchins. Mitchell Hutchins shall bear all costs
and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of Class A Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class A Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class A Shares as
may be incurred in connection with their sales efforts.
9. Indemnification.
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities
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<PAGE>
or expenses arise out of or are based upon any such untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or trustee
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to Mitchell Hutchins or
any person against whom such action is brought otherwise than on account of this
indemnity agreement. The Fund shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any claims subject to this indemnity agreement. If the Fund
elects to assume the defense of any such claim, the defense shall be conducted
by counsel chosen by the Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the defense of a
suit, it will reimburse the indemnified defendants for the reasonable fees and
expenses of any counsel retained by the indemnified defendants. The Fund agrees
to notify Mitchell Hutchins promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of its Class A Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the
Fund, its officers and trustees and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising
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used by Mitchell Hutchins in connection with its duties under this Contract.
Mitchell Hutchins shall be entitled to participate, at its own expense, in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce the claim, but if Mitchell Hutchins elects to assume the defense, the
defense shall be conducted by counsel chosen by Mitchell Hutchins and
satisfactory to the indemnified defendants whose approval shall not be
unreasonably withheld. In the event that Mitchell Hutchins elects to assume the
defense of any suit and retain counsel, the defendants in the suit shall bear
the fees and expenses of any additional counsel retained by them. If Mitchell
Hutchins does not elect to assume the defense of any suit, it will reimburse the
indemnified defendants in the suit for the reasonable fees and expenses of any
counsel retained by them.
10. Limitation of Liability of the Trustees and Shareholders of the Fund.
The trustees of the Fund and the shareholders of any Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and Mitchell
Hutchins agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
11. Services Provided to the Fund by Employees of Mitchell Hutchins. Any
person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. Duration and Termination.
(a) This Contract shall become effective upon the date hereabove
written, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in the operation of the Plan relating to the Series or in any
agreements related thereto (all such trustees collectively being referred to
herein as the "Independent Trustees") cast in person at a meeting called for the
purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class A Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a
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majority of the Independent Trustees or by vote of a majority of the outstanding
voting securities of the Class A Shares of such Series on sixty days' written
notice to Mitchell Hutchins or by Mitchell Hutchins at any time, without the
payment of any penalty, on sixty days' written notice to the Fund or such
Series. This Contract will automatically terminate in the event of its
assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. Amendment of this Contract. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. Governing Law. This Contract shall be construed in accordance with the
laws of the State of Delaware and the 1940 Act, provided, however, that Section
10 above will be construed in accordance with the laws of the Commonwealth of
Massachusetts. To the extent that the applicable laws of the State of Delaware
or the Commonwealth of Massachusetts conflict with the applicable provisions of
the l940 Act, the latter shall control.
15. Notice. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
16. Miscellaneous. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
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IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: PAINEWEBBER MUTUAL FUND TRUST
/s/ Jenny Ann Frank By: /s/ Dianne E. O'Donnell
-------------------------- ---------------------------------
Dianne E. O'Donnell
Secretary and Vice President
ATTEST: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
/s/ Jenny Ann Frank By: /s/ Jack W. Murphy
-------------------------- ---------------------------------
Jack W. Murphy
First Vice President
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Exhibit No. 5(b)
PAINEWEBBER MUTUAL FUND TRUST
DISTRIBUTION CONTRACT
CLASS B SHARES
CONTRACT made as of July 7, 1993, between PAINEWEBBER MUTUAL FUND TRUST, a
Massachusetts business trust ("Fund") and MITCHELL HUTCHINS ASSET MANAGEMENT
INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of l940,
as amended ("l940 Act"), as an open-end management investment company and
currently has two distinct series of shares of beneficial interest ("Series"),
which correspond to distinct portfolios and have been designated as the
PaineWebber California Tax-Free Income Fund and PaineWebber National Tax-Free
Income Fund; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class B shares ("Class B Shares"); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act for its Class B Shares ("Plan") and desires to retain
Mitchell Hutchins as principal distributor in connection with the offering and
sale of the Class B Shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Board and have Class B Shares
established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of
the Class B Shares of each such Series on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins as its
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class B Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class B Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the Securities Act of
1933, as amended ("1933 Act"), and the 1940 Act.
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2. Services and Duties of Mitchell Hutchins.
(a) Mitchell Hutchins agrees to sell Class B Shares on a best
efforts basis from time to time during the term of this Contract as agent for
the Fund and upon the terms described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Class B Shares to the public by a Series, Mitchell Hutchins will
hold itself available to receive purchase orders, satisfactory to Mitchell
Hutchins, for Class B Shares of that Series and will accept such orders on
behalf of the Fund as of the time of receipt of such orders and promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class B Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class B Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office. The Fund shall promptly
furnish Mitchell Hutchins with a statement of each computation of net asset
value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class B Shares.
(f) To facilitate redemption of Class B Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class B Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement. Such price shall reflect the subtraction
of the contingent deferred sales charge, if any, computed in accordance with and
in the manner set forth in the Registration Statement.
(g) Mitchell Hutchins shall provide ongoing shareholder services,
which include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class B Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Section 26(d) of the National Association of Securities Dealers,
Inc. ("NASD") Rules of Fair Practice (collectively, "service activities").
"Service activities" do not include the transfer agency-related and other
services for which PaineWebber receives compensation under the Service Contract
between PaineWebber and the Fund.
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services
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under this Contract; provided, however, that Mitchell Hutchins shall not sell or
knowingly provide such list or lists to any unaffiliated person.
3. Authorization to Enter into Exclusive Dealer Agreements and to Delegate
Duties as Distributor. With respect to the Class B Shares of any or all Series,
Mitchell Hutchins may enter into an exclusive dealer agreement with PaineWebber
or any other registered and qualified dealer with respect to sales of the Class
B Shares or the provision of service activities. In a separate contract or as
part of any such exclusive dealer agreement, Mitchell Hutchins also may delegate
to PaineWebber or another registered and qualified dealer ("sub-distributor")
any or all of its duties specified in this Contract, provided that such separate
contract or exclusive dealer agreement imposes on the sub-distributor bound
thereby all applicable duties and conditions to which Mitchell Hutchins is
subject under this Contract, and further provided that such separate contract or
exclusive dealer agreement meets all requirements of the 1940 Act and rules
thereunder.
4. Services Not Exclusive. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. Compensation.
(a) As compensation for its service activities under this contract
with respect to the Class B Shares, Mitchell Hutchins shall receive from the
Fund a service fee at the rate and under the terms and conditions of the Plan
adopted by the Fund with respect to the Class B Shares of the Series, as such
Plan is amended from time to time, and subject to any further limitations on
such fee as the Board may impose.
(b) As compensation for its activities under this contract with
respect to the distribution of the Class B Shares, Mitchell Hutchins shall
receive from the Fund a distribution fee at the rate and under the terms and
conditions of the Plan adopted by the Fund with respect to the Class B Shares of
the Series, as such Plan is amended from time to time, and subject to any
further limitations on such fee as the Board may impose.
(c) As compensation for its activities under this contract with
respect to the distribution of the Class B Shares, Mitchell Hutchins shall
receive all contingent deferred sales charges imposed on redemptions of Class B
Shares of each Series. Whether and at what rate a contingent deferred sales
charge will be imposed with respect to a redemption shall be determined in
accordance with, and in the manner set forth in, the Registration Statement.
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(d) Mitchell Hutchins may reallow any or all of the distribution
fees, contingent deferred sales charges, or service fees which it is paid under
this Contract to such dealers as Mitchell Hutchins may from time to time
determine.
6. Duties of the Fund.
(a) The Fund reserves the right at any time to withdraw offering
Class B Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class B Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing Class B Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing Class B Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of Class B Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class B Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class B Shares under the 1933 Act to the end that there will be available for
sale such number of Class B Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class B Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Declaration of Trust or By-Laws to comply with the laws of
any jurisdiction, to maintain an office in any jurisdiction, to change the terms
of the offering of the Class B Shares in any jurisdiction from the terms set
forth in its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Class B Shares.
Mitchell Hutchins shall
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furnish such information and other material relating to its affairs and
activities as may be required by the Fund in connection with such
qualifications.
7. Expenses of the Fund. The Fund shall bear all costs and expenses of
registering the Class B Shares with the Securities and Exchange Commission and
state and other regulatory bodies, and shall assume expenses related to
communications with shareholders of each Series, including (i) fees and
disbursements of its counsel and independent public accountant; (ii) the
preparation, filing and printing of registration statements and/or prospectuses
or statements of additional information required under the federal securities
laws; (iii) the preparation and mailing of annual and interim reports,
prospectuses, statements of additional information and proxy materials to
shareholders; and (iv) the qualifications of Class B Shares for sale and of the
Fund as a broker or dealer under the securities laws of such jurisdictions as
shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph 6(e)
hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. Expenses of Mitchell Hutchins. Mitchell Hutchins shall bear all costs
and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of Class B Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class B Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class B Shares as
may be incurred in connection with their sales efforts.
9. Indemnification.
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement;
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provided, however, that this indemnity agreement shall not inure to the benefit
of any person who is also an officer or trustee of the Fund or who controls the
Fund within the meaning of Section 15 of the 1933 Act, unless a court of
competent jurisdiction shall determine, or it shall have been determined by
controlling precedent, that such result would not be against public policy as
expressed in the 1933 Act; and further provided, that in no event shall anything
contained herein be so construed as to protect Mitchell Hutchins against any
liability to the Fund or to the shareholders of any Series to which Mitchell
Hutchins would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations under this Contract. The Fund shall not be
liable to Mitchell Hutchins under this indemnity agreement with respect to any
claim made against Mitchell Hutchins or any person indemnified unless Mitchell
Hutchins or other such person shall have notified the Fund in writing of the
claim within a reasonable time after the summons or other first written
notification giving information of the nature of the claim shall have been
served upon Mitchell Hutchins or such other person (or after Mitchell Hutchins
or the person shall have received notice of service on any designated agent).
However, failure to notify the Fund of any claim shall not relieve the Fund from
any liability which it may have to Mitchell Hutchins or any person against whom
such action is brought otherwise than on account of this indemnity agreement.
The Fund shall be entitled to participate at its own expense in the defense or,
if it so elects, to assume the defense of any suit brought to enforce any claims
subject to this indemnity agreement. If the Fund elects to assume the defense of
any such claim, the defense shall be conducted by counsel chosen by the Fund and
satisfactory to indemnified defendants in the suit whose approval shall not be
unreasonably withheld. In the event that the Fund elects to assume the defense
of any suit and retain counsel, the indemnified defendants shall bear the fees
and expenses of any additional counsel retained by them. If the Fund does not
elect to assume the defense of a suit, it will reimburse the indemnified
defendants for the reasonable fees and expenses of any counsel retained by the
indemnified defendants. The Fund agrees to notify Mitchell Hutchins promptly of
the commencement of any litigation or proceedings against it or any of its
officers or trustees in connection with the issuance or sale of any of its Class
B Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the
Fund, its officers and trustees and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the
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defense of any suit brought to enforce the claim, but if Mitchell Hutchins
elects to assume the defense, the defense shall be conducted by counsel chosen
by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. Limitation of Liability of the Trustees and Shareholders of the Fund.
The trustees of the Fund and the shareholders of any Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and Mitchell
Hutchins agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
11. Services Provided to the Fund by Employees of Mitchell Hutchins. Any
person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. Duration and Termination.
(a) This Contract shall become effective upon the date hereabove
written, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in the operation of the Plan relating to the Series or in any
agreements related thereto (all such trustees collectively being referred to
herein as the "Independent Trustees"), cast in person at a meeting called for
the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class B Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting securities of the Class B Shares of such
Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
Hutchins at any time, without the payment of any penalty, on sixty days' written
notice
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to the Fund or such Series. This Contract will automatically terminate in the
event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. Amendment of this Contract. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. Governing Law. This Contract shall be construed in accordance with the
laws of the State of Delaware and the 1940 Act, provided, however, that Section
10 above will be construed in accordance with the laws of the Commonwealth of
Massachusetts. To the extent that the applicable laws of the State of Delaware
or the Commonwealth of Massachusetts conflict with the applicable provisions of
the l940 Act, the latter shall control.
15. Notice. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
16. Miscellaneous. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: PAINEWEBBER MUTUAL FUND TRUST
/s/ Jenny Ann Frank By: /s/ Dianne E. O'Donnell
----------------------- -----------------------------------
Dianne E. O'Donnell
Secretary and Vice President
ATTEST: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
/s/ Jenny Ann Frank By: /s/ Jack W. Murphy
----------------------- -----------------------------------
Jack W. Murphy
First Vice President
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Exhibit No. 5(e)
EXCLUSIVE DEALER AGREEMENT
CLASS A SHARES OF PAINEWEBBER MUTUAL FUND TRUST
AGREEMENT made as of July 7, 1993, between Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and PaineWebber
Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS PaineWebber Mutual Fund Trust ("Fund") is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended ("1940
Act"), as an open-end management investment company; and
WHEREAS the Fund currently has two distinct series of shares of beneficial
interest ("Series"), which correspond to distinct portfolios and have been
designated as the PaineWebber California Tax-Free Income Fund and PaineWebber
National Tax-Free Income Fund; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class A shares ("Class A Shares") and has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Plan") with respect to the Class A
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class A Shares established; and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with
the Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class A
Shares of each such Series; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class A Shares of each
Series and to delegate to PaineWebber performance of certain of the services
which Mitchell Hutchins provides to the Fund under the Distribution Contract;
and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive
agent in connection with the offering and sale of such Class A Shares and to
perform such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
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1. Appointment. Mitchell Hutchins hereby appoints PaineWebber as its
exclusive agent to sell and to arrange for the sale of the Class A Shares on the
terms and for the period set forth in this Agreement. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class A Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Agreement,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. Services, Duties and Representations of PaineWebber.
(a) PaineWebber agrees to sell the Class A Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms described in this Agreement and the Registration
Statement.
(b) Upon the later of the date of this Agreement or the initial
offering of Class A Shares by a Series to the public, PaineWebber will hold
itself available to receive orders, satisfactory to PaineWebber and Mitchell
Hutchins, for the purchase of Class A Shares and will accept such orders on
behalf of Mitchell Hutchins and the Fund as of the time of receipt of such
orders and will promptly transmit such orders as are accepted to the Fund's
transfer agent. Purchase orders shall be deemed effective at the time and in the
manner set forth in the Registration Statement.
(c) PaineWebber in its discretion may sell Class A Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall act
only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class A Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office, plus the applicable initial sales
charge, if any, as set forth in the Registration Statement. Mitchell Hutchins
shall promptly furnish or arrange for the furnishing to PaineWebber of a
statement of each computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain number of
Class A Shares.
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(f) To facilitate redemption of Class A Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class A Shares presented
to it by shareholders, its correspondent firms and other dealers at the price
determined in accordance with, and in the manner set forth in, the Registration
Statement. Such price shall reflect the subtraction of the applicable contingent
deferred sales charge, if any, computed in accordance with and in the manner set
forth in the Registration Statement.
(g) PaineWebber shall provide ongoing shareholder services, which
include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class A Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Section 26(d) of the National Association of Securities Dealers,
Inc. ("NASD") Rules of Fair Practice (collectively, "service activities").
"Service activities" do not include the transfer agency-related and other
services for which PaineWebber receives compensation under the Service Contract
between PaineWebber and the Fund.
(h) PaineWebber represents and warrants that: (i) it is a member in
good standing of the NASD and agrees to abide by the Rules of Fair Practice of
the NASD; (ii) it is registered as a broker-dealer with the Securities and
Exchange Commission; (iii) it will maintain any filings and licenses required by
federal and state laws to conduct the business contemplated under this
Agreement; and (iv) it will comply with all federal and state laws and
regulations applicable to the offer and sale of the Class A Shares.
(i) PaineWebber shall not incur any debts or obligations on behalf
of Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it
incurs in selling the Class A Shares and in complying with the terms and
conditions of this Agreement as more specifically set forth in paragraph 8.
(j) PaineWebber shall not permit any employee or agent to offer or
sell Class A Shares to the public unless such person is duly licensed under
applicable federal and state laws and regulations.
(k) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class A Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class A Shares in jurisdictions in which they have not been
approved for offer and sale.
3. Services Not Exclusive. The services furnished by PaineWebber hereunder
are not to be deemed exclusive and PaineWebber shall be free to furnish similar
services to others so long as its services under this Agreement are not impaired
thereby. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of PaineWebber who may also be a director,
trustee, officer or employee of Mitchell Hutchins or the Fund, to engage in any
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other business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar or a
dissimilar nature.
4. Compensation.
(a) As compensation for its service activities under this Agreement
with respect to the Class A Shares, Mitchell Hutchins shall pay to PaineWebber
service fees with respect to Class A Shares maintained in shareholder accounts
serviced by PaineWebber employees, correspondent firms and other dealers in such
amounts as Mitchell Hutchins and PaineWebber may from time to time agree upon.
(b) As compensation for its activities under this Agreement with
respect to the distribution of the Class A Shares, PaineWebber shall retain that
portion of the offering price constituting the Discount to Selected Dealers
("Discount"), if any, set forth in the Registration Statement for Class A shares
sold with an initial sales charge under this Agreement. PaineWebber is
authorized to collect the gross proceeds derived from the sale of such Class A
Shares; remit the net asset value thereof to the Fund's Transfer Agent; remit to
Mitchell Hutchins the difference between the offering price of the Class A
Shares and the applicable Discount; and retain said Discount. Whether the
offering price of the Class A Shares includes any initial sales charge out of
which a Discount may be retained by PaineWebber shall be determined in
accordance with the Registration Statement.
(c) Mitchell Hutchins shall pay to PaineWebber such commissions and
other compensation for sales of the Class A Shares by PaineWebber employees,
correspondent firms and other dealers as Mitchell Hutchins and PaineWebber may
from time to time agree upon.
(d) Mitchell Hutchins' obligation to pay compensation to PaineWebber
as agreed upon pursuant to this paragraph 4 is not contingent upon receipt by
Mitchell Hutchins of any compensation from the Fund or Series. Mitchell Hutchins
shall advise the Board of any agreements or revised agreements as to
compensation to be paid by Mitchell Hutchins to PaineWebber at their first
regular meeting held after such agreement but shall not be required to obtain
prior approval for such agreements from the Board.
(e) PaineWebber may reallow all or any part of the service fees,
commissions or other compensation which it is paid under this Agreement to its
correspondent firms or other dealers, in such amounts as PaineWebber may from
time to time determine.
5. Duties of Mitchell Hutchins.
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class A Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the
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distribution of Class A Shares, including, without limitation, certified copies
of any financial statements prepared for the Fund by its independent public
accountant and such reasonable number of copies of the most current prospectus,
statement of additional information, and annual and interim reports of any
Series as PaineWebber may request, and Mitchell Hutchins shall cooperate fully
in the efforts of PaineWebber to sell and arrange for the sale of the Class A
Shares and in the performance of PaineWebber under this Agreement.
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class A Shares.
6. Advertising. Mitchell Hutchins agrees to make available such sales and
advertising materials relating to the Class A Shares as Mitchell Hutchins in its
discretion determines appropriate. PaineWebber agrees to submit all sales and
advertising materials developed by it relating to the Class A Shares to Mitchell
Hutchins for approval. PaineWebber agrees not to publish or distribute such
materials to the public without first receiving such approval in writing.
Mitchell Hutchins shall assist PaineWebber in obtaining any regulatory approvals
of such materials that may be required of or desired by PaineWebber.
7. Records. PaineWebber agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of the Class A Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. Expenses of PaineWebber. PaineWebber shall bear all costs and expenses
of (i) preparing, printing, and distributing any materials not prepared by the
Fund or Mitchell Hutchins and other materials used by PaineWebber in connection
with its offering of Class A Shares for sale to the public; (ii) any expenses of
advertising incurred by PaineWebber in connection with such offering; (iii) the
expenses of registration or qualification of PaineWebber as a dealer or broker
under federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to PaineWebber's Investment
Executives or other employees and others for selling Class A Shares, and all
expenses of PaineWebber, its Investment Executives and employees and others who
engage in or support the sale of Class A Shares as may be incurred in connection
with their sales efforts. PaineWebber shall bear such additional costs and
expenses as it and Mitchell Hutchins may agree upon, such agreement to be
evidenced in a writing signed by both parties. Mitchell Hutchins shall advise
the Board of any such agreement as to additional costs and expenses borne by
PaineWebber at their first regular meeting held after such agreement but shall
not be required to obtain prior approval for such agreements from the Board.
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9. Indemnification.
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Class A Shares
provided by Mitchell Hutchins to PaineWebber. However, this indemnity agreement
shall not apply to any claims, demands, liabilities, or expenses that arise out
of or are based upon any such untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with information
furnished in writing by PaineWebber to Mitchell Hutchins or the Fund for use in
the Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement.
(b) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and trustees,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending against such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Mitchell Hutchins or its officers or
directors or the Fund, its officers or trustees, or any such controlling person
may incur under the 1933 Act, under common law or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration Statement; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Agreement.
6
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<PAGE>
10. Duration and Termination.
(a) This Agreement shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related thereto (all
such trustees collectively being referred to herein as the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
action.
(b) Unless sooner terminated as provided herein, this Agreement
shall continue in effect for one year from the above written date. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or with respect to any given Series by vote of a
majority of the outstanding voting securities of the Class A Shares of such
Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Agreement may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Agreement may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class A Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
(d) Termination of this Agreement with respect to any given Series
shall in no way affect the continued validity of this Agreement or the
performance thereunder with respect to any other Series. This Agreement will
automatically terminate in the event of its assignment or in the event that the
Distribution Contract is terminated.
(e) Notwithstanding the foregoing, Mitchell Hutchins may terminate
this Agreement without penalty, such termination to be effective upon the giving
of written notice to PaineWebber in the event that the Plan is terminated or is
amended to reduce the compensation payable to Mitchell Hutchins thereunder or in
the event that the Registration Statement is amended so as to reduce the amount
of compensation payable to Mitchell Hutchins under the Distribution Contract,
provided that Mitchell Hutchins gives notice of termination pursuant to this
provision within 90 days of such amendment or termination of the Plan or
amendment of the Registration Statement.
11. Amendment of this Agreement. No provision of this Agreement may be
amended, changed, waived, discharged or terminated orally, but only by an
instrument in writing
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signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
12. Use of PaineWebber Name. PaineWebber hereby authorizes Mitchell
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class A Shares, but
only for so long as this Agreement or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meaning as such terms
have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: /s/ Jenny Ann Frank By: /s/ Dianne E. O'Donnell
--------------------- --------------------------------
Dianne E. O'Donnell
First Vice President
PAINEWEBBER INCORPORATED
Attest: /s/ Jenny Ann Frank By: /s/ Steven M. Joenk
--------------------- --------------------------------
Steven M. Joenk
Corporate Vice President
8
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Exhibit No. 5(f)
EXCLUSIVE DEALER AGREEMENT
CLASS B SHARES OF PAINEWEBBER MUTUAL FUND TRUST
AGREEMENT made as of July 7, 1993, between Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and PaineWebber
Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS PaineWebber Mutual Fund Trust ("Fund") is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended ("1940
Act"), as an open-end management investment company; and
WHEREAS the Fund currently has two distinct series of shares of beneficial
interest ("Series"), which correspond to distinct portfolio and have been
designated as the PaineWebber California Tax-Free Income Fund and PaineWebber
National Tax-Free Income Fund; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class B shares ("Class B Shares") and has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Plan") with respect to the Class B
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class B Shares established; and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with
the Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class B
Shares of each such Series; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class B Shares of each
Series and to delegate to PaineWebber performance of certain of the services
which Mitchell Hutchins provides to the Fund under the Distribution Contract;
and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive
agent in connection with the offering and sale of such Class B Shares and to
perform such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
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<PAGE>
1. Appointment. Mitchell Hutchins hereby appoints PaineWebber as its
exclusive agent to sell and to arrange for the sale of the Class B Shares on the
terms and for the period set forth in this Agreement. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class B Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Agreement,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. Services, Duties and Representations of PaineWebber.
(a) PaineWebber agrees to sell the Class B Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms described in this Agreement and the Registration
Statement.
(b) Upon the later of the date of this Agreement or the initial
offering of Class B Shares by a Series to the public, PaineWebber will hold
itself available to receive orders, satisfactory to PaineWebber and Mitchell
Hutchins, for the purchase of Class B Shares and will accept such orders on
behalf of Mitchell Hutchins and the Fund as of the time of receipt of such
orders and will promptly transmit such orders as are accepted to the Fund's
transfer agent. Purchase orders shall be deemed effective at the time and in the
manner set forth in the Registration Statement.
(c) PaineWebber in its discretion may sell Class B Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall act
only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class B Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office. Mitchell Hutchins shall promptly
furnish or arrange for the furnishing to PaineWebber of a statement of each
computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain number of
Class B Shares.
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(f) To facilitate redemption of Class B Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class B Shares presented
to it by shareholders, its correspondent firms and other dealers at the price
determined in accordance with, and in the manner set forth in, the Registration
Statement. Such price shall reflect the subtraction of the applicable contingent
deferred sales charge, if any, computed in accordance with and in the manner set
forth in the Registration Statement.
(g) Painewebber shall provide ongoing shareholder services, which
include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class B Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Section 26(d) of the National Association of Securities Dealers,
Inc. ("NASD") Rules of Fair Practice (collectively, "service activities").
"Service activities" do not include the transfer agency-related and other
services for which PaineWebber receives compensation under the Service Contract
between PaineWebber and the Fund.
(h) PaineWebber represents and warrants that: (i) it is a member in
good standing of the NASD and agrees to abide by the Rules of Fair Practice of
the NASD; (ii) it is registered as a broker-dealer with the Securities and
Exchange Commission; (iii) it will maintain any filings and licenses required by
federal and state laws to conduct the business contemplated under this
Agreement; and (iv) it will comply with all federal and state laws and
regulations applicable to the offer and sale of the Class B Shares.
(i) PaineWebber shall not incur any debts or obligations on behalf
of Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it
incurs in selling the Class B Shares and in complying with the terms and
conditions of this Agreement as more specifically set forth in paragraph 8.
(j) PaineWebber shall not permit any employee or agent to offer or
sell Class B Shares to the public unless such person is duly licensed under
applicable federal and state laws and regulations.
(k) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class B Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class B Shares in jurisdictions in which they have not been
approved for offer and sale.
3. Services Not Exclusive. The services furnished by PaineWebber hereunder
are not to be deemed exclusive and PaineWebber shall be free to furnish similar
services to others so long as its services under this Agreement are not impaired
thereby. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of PaineWebber who may also be a director,
trustee, officer or employee of Mitchell Hutchins or the Fund, to engage in any
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<PAGE>
other business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar or a
dissimilar nature.
4. Compensation.
(a) As compensation for its service activities under this Agreement
with respect to the Class B Shares, Mitchell Hutchins shall pay to PaineWebber
service fees with respect to Class B Shares maintained in shareholder accounts
serviced by PaineWebber employees, correspondent firms and other dealers in such
amounts as Mitchell Hutchins and PaineWebber may from time to time agree upon.
(b) As compensation for its activities under this Agreement with
respect to the distribution of the Class B Shares, Mitchell Hutchins shall pay
to PaineWebber such commissions for sales of the Class D shares by PaineWebber
employees, correspondent firms and other dealers and such other compensation as
Mitchell Hutchins and PaineWebber may from time to time agree upon.
(c) Mitchell Hutchins' obligation to pay compensation to PaineWebber
as agreed upon pursuant to this paragraph 4 is not contingent upon receipt by
Mitchell Hutchins of any compensation from the Fund or Series. Mitchell Hutchins
shall advise the Board of any agreements or revised agreements as to
compensation to be paid by Mitchell Hutchins to PaineWebber at their first
regular meeting held after such agreement but shall not be required to obtain
prior approval for such agreements from the Board.
(d) PaineWebber may reallow all or any part of the service fees,
commissions or other compensation which it is paid under this Agreement to its
correspondent firms or other dealers, in such amounts as PaineWebber may from
time to time determine.
5. Duties of Mitchell Hutchins.
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class B Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the distribution of Class B
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of any Series as
PaineWebber may request, and Mitchell Hutchins shall cooperate fully in the
efforts of PaineWebber to sell and arrange for the sale of the Class B Shares
and in the performance of PaineWebber under this Agreement.
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<PAGE>
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class B Shares.
6. Advertising. Mitchell Hutchins agrees to make available such sales and
advertising materials relating to the Class B Shares as Mitchell Hutchins in its
discretion determines appropriate. PaineWebber agrees to submit all sales and
advertising materials developed by it relating to the Class B Shares to Mitchell
Hutchins for approval. PaineWebber agrees not to publish or distribute such
materials to the public without first receiving such approval in writing.
Mitchell Hutchins shall assist PaineWebber in obtaining any regulatory approvals
of such materials that may be required of or desired by PaineWebber.
7. Records. PaineWebber agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of the Class B Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. Expenses of PaineWebber. PaineWebber shall bear all costs and expenses
of (i) preparing, printing, and distributing any materials not prepared by the
Fund or Mitchell Hutchins and other materials used by PaineWebber in connection
with its offering of Class B Shares for sale to the public; (ii) any expenses of
advertising incurred by PaineWebber in connection with such offering; (iii) the
expenses of registration or qualification of PaineWebber as a dealer or broker
under federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to PaineWebber's Investment
Executives or other employees and others for selling Class B Shares, and all
expenses of PaineWebber, its Investment Executives and employees and others who
engage in or support the sale of Class B Shares as may be incurred in connection
with their sales efforts. PaineWebber shall bear such additional costs and
expenses as it and Mitchell Hutchins may agree upon, such agreement to be
evidenced in a writing signed by both parties. Mitchell Hutchins shall advise
the Board of any such agreement as to additional costs and expenses borne by
PaineWebber at their first regular meeting held after such agreement but shall
not be required to obtain prior approval for such agreements from the Board.
9. Indemnification.
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any
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<PAGE>
sales or advertising materials with respect to the Class B Shares provided by
Mitchell Hutchins to PaineWebber. However, this indemnity agreement shall not
apply to any claims, demands, liabilities, or expenses that arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished in
writing by PaineWebber to Mitchell Hutchins or the Fund for use in the
Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement.
(b) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and trustees,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending against such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Mitchell Hutchins or its officers or
directors or the Fund, its officers or trustees, or any such controlling person
may incur under the 1933 Act, under common law or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration Statement; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Agreement.
10. Duration and Termination.
(a) This Agreement shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related thereto (all
such trustees collectively being referred to herein as the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
action.
(b) Unless sooner terminated as provided herein, this Agreement
shall continue in effect for one year from the above written date. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or with respect to any given Series by vote of a
majority of the outstanding voting securities of the Class B Shares of such
Series.
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(c) Notwithstanding the foregoing, with respect to any Series this
Agreement may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Agreement may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class B Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
(d) Termination of this Agreement with respect to any given Series
shall in no way affect the continued validity of this Agreement or the
performance thereunder with respect to any other Series. This Agreement will
automatically terminate in the event of its assignment or in the event that the
Distribution Contract is terminated.
(e) Notwithstanding the foregoing, Mitchell Hutchins may terminate
this Agreement without penalty, such termination to be effective upon the giving
of written notice to PaineWebber in the event that the Plan is terminated or is
amended to reduce the compensation payable to Mitchell Hutchins thereunder or in
the event that the Registration Statement is amended so as to reduce the amount
of compensation payable to Mitchell Hutchins under the Distribution Contract,
provided that Mitchell Hutchins gives notice of termination pursuant to this
provision within 90 days of such amendment or termination of the Plan or
amendment of the Registration Statement.
11. Amendment of this Agreement. No provision of this Agreement may be
amended, changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
12. Use of PaineWebber Name. PaineWebber hereby authorizes Mitchell
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class B Shares, but
only for so long as this Agreement or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto
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<PAGE>
and their respective successors. As used in this Agreement, the terms "majority
of the outstanding voting securities," "interested person" and "assignment"
shall have the same meaning as such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: /s/ Jenny Ann Frank By: /s/ Dianne E. O'Donnell
---------------------- --------------------------
Dianne E. O'Donnell
First Vice President
PAINEWEBBER INCORPORATED
Attest: /s/ Jenny Ann Frank By: /s/ Steven M. Joenk
---------------------- --------------------------
Steven M. Joenk
Corporate Vice President
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Exhibit No. 7
CUSTODIAN CONTRACT
Between
PAINEWEBBER CALIFORNIA TAX-EXEMPT INCOME FUND
and
STATE STREET BANK AND TRUST COMPANY
SCS 01/87
WP0585C
<PAGE>
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TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held By It.....................1
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian.............................................................2
2.1 Holding Securities....................................................2
2.2 Delivery of Securities................................................2
2.3 Registration of Securities............................................6
2.4 Bank Accounts.........................................................6
2.5 Payments for Shares...................................................7
2.6 Investment and Availability of Federal Funds..........................7
2.7 Collection of Income..................................................7
2.8 Payment of Fund Moneys................................................8
2.9 Liability for Payment in Advance of Receipt of Securities Purchased..10
2.10 Payments for Repurchases or Redemptions of Shares of the Fund.......10
2.11 Appointment of Agents...............................................11
2.12 Deposit of Fund Assets in Securities System.........................11
2.13 Segregated Account..................................................13
2.14 Ownership Certificates for Tax Purposes.............................15
2.15 Proxies.............................................................15
2.16 Communications Relating to Fund Portfolio Securities................15
2.17 Proper Instructions.................................................16
2.18 Actions Permitted Without Express Authority.........................16
2.19 Evidence of Authority...............................................17
3. Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income............................17
4. Records..................................................................18
5. Opinion of Fund's Independent Certified Public Accountants...............19
6. Reports to Fund by Independent Certified Public Accountants..............19
7. Compensation of Custodian................................................19
8. Responsibility of Custodian..............................................19
9. Effective Period, Termination and Amendment..............................20
10. Successor Custodian......................................................21
11. Interpretive and Additional Provisions...................................23
12. Additional Funds.........................................................23
13. Massachusetts Law to Apply...............................................23
i
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14. Prior Contracts; Assignment..............................................23
15. Headings.................................................................24
16. Notice...................................................................24
17. Limitation of Liability of the Trustees and Shareholders.................24
ii
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CUSTODIAN CONTRACT
This Contract between PaineWebber California Tax-Exempt Income Fund, a
Massachusetts business trust organized and existing under the laws of
Massachusetts, having its principal place of business at 1285 Avenue of the
Americas, New York, New York 10019 hereinafter called the "Fund", and State
Street Bank and Trust Company, a Massachusetts corporation, having its principal
place of business at 225 Franklin Street, Boston, Massachusetts, 02110,
hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares of beneficial interest,
each share representing interests in a portfolio of securities and other assets
of the Fund; and
NOW THEREFOR: in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets
pursuant to the provisions of the Declaration of Trust. The Fund agrees to
deliver to the Custodian all securities and cash owned by it, and all payments
of income, payments of principal or capital distributions received by it with
respect to all securities owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest ("Shares") of the Fund as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or received
by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall from time to time employ one or more sub-custodians,
but only in accordance with an
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applicable vote by the Trustees of the Fund, and provided that the Custodian
shall have no more or less responsibility or liability to the Fund on account of
any actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property,
including all securities owned by the Fund, other than securities
which are maintained pursuant to Section 2.12 in a clearing agency
which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System".
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by the Fund held by the Custodian or in a
Securities System account of the Custodian only upon receipt of
Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
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5) To the issuer thereof, or its agent, when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.11 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
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provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934
("Exchange Act') and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance
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with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Trustees or of the Executive Committee
signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
corporate purpose,
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and naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other
than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment
companies having the same investment adviser as the Fund, or in the
name or nominee name of any agent appointed pursuant to Section 2.11
or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on
behalf of the Fund under the terms of this Contract shall be in
"street name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of the Fund, subject only to draft
or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account
of the Fund, other than cash maintained by the Fund in a bank
account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for the
Fund may be deposited by it to its credit as Custodian in the
Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company
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Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be
approved by vote of a majority of the Trustees of the Fund. Such
funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Payments for Shares. The Custodian shall receive from the
distributor for the Fund's Shares or from the Transfer Agent of the
Fund and deposit into the Fund's account such payments as are
received for Shares of the Fund issued or sold from time to time by
the Fund. The Custodian will provide timely notification to the Fund
and the Transfer Agent of any receipt by it of payments for Shares
of the Fund.
2.6 Investment and Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of Proper Instructions,
1) invest in such instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and
the Fund; and
2) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the
Fund which are deposited into the Fund's account.
2.7 Collection of Income. The Custodian shall collect on a timely basis
all income and other payments with respect to registered securities
held hereunder to which
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the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all
income and other payments with respect to bearer securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present
for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest
when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2 (10)
shall be the responsibility of the Fund. The Custodian will have no
duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary
to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Fund is properly entitled.
2.8 Payment of Fund Moneys. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of the Fund in the
following cases only:
1) Upon the purchase of securities, options, futures contracts or
options on futures contracts for the account of the Fund but
only (a) against the delivery of such securities or evidence
of title to such options, futures contracts or options on
futures contracts to the Custodian (or any bank, banking firm
or trust company doing business in the United States or abroad
which is qualified under the Investment Company Act of 1940,
as amended, to act as a custodian and has been designated by
the Custodian
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as its agent for this purpose) registered in the name of the
Fund or in the name of a nominee of the Custodian referred to
in Section 2.3 hereof or in proper form for transfer; (b) in
the case of a purchase effected through a Securities System,
in accordance with the conditions set forth in Section 2.12
hereof; or (c) in the case of repurchase agreements entered
into between the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities (notwithstanding that the written
agreement to repurchase will be received subsequently) or (ii)
against delivery of the receipt evidencing purchase by the
Fund of securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase such
securities from the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
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5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Trustees or of the Executive Committee of
the Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which such payment
is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be
made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.
In any and every case where payment for purchase of securities for
the account of the Fund is made by the Custodian in advance of
receipt of the securities purchased in the absence of specific
written instructions from the Fund to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities
to the same extent as if the securities had been received by the
Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of the Fund. From
such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of
the Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the
Transfer Agent a request for redemption or repurchase of their
Shares. In
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connection with the redemption or repurchase of Shares of the Fund,
the Custodian is authorized upon receipt of instructions from the
Transfer Agent to wire funds to or through a commercial bank
designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian shall
honor checks drawn on the Custodian by a holder of Shares, which
checks have been furnished by the Fund to the holder of Shares, when
presented to the Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time between the
Fund and the Custodian.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to
carry out such of the provisions of this Article 2 as the Custodian
may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System" in accordance
with
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applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities system
which shall not include any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices
from the Securities System of transfers of securities for the
account of the Fund shall identify the Fund; be maintained for
the Fund by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or
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from the account of the Fund in the form of a written advice
or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
Securities System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
b~ the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.
2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of the
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Fund, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account be the
Custodian pursuant to Section 2.12 hereof, (i) in accordance with
the provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the
NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of
The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or
any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection
with transactions by the Fund, (ii) for purposes of segregating cash
or government securities in connection with options purchased, sold
or written by the Fund or commodity futures contracts or options
thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in
the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Trustees or of
the Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary, setting forth
the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
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2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tar purposes in connection with receipt of income or other
payments with respect to securities of the Fund held by it and in
connection with transfers of securities.
2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.16 Communications Relating to Fund Portfolio Securities. The Custodian
shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund and
the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held
for the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the securities
those tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to
take action with respect to any tender offer, exchange offer or and
other similar transaction, the
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Fund shall notify the Custodian at least three business days prior
to the date on which the Custodian is to take such action.
2.17 Proper Instructions. Proper Instructions as used throughout this
Article 2 means a writing signed or initialled by one or more person
or persons as the Trustees shall have from time to time authorized.
Each such writing shall set forth the specific transaction or type
of transaction involved, including a specific statement of the
purpose for which such action is requested. Oral instructions will
be considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund
shall cause all oral instructions to be confirmed in writing. Upon
receipt of a certlflcate of the Secretary or an Assistant Secretary
as to the authorization by the Trustees of the Fund accompanied by a
detailed description of procedures approved by the Trustees, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Trustees
and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets.
2.18 Actions Permitted without Express Authority. The Custodian may in
its discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
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3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Trustees of
the Fund.
2.19 Evidence of Authority. The Custodian shall be protected in acting
upon any instructions, notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have
been properly executed by or on behalf of the Fund. The Custodian
may receive and accept a certified copy of a vote of the Trustees of
the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or
of any action by the Trustees pursuant to the Declaration of Trust
as described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written
notice to the contrary.
3. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Trustees of the Fund to keep the books of
account of the Fund and/or compute the net asset value per Share of the
outstanding Shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
Share. Unless otherwise directed, the Custodian shall also calculate daily the
net
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income of the Fund as described in the Fund's currently effective prospectus and
shall advise the Fund and the Transfer Agent daily of the total amounts of such
net income and, if instructed in writing by an officer of the Fund to do so,
shall advise the Transfer Agent periodically of the division of such net income
among its various components. The calculations of the net asset value per Share
and the daily income of the Fund shall be made at the time or times described
from time to time in the Fund's currently effective prospectus.
4. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All such records shall be the
property of the Fund and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by the Fund and held by the Custodian and shall,
when requested to do so by the Fund and for such compensation as shall be agreed
upon between the Fund and the Custodian, include certificate numbers of such
tabulations.
5. Opinion of Fund's Independent Certified Public Accountants
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to its activities
hereunder in connection with the preparation of
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the Fund's Form N-1A, and Form N-SAR or other annual reports to the Securities
and Exchange Commission and with respect to any other requirements of such
Commission.
6. Reports to Fund by Independent Certified Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent certified public accountants on
the accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures contracts,
including securities deposited and/or maintained in a Securities System,
relating to the services provided by the Custodian under this Contract; such
reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
7. Compensation of Custodian.
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
8. Responsibility of Custodian.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in
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good faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the option of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purposes or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of Fund
assets to the extent necessary to obtain reimbursement.
9. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall
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not act under Section 2.12 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Trustees of the
Fund has approved the initial use of a particular Securities System and the
receipt of an annual certificate of the Secretary or an Assistant Secretary that
the Trustees has reviewed the use by the Fund of such Securities System, as
required in each case by Rule 17f-4 under the Investment Company Act of 1940, as
amended; provided further, however, that the Fund shall not amend or terminate
the Contract in contravention of any applicable federal or state regulations, or
any provision of the Declaration of Trust, and further provided, that the Fund
may at anytime by action of its Trustees (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements as
contemplated by this Contract.
10. Successor Custodian
If a successor custodian shall be appointed by the Trustees of the Fund,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder and shall transfer to an account of the
successor custodian all of the Fund's securities held in a Securities System.
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If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Trustees of the
Fund, deliver at the office of the Custodian and transfer such securities, funds
and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Trustees shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a "bank" as defined in the Investment Company Act of 1940, doing
business in Boston, Massachusetts, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Trustees to appoint a successor custodian, the Custodian shall be entitled
to fair compensation for its services during such period as the Custodian
retains possession of such securities, funds and other properties and the
provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
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11. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust of the Fund. No interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be an amendment of
this Contract.
12. Additional Funds
In the event that the Fund establishes additional series of beneficial
interest other than the Shares with respect to which it desires to have the
Custodian render services as custodian under the terms hereof, it shall so
notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a Fund hereunder.
13. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
14. Prior Contracts; Assignment
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets. This Contract may not be assigned by the Custodian except as
expressly provided for in Section 10 hereof, without the prior written consent
of the Fund.
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15. Headings
The Headings of the Sections of this Contract are inserted for reference
and convenience only, and shall not affect the construction of this Contract.
16. Notice
All notices and communications, including Proper Instructions
(collectively referred to as Notice or Notices in this paragraph), hereunder
shall be in writing or by confirming telegram, cable or telex. Notices shall be
addressed (a) if to the Custodian at its address, 225 Franklin Street, Boston,
Massachusetts 02110, marked for the attention of the Insurance/Broker-Dealer
Services Division, (b) if to the Fund, at the address of the Fund, or (c) if to
neither of the foregoing, at such other address as shall have been notified to
the sender of any such Notice.
17. Limitation of Liability of the Trustees and Shareholders
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Trust as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers or shareholders individually but are binding
only upon the assets and property of the Trust.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed as of the ____ day of ______, 19____.
ATTEST: PAINEWEBBER CALIFORNIA
TAX-FREE INCOME FUND
By:
- -------------------------- -------------------------------
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ATTEST: STATE STREET BANK AND
TRUST COMPANY
By:
- -------------------------- -------------------------------
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Exhibit No. 8
TRANSFER AGENCY AND RELATED SERVICES AGREEMENT
THIS AGREEMENT is made as of August 1, 1997 by and between PFPC INC., a
Delaware corporation ("PFPC"), and PAINEWEBBER MUTUAL FUND TRUST, a
Massachusetts business trust (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to the Fund's
Portfolios (as hereinafter defined) and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions. As Used in this Agreement:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(c ) "Authorized Person" means any officer of the Fund and any other
person duly authorized by the Fund's Board of Directors or Trustees ("Board") to
give Oral Instructions and Written Instructions on behalf of the Fund and listed
on the Authorized Persons Appendix attached hereto and made a part hereof or any
amendment thereto as may be received by PFPC. An Authorized Person's scope of
authority may be limited by the Fund by setting forth such limitation in the
Authorized Persons Appendix.
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(d) "CEA" means the Commodities Exchange Act, as amended.
(e) "Oral Instructions" mean oral instructions received by PFPC from
an Authorized Person.
(f) "Portfolio" means a series or investment portfolio of the Fund
identified on Annex A hereto, as the same may from time to time be amended, if
the Fund consists of more than one series or investment portfolio; however, if
the Fund does not have separate series or investment portfolios, then this term
shall be deemed to refer to the Fund itself.
(g) "SEC" means the Securities and Exchange Commission.
(h) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act
and the CEA.
(i) "Shares" mean the shares of common stock or beneficial interest
of any series or class of the Fund.
(j) "Written Instructions" mean written instructions signed by an
Authorized Person and received by PFPC. The instructions may be delivered by
hand, mail, tested telegram, cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PFPC to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to the Fund, and
should the Fund have separate Portfolios, those Portfolios which are listed on
Annex A hereto, in accordance with the terms set forth in this Agreement. PFPC
accepts such appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund (or a particular Portfolio, as
appropriate) has provided or, where applicable, will provide PFPC with the
following:
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(a) Certified or authenticated copies of the resolutions of the Fund's
Board approving the appointment of PFPC to provide services to the
Fund and approving this Agreement;
(b) A copy of each executed broker-dealer agreement with respect to each
Fund; and
(c) Copies (certified or authenticated if requested by PFPC) of any
post-effective amendment to the Fund's registration statement,
advisory agreement, distribution agreement, shareholder servicing
agreement and all amendments or supplements to the foregoing upon
request.
4. Compliance with Rules and Regulations. PFPC undertakes to comply with
all applicable requirements of the Securities Laws and any laws, rules and
regulations of governmental authorities having jurisdiction with respect to the
duties to be performed by PFPC hereunder. Except as specifically set forth
herein, PFPC assumes no responsibility for such compliance by the Fund or any of
its Portfolios.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC shall act only upon
Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instructions and Written
Instructions it receives from an Authorized Person pursuant to this Agreement.
PFPC may assume that any Oral Instruction or Written Instruction received
hereunder is not in any way inconsistent with the provisions of organizational
documents or of any vote, resolution or proceeding of the Fund's Board or of the
Fund's shareholders, unless and until PFPC receives Written Instructions to the
contrary.
(c ) The Fund agrees to forward to PFPC Written Instructions confirming
Oral Instructions so that PFPC receives the Written Instructions by the close of
business on the next day after such Oral Instructions are received. The fact
that such confirming Written Instructions
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are not received by PFPC shall in no way invalidate the transactions or
enforceability of the transactions authorized by the Oral Instructions. Where
Oral Instructions or Written Instructions reasonably appear to have been
received from an Authorized Person, PFPC shall incur no liability to the Fund in
acting upon such Oral Instructions or Written Instructions provided that PFPC's
actions comply with the other provisions of this Agreement.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action it should or
should not take, PFPC may request directions or advice, including Oral
Instructions or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any question of law
pertaining to any action it should or should not take, PFPC may request advice
at its own cost from such counsel of its own choosing (who may be counsel for
the Fund, the Fund's investment adviser or PFPC, at the option of PFPC).
(c ) Conflicting Advice. In the event of a conflict between directions,
advice or Oral Instructions or Written Instructions PFPC receives from the Fund,
and the advice it receives from counsel, PFPC may rely upon and follow the
advice of counsel. In the event PFPC so relies on the advice of counsel, PFPC
remains liable for any action or omission on the part of PFPC which constitutes
willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any
duties, obligations or responsibilities set forth in this Agreement.
(d) Protection of PFPC. PFPC shall be protected in any action it takes or
does not take in reliance upon directions, advice or Oral Instructions or
Written Instructions it receives from the Fund or from counsel and which PFPC
believes, in good faith, to be consistent with those directions, advice or Oral
Instructions or Written Instructions. Nothing in this section shall
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be construed so as to impose an obligation upon PFPC (i) to seek such
directions, advice or Oral Instructions or Written Instructions, or (ii) to act
in accordance with such directions, advice or Oral Instructions or Written
Instructions unless, under the terms of other provisions of this Agreement, the
same is a condition of PFPC's properly taking or not taking such action. Nothing
in this subsection shall excuse PFPC when an action or omission on the part of
PFPC constitutes willful misfeasance, bad faith, negligence or reckless
disregard by PFPC of any duties, obligations or responsibilities set forth in
this Agreement.
7. Records; Visits. PFPC shall prepare and maintain in complete and
accurate form all books and records necessary for it to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to each
Portfolio, including (a) all those records required to be prepared and
maintained by the Fund under the 1940 Act, by other applicable Securities Laws,
rules and regulations and by state laws and (b) such books and records as are
necessary for PFPC to perform all of the services it agrees to provide in this
Agreement and the appendices attached hereto, including but not limited to the
books and records necessary to effect the conversion of Class B shares, the
calculation of any contingent deferred sales charges and the calculation of
front-end sales charges. The books and records pertaining to the Fund, which are
in the possession or under the control of PFPC, shall be the property of the
Fund. The Fund and Authorized Persons shall have access to such books and
records in the possession or under the control of PFPC at all times during
PFPC's normal business hours. Upon the reasonable request of the Fund, copies of
any such books and records in the possession or under the control of PFPC shall
be provided by PFPC to the Fund or to an Authorized Person. Upon reasonable
notice by the Fund, PFPC shall make available during regular business hours its
facilities and premises employed in connection with its performance of this
Agreement for reasonable visits by the
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Fund, any agent or person designated by the Fund or any regulatory agency having
authority over the Fund.
8. Confidentiality. PFPC agrees to keep confidential all records of the
Fund and information relating to the Fund and its shareholders (past, present
and future), its investment adviser and its principal underwriter, unless the
release of such records or information is otherwise consented to, in writing, by
the Fund prior to its release. The Fund agrees that such consent shall not be
unreasonably withheld and may not be withheld where PFPC may be exposed to civil
or criminal contempt proceedings or when required to divulge such information or
records to duly constituted authorities.
9. Cooperation with Accountants. PFPC shall cooperate with the Fund's
independent public accountants and shall take all reasonable actions in the
performance of its obligations under this Agreement to ensure that the necessary
information is made available to such accountants for the expression of their
opinion, as required by the Fund.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable provisions for
periodic backup of computer files and data with respect to the Fund and
emergency use of electronic data processing equipment. In the event of equipment
failures, PFPC shall, at no additional expense to the Fund, take reasonable
steps to minimize service interruptions. PFPC shall have no liability with
respect to the loss of data or service interruptions caused by equipment
failure, provided such loss or interruption is not caused by PFPC's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties or
obligations under this Agreement and provided further that PFPC has complied
with the provisions of this paragraph 10.
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11. Compensation. As compensation for services rendered by PFPC during the
term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed
to from time to time in writing by the Fund and PFPC.
12. Indemnification.
(a) The Fund agrees to indemnify and hold harmless PFPC and its affiliates
from all taxes, charges, expenses, assessments, penalties, claims and
liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation) reasonable
attorneys' fees and disbursements, arising directly or indirectly from (i) any
action or omission to act which PFPC takes (a) at the request or on the
direction of or in reliance on the advice of the Fund or (b) upon Oral
Instructions or Written Instructions or (ii) the acceptance, processing and/or
negotiation of checks or other methods utilized for the purchase of Shares.
Neither PFPC, nor any of its affiliates, shall be indemnified against any
liability (or any expenses incident to such liability) arising out of PFPC's or
its affiliates' own willful misfeasance, bad faith, negligence or reckless
disregard of its duties and obligations under this Agreement. The Fund's
liability to PFPC for PFPC's acceptance, processing and/or negotiation of checks
or other methods utilized for the purchase of Shares shall be limited to the
extent of the Fund's policy(ies) of insurance that provide for coverage of such
liability, and the Fund's insurance coverage shall take precedence.
(b) PFPC agrees to indemnify and hold harmless the Fund from all taxes,
charges, expenses, assessments, penalties, claims and liabilities arising from
PFPC's obligations pursuant to this Agreement (including, without limitation,
liabilities arising under the Securities Laws, and any state and foreign
securities and blue sky laws, and amendments thereto) and expenses,
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including (without limitation) reasonable attorneys' fees and disbursements
arising directly or indirectly out of PFPC's or its nominee's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
(c) In order that the indemnification provisions contained in this
Paragraph 12 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
(d) The members of the Board of the Fund, its officers and Shareholders,
or of any Portfolio thereof, shall not be liable for any obligations of the
Fund, or any such Portfolio, under this Agreement, and PFPC agrees that in
asserting any rights or claims under this Agreement, it shall look only to the
assets and property of the Fund or the particular Portfolio in settlement of
such rights or claims and not to such members of the Board, its officers or
Shareholders. PFPC further agrees that it will look only to the assets and
property of a particular Portfolio of the Fund, should the Fund have established
separate series, in asserting any rights or claims under this Agreement with
respect to services rendered with respect to that Portfolio and will not seek to
obtain settlement of such rights or claims from the assets of any other
Portfolio of the Fund.
13. Insurance. PFPC shall maintain insurance of the types and in the
amounts deemed by it to be appropriate. To the extent that policies of insurance
may provide for coverage of claims for liability or indemnity by the parties set
forth in this Agreement, the contracts of
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insurance shall take precedence, and no provision of this Agreement shall be
construed to relieve an insurer of any obligation to pay claims to the Fund,
PFPC or other insured party which would otherwise be a covered claim in the
absence of any provision of this Agreement.
14. Security.
(a) PFPC represents and warrants that, to the best of its knowledge, the
various procedures and systems which PFPC has implemented with regard to the
safeguarding from loss or damage attributable to fire, theft or any other cause
(including provision for twenty-four hours a day restricted access) of the
Fund's blank checks, certificates, records and other data and PFPC's equipment,
facilities and other property used in the performance of its obligations
hereunder are adequate, and that it will make such changes therein from time to
time as in its judgment are required for the secure performance of its
obligations hereunder. PFPC shall review such systems and procedures on a
periodic basis, and the Fund shall have reasonable access to review these
systems and procedures.
(b) Y2K Compliance. PFPC further represents and warrants that any and all
electronic data processing systems and programs that it uses or retains in
connection with the provision of services hereunder on or before January 1, 1999
will be year 2000 compliant.
15. Responsibility of PFPC.
(a) PFPC shall be under no duty to take any action on behalf of the Fund
except as specifically set forth herein or as may be specifically agreed to by
PFPC in writing. PFPC shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith and to use its best
efforts in performing services provided for under this Agreement. PFPC shall be
liable for any damages arising out of PFPC's failure to perform its duties under
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this Agreement to the extent such damages arise out of PFPC's willful
misfeasance, bad faith, negligence or reckless disregard of such duties.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC shall not be under any duty or obligation to
inquire into and shall not be liable for (A) the validity or invalidity or
authority or lack thereof of any Oral Instruction or Written Instruction, notice
or other instrument which conforms to the applicable requirements of this
Agreement, and which PFPC reasonably believes to be genuine; or (B) subject to
Section 10, delays or errors or loss of data occurring by reason of
circumstances beyond PFPC's control, including acts of civil or military
authority, national emergencies, labor difficulties, fire, flood, catastrophe,
acts of God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
(c) Notwithstanding anything in this Agreement to the contrary, neither
PFPC nor its affiliates shall be liable to the Fund for any consequential,
special or indirect losses or damages which the Fund may incur or suffer by or
as a consequence of PFPC's or its affiliates' performance of the services
provided hereunder, whether or not the likelihood of such losses or damages was
known by PFPC or its affiliates.
(d) Notwithstanding anything in this Agreement to the contrary, the Fund
shall not be liable to PFPC nor its affiliates for any consequential, special or
indirect losses or damages which PFPC or its affiliates may incur or suffer by
or as a consequence of PFPC's performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was known by the Fund.
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16. Description of Services.
(a) Services Provided on an Ongoing Basis, If Applicable.
(i) Calculate 12b-1 payments to financial intermediaries,
including brokers, and financial intermediary trail
commissions;
(ii) Develop, monitor and maintain, in consultation with the
Fund, all systems necessary to implement and operate the
four-tier distribution system, including Class B conversion
feature, as described in the registration statement and
related documents of the Fund, as they may be amended from
time to time;
(iii) Calculate contingent deferred sales charge amounts upon
redemption of Fund shares and deduct such amounts from
redemption proceeds;
(iv) Calculate front-end sales load amounts at time of purchase
of shares;
(v) Determine dates of Class B conversion and effect the same;
(vi) Establish and maintain proper shareholder registrations;
(vii) Review new applications and correspond with shareholders to
complete or correct information;
(viii) Direct payment processing of checks or wires;
(ix) Prepare and certify stockholder lists in conjunction with
proxy solicitations;
(x) Prepare and mail to shareholders confirmation of activity;
(xi) Provide toll-free lines for direct shareholder use, plus
customer liaison staff for on-line inquiry response;
(xii) Send duplicate confirmations to broker-dealers of their
clients' activity, whether executed through the
broker-dealer or directly with PFPC;
(xiii) Provide periodic shareholder lists, outstanding share
calculations and related statistics to the Fund;
(xiv) Provide detailed data for underwriter/broker confirmations;
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(xv) Prepare and mail required calendar and taxable year-end tax
and statement information (including forms 1099-DIV and
1099-B and accompanying statements);
(xvi) Notify on a daily basis the investment adviser, accounting
agent, and custodian of fund activity;
(xvii) Perform, itself or through a delegate, all of the services,
whether or not included within the scope of another
paragraph of this Paragraph 16(a), specified on Annex B
hereto; and
(xviii) Perform other participating broker-dealer shareholder
services as may be agreed upon from time to time.
(b) Services Provided by PFPC Under Oral Instructions or Written
Instructions.
(i) Accept and post daily Fund and class purchases and
redemptions;
(ii) Accept, post and perform shareholder transfers and
exchanges;
(iii) Pay dividends and other distributions;
(iv) Solicit and tabulate proxies; and
(v) Cancel certificates.
(c) Purchase of Shares. PFPC shall issue and credit an account of an
investor, in the manner described in the Fund's prospectus, once it receives:
(i) A purchase order;
(ii) Proper information to establish a shareholder account; and
(iii) Confirmation of receipt or crediting of funds for such order
to the Fund's custodian.
(d) Redemption of Shares. PFPC shall redeem Shares only if that function
is properly authorized by the Fund's organizational documents or resolutions of
the Fund's Board. Shares shall be redeemed and payment therefor shall be made in
accordance with the Fund's or Portfolio's prospectus.
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(i) Broker-Dealer Accounts.
When a broker-dealer notifies PFPC of a redemption desired by
a customer, and the Fund's or Portfolio's custodian (the
"Custodian") has provided PFPC with funds, PFPC shall (a)
transfer by Fedwire or other agreed upon electronic means such
redemption payment to the broker-dealer for the credit to, and
for the benefit of, the customer's account or (b) shall
prepare and send a redemption check to the broker-dealer, made
payable to the broker-dealer on behalf of its customer.
(ii) Fund-Only Accounts.
If Shares (or appropriate instructions) are received in proper
form, at the Fund's request Shares may be redeemed before the
funds are provided to PFPC from the Custodian. If the
recordholder has not directed that redemption proceeds be
wired, when the Custodian provides PFPC with funds, the
redemption check shall be sent to and made payable to the
recordholder, unless:
(a) the surrendered certificate is drawn to the order of an
assignee or holder and transfer authorization is signed
by the recordholder; or
(b) transfer authorizations are signed by the recordholder
when Shares are held in book-entry form.
(e) Dividends and Distributions. Upon receipt of a resolution of the
Fund's Board authorizing the declaration and payment of dividends and
distributions, PFPC shall issue dividends and distributions declared by the Fund
in Shares, or, upon shareholder election, pay such dividends and distributions
in cash, if provided for in the appropriate Fund's or Portfolio's prospectus.
Such issuance or payment, as well as payments upon redemption as described
above,
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shall be made after deduction and payment of the required amount of funds to be
withheld in accordance with any applicable tax law or other laws, rules or
regulations. PFPC shall mail to the Fund's shareholders and the IRS and other
appropriate taxing authorities such tax forms, or permissible substitute forms,
and other information relating to dividends and distributions paid by the Fund
(including designations of the portions of distributions of net capital gain
that are 20% rate gain distributions and 28% rate gain distributions pursuant to
IRS Notice 97-64) as are required to be filed and mailed by applicable law, rule
or regulation within the time required thereby. PFPC shall prepare, maintain and
file with the IRS and other appropriate taxing authorities reports relating to
all dividends above a stipulated amount paid by the Fund to its shareholders as
required by tax or other law, rule or regulation.
(f) Shareholder Account Services.
(i) PFPC will arrange, in accordance with the appropriate Fund's
or Portfolio's prospectus, for issuance of Shares obtained
through:
- The transfer of funds from shareholders' accounts at
financial institutions, provided PFPC receives advance
Oral or Written Instruction of such transfer;
- Any pre-authorized check plan; and
- Direct purchases through broker wire orders, checks and
applications.
(ii) PFPC will arrange, in accordance with the appropriate Fund's
or Portfolio's prospectus, for a shareholder's:
- Exchange of Shares for shares of another fund with which
the Fund has exchange privileges;
Automatic redemption from an account where that
shareholder participates in a systematic withdrawal
plan; and/or
- Redemption of Shares from an account with a checkwriting
privilege.
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(g) Communications to Shareholders. Upon timely Written Instructions, PFPC
shall mail all communications by the Fund to its shareholders, including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of Fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
(vi) Tax forms (including substitute forms) and accompanying
information containing the information required by paragraph
16(e).
If requested by the Fund, PFPC will receive and tabulate the proxy cards
for the meetings of the Fund's shareholders and supply personnel to serve as
inspectors of election.
(h) Records. PFPC shall maintain those records required by the Securities
Laws and any laws, rules and regulations of governmental authorities having
jurisdiction with respect to the duties to be performed by PFPC hereunder with
respect to shareholder accounts or by transfer agents generally, including
records of the accounts for each shareholder showing the following information:
(i) Name, address and United States Taxpayer Identification or
Social Security number;
(ii) Number and class of Shares held and number and class of Shares
for which certificates, if any, have been issued, including
certificate numbers and denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions paid, their
character (e.g. ordinary income, net capital gain (including
20% rate gain and 28% rate gain), exempt-interest, foreign
tax-credit and dividends received deduction eligible) for
federal income tax purposes and the date and price for all
transactions on a shareholder's account;
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(iv) Any stop or restraining order placed against a shareholder's
account;
(v) Any correspondence relating to the current maintenance of a
shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent to
perform any calculations contemplated or required by this
Agreement.
(i) Lost or Stolen Certificates. PFPC shall place a stop notice against
any certificate reported to be lost or stolen and comply with all applicable
federal regulatory requirements for reporting such loss or alleged
misappropriation. The lost or stolen certificate will be canceled and
uncertificated Shares will be issued to a shareholder's account only upon:
(i) The shareholder's pledge of a lost instrument bond or such
other appropriate indemnity bond issued by a surety company
approved by PFPC; and
(ii) Completion of a release and indemnification agreement signed
by the shareholder to protect PFPC and its affiliates.
(j) Shareholder Inspection of Stock Records. Upon a request from any Fund
shareholder to inspect stock records, PFPC will notify the Fund, and the Fund
will issue instructions granting or denying each such request. Unless PFPC has
acted contrary to the Fund's instructions, the Fund agrees and does hereby
release PFPC from any liability for refusal of permission for a particular
shareholder to inspect the Fund's shareholder records.
(k) Withdrawal of Shares and Cancellation of Certificates. Upon receipt of
Written Instructions, PFPC shall cancel outstanding certificates surrendered by
the Fund to reduce the total amount of outstanding shares by the number of
shares surrendered by the Fund.
16
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17. Duration and Termination.
(a) This Agreement shall be effective on the date first written above and
shall continue for a period of three (3) years (the "Initial Term"). Upon the
expiration of the Initial Term, this Agreement shall automatically renew for
successive terms of one (1) year ("Renewal Terms") each provided that it may be
terminated by either party during a Renewal Term upon written notice given at
least ninety (90) days prior to termination. During either the Initial Term or
the Renewal Terms, this Agreement may also be terminated on an earlier date by
either party for cause.
(b) With respect to the Fund, cause includes, but is not limited to, (i)
PFPC's material breach of this Agreement causing it to fail to substantially
perform its duties under this Agreement. In order for such material breach to
constitute "cause" under this Paragraph, PFPC must receive written notice from
the Fund specifying the material breach and PFPC shall not have corrected such
breach within a 15-day period; (ii) financial difficulties of PFPC evidenced by
the authorization or commencement of a voluntary or involuntary bankruptcy under
the U.S. Bankruptcy Code or any applicable bankruptcy or similar law, or under
any applicable law of any jurisdiction relating to the liquidation or
reorganization of debt, the appointment of a receiver or to the modification or
alleviation of the rights of creditors; and (iii) issuance of an administrative
or court order against PFPC with regard to the material violation or alleged
material violation of the Securities Laws or other applicable laws related to
its business of performing transfer agency services;
(c ) With respect to PFPC, cause includes, but is not limited to, the
failure of the Fund to pay the compensation set forth in writing pursuant to
Paragraph 11 of this Agreement.
17
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(d) Any notice of termination for cause in conformity with subparagraphs
(a), (b) and (c ) of this Paragraph by the Fund shall be effective thirty (30)
days from the date of any such notice. Any notice of termination for cause by
PFPC shall be effective 90 days from the date of such notice.
(e) Upon the termination hereof, the Fund shall pay to PFPC such
compensation as may be due for the period prior to the date of such termination.
In the event that the Fund designates a successor to any of PFPC's obligations
under this Agreement, PFPC shall, at the direction and expense of the Fund,
transfer to such successor all relevant books, records and other data
established or maintained by PFPC hereunder including, a certified list of the
shareholders of the Fund or any Portfolio thereof with name, address, and if
provided, taxpayer identification or Social Security number, and a complete
record of the account of each shareholder. To the extent that PFPC incurs
expenses related to a transfer of responsibilities to a successor, other than
expenses involved in PFPC's providing the Fund's books and records described in
the preceding sentence to the successors, PFPC shall be entitled to be
reimbursed for such extraordinary expenses, including any out-of-pocket expenses
reasonably incurred by PFPC in connection with the transfer.
(f) Any termination effected pursuant to this Paragraph shall not affect
the rights and obligations of the parties under Paragraph 12 hereof.
(g) Notwithstanding the foregoing, this Agreement shall terminate with
respect to the Fund or any Portfolio thereof upon the liquidation, merger, or
other dissolution of the Fund or Portfolio or upon the Fund's ceasing to be a
registered investment company.
18. Registration as a Transfer Agent. PFPC represents that it is currently
registered with the appropriate federal agency for the registration of transfer
agents, or is otherwise
18
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permitted to lawfully conduct its activities without such registration and that
it will remain so registered or able to so conduct such activities for the
duration of this Agreement. PFPC agrees that it will promptly notify the Fund in
the event of any material change in its status as a registered transfer agent.
Should PFPC fail to be registered with the SEC as a transfer agent at any time
during this Agreement, and such failure to register does not permit PFPC to
lawfully conduct its activities, the Fund may, on written notice to PFPC,
terminate this Agreement upon five days written notice to PFPC.
19. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notices shall be addressed (a) if to PFPC, at 400
Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address
of the Fund or (c) if to neither of the foregoing, at such other address as
shall have been given by like notice to the sender of any such notice or other
communication by the other party. If notice is sent by confirming telegram,
cable, telex or facsimile sending device during regular business hours, it shall
be deemed to have been given immediately; if sent at a time other than regular
business hours, such notice shall be deemed to have been given at the opening of
the next business day. If notice is sent by first-class mail, it shall be deemed
to have been given three days after it has been mailed. If notice is sent by
messenger, it shall be deemed to have been given on the day it is delivered. All
postage, cable, telegram, telex and facsimile sending device charges arising
from the sending of a notice hereunder shall be paid by the sender.
20. Amendments. This Agreement, or any term thereof, may be changed or
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
19
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21. Additional Portfolios. In the event that the Fund establishes one or
more investment series in addition to and with respect to which it desires to
have PFPC render services as transfer agent, registrar, dividend disbursing
agent and related services agent under the terms set forth in this Agreement, it
shall so notify PFPC in writing, and PFPC shall agree in writing to provide such
services, and such investment series shall become a Portfolio hereunder, subject
to such additional terms, fees and conditions as are agreed to by the parties.
22. Delegation; Assignment.
(a) PFPC may, at its own expense, assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund
thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the Securities
Laws; and (iii) PFPC and such delegate (or assignee) promptly provide such
information as the Fund may request, and respond to such questions as the Fund
may ask, relative to the delegation (or assignment), including (without
limitation) the capabilities of the delegate (or assignee). The assignment and
delegation of any of PFPC's duties under this subparagraph (a) shall not relieve
PFPC of any of its responsibilities or liabilities under this Agreement.
(b) PFPC may delegate to PaineWebber Incorporated its obligation to
perform the services described on Annex B hereto. In addition, PFPC may assign
its rights and delegate its other duties hereunder to PaineWebber Incorporated
or Mitchell Hutchins Asset Management Inc. or an affiliated person of either,
provided that (I) PFPC gives the Fund thirty (30) days' prior written notice;
(ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all
relevant provisions of the Securities Laws; and (iii) PFPC and such delegate (or
assignee)
20
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promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the delegation (or assignment),
including (without limitation) the capabilities of the delegate (or assignee).
In assigning its rights and delegating its duties under this paragraph, PFPC may
impose such conditions or limitations as it determines appropriate including the
condition that PFPC be retained as a sub-transfer agent.
(c ) In the event that PFPC assigns its rights and delegates its duties
under this section, no amendment of the terms of this Agreement shall become
effective without the written consent of PFPC.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
25. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to services to be performed and fees payable under this Agreement.
(b) Captions. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect.
21
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<PAGE>
(c ) Governing Law. This Agreement shall be deemed to be a contract made
in Delaware and governed by Delaware law, without regard to principles of
conflicts of law.
(d) Partial Invalidity. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
(e) Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any party to this
Agreement shall constitute the valid and binding execution hereof by such party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By: /s/ Joseph Gramlich
----------------------------------
Title: Senior Vice President
PAINEWEBBER MUTUAL FUND TRUST
By: /s/ Dianne E. O'Donnell
----------------------------------
Title: Secretary and Vice President
22
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ANNEX A
Portfolios
PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
23
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<PAGE>
AUTHORIZED PERSONS APPENDIX
Name (Type) Signature
_____________ ____________
_____________ ____________
_____________ ____________
_____________ ____________
_____________ ____________
_____________ ____________
24
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ANNEX B
a. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all shareholder
inquiries received by telephone, mail or in-person regarding the Funds and
their accounts
b. Provide timely execution of redemptions, exchanges and non-financial
transactions directed to investment executives and specifically requested
by Fund shareholders
c. Issue checks from proceeds of Fund share redemptions to shareholders as
directed by the shareholders or their agents
d. Process and maintain shareholder account registration information
e. With respect to customer accounts maintained through PaineWebber
Incorporated ("PaineWebber"), review new applications and correspond with
shareholders to complete or correct information
f. Prepare and mail monthly or quarterly consolidated account statements that
reflect PaineWebber Mutual Fund balances and transactions (such
information to be combined with other activity and holdings in investors'
brokerage accounts if this responsibility is delegated to PaineWebber)
g. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all branch
inquiries regarding operational issues and performance
h. Capture, process and mail required tax information to shareholders and
report this information to the Internal Revenue Service
i. Provide the capability to margin PaineWebber Mutual Funds held within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
j. Prepare and provide shareholder registrations for mailing of proxies,
reports and other communications to shareholders
k. Develop, maintain and issue checks from the PaineWebber systematic
withdrawal plan offered within the client's brokerage account (if this
responsibility is delegated to PaineWebber)
l. Maintain duplicate shareholder records and reconcile those records with
those at the transfer agent (if this responsibility is delegated to
PaineWebber)
25
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m. Process and mail duplicate PaineWebber monthly or quarterly statements to
PaineWebber Investment Executives
n. Establish and maintain shareholder distribution options (i.e., election to
have dividends paid in cash, rather than reinvested in Fund shares)
o. Process and mail purchase, redemption and exchange confirmations to Fund
shareholders and PaineWebber Investment Executives
p. Issue dividend checks to shareholders that select cash distributions to
their brokerage account (if this responsibility is delegated to
PaineWebber)
q. Develop and maintain the automatic investment plan offered within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
r. Provide bank-to-bank wire transfer capabilities related to transactions in
Fund shares
s. Maintain computerized compliance programs for blue sky and non-resident
alien requirements (only with respect to PaineWebber Cashfund, Inc.)
26
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Exhibit No. 9
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone 202-778-9000
www.kl.com
June 30, 1998
PaineWebber Mutual Fund Trust
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion, as counsel to PaineWebber Mutual Fund
Trust ("Trust"), as to certain matters regarding the issuance of certain Shares
of the Trust. As used in this letter, the term "Shares" means the Class A, Class
B, Class C and Class Y shares of beneficial interest of the series of the Trust
listed below during the time that Post-Effective Amendment No. 26 to the Trust's
Registration Statement on Form N-1A ("PEA") is effective and has not been
superseded by another post-effective amendment. These series of the Trust are
PaineWebber California Tax-Free Income Fund and PaineWebber National Tax-Free
Income Fund.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) in the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by unincorporated voluntary associations and to the Securities Act of
1933 ("1933 Act"), the Investment Company Act of 1940 ("1940 Act") and the
regulations of the Securities and Exchange Commission ("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in accordance
with the terms contemplated by the PEA, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, the
Shares will have been validly issued, fully paid and non-assessable.
We note, however, that the Trust is an entity of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that creditors of,
contractors with and claimants against the Trust or any series shall look only
to the assets of the Trust for the appropriate series for payment. It also
requires that notice of such disclaimer be given in each note, bond, contract,
certificate undertaking or instrument made or issued by the officers or the
trustees of the Trust on behalf of the Trust. The Declaration of Trust further
provides: (1) for indemnification from the assets of the Trust or the
appropriate
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Paine Webber Mutual Fund Trust
June 30, 1998
Page 2
series for all loss and expense of any shareholder held personally liable for
the obligations of the Trust or any series by virtue of ownership of shares of
the Trust or such series; and (2) for the Trust or appropriate series to assume
the defense of any claim against the shareholder for any act or obligation of
the Trust or series. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
or series would be unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report dated April 15,
1998, in this Registration Statement (Form N-1A No. 2-98149) of PaineWebber
Mutual Fund Trust (comprising, respectively, the PaineWebber California Tax-Free
Income Fund and PaineWebber National Tax-Free Income Fund).
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
June 29, 1998
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[LETTERHEAD OF ORRICK, HERRINGTON & SUTCLIFF LLP]
June 30, 1998
Mitchell Hutchins
1285 Avenue of the Americas
New York, New York 10019
Re: PaineWebber California Tax-Free Income Fund, a
series of the PaineWebber Mutual Fund Trust (the
"California Fund")
-------------------------------------------------------------
We hereby consent to the filing of this consent as an exhibit
to the registration statement on Form N-1A for the California Fund dated as of
the date hereof (the "Registration Statement") and to the use of our name as
counsel to the California Fund with respect to California law in the
Registration Statement and the Prospectus for the California Fund.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
Orrick, Herrington & Sutcliffe LLP
<PAGE>
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Exhibit No. 12
[LETTERHEAD OF PAINEWEBBER INCORPORATED]
PaineWebber
August 28, 1985
PaineWebber California Tax-Exempt
Income Fund, Inc.
1285 Avenue of the Americas
New York, New York 10019
Gentlemen:
Please be advised that PaineWebber Incorporated herewith tenders $100,000 to
purchase shares of PaineWebber California Tax-Exempt Income Fund, Inc. valued at
$100,000 minimum initial capital required by the Investment Company Act of 1940.
We intend to purchase the shares as an investment and have no present intention
of redeeming or selling such shares.
Very truly yours,
/s/ Anne F. Riney
- ----------------------------------
Anne F. Riney
Vice President - Finance
<PAGE>
<PAGE>
Exhibit No. 13(a)
PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND--CLASS A SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, PaineWebber California Tax-Free Income Fund ("Trust") is
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company, and currently offers for public sale
a single series of shares of beneficial interest ("Series"), which corresponds
to a distinct portfolio and has been designated as the Initial Series; and
WHEREAS, the Trust desires to adopt a Plan of Distribution ("Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to the Class A shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Trust's board of trustees ("Board") and have Class A shares
established; and
WHEREAS, the Trust has entered into a Distribution Contract ("Contract")
with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to
which Mitchell Hutchins has agreed to serve as Distributor of the Class A shares
of each such Series;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Class A shares of each Series in accordance with Rule 12b-1 under the 1940 Act.
1. A. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
A shares, a service fee at the rate of 0.25% on an annualized basis of the
average daily net assets of the Series' Class A shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
B. Any Series may pay a service fee to Mitchell Hutchins at a lesser
rate than the fee specified in paragraph 1A of this Plan, as agreed upon by the
Board and Mitchell Hutchins and as approved in the manner specified in paragraph
4 of this Plan.
2. As Distributor of the Class A shares of each Series, Mitchell Hutchins
may spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the Series' Class A shares or the
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Mitchell Hutchins; compensation to and
expenses, including overhead and telephone and other communication expenses, of
Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other selected
dealers who engage in or support the distribution of shares or who service
shareholder accounts; the printing of prospectuses, statements of additional
information, and reports for other than existing
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<PAGE>
shareholders; and the preparation, printing and distribution of sales literature
and advertising materials.
3. This Plan shall take effect with respect to the Class A shares of the
Initial Series on the date set forth below, provided that it has first been
approved by the Board as set forth in paragraph 4, but shall not take effect
with respect to the Class A shares of any other Series unless it first has been
approved by a vote of the then sole shareholder of the Class A shares of such
Series.
4. This Plan shall not take effect with respect to any Series unless it
first has been approved, together with any related agreements, by votes of a
majority of both (a) the Board and (b) those Trustees of the Trust who are not
"interested persons" of the Trust and have no direct or indirect financial
interest in the operation of this Plan or any agreements related thereto
("Independent Trustees"), cast in person at a meeting (or meetings) called for
the purpose of voting on such approval; and until the Trustees who approve the
Plan's taking effect with respect to such Series' Class A shares have reached
the conclusion required by Rule 12b-1(e) under the 1940 Act.
5. With respect to any Series for which this Plan was approved as set
forth in paragraphs 3 and 4 prior to the commencement of operations of such
Series, this Plan shall continue in full force and effect until the first
meeting of the Class A shareholders held after the initial offering of such
shares of such Series to the public. If approved at such meeting by a vote of a
majority of the outstanding voting securities of the Class A shares of such
Series, the Plan shall continue in full force and effect with respect to such
Series for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class A shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"service activities," as defined in this Paragraph 6, to the Board in support of
the service fee payable hereunder.
For purposes of this Plan, "service activities" shall mean activities in
connection with the provision by Mitchell Hutchins or PaineWebber of personal,
continuing services to investors in the Class A Shares of the Series; provided,
however, that if the National Association of Securities Dealers, Inc. ("NASD")
adopts a definition of "service fee" for purposes of Section 26(d) of the NASD
Rules of Fair Practice that differs from the definition of "service activities"
hereunder, or if the NASD adopts a related definition intended to define the
same concept, the definition of "service activities" in this Paragraph shall be
automatically amended, without further action of the parties, to conform to such
NASD definition. Overhead and other expenses of Mitchell Hutchins and
PaineWebber related to their "service activities," including telephone
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<PAGE>
and other communications expenses, may be included in the information regarding
amounts expended for such activities.
7. This Plan may be terminated with respect to the Class A shares of any
Series at any time by vote of the Board, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the Class A shares of that Series.
8. This Plan may not be amended to increase materially the amount of
service fees provided for in paragraph 1A hereof unless such amendment is
approved by a vote of a majority of the outstanding voting securities of each
Series, and no material amendment to the Plan shall be made unless approved in
the manner provided for approval and annual renewal in paragraph 5 hereof.
9. The amount of the service fees payable by any Series to Mitchell
Hutchins under paragraph 1A hereof and the Contract is not related directly to
expenses incurred by Mitchell Hutchins on behalf of such Series in serving as
Distributor of the Class A shares, and paragraph 2 hereof and the Contract do
not obligate the Series to reimburse Mitchell Hutchins for such expenses. The
service fees set forth in paragraph 1A hereof will be paid by the Series to
Mitchell Hutchins until either the Plan or the Contract is terminated or not
renewed. If either the Plan or the Contract is terminated or not renewed with
respect to the Class A shares of any Series, any distribution expenses incurred
by Mitchell Hutchins on behalf of the Series in excess of payments of the
service fees specified in paragraph 1A hereof and the Contract which Mitchell
Hutchins has received or accrued through the termination date are the sole
responsibility and liability of Mitchell Hutchins, and are not obligations of
the Series.
10. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons of the Trust.
11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
12. The Trust shall preserve copies of this Plan (including any amendments
thereto) and any related agreements and all reports made pursuant to paragraph 6
hereof for a period of not less than six years from the date of this Plan, the
first two years in an easily accessible place.
13. The Trustees of the Trust and the shareholders of each Series shall
not be liable for any obligations of the Trust or any Series under this Plan,
and Mitchell Hutchins or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Series in settlement of such right or claim, and not to such Trustees or
shareholders.
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IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution on
the day and year set forth below in New York, New York.
Date: July 1, 1991
ATTEST: PAINEWEBBER CALIFORNIA TAX-FREE INCOME
FUND
/s/ Jack W. Murphy By:/s/ Dianne E. O'Donnell
- ----------------------------- -------------------------
- 4 -
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<PAGE>
Exhibit No. 13(b)
PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND--CLASS B SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, PaineWebber California Tax-Free Income Fund ("Trust") is
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company, and currently offers for public sale
a single distinct series of shares of beneficial interest ("Series"), which
corresponds to a distinct portfolio and has been designated as the Initial
Series; and
WHEREAS, the Trust desires to adopt a Plan of Distribution ("Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to the Class B shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Trust's board of trustees ("Board") and have Class B shares
established; and
WHEREAS, the Trust has entered into a Distribution Contract ("Contract")
with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to
which Mitchell Hutchins has agreed to serve as Distributor of the Class B shares
of each such Series;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Class B shares of each Series in accordance with Rule 12b-1 under the 1940 Act.
1. A. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
B shares, a distribution fee at the rate of 0.75% on an annualized basis of the
average daily net assets of the Series' Class B shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
B. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
B shares, a service fee at the rate of 0.25% on an annualized basis of the
average daily net assets of the Series Class B shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
C. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified in Paragraphs 1A and 1B,
respectively, of this Plan, in either case as agreed upon by the Board and
Mitchell Hutchins and as approved in the manner specified in Paragraph 4 of this
Plan.
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2. As Distributor of the Class B shares of each Series, Mitchell Hutchins
may spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the Class B shares of the Series or
the servicing and maintenance of shareholder accounts, including, but not
limited to, compensation to employees of Mitchell Hutchins; compensation to and
expenses, including overhead and telephone and other communication expenses, of
Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other selected
dealers who engage in or support the distribution of shares or who service
shareholder accounts; the printing of prospectuses, statements of additional
information, and reports for other than existing shareholders; and the
preparation, printing and distribution of sales literature and advertising
materials.
3. This Plan shall not take effect with respect to the Class B shares of
any Series unless it first has been approved by a vote of the then sole
shareholder of the Class B shares of the Series.
4. This Plan shall not take effect with respect to the Class B shares of
any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Trustees
of the Trust who are not "interested persons" of the Trust and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related thereto ("Independent Trustees"), cast in person at a meeting (or
meetings) called for the purpose of voting on such approval; and until the
Trustees who approve the Plan's taking effect with respect to such Series' Class
B shares have reached the conclusion required by Rule 12b-1(e) under the 1940
Act.
5. After approval as set forth in paragraphs 3 and 4, this Plan shall take
effect and continue in full force and effect until a meeting of the Class B
shareholders held after the initial offering of such shares of such Series to
the public. If approved at such meeting by a vote of a majority of the
outstanding voting securities of the Class B shares of such Series, the Plan
shall continue in full force and effect with respect to the Class B shares of
such Series for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in Paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class B shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"distribution activities," as defined in this Paragraph 6, to the Board in
support of the distribution fee payable hereunder and shall submit only
information regarding amounts expended for "service activities," as defined in
this Paragraph 6, to the Board in support of the service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall mean any
activities in connection with Mitchell Hutchins' performance of its obligations
under this Plan or the Contract that are not deemed "service activities."
"Service activities" shall mean activities in connection with the provision by
Mitchell Hutchins or PaineWebber of personal, continuing services to
2
<PAGE>
<PAGE>
investors in the Class B shares of the Series; provided, however, that if the
National Association of Securities Dealers, Inc. ("NASD") adopts a definition of
"service fee" for purposes of Section 26(d) of the NASD Rules of Fair Practice
that differs from the definition of "service activities" hereunder, or if the
NASD adopts a related definition intended to define the same concept, the
definition of "service activities" in this Paragraph shall be automatically
amended, without further action of the parties, to conform to such NASD
definition. Overhead and other expenses of Mitchell Hutchins and PaineWebber
related to their "distribution activities" or "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such activities.
7. This Plan may be terminated with respect to the Class B shares of any
Series at any time by vote of the Board, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the Class B shares of that Series.
8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in Paragraph 1A hereof or the amount of service
fees provided for in Paragraph 1B hereof unless such amendment is approved in
the manner provided for initial approval in paragraphs 3 and 4 hereof, and no
material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in Paragraph 5 hereof.
9. The amount of the distribution and service fees payable by the Series
to Mitchell Hutchins under Paragraphs 1A and 1B hereof and the Contract is not
related directly to expenses incurred by Mitchell Hutchins on behalf of such
Series in serving as Distributor of the Class B shares, and Paragraph 2 hereof
and the Contract do not obligate the Series to reimburse Mitchell Hutchins for
such expenses. The distribution and service fees set forth in Paragraphs 1A and
1B hereof will be paid by the Series to Mitchell Hutchins until either the Plan
or the Contract is terminated or not renewed. If either the Plan or the Contract
is terminated or not renewed with respect to the Class B shares of any Series,
any distribution expenses incurred by Mitchell Hutchins on behalf of the Class B
shares of the Series in excess of payments of the distribution and service fees
specified in Paragraphs 1A and 1B hereof and the Contract which Mitchell
Hutchins has received or accrued through the termination date are the sole
responsibility and liability of Mitchell Hutchins, and are not obligations of
the Series.
10. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons of the Trust.
11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
12. The Trust shall preserve copies of this Plan (including any amendments
thereto) and any related agreements and all reports made pursuant to Paragraph 6
hereof for a period of not less than six years from the date of this Plan, the
first two years in an easily accessible place.
3
<PAGE>
<PAGE>
13. The Trustees of the Trust and the shareholders of each Series shall
not be liable for any obligations of the Trust or any Series under this Plan,
and Mitchell Hutchins or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Series in settlement of such right or claim, and not to such Trustees or
shareholders.
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution on
the day and year set forth below in New York, New York.
Date: July 1, 1991
ATTEST: PAINEWEBBER CALIFORNIA TAX-FREE INCOME
FUND
/s/ Jack W. Murphy By: /s/ Dianne E. O'Donnell
- ---------------------------- ---------------------------------
4
<PAGE>
<PAGE>
Exhibit No. 13(c)
PAINEWEBBER MUTUAL FUND TRUST -- CLASS D SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, PaineWebber Mutual Fund Trust ("Fund") is registered under the
Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company, and currently has two distinct series of shares
of beneficial interest ("Series"), which correspond to distinct portfolios and
have been designated as the PaineWebber California Tax-Free Income Fund and
PaineWebber National Tax-Free Income Fund; and
WHEREAS, the Fund desires to adopt a Plan of Distribution ("Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to the Class D shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Fund's board of trustees ("Board") and have Class D shares
established; and
WHEREAS, the Fund has entered into a Distribution Contract ("Contract")
with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to
which Mitchell Hutchins has agreed to serve as Distributor of the Class D
shares of each such Series;
NOW, THEREFORE, the Fund hereby adopts this Plan with respect to the Class
D shares of each Series in accordance with Ru1e 12b-1 under the 1940 Act.
1. A. The following Series of the Fund are authorized to pay to
Mitchell Hutchins, as compensation for Mitchell Hutchins' services as
Distributor of the Series' Class D shares, distribution fees at the rate (on an
annualized basis) set forth below of the average daily net assets of the Series'
Class D shares. Such fee shall be calculated and accrued daily and paid monthly
or at such other intervals as the Board shall determine.
PaineWebber California
Tax-Free Income Fund 0.50%
PaineWebber National
Tax-Free Income Fund 0.50%
B. Any Series hereafter established is authorized to pay to Mitchell
Hutchins, as compensation for Mitchell Hutchins' services as Distributor of the
Series' Class D Shares, a distribution fee in the amount to be agreed upon in a
written distribution fee addendum to this Plan ("Distribution Fee Addendum")
executed by the Fund on behalf of such Series. All such Distribution Fee Addenda
shall provide that they are subject to all terms and conditions of this Plan.
<PAGE>
<PAGE>
C. Each series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
D shares, a service fee at the rate of 0.25%, on an annualized basis, of the
average daily net assets of the Series' Class D shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
D. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified above, as agreed upon by the
Board and Mitchell Hutchins and as approved in the manner specified in Paragraph
4 of this Plan.
2. As Distributor of the Class D shares of each Series, Mitchell Hutchins
may spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the Class D shares of the Series or
the servicing and maintenance of shareholder accounts, including, but not
limited to, compensation to employees of Mitchell Hutchins; compensation to and
expenses, including overhead and telephone and other communication expenses, of
Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other selected
dealers who engage in or support the distribution of shares or who service
shareholder accounts; the printing of prospectuses, statements of additional
information, and reports for other than existing shareholders; and the
preparation, printing and distribution of sales literature and advertising
materials.
3. This Plan shall not take effect with respect to the Class D shares of
any Series unless it first has been approved by a vote of the then sole
shareholder of the Class D shares of the Series.
4. This Plan shall not take effect with respect to the Class D shares of
any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Trustees
of the Fund who are not "interested persons" of the Fund and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related thereto ("Independent Trustees"), cast in person at a meeting (or
meetings) called for the purpose of voting on such approval; and until the
Trustees who approve the Plan's taking effect with respect to such Series' Class
D shares have reached the conclusion required by Rule 12b-l(e) under the 1940
Act.
5. After approval as set forth in paragraphs 3 and 4, this Plan shall take
effect and continue in full force and effect until a meeting of the Class D
shareholders held after the initial offering of such shares of such Series to
the public. If approved at such meeting by a vote of a majority of the
outstanding voting securities of the Class D shares of such Series, the Plan
shall continue in full force and effect with respect to the Class D shares of
such Series for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in Paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class D shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such
2
<PAGE>
<PAGE>
expenditures were made. Mitchell Hutchins shall submit only information
regarding amounts expended for "distribution activities," as defined in this
Paragraph 6, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for "service
activities," as defined in this Paragraph 6, to the Board in support of the
service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall mean any
activities in connection with Mitchell Hutchins' performance of its obligations
under this Plan or the Contract that are not deemed "services activities."
"Service activities" shall mean activities in connection with the provision by
Mitchell Hutchins or PaineWebber of personal, continuing services to investors
in the Class D shares of the Series; provided, however, that if the National
Association of Securities Dealers, Inc. ("NASD") adopts a definition of "service
fee" for purposes of Section 26(d) of the NASD Rules of Fair Practice that
differs from the definition of "service activities" hereunder, or if the NASD
adopts a related definition intended to define the same concept, the definition
of "service activities" in this Paragraph shall be automatically amended,
without further action of the parties, to conform to such NASD definition.
Overhead and other expenses of Mitchell Hutchins and PaineWebber related to
their "distribution activities" or "service activities," including telephone and
other communications expenses, may be included in the information regarding
amounts expended for such activities.
7. This Plan may be terminated with respect to the Class D shares of any
Series at any time by vote of the board, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the Class D shares of that Series.
8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in Paragraph lA or lB hereof or the amount of
service fees provided for in Paragraph lC hereof unless such amendment is
approved in the manner provided for initial approval in paragraphs 3 and 4
hereof, and no material amendment to the Plan shall be made unless approved in
the manner provided for approval and annual renewal in Paragraph 5 hereof.
9. The amount of the distribution and service fees payable by the Series
to Mitchell Hutchins under Paragraphs 1 hereof and the Contract is not related
directly to expenses incurred by Mitchell Hutchins on behalf of such Series in
serving as Distributor of the Class D shares, and Paragraph 2 hereof and the
Contract do not obligate the Series to reimburse Mitchell Hutchins for such
expenses. The distribution and service fees set forth in Paragraph 1 hereof will
be paid by the Series to Mitchell Hutchins until either the Plan or the Contract
is terminated or not renewed. If either the Plan or the Contract is terminated
or not renewed with respect to the Class D shares of any Series, any
distribution expenses incurred by Mitchell Hutchins on behalf of the Class D
shares of the Series in excess of payments of the distribution and service fees
specified in Paragraphs 1 hereof and the Contract which Mitchell Hutchins has
received or accrued through the termination date are the sole responsibility and
liability of Mitchell Hutchins, and are not obligations of the Series.
3
<PAGE>
<PAGE>
10. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Fund shall be committed to the
discretion of the Trustees who are not interested persons of the Fund.
11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
12. The Fund shall preserve copies of this Plan (including any amendments
thereto) and any related agreements and all reports made pursuant to Paragraph 6
hereof for a period of not less than six years from the date of this Plan, the
first two years in an easily accessible place.
13. The Trustees of the Fund and the shareholders of each Series shall not
be liable for any obligations of the Fund or any Series under this Plan, and
Mitchell Hutchins or any other person, in asserting any rights or claims under
this Plan, shall look only to the assets and property of the Fund or such Series
in settlement of such right or claim, and not to such Trustees or shareholders.
IN WITNESS WHEREOF, the Fund has caused this Plan of Distribution to be
executed on the day and year set forth below in New York, New York.
Date: July 1, 1992
ATTEST: PAINEWEBBER MUTUAL FUND TRUST
/s/ Michelle Ehrler By: /s/ Dianne E. O'Donnell
- ------------------------------ -----------------------
Michelle Ehrler Dianne E. O'Donnell
Secretary and Vice President
4
<PAGE>
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<NAME> PAINEWEBBER NATIONAL TAX-FREE INCOME FUND CLASS B
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